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Using the Profit First Method

About This Talk

This talk is by Ron Saharyan and was recorded on October 13, 2020. You can learn more about Ron Saharyan by:

Timestamps

0:00 Intro
1:30 What Is the Profit First Method?
5:56 Why Focus on Profit First
8:00 How the Profit First Method Works
12:30 How Your Business Can Do More With Less
17:25 How to Start With the Profit First Method

What Is the Profit First Method?

Every business is built on systems. You have a sales system, marketing system, a way of running your operations, and more. Systems make the machine that is your business. But most businesses are missing a cashflow system. 

Enter profit first. A lot of firms take an approach of sell, sell, sell, and then hopefully something is left over. We call that profit. Ron suggests you flip that equation on it’s head. 

Go from this: 

Sales – Expenses = Profit

To this: 

Sales – Profit = Expenses

The big idea here is to pay yourself and run your expenses as low as possible. If you focus doggedly on profit instead of orienting yourself to spending and expenses first, you’ll see a huge difference in the way you think about and approach profit. 

Why Focus on Profit First

Every business should have the security of 3-6 months of core capital available to weather various storms they might experience. Your business also needs a purpose, and typically the owner can’t achieve their purpose without profit. Whether it’s providing for your family, creating jobs for amazing people, and sneaking off to an early retirement, you need profit for achieve any of it. 

How the Profit First Method Works

You may have heard of grandmother’s envelope budgeting methodology. It’s pretty simple. Whenever grandma got a little bit of money, she put it in envelopes. She had an envelope for everything she needed to save or spend. One for housing, one for food, one for clothes, and so on. Anything extra went into a savings envelope or in the bank. 

When she went to the grocery store, she only spent money from the grocery envelope. 

Parkinson’s Law says that humans will exhaust all available resources in any amount or given period of time. This study about popcorn proves the point: people ate more popcorn if they were given larger containers, leaving about the same percentage uneaten no matter the size of the container. 

Here’s what it means for your business: the more money you have access to spend on expenses, the more you will. So remove the temptation, and do more with less. 

How Your Business Can Do More With Less

You’ll eat less popcorn if you have smaller popcorn bags. Fitness trainers will tell you to downgrade your dishes because smaller plates will help you eat less.

Let’s use bank accounts to keep your profit safe from spending. 

Ron recommends that you have 5 foundational accounts:

  1. Income account – this is a holding account where your money goes
  2. Profit account – this is a fixed percentage you allocate to profit
  3. Owner’s pay account – where you pay yourself as an owner
  4. Tax account – where you save for taxes (not including payroll taxes)
  5. Operating account – this is where your business cashflow happens (including your payroll taxes and other expenses and liabilities) 

Empowerment and Focus

Follow this methodology and you’ll feel empowered, and experience increased focus. You’ll feel empowered with the control you have over your expenses, and the added profit you can see growing in your bank account. You’ll be able to focus more on your craft, honing your expertise instead of worrying about making payroll or how much money will be left after expenses. 

How to Start With the Profit First Method

If you’re wondering how to get started, here’s how to start with the profit first method. 

Don’t jump straight into opening five bank accounts. Instead, start smaller. Ron recommends that you:

  1. Start with two bank accounts and one percentage you allocate
  2. Cut expenses relentlessly – tools, software subscriptions, overhead, staff
  3. Improve margins – evaluate inventory, pricing, and other variables that affect your margins and your ability to produce profit

The sooner you get started, the sooner you’ll see your profits grow. 

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