The Pros and Cons of Profit First Accounting

Starting a business is a challenging endeavor and potentially terrifying if you don’t know where to start or how to start and many start by getting information by reading books or articles online for starting your business.

There are many books on business, and business practices, however, very few on the topic of small business finance and accounting.

When you find one, you will notice two things in common: (1) designed for accountants and finance professionals infused with jargon; (2) it only includes basic introductions/guides designed for people who have no professional experience in finance but need to make financial decisions.

And honestly, these books will only make you bewildered by all the information. And none of them often helps nor produce tangible results.

On the other hand, Mike Michalowicz’ book, Profit First, is a different thing.

This book gets praise from various small business owners and even accountants and the financial independence community for addressing the needs seen above. 

This method, Profit First, shows an accessible, practical, actionable blueprint for making and increasing your profits constantly.

In this blog, we will dive into Profit First and we will also be listing down the perks and downside of this method.

What is the Profit First Method?

The Profit First method is a system in which business owners take a percentage from each sale as profit.

The Profit First formula flips the traditional view on how business owners typically think about accounting and budget by changing the equation used to calculate profits.

Traditional Profit formula: Sales – Expenses = Profit

Traditionally, business owners deduct expenses from sales and consider the remaining amount of profit. 

The Profit First formula: Sales – Profit = Expenses

The Profit First formula puts profit first. It encourages you to deduct profit first from each sale and use the remaining amount for expenses.

So basically, you’re accounting for your profit, taxes, and pay. What’s leftover is spent on the budget of your company – i.e. rent, salaries, material costs, and utilities.

Others might find it disturbing in running the business this way but having your business start this way actually makes you more conscious of where and how you’re spending money.

The Pros

1. Good for small business owners

Budgeting and managing cash flow is really a hard thing for a small business owner. And it is the actual point of Profit First.

Its goal is for you to understand better and easier how to manage your cash flow and accounting.

2. Doesn’t require agonizing over financial decisions

The system runs itself once you set it up for your business.

On the other hand, you must check in occasionally. It is to make sure you’re still using the optimum cash allocation percentages for your current financial situation.

Remember that if you’re using Profit First correctly, you will constantly be improving. No more worries about whether to buy a certain piece of equipment, or is there enough money to pay taxes, or whether you have to dip into your own pocket to pay yearly fees. 

3. Creates tangible improvements on your finances

It gives you an easy to use, easy to implement budgeting plan, which we can say is the greatest benefit of Profit First. You can see all the improvements on your finances both personally and professionally!

The Cons

1. Doesn’t always work for online businesses

The reason for growing fast in online business is because of launches. And launches happen one month and possibly there’s no launch in the second month.

Due to the cyclical nature of when revenues come in, Profit First, may not be the best accounting strategy here, unless money is being allocated for the next launch.  

2. Doesn’t work for high-growth businesses

Will Profit First work for you? It does if you have a small business, if your income is predictable and stable throughout the year and if you have trouble managing your cash flow.

But for high-growth businesses that have been through a lot over the years, using Profit First is not a good thing.

Profit First doesn’t support a big money mindset where you’re willing to invest forward and even go without salary for a time while you’re building your business.

3. Doesn’t grow your business fast

Remember that using Profit First won’t grow your business fast. Since you are taking out the profit and getting the expenses there, you won’t have as much money for investing in your business, allowing it to grow.

Money is important in any business. It’s the fuel of business. So, if you take all the fuel out, then there’s nothing left in keeping your business.

If you want your business to grow or to keep growing, you have to set it up and/or keep investing big time.

Conclusion

Profit First has helped a lot of business owners. However, there are business owners whom it did not help.   And, whether this method helps or not, a business’s growth still lies on the person managing it.

Regardless of what accounting method you use, you still need to be diligent and track every single detail of your business. Hence, having professionals – i.e. accountants, mentors, is a good option.  Make sure you have someone who can help you hone in on your profit margins in keeping your business on track as this will help in growing your business overall, long term.

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