In this episode of Financial and Lifestyle Freedom for UK Business Owners, Annette Ferguson dives deep into the Profit First cash management system and reveals the five biggest mistakes UK businesses make when trying to implement it. If you've ever struggled to get Profit First working for your business, or if you're considering implementing it, this episode is packed with essential advice.
Key Takeaways:
• Profit First is Not One-Size-Fits-All: Learn why you can't just take the percentages from the book and apply them to your UK business.
• VAT is a Critical Factor: Discover why ignoring VAT is a major pitfall and how to handle it correctly within your Profit First system.
• Professional Guidance is Key: Understand why going it alone with Profit First often leads to failure and how professional support can ensure your success.
In This Episode, You'll Learn:
• The 5 Biggest Profit First Mistakes: Annette breaks down the common errors that cause UK businesses to fail with Profit First, from incorrect bank account setups to treating it as a one-time system.
• How to Adapt Profit First for the UK: Get practical advice on adjusting the system for the UK's unique tax and banking systems.
• The Importance of Regular Reviews: Learn why Profit First is not a "set and forget" system and how to actively manage it for long-term success.
Resources Mentioned:
• Book a Fitting Call with Annette & Co: https://www.annetteandco.co.uk/fitting/
• Free Profit First Core Chapters: https://www.annetteandco.co.uk/pfbook/
Episode 555 Transcript: Why most UK Businesses Get Profit First Wrong
Host: Annette Ferguson
Podcast: Financial and Lifestyle Freedom for UK Business Owners
Welcome to the Financial and Lifestyle Freedom podcast with me Annette Ferguson. What you're about to listen to is a live that I did on YouTube called the five big profit first mistakes UK businesses make. I hope you enjoy.
For those of you that don't know me, if you've stumbled across this live stream or in fact the replay, my name is Annette Ferguson, I am CEO of Annette & Co UK based accounting firm. I am a Chartered Accountant, Certified Profit First Professional and Small Business Financial Strategist. My company, as I said, is Annette & Co. So you can check out more about me by going to annetteandco.co.uk.
Today I want to speak about profit first and why most UK businesses get profit first wrong. But you maybe haven't even heard of profit first. So I'm going to tell you a little bit about it. Profit first is a book by Mike Michalowicz with the same name. Profit first is also a cash management system. And whilst many businesses have a method of transaction management in their business, so that's Xero or QuickBooks or something along those lines, there are also a number of businesses that do not have a cash management system and in fact most. So most have a transaction management system, but are lacking a cash management system.
In order for a business to be financially healthy, it needs both. It needs a cash management system and a transaction management system. So if you do not have a cash management system in your business, I highly, highly recommend profit first. You can pick up a copy physically, there is an e-book, all those things. But I highly recommend it because this is a method of cash management that supports the business owner getting paid. It also supports you having the tax money when the tax time is due. All these good things that quite frankly help us as business owners sleep better at night.
So what I would love to know, as we are getting stuck into the topic for today, is I would love to know if you have implemented profit first. If you want to tell me in the comments, that would be incredible, but I also understand that some people can be a little bit shy with commenting on live videos, but I would love to know if you have implemented profit first, even if you're watching the replay. Let me know in the comments to this video because I will look back and check on what people are saying as well.
Now this is the UK profit show and this show is going to be happening every single Tuesday. For the most part, it will be at midday at 12 noon UK time. There will be the odd week where I perhaps have to change it due to my schedule or previous things that are in the diary, but for the most part, it will be 12 o'clock but you can check my socials for whether that time changes or whether that stays the same. But I would love to know if you have implemented profit first, do let me know in the comments because it is always good to know where people are when we're speaking about all of these things as well.
And as I mentioned, today's session is all about why most UK businesses get profit first wrong. And I'm going to tell you today, the five biggest mistakes that I see from UK business owners who try to implement profit first and how you can avoid those mistakes.
So what I would also love to know as we're going through because I can answer these questions are what is your biggest challenge with profit first for those people that have tried to implement profit first or are implementing profit first. If you can let me know what your biggest challenge with that is again in the comments, and then I will be able to come back and help and support you with those questions as well or with those challenges as well.
Mistake #1: Using US-Based Percentages Without Adjusting for the UK
So the first thing I want to speak about mistake number one is using those US based percentages without adjusting for the UK. Okay, so the first mistake is just taking the percentages straight out the book and running with them. Because whilst they are a great beginning point, for us understanding profit first, our systems, our tax system, our banking system, our systems are different to the US. We have a lot in common with the US, but our tax system is actually quite different.
And so for example, what you will see in the profit first book is you will see 15% of revenue as the suggested amount for most revenue levels to be put to tax. And this is to cover personal tax and corporate tax. But actually, the percentage that you want to allocate to tax depends on the structure of the business, how you are taking money home. And of course, there's the AT and additional tax that we have to think about as well. And not to mention PAYE taxes too. So we have a different structure, particularly when it comes to tax. And if you're just taking 15% of your revenue, as is suggested in the profit first book, the likelihood is you actually won't have enough saved in your tax account.
Now, it's great, it's a great starting point, because it's better to have some saved than nothing at all, but you're not going to be fully covered. So making sure that you understand the nuances of what your tax percentages should be for your specific business, based on the structure, based on how you take money home, is really, really important.
Mistake #2: Ignoring VAT
I'm going to drink a cup of tea as well, because I can hear my voice starting to crack. Excuse me. Okay, there we go. Now mistake number two, I just this second touched on, because mistake number two is ignoring VAT, ignoring the timing of VAT and ignoring VAT in your allocations.
So if you are VAT registered, it is incredibly important that you also have a VAT, bank account, pot or space under profit first, and you are allocating into that each week, or each two weeks as you do your allocation. It's also really important if you're not a VAT registered business, because you are under the threshold, that you are keeping an eye on your VAT threshold, because at some point, you may reach that and then have to start allocating for VAT.
So if you're not VAT registered just now, and you're below the threshold, don't just ignore this, because you do need to track your VAT, and you need to track it monthly, that is part of the legislation, you need to be tracking your revenue on a monthly basis to ensure that you have not breached the VAT threshold. If you are close to the VAT threshold, this is really, really important, because you may have to start charging VAT and setting that aside.
Remember, VAT is not our money as business owners, VAT is the tax man's money, and we are basically tax collectors. Lots of people kind of forget that that's all we're doing with VAT, we are collecting tax and we are giving it to the VAT man, it's not ours to spend, therefore, we need to be allocating that separately. And the best way to do that is actually taking the total money that has come in, allocating your VAT percentage, and then using that balance for the rest of your allocations.
Remember as well, that depending again, on your revenue size, the allocations for VAT and the amount you pay for VAT may be on what's called an accruals basis. So you are paying VAT before the cash has come in. And if you are in that situation, you're going to have to tweak your percentages further to account for the fact that your VAT is done on an accruals basis, and your allocations are done on a cash basis. So that can be a really important distinction that if you're VAT registered, and you are doing accrual accounting for VAT, that you need to make sure you are taking into account when you are working out what your allocations should be as well. Okay?
Mistake #3: Setting Up Bank Accounts Incorrectly
Mistake number three is setting up bank accounts incorrectly. Now, I am of the opinion that the more bank accounts there are, the better. What we often see from people is that they will group all the taxes together because the book just has one tax account. So they'll put their personal tax, their corporation tax, any employee's PAYE tax, and VAT all in one tax account. That is really dangerous because at no point can you get a good handle on how much is available in there for your tax bills. It's really difficult to do a reconciliation of whether you're putting the right percentages in or not into those accounts.
So making sure that you are setting up the accounts in alignment with your business. Because the other thing is, let's say you are a business, it's a retailer, you're going to want an inventory account. Let's say that you have staff, you're going to want a team account. And many, many businesses don't have an emergency fund account, which again, you're going to want if you don't have it. So understanding how to set up the accounts correctly for your specific business goes way beyond what you will read in the book. And making sure that actually your bank accounts are in alignment with your business, your type of business, your business model, and your ultimate financial goals is really, really important in getting profit first working in your business and managing to get the benefits of that at the end of the day as well. Okay.
Mistake #4: Treating Profit First as a One-Time Setup
The next mistake that we see from people is treating profit first as a one-time setup. So they maybe just work with somebody to get it set up, or they just set it up in their business and they assume it's a set and forget system. If profit first is done correctly, it is anything but a set and forget system. It is something that needs reviewed regularly. And we review this with clients on a monthly basis. We are reviewing their allocation percentages. We are making sure the right amounts in the tax account. And this is something that if you're implementing profit first yourself, you need to have time set aside each month to review and make sure that you are on the right track.
Because otherwise, whilst you can be setting aside money for tax, as I said, you can get to the year end and realise the tax pot is very short if you are just setting it up, running with it, and assuming everything will stay the same. Because remember, tax rates vary as your profit goes up, as your take home goes up, and therefore things do need to be tweaked and changed. Also, your business changes over time. So it might be that you didn't have team and now you've got four team members. And these things all need to be taken into account when you are looking at your profit first percentages and working out where those need to be. So profit first is not a set and forget system. It is a cash management system and it needs to be actively managed in order for it to be successful and actually work in the longer term in your business as a business system as a proper business system as well.
Mistake #5: Going It Alone Without Professional Guidance
And these items all really add to mistake number five. Mistake number five is going alone without professional guidance. And when we see businesses that have done this, they are typically making all of mistakes number one to four. So they are typically having issues with percentages, having issues with BAT, having issues with having the right account set up, treating it as a one time system, which then falls apart and falls over because there's not that level of scrutiny and expertise that is happening on a regular basis for this system.
On paper, this system is very simple, but actually there are individual nuances that exist for different industries, different business models, and different end financial goals. We have implemented profit first with in excess of 200 companies it will be now over the last 10 years. And that is a key reason, this is a key reason why businesses don't stick to profit first, they go in, they get the bank account set up, they get really excited, and then it falls off a cliff, because there is no professional guidance and support.
So this is really important in getting profit first actually working in the long term in your business, whether that is working with a profit first accountant, or coach in your business, and many profit first accountants also do just coaching as well. Whereas the coaches obviously don't do the accounting function. So there's, there's that element to consider as well. But if you're working with a profit first professional, somebody who has been qualified in the profit first methodology, then they will be able to help and support you with this.
We have been profit first certified for, as I said, for 10 years, and we've helped hundreds of businesses through this system. So I highly recommend you get some professional guidance and support. If you have any of these mistakes happening in your business, or if you've tried implementing profit first, and it's fallen over, you've fallen off the bandwagon, then please do reach out to a profit first professional, so that you can get professional support and guidance with this as well.
Now, as I've said, I am Annette Ferguson, and at Annette & Co, we have over 10 years worth of experience as being certified profit first professionals. But we are not the only ones in the UK. And I'm sure that you can, if you don't like me, you can reach out to some others as well. But we would love if you want to reach out to us for help and support with this. You can book a call through my website, a fitting call to see if we're the right fit for you. And you're the right fit for us, if you are considering getting profit first, working a little better in your business than perhaps it is, or if profit first has actually maybe been one of those things that's been on your to do list for a long time, then perhaps it's worth reaching out, there is no pressure.
This isn't a salesy call, it's just to work out whether this is something that you want to proceed with in your business for your finances or not. And if we're the right people to actually help and support you with that. So I would love to have a call with you and discuss that with you if that's going to be something that you are thinking about in your business.
Now as I said, if you have stumbled across this and you haven't really heard of profit first at all, and you don't really know what I'm talking about, the book is a great place to start. I do have the core chapters available as a free PDF download on the website as well. So you can just go to Annette and co.co.uk without the slash fitting that's on the screen there to get a copy of the core chapters for free and straight to your inbox as well if that is something that you are interested in and you have not read the book, you don't have a copy of it, you've not seen it, it's available on Audible as well. So if you're a listening person, then you can listen to that there too.
But I appreciate you tuning in this week to our session, it has been lovely to see you. This is the UK Profit Show and it will be live with me every Tuesday, typically at midday. Now next week we are speaking about, let me look it up, we have a client spotlight and we're speaking about how Sarah went from zero to 4000 pounds monthly profit in her business. So we will be going through basically Sarah's situation, the week by week transformation and the kind of breakthrough moment and the key lessons that were learned when we worked with Sarah to get profit first set up and implementation in her business and we work with her on an ongoing basis as well. So I'll be going through that case study with you on next week's session.
Please mark it in your diaries, come and watch wherever you happen to be watching today. I do appreciate your time, I know it is incredibly precious so thank you so much for spending some of it with me here today and I will speak to you all very soon. Take care everyone.
I do hope that you enjoyed listening to that episode. If you do enjoy the podcast, please, please do make sure that you subscribe in whichever podcast player you happen to be listening in and also it would mean a massive amount to us if you leave a review. Reviews are the way that other people find this podcast as well so it would mean a lot and I will speak to you all soon.
