In this special Community Q&A episode, Annette Ferguson answers the top 10 most common questions about implementing Profit First in your business. Whether you're just starting out or looking to refine your system, this episode is packed with practical advice for UK business owners.
Key Takeaways:
• Profit First is for Everyone (with a catch): Learn why Profit First works for any business size or industry, but why you can't just take the percentages straight from the book.
• VAT is Not Your Money: Discover the right way to handle VAT in your Profit First system to avoid nasty surprises from HMRC.
• Feeling Overwhelmed? Start Here: Find out the one simple exercise you can do today to get your business finances under control, even if you're not ready for the full Profit First system.
In This Episode, You'll Learn:
• The 10 Most Common Profit First Questions: Get clear, actionable answers to your biggest questions about bank accounts, percentages, VAT, and more.
• Why Spreadsheets Don't Work: Understand the psychological and practical reasons why you need to physically separate your money.
• How to Reduce Your Operating Expenses: Learn the "Money Leaks Exercise" to identify and eliminate unnecessary spending in your business.
• The Right Way to Get Started: Discover how to determine your initial Profit First percentages and map your journey to financial health.
Resources Mentioned:
• "The Profit Plan" Book: Amazon UK
• Money Leaks Exercise: Find it on the YouTube Channel
• Book a Fitting Call: annetteandco.co.uk/fitting
Transcript: Your Top 10 Profit First Questions Answered
Host: Annette Ferguson
Podcast: Financial and Lifestyle Freedom for UK Business Owners
Welcome to the Financial and Lifestyle Freedom podcast with me Annette Ferguson. I hope you are very well today and I appreciate you tuning in and listening to the podcast. Now if you do get value from it I would love if you want to subscribe and also leave us a review in whichever podcast player you happen to be listening in. It really does mean a huge amount to us and it helps others find our podcast as well. Now you're about to listen to a session that I did which was a Q&A session all around Profit First. If you have any Profit First questions though do make sure that you pop me an email with those and I would be happy to answer them. You can email me at admin, A-D-M-I-N, at annetteandco.co.uk I'll also put this in the description to this podcast episode. Let's dive in.
Hello, hello everyone I hope you're well today. It is lovely to see you rhetorically of course on the live stream today the UK Profit Show. Thank you so much for tuning in and joining me and if you are watching please say hello even if you're tuning in on the replay please give me a hello in the comments let me know that you are here. It is always lovely to connect with those of you that are watching. Today is going to be our Profit First Q&A session so I have a number of questions that I have already been sent and have already been submitted however if you have a question please please ask in the comments and I will answer that as well. I'm not only going to answer pre submitted stuff so if you do have a question for me then please do ask that question in the comments and I will get around to answering that too. Now if you are tuning in on the replay and you will have a question again please just ask in the comments I will come back and check those to be able to then answer any other questions that may come up during this session from anyone as well so please do make sure that you ask.
For those of you that don't know me if you are stumbling across this live my name is Annette Ferguson I am CEO of Annette & Co a UK based accounting firm. I'm a Chartered Accountant, Certified Profit First Professional and Small Business Financial Strategist and fundamentally we help business owners take home more money from their business for them and their families to enjoy. Today we are speaking all about Profit First and answering your Profit First questions.
Now for those of you that don't know Profit First is a book by Mike Michalowicz and in this book it outlines a cash management strategy for businesses. Most businesses already have a transaction management strategy in place be that zero or QuickBooks a method of recording the transactions that happen in your business but in order to have a financially healthy business we need both a cash management strategy and a transaction management strategy so both need to exist and whilst most businesses as I said have a transaction management strategy many many businesses do not have a cash management strategy and that's exactly what Profit First is. It doesn't mean anything comes second, it doesn't mean that your employees or your ethics or your morals or anything comes second to profit. We are talking about the allocation of funds and the management of cash in a business when we are speaking about Profit First so please don't get it confused with anything to do with morals or ethics or humans or anything like that. This is the movement of cash that we're discussing.
So Profit First as I said it's a pretty robust cash management strategy one that we have been doing with business owners for over 10 years now and it makes a massive difference to the businesses that have this implemented and continue to operate it through in their business and I say continue to operate it because it's not a set once and done system it does need managed like any system in a business does.
So today as I said I am answering your Profit First questions so please do let me know in the comments if you have any please ask your question I will come round and answer those as well as the ones that I have pre-submitted but I'm going to dive now in to some of the questions that we have already had through so that I could answer those and perhaps some of those are ones that you may already have had as well. Before I do that I am going to take a quick drink of my tea and then we will look at the questions.
1. Who is Profit First for? Is it suitable for all businesses?
So the first question is who is Profit First for? Is it suitable for all businesses? This is a question I get asked quite frequently either in relation to industries or in relation to revenue. I had a call with a prospective client the other day who was wondering if their business was too small had too little revenue in order to implement Profit First and have that in place. And the answer is really that Profit First does work on all businesses all business sizes and all industries but you may need to tweak it to work for your business size and your business industry. Profit First straight out the book exactly as is written in the book doesn't necessarily always work straight away for every business type and every business size. Whilst the book gives us a great guideline as to how Profit First works and what our optimum percentages are it doesn't mean that that is the starting point actually for any business regardless of industry or size and it is a system that typically needs modelled and molded to your specific business. So that is exactly what we do for clients when they first come on board we establish what their starting Profit First percentages will be and how we will move them towards the ideal percentages that they want but that is a situation that you most businesses 99% of businesses cannot pluck the percentage allocations straight out the book and implement them straight away in their business. Most of the time when we see that happen with business owners they try it and then they end up taking back all the money back out the pots and the system collapses. So it is suitable for any business any size but with modifications.
2. Do I really need multiple bank accounts?
Okay so next question that I have here the book talks about setting up multiple bank accounts do I really need them? The very short answer is yes you do. Now with some of the challenger banks we have slightly different setups and systems so for example Starling has something called spaces Monzo has something called pots and so they don't necessarily need to be separate actual bank accounts you can utilize that functionality within the challenger banks that exist. So for example in my business we use Starling for banking and that is what we run Profit First through we use Starling but you do need some way of segmenting the money of physically segmenting them because a follow-on question from this that I sometimes get from people although I don't think I've had it submitted today is can I just track this on a spreadsheet instead and not physically move the money around and the answer is no you can't because that takes away part of the benefits that you actually get from Profit First so having the tax money physically set aside if you do it in a spreadsheet you can spend that money it goes whereas having monies physically set aside for its different purposes is part of what you get as a benefit from Profit First it helps both with mindset and actually the cash not being available in places it shouldn't be and being available in places that it should be as well. So the answer is yes you do need some way to segment the actual money into different bank accounts and or pots or spaces whatever that happens to be with whatever bank you are using at this point in time.
3. How do I determine the right percentages?
Okay and the next question we have here is how do I determine the right percentages for my profit owners pay tax and operating expenses? So as I briefly mentioned this is an exercise that we do with clients when they first come on board over the first six weeks we build out what we call a profit plan it is a forward-looking cash projection for the business with the principles of Profit First layered into it so we can establish our initial Profit First percentages which more than likely are probably nowhere near the percentages you will find in the Profit First book but we need to start somewhere with our percentages. So what I recommend that you do to determine your initial percentages that you're going to use is that you build out your own version of a profit plan you build out a forward-looking cash projection and you calculate where those percentages start so that you can get a good understanding of how the business is operating now and then you can map out how you're going to move closer to those Profit First percentages that exist in the book. Now speaking of books I do also have a book called The Profit Plan if you want to do this yourself then the book is a Kindle book it is only 77 pence or something like that on Amazon so if you go and go on to Amazon and you search The Profit Plan I suspect if you search my name Annette Ferguson it will also come up but if you search The Profit Plan book it's called The Profit Plan the science of predictable profit as I say it is 77 pence to buy on Kindle but it's also available on Kindle Unlimited so you'll be able to access that there as well if you want a step-by-step guide on exactly how to have your own profit plan in your business as well.
4. How often should I be allocating my income?
So our next question how often should I be allocating my income to the different accounts can I just do it monthly? So the idea part of the idea of Profit First there are lots of benefits from Profit First but one of them is that you can actually see the cadence of cash coming in and cash going out to your business and we recommend that you do actually do Profit First on a weekly basis so you can see that and you're in touch with the money more and I know that Mike has spoken in the past saying that he often does his allocations weekly now as well and not just not sticking to the 10th and 25th so we recommend that you do weekly and you choose a day of the week and you set aside 10 to 15 minutes in your diary as a recurring diary entry with yourself so that you can get into the habit of doing your Profit First allocations on a weekly basis that enables you as I said to get closer to the cash to understand the income incomings and outgoings much more closely and also lets you see that cadence of money coming in and coming out so that you can start to get a really good handle on what that looks like for your business that's a really important part of doing this therefore if you leave it monthly you don't get to see that it takes away it also typically means that many people would forget if they don't do it as frequently and that's what we typically found with the 10th and 25th method is people would forget or the 10th would fall on a Sunday and they wouldn't actually be working that day so that's why weekly and choosing a day of the week that's going to work for you typically works best for allocations and we do recommend that you don't leave it till monthly that you do do it much more frequently than monthly ideally on a weekly basis.
5. How does VAT fit into Profit First?
Remember if you have any Profit First questions please please do ask those in the comments I will answer any that we get in live as they come in so I will answer those for you if you are tuning in on a replay and watching this back out with the live session you can still ask questions in the comments I will make sure that I come back and check those for any questions that you have so that I can answer those for you as well. Our next question in how does VAT fit into Profit First this is my biggest concern. So VAT is not covered at all in the Profit First book because it's not a tax that exists in the US and Mike is a US author but how we work Profit First and VAT is that we need to have a separate account for VAT in the business and how we do this with clients is we actually get them to allocate the VAT money out straight away before they even make allocations to profit and that is because the VAT money is just not yours. When you are a VAT registered business you are collecting VAT on behalf of the government you are a tax collector this is not your money and therefore setting aside at the very beginning before you work out how much you can allocate out to the different pots is really important so that's what we really recommend when you are VAT registered with Profit First is that the VAT goes out straight away to your VAT account and it waits there for when you get to make your VAT payment typically quarterly over to HMRC.
6. UK Banking recommendations for Profit First?
Next we say have are there any specific UK banking recommendations for setting up the multiple bank accounts required for Profit First? I touched on this in one of my earlier answers but any bank you can work with Profit First you can have current accounts and then multiple savings accounts set up we haven't seen a bank yet that cannot be put in place one of the traditional banks or having these kind of pots spaces functionalities that the challenger banks have so you can use either some people have a mixture of the two so they may have for example a tax hold account in a traditional bank and they may then have their sort of day-to-day working accounts that they're using in in a challenger bank like like Starling or Monzo that is a good way to that's a good way to run it is to have have that sort of set up in the business is is a typical setup that we would recommend nowadays these things of course change a little bit over time as well as different banks come in with different types of service offerings but that's the type of thing that I would be looking at and as I said we use Starling in in my business to implement Profit First with as well.
7. How do I reduce my operating expenses?
Next we have I've been using a Profit First for a while but my operating expenses still seem too high what are some strategies for reducing that percentage? I like to tell people to have a look at our money leaks exercise you can find it on the YouTube channel if you're watching on YouTube and I will briefly speak through it now but the idea is that you gather together all your business bank statements, business credit card statements, PayPal wherever business spending is happening you gather together all the transactions for the last 12 months and then you can go through and if you have a physical copy I take a highlighter and a red pen to those and I would go through every single page every month every line and ask yourself first of all when you do the first pass is this expense 100% necessary to keep the proverbial lights on in my business and if the answer is yes you can highlight that transaction and you ask 12 months for some things and that's okay because they recur and you've got 12 times that's alright. Then you go back through the transactions and with your red pen this time ask yourself is this expense 100 sorry is this expense leaving me a positive return on the money I'm spending out so am I getting more money in or is it releasing my time for me to go and be revenue generating and if the answer is yes you can circle that. Then what you end up with is you end up with some transactions circled some highlighted some both and some with nothing marked on them and the question I have for you is with nothing marked what are those expenses what is the purpose and typically the purpose is they are nice-to-haves and whilst nice-to-haves are nice-to-have we need to also remember that nice-to-haves inflate our operating costs and decrease our profit and therefore are you willing to keep that nice-to-have on that basis and the answer might be yes but then you now know that you're doing this consciously and you're not just overspending in the business so that is what I recommend if you are in a situation where it still feels like your operating expenses are too high going through them and making sure that they are either 100% necessary to keep the lights on or they do living delivering you a positive return on in your business in terms of money or in terms of time okay.
8. How does Profit First help with big financial decisions?
Okay what have we got next up let me take a drink of my tea whilst I read and have a look at to see if you've got any comments in as well. How does profit first help with making big financial decisions in the business like hiring new team members or investing in software? So this tallies in with what I was mentioning before about building a profit plan building a forward-looking cash projection for your business and that is exactly how you would use Profit First to help with those big decisions. You would model out the different scenarios so you would model out what would happen if you hired a new team member what would happen if you invested in that software what would happen if you made that big purchase and you would see what the impact of that is on your cash flow and on your profitability and that enables you to make a data-driven decision rather than a gut feeling decision and that is a really important part of being a business owner is making data-driven decisions and not just gut feeling decisions. So that is how you would use Profit First to help with those big decisions.
9. Do I need both Profit First and accounting software?
Next question is do I need both Profit First and an accounting software like zero or QuickBooks? Yes you do. Profit First is a cash management strategy and your accounting software is a transaction management strategy. A financially healthy business needs both those things. It needs a way of managing the cash and it needs a way of managing the transactions and the records and those online softwares help and support you to do that as well so yes you absolutely need both and you should make sure that all your bank accounts are connected to your software for transaction management they all need to be in there whether that's two separate savings accounts your current accounts whether that is PayPal accounts Stripe accounts all those things credit card accounts they need to all be connected within your transaction management system.
10. I'm feeling overwhelmed, where do I start?
And the final question that I have that was a was a pre submitted question I as I say I'm happy to take other questions just let me know in the comments what your question is and I will answer that I'm starting to feel a bit overwhelmed where do I start so where to start with profit first hmm the ideal position is to build out a cash flow forecast and work out what your starting percentages are but if that all feels way too much that's okay start with your money leaks exercise that I described earlier so understanding whether the spending in your business is 100% necessary to keep the light lights on delivers you a positive return if it is neither of those two then it's a nice to have and what's nice to haves are great to have we don't necessarily want them in our business when we're trying to change the financial trajectory and therefore understanding that the more nice-to-haves you have in your business the less you have profit therefore establishing whether some of those nice-to-haves shouldn't exist anymore and you should cancel those that is the very first thing to do if the whole idea of getting this in place is overwhelming get your money leaks under control first and then you can move on to getting profit first set up and in place a little bit easier because you will have freed up some funds in your business to give yourself a little bit of breathing room if it feels like you have none at this point in time.
Right any questions that are coming in from our various platforms that we are on I'm just going to check the streams on my phone as well because occasionally they don't actually show on on my dashboard here but they will show in they will show if I click on them in the streams so I'm just checking there as well but if you do have any profit first questions please do ask them in the comments I would love to answer those for you so please do let me know I can't see any coming through here I think everyone must be shy today but that's okay if you are as I said tuning in on the replay you can also ask those after the fact and I will come back and answer those for you as well. I thank you so much for tuning in today too I know your time is incredibly precious so I really do appreciate you some spending some of it with me I hope this has been helpful as well for you on your profit first journey as I said we have been implementing profit first for over 10 years now both in our own business and with our clients businesses as well and we have seen massive massive results from those people that do implement profit first so I really hope that you get a chance to start working on this in your business if you have not already. If you want to have a chat with us about how we can support you to help get profit first in place then please do book a call with me it's Annette and co.co.uk slash fitting is our URL for our call it's also should be in the description to this video as well or you can just head to the website Annette and co.co.uk and you'll be able to click the link there to the relevant page for booking a call but as I say thank you so much for tuning in and joining me today I do appreciate your time I know it's incredibly precious so thank you so much for spending some of that with me today and I will see you all again really soon take care everyone
