Profit First Method: The ultimate guide to setting up your Profit First accounts
The Profit First method is a game-changing method for running a profitable business (yes, please!) that is easy to learn and simple to implement. In this guide, we'll run you through how to set up Profit First and why Thriday is the perfect tool for small businesses to keep track of their profits.
The Profit First Method is a financial management system created by author and entrepreneur Mike Michalowicz. The system is designed to help businesses achieve profitability by prioritising profit over revenue. The Profit First method is unique because it requires business owners to set aside a percentage of all their income into a "profit" account. By taking Profit out first, all the remaining money is divided to cover salaries, operating expenses and taxes. Once implemented, business owners must prioritise profit-making and only spending within their means.
"The Profit First method is unique because it requires business owners to set aside a percentage of all their income into a 'profit' account."
What is Profit First?
The Profit First system has gained popularity among small business owners and entrepreneurs as a simple and effective way to improve financial health, achieve financial stability, and ultimately run a sustainable business. In Australia, awareness and training on the Profit First model is overseen by Profit First Professionals Australia, a proud partner of Thriday.
What are the Profit First accounts?
To start with Profit First, you must set up separate bank accounts for different financial 'buckets' or goals, such as profit, taxes, operating expenses, and owner's salary. These accounts are used to allocate a percentage of revenue to each financial goal and to ensure that small businesses can prioritise profit over revenue. Here are the different Profit First bank accounts that small businesses should set up:
- Revenue: This account is where all your income should be deposited into. If you invoice clients with Thriday, you would select this account to be displayed on your invoices. This is where the funds will then be disbursed to the other accounts.
- Profit: This account holds a percentage of revenue allocated to Profit and is what the model is named after. The funds in this account can be used to pay dividends at the end of the year or to invest in the future growth of the business.
- Tax: This account stores a percentage of revenue allocated to pay taxes. In Australia, you may use this money for GST (or see later if you want a separate account), income tax, and payroll tax. With Thriday, you can see your predicted and estimated tax bill in real-time so that you can move funds to this account based on the data in Thriday.
- Opex: This account holds a percentage of revenue to cover operating expenses. The money held in this account can be used to pay for software, utilities, rent and other costs. When using Thriday, it makes sense to have your Thriday Visa Debit card* linked to this account.
- Owner's Pay: This account holds a percentage of revenue that is allocated to your owner's pay. The money in this account should be what you draw down on for your personal day-to-day living expenses.
- GST account: If you are registered for GST, you may want to set up a separate account for GST. When income comes in, you can set aside 10%, so you are not left short at BAS and tax time. Because the money is not yours, it's ultimately the Government's, a GST account is a good idea for Aussie small businesses.
Thriday is the best tool for setting up these accounts, as users can create bank accounts* for free, and it only takes a few minutes. Once you sign up for Thriday, you will instantly be issued with a business bank account*, and then you can create up to nine more with a press of a button. You can also nominate the account you want to get paid into when you issue Thriday invoices. You can check out this video to see how easy it is.
The frequency at which you should review your Profit First target allocations will depend on the specific needs of your business and how quickly your business is growing. Small businesses should review their allocation percentages regularly, such as monthly or quarterly. We recommend you connect with a trained and certified Profit First Australia coach to get started. You can also participate in online events and webinars by Profit First Professionals Australia.
Having a coach can ensure you make the right adjustments as needed and ensure that you are on track to meet your business profit goals. Reviewing the allocations frequently gives you a better understanding of the financial health of your business, allowing you to make better decisions about where to invest your time and resources. It's important to note that the allocation percentages you have set up will need to be adjusted accordingly as the business evolves.
What are some other Profit First account types?
In addition to the five main Profit First accounts (Profit, Tax, Operating Expenses and Owner's Salary) listed earlier, some small businesses may also consider creating additional sub-accounts for specific needs.
- Reserve account: This account can hold a percentage of revenue for a rainy day. The money in this account can cover unexpected expenses or emergency situations.
- Capital Expenditure account: This account can hold a percentage of revenue for capital expenditures, such as equipment, vehicles or property purchases.
- Debt repayment account: This account holds a percentage of revenue for paying off debts, such as business loans or credit card balances.
- Marketing account: This account can hold a percentage of revenue for marketing and advertising expenses, such as creating and running ads or attending trade shows.
- Super account: This account holds a percentage of revenue for super contributions.
It's important to note that these accounts are not mandatory for the Profit First method, but they can be added as per your business needs and goals. The key is to set them up based on the specific requirements of your business and to monitor and adjust the allocation percentages regularly to ensure that the company is meeting its profit goals.
What types of businesses can use the Profit First method?
The Profit First method is designed to help small businesses of all shapes and sizes focus on generating profits. As such, the method is well-suited to a wide range of businesses, including:
- Trade and construction businesses: Construction and contractor businesses can use the Profit First method to allocate a percentage of revenue to Profit, taxes, operating expenses, and owner's compensation.
- Design and creative businesses: Profit First is perfect for people in creative fields such as photography, design, and make-up. With Thriday, it only takes a couple of minutes to set up as well.
- Service-based businesses: Businesses that provide services, such as consulting, coaching, or professional services, can benefit significantly from implementing the Profit First method.
- Retail businesses: Retail businesses, such as brick-and-mortar stores or online shops, can use Thriday and the Profit First method to allocate a percentage of revenue to Profit.
- Transport businesses: Transport businesses, such as taxi drivers, rideshare drivers, couriers or gig workers, can use the Profit First method to allocate a percentage of revenue to Profit, taxes, operating expenses, and owner's compensation.
The Profit First method works by shifting the focus of small businesses from generating revenue to generating profits. By setting up separate bank accounts* for different financial goals and allocating a percentage of revenue to each sub-account, small businesses can ensure that they are always able to prioritise Profit over revenue. Profit First can help all companies to achieve financial stability and increase profitability over time. Make Profit First your competitive advantage today with Thriday.