Profit First

profit first

Profit First

This week Nathan gives us a presentation on one of NGR Accounting’s services ‘create a profit-making machine’ specifically looking deeper into the meaning of ‘Profit First’ cashflow system for business. If you are a small business who is struggling to bring in profit, especially during this unforeseen lockdown, then this week’s topic is for you!

Traditional Accounting broken formula alone focuses on the numbers. It ignores the human behaviour of the business that surrounds these numbers.

SALES – EXPENSES = PROFIT

Traditional Accounting broken formula alone focuses on the numbers. It ignores the human behaviour of the business that surrounds these numbers.

The GAAP (Generally Accepted Accounting Principles) formula for determining a business’s profit is Sales – Expenses = Profit. It is simple, logical, and clear. Unfortunately, it’s a lie. The formula, while logically accurate, does not account for human behaviour.

In the GAAP formula profit is a left over, a final consideration, something that is hopefully a nice surprise at the end of the year. Unfortunately, the profit is rarely there, and the business continues its cheque-to-cheque survival (wait who issues Cheques these days, EFT to EFT just doesn’t have the same ring to it).

 

Parkinson’s Law

“Our demand expands to meet the supply”

Author and historian C. Northcote Parkinson theorized that our demand for a resource increases to meet the supply of it. That is why when given $1,000 to complete our work we get it done with $1,000 and when given $10,000 to complete the same work, it takes $10,000. Profit First makes Parkinson’s Law an asset.

By taking profit first the money available for expenses lessens, and we are forced to find ways to get the same things done for less money.

 

Bank Balance Accounting: 

While we know we ‘should’ read our Profit and Loss, Cash Flow and Balance Sheets regularly, conduct financial analysis, and read our General Ledgers … we don’t. We check our bank balance online to determine how profitable we are.

  • Parkinson’s Law dictates as deposits increase so does our spending. And vice versa. Hence most businesses have extremely volatile financial trends, and rarely have a profit.
  • But if you take your profit first, your natural behavior becomes your biggest asset.

Per Parkinson’s Law, we consume what we see in our bank account.

 

Don’t Change Habits, Leverage them:

Profit First encourages the entrepreneur to continue “bank balance accounting” by first allocating money to profit (and other accounts) so that the entrepreneur sees the actual portion of deposits that are available for expenses, and they automatically adjust their spending accordingly.

The Profit First principle does not try to change your habits (that is nearly impossible to do), Profit First works with your existing habits. By first allocating money to different accounts, and then removing the temptation to “borrow” from yourself, your business will become fiscally strong, and you will benefit from regular profit distributions.

SALES – PROFIT = EXPENSES

With Profit First you to flip the formula to Sales – Profit = Expenses.

Logically the math is the same, but from the standpoint of the entrepreneur’s behaviour it is radically different. With Profit First, you take a predetermined percentage of profit from every sale first, and only the remainder is available for expenses.

With Profit First you to flip the formula to Sales – Profit = Expenses.

Logically the math is the same, but from the standpoint of the entrepreneur’s behaviour it is radically different. With Profit First, you take a predetermined percentage of profit from every sale first, and only the remainder is available for expenses.

 

Implement a Rhythm

By doing the allocation process and paying bills twice a month (on the 10th and 25th) you benefit in two ways.

First, doing this process every two weeks means you are doing it in a batch – which means you are more efficient. Secondly it gives clarity on cash flow trends. He will see the income accumulate and disperse, like waves in the ocean. When he sees trend changes it may indicate an overall change (problem or opportunity). Just like waves indicate the tides.

For some businesses a weekly rhythm is better. In that case, select the day of the week (e.g., Friday’s) to allocate funds from the Income account to the allocation accounts.

Avoid doing the allocation process more frequently than once a week or ad hoc. A highly frequent rhythm or sporadic rhythm makes it difficult to observe the cash flow waves coming in and out of the Income account.

 

NGR Accounting’s ‘Profit First Package’

Here at NGR we offer a package that helps small businesses create a ‘profit making machine’. Here is a brief overview of what this package can offer your business.

As an Accountant we often see clients who have cashflow nightmares, you wonder why people do it year after year. In this program we first analyse your business and create the strategy to manage your cashflow so that you can start being profitable.

Stage 1: Analyse and create a new cashflow plan

Includes:

  • Review of Accounting System – is there one and is it being used well?
  • Review of current situation, what does the sales, payroll, operation expenses, owner wages and owner dividend look like?
  • Calculation of what revenue, operation expenses, and owner wages are advised to be
  • Work out and set KPI’s to reach, for example how many leads you need to convert to achieve the revenue target
  • Create Profit First System to suit your business and start your journey to business fulfillment

Stage 2: Ongoing support and financial coaching

Includes:

  • After implementing, first 6-12 months, monthly meetings to discuss the Profit First System and any roadblocks or problems in implementing the system
  • Once successfully implementing the system, quarterly meetings to review the financial success of the business, discuss any concerns in the business
  • Behind the scenes, we review accounting ratios and benchmarks

Identify external coaches or consultants to assist and help in other business areas besides financial aspects.