My Love/Hate Relationship with Profit First
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So, you’ve heard of Profit First—you probably wouldn’t be reading this if you hadn’t!— and you’re wondering if it might be a good thing to try. (We all need some help wrangling our biz finances, amiright? 🤣) Before you dive in headfirst, let’s chat about what it is, why it’s popular, and whether it’s a good fit for your business.
What is Profit First, Anyway?
Profit First is a financial strategy popularized by Mike Michalowicz, and popular among small business owners and solopreneurs. It flips the traditional accounting formula on its head. Instead of the usual "Revenue - Expenses = Profit," our friend Mike suggests you operate from a mindset of "Revenue - Profit = Expenses."
In other words, you set aside your profit first, and then work with what’s left for expenses.
Sounds simple enough, yes? But how does this actually work? Well, it involves dividing your revenue into different percentages and allocating those funds to multiple bank accounts. Here are the bank accounts Profit First has you set up:
Revenue/Income: The total money coming into your business.
Profit: A percentage of revenue set aside as a “bonus” for the owners.
Owner’s Pay: Your regular monthly pay as the business owner.
Taxes: Funds earmarked for those inevitable tax bills.
Operating Expenses: The money left to cover all the business costs.
And here’s an example of what it might look like to allocate funds between the accounts (let’s pretend your monthly revenue is $10,000):
$10,000 in revenue gets deposited to your Revenue account during the month. You know, by all your amazing clients and customers. At the end of the month, you allocate it to the following bank accounts:
5% goes to Profit: you move $500 to your Profit account and use part of the balance to pay yourself a bonus each quarter
40% goes to Owner’s Compensation: you move $4,000 to your Owner’s Pay account and use it to pay yourself your regular “salary”
15% goes to Taxes: you move $1500 to your Taxes account, and use that to pay estimated payments and your tax bill come April 15th
The remaining 40% goes to Operating Expenses: you move $4,000 to your OpEx account and use it to pay your day-to-day business expenses
You repeat this process once or twice a month, moving funds from your revenue account to your different bank accounts. The idea is that by setting aside funds for owner’s compensation, profit bonuses/savings, and taxes, you’re limiting the amount you can spend on operating expenses. It makes sure you as the business owner are the first beneficiary of all your hard work, not ever-ballooning levels of expenses.
Why Profit First is So Popular
The book Profit First was published in 2014 (happy 10-year birthday, Profit First!) and it’s become an entire industry in and of itself at this point. You can hire coaches, consultants, and certified Profit First Professionals to help you implement the method into your business. So why do so many people love it?
It’s (relatively) simple. Instead of trying to understand sometimes misleading financial statements and complicated budgets, when implemented correctly, Profit First makes it easy to track your cash flow and know how much money you actually have available at any given time.
The psychological benefits. This one is threefold. 1. Profit First emphasizes putting aside funds for taxes, so when it’s time to pay the IRS, the funds are already there. This can be a BIG stress-reducer for business owners, knowing they won’t have to scramble to come up with funds to pay the tax bill. (Same goes with paying themselves at the end of the month. The funds are already there, so there’s no need to “rob Peter to pay Paul” when it comes to writing your own paycheck.) 2. Transferring money into a “Profit” account, even if it’s only 1 or 2% of your revenue, is like giving yourself a gold star. It feels awesome, and can help build your confidence. 3. Having money in different bank accounts gives you clear parameters on how that money is to be spent. It can help reduce decision fatigue and build financial “discipline”. (I hate the word discipline in this context, but can’t think of a better word to use!)
It helps control cash flow. When you’re operating on a cash basis (which is the entire point of Profit First) it helps prevent overspending by forcing you to live within your means. Said another way: “If the cash isn’t in your account, you can’t buy the thing”. This means there won’t be any surprise credit card bills coming due or large interest payments to figure out how you’re going to pay.
What I Love About Profit First
There’s a lot to like about Profit First. For starters, it encourages you to run a lean business. By setting aside your profit and paying yourself first, you’re forced to operate your business with whatever is left over. Having a limited budget can help you reduce unnecessary expenses (do you REALLY need the paid tier of Airtable, or can you make do with the free version?) and encourages you to get creative, to make the absolute most of the funds you have available to you.
(And btw, having a “lean business mindset” doesn’t have to go away as your revenue increases! Being mindful of your expenses can simply become your default way of doing business, which, in the long run, can greatly increase your profitability, allowing you to pay yourself more, pay your team more, and all those wonderful “trickle-down” effects that make the world a better place.)
Another big plus is how it makes you get up close and personal with your money. No more ignoring your bank accounts or letting them manage themselves. Profit First demands that you pay attention to the details, which means moving money around, staying on top of your balances, and really knowing where every dollar is going. This, almost by default, leads to better financial literacy (to use a fancy term) and more confidence in your financial decisions.
Lastly, this method also requires you to create a budget or spending plan. Whether you call it a budget or something else, the reality is that you’ll need a good handle on your expenses to make sure there’s enough money in the bank to cover them. Before you sign up for another software service (because ohmigoodness, there’s so many fun ones!!) you need to know if there’s cash in the bank this month (and will be the next month, and the month after that) to pay for it. It’s no longer an option to make financial decisions in a vaccum.
What I Don’t Love (In No Particular Order)
Now, as much as I appreciate the concept, there are a few things about Profit First that don’t quite sit right with me.
1. It Doesn’t Lend Itself to Using Credit Cards
This is a biggie. On the one hand, Profit First’s cash-only approach helps you avoid racking up debt, which is great. But on the other hand, you miss out on the benefits that come with credit cards, like cash back and/or travel rewards, and built-in fraud protection. (Seriously - if possible, please use credit cards for making purchases, especially online. It’s less risky than using debit cards.)
For people who want to use credit cards regularly (raises hand 👋🏻), the whole Profit First system starts to quickly fall apart unless you’re constantly cross-referencing your credit card balance with your bank account balance.
Also, (and we’ll talk about this more in a second) Profit First doesn’t really account for situations where taking on debt might be a smart, well-thought-out business move. Staying cash-only simply for the sake of staying cash only can sometimes hamstring your business.
2. There Are Just So. Many. Bank. Accounts.
Profit First requires you to set up multiple bank accounts (five at the absolute minimum), which can get overwhelming and expensive if your bank charges fees for each account. If you go this route, please make sure to choose a bank that offers no-fee accounts like Relay or Mercury.
Profit First can also complicate your official bookkeeping, having to track all the transfers between accounts. It’s certainly doable, though, so don’t let that in of itself be why you don’t try Profit First. It’s just something to consider, especially if you do your own bookkeeping!
3. It Doesn’t Work Well for Brand-New or Very-Low-Revenue Businesses
If your business is new or your revenue is on the lower side, Profit First can be tough to implement. When you’re in the start-up phase, your revenue might not be able to cover even the leanest of expenses, let alone setting aside funds for paying yourself any wage at all, let alone a profit payout.
If this is you, here’s a suggestion: Take stock of your super-lean expenses (for example, in the online business world, this might be $25/month for Squarespace, $6/month for Google Workspace, and $15/month for Zoom) and keep them there until your revenue increases enough to generate a profit. Then, be VERY mindful of what you do with those profits. Maybe you pay yourself half and reinvest half back into your business. Maybe it’s some other percentage. But until your revenue covers lean expenses and paying yourself the bare minimum of what you need, I wouldn’t worry too much about implementing Profit First.
4. Calculating Taxes as a Percentage of Revenue
This one just doesn’t make sense to me. Sure, if it works for you, go ahead, truly! But I think there’s a better way. Instead of just taking a percentage of your revenue and setting it aside for taxes, try this: Have a solid understanding of your monthly expenses. Set aside funds for those first, and then set aside a percentage of what’s left over for taxes. This approach gives you a more accurate way to calculate how much you should set aside for taxes.
5. Too Much Focus on Lowering Expenses
Profit First tends to focus on keeping expenses low, which is important, but it can miss the bigger picture. And that bigger picture is INCREASING revenue!
In a lot of cases, the problem isn’t that expenses are too high – it’s that revenue is simply too low! You can’t budget your way to abundance.
Often, the key to success is not in cutting your costs, but in increasing your revenue.
You know, the super easy (said very sarcastically) process of increasing your prices, improving your marketing, getting better at selling, etc, most of which are WAY beyond my areas of expertise! 🤣
Suggested Tweaks and Alternatives to Profit First
Don’t get me wrong – Profit First can be a great framework for handling your finances, if it works for you, your brain, and the current stage of your business.
AND.
If you’ve tried to implement it and it just isn’t sticking, here are some tweaks and alternatives for you to consider.
1. Before diving in with Profit First, set up a solid budget and cash flow plan.
Don’t just rely on percentages, as is the Profit First way. Get a good understanding of the actual dollar amounts of your revenue and expenses. Regardless of whether you use the system I set up, someone else’s, or something you put together yourself, it’s INVALUABLE to have a full understanding of where you money is coming from (your revenue) and where it’s going (your expenses, taxes, savings, and paying yourself).
2. Remember to look at your revenue. Don’t focus solely on reducing expenses. As I mentioned just a bit ago, you can’t budget your way to abundance and a thriving wage. Get REALLY good at delivering an amazing product or service, and at SELLING that product or service. This will help SO MUCH MORE than cutting your expenses by 10% a month. (I just pulled 10% out of the air, so don’t read too much into that number!)
3. Don’t be afraid of debt. Profit First is very much based on the idea of “if you don’t have the cash, don’t buy the thing”. Which is very sound advice A LOT of the time. But other times? The thing that makes the most sense is taking on some debt so you can invest in your business. Am I advocating for mindlessly racking up credit card debt? No, of course not. But I AM advocating for thoughtfully, and purposefully using debt (which is sometimes in the form of credit cards) when it makes sense for your business. For example, there’s a 6-month mastermind I have my eye on that I know is a bit of a stretch for me given my current cash flow. I also know that I truly need help with the logistics of scaling my business. It’s not something I can figure out all on my own. Given that, it makes sense for me to take on a bit of debt in order to make that happen.
4. Consider using something like YNAB for your business. YNAB (affiliate link) is a tool that (in my opinion!) gives you all the benefits of Profit First without any of the drawbacks. (The short TLDR on YNAB: It’s a budgeting app that helps you wrap your brain around your cash flow by giving every dollar a job (aka “zero-based budgeting”), plan for upcoming expenses, and prioritizing financial goals.)
You don’t need to open multiple bank accounts. YNAB makes use of digital “buckets” instead of separate bank accounts, making your official bookkeeping easier and eliminating the need to transfer funds between accounts multiple times a month.
It lends itself beautifully to using credit cards to pay for day-to-day business expenses. This lets you keep getting rewards and having access to the security features of credit cards while still running your business on a “cash” basis. Plus, if you DO need to take on debt, YNAB helps you stay mindful of that debt and chip away at paying it down.
Side note: yes, I LOVE YNAB. I’ve been using it for both my business and personal finances since… umm… 2016? I think? (I’m too lazy to look it up! 🤣) But seriously, check it out. It’s amazing. There IS a learning curve. AND. It’s 100% worth it!!
So, is Profit First the “secret sauce” your business needs?
Maybe! It’s a method that can work wonders for businesses looking to reduce their expenses and be super mindful of their finances. But like any tool (even my beloved YNAB!), it’s not a one-size-fits-all solution. If it’s feeling like too much (hello, multiple bank accounts), or don’t want to stop using credit cards, don’t be afraid to adapt it to fit your style or try alternatives. In the end, the best system is the one that helps you actually understand and feel confident about your money.
You’ve got this - I believe in you!
