Mike Michalowicz, the author of the book Profit First and founder of the Profit First Method, developed a comprehensive training and certification program for advisors. This program teaches how to effectively implement the Profit First method in businesses. Eric Joern, CPA, and Partner at Kaizen CPAs, is a Certified Profit First Professional. But what does that mean?
“The Profit First certification program is rigorous,” Eric explains. “It’s not just handed to you. I had to go through Profit First University, pass exams, and apply the methodology in my own business. Additionally, I was required to select beta test clients and help them implement the Profit First methodology in their businesses.”
Every business owner aims to make a profit, but how much profit do you actually retain from every dollar earned? The Profit First system ensures profit is the priority from the start. Profit is essential—not just for the business owner, but also for the business itself, its employees, the community, and its customers.
You might be familiar with the envelope budgeting method, where you allocate money into different envelopes for various expenses like mortgage, insurance, and groceries. When one envelope is empty, you stop spending or find a way to manage. This is the basic premise of Profit First.
All income sources are deposited into the Income Account account. Whether it’s a customer check, POS, or credit card processor, everything goes into this account. From there, the money is distributed to four other accounts based on a percentage that you calculate.
The Profit Account is a crucial component of the Profit First system. The idea is simple: set aside a portion of every dollar earned as profit before paying any expenses. This isn’t just an accounting trick—it’s a mindset shift. By prioritizing profit, you’re forcing yourself to manage the business on what’s left, which naturally leads to leaner operations and smarter spending. Regularly transferring money into the Profit Account builds a financial buffer, ensuring that your business isn’t just surviving but thriving.
This proactive approach to profitability can lead to better decision-making, increased business stability, and, ultimately, greater financial freedom.
“How do I pay myself?” is a common question for business owners. The Owner's Comp Account covers your salary, profit distributions, and any personal expenses paid through the business, such as a cell phone or vehicle. A healthy Owner’s Comp Account ensures that your personal finances are in order, reducing the likelihood of making poor business decisions out of financial desperation.
No one likes paying taxes, but with Profit First, you’ll never be caught off guard. By setting aside a percentage of your income into a dedicated Tax Account, you’ll always have the funds available when it’s time to pay the taxman. This proactive approach eliminates the stress and uncertainty of tax season.
The Operating Expense Account account is where the remaining funds live to pay your business’s bills and operational costs.
Think of your Income Account as a serving tray—portion out your money into the appropriate accounts, and what’s left over is your budget for running the business.
Accountants often dislike Profit First because they mistakenly see it as an accounting method. However, it’s more of a cash management system designed to ensure profitability. The additional bank accounts required by Profit First create more transactions, which some accountants view as unnecessary extra work.
However, these accounts serve a purpose: they provide clarity and discipline, ensuring that every dollar is allocated with intention. While it may seem like more work on the surface, the long-term benefits of financial stability and profitability far outweigh the initial setup and ongoing management effort.
Traditional accounting follows the equation: revenue minus expenses equals profit. Profit First flips this on its head, promoting the idea that revenue minus profit equals expenses. By prioritizing profit, you’re forcing your business to live within its means. This is a radical departure from what most accountants are taught, which is why some resist the Profit First methodology.
Before anything else, read Profit First to understand its concepts. This will prevent you from getting lost in the process and save you from paying a Certified Profit First Professional to explain the basics.
Once you understand the basics, open the necessary bank accounts. Depending on your business goals, you may need additional accounts beyond the five foundational ones, such as an acquisition account, CapEx (capital expenditures) account, or a bonus account for employees.
Look back at the last three years and analyze your spending. Determine how much went to owner’s comp, operating expenses, and taxes. This will help you identify your current allocation percentages and create a roadmap for your business’s financial future.
It’s important to note that your books need to be in good shape before implementing Profit First. If your books are a mess, the system won’t work effectively. The first step is often to eliminate excess expenses, which can lead to a significant initial improvement.
After setting up your accounts and conducting a profit assessment, it’s time to actively use the Profit First system in your business. Begin by regularly allocating funds according to the percentages you’ve determined for each account. This means that every time revenue enters your Income Account, you immediately distribute it to your Profit, Owner’s Comp, Tax, and OPEX accounts based on your set allocations.
Consistency is key—make these transfers a regular part of your financial routine. As you begin to operate within these new constraints, you may find areas where you can reduce expenses or increase efficiency.
Over time, you’ll start to see the benefits of prioritizing profit, such as improved cash flow, better financial decision-making, and a more resilient business model. The system will also highlight any areas of financial stress, allowing you to address them proactively before they become larger issues.
Implementing Profit First is not a quick fix but a comprehensive financial strategy that requires commitment and discipline. If you’ve read the book and understand the envelope method, you might feel ready to start the process.
However, it’s important to recognize that this system is not for everyone. It’s particularly beneficial for businesses with a more advanced financial structure and for owners who are committed to long-term profitability. The initial setup might seem daunting, but the rewards—financial stability, reduced stress, and a healthier bottom line—are well worth the effort. By putting profit first, you’re not just ensuring the survival of your business; you’re setting it up to thrive.
Are you interested in applying the Profit First method in your business? Click the ‘Let’s Chat’ button below and find out how Kaizen CPAs can help.
3 min read
Eric Joern : | September 11, 2023
Let’s get this out of the way first – Profit First IS NOT a “set it and forget it” solution. If you’re looking for a hands off solution to your...
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Eric Joern : | July 19, 2022
It’s easy to want to skip to the "bottom line" of your financial statements, but like any great story, you’ll need context for the ending to make...
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The Kaizen Team : | January 10, 2023
Most CPA firms don’t encourage the Profit First model, here’s why we do. Profit First is a book written by Mike Michalowicz on how to properly budget...
Eric Joern