Can I use Profit First as a Sole Trader?
What typically happens for most business owners, is that we live cheque to cheque. Meaning, the money comes in and it seems to go back out just as fast. Resulting in very little (if any) left over for the business owners.
This is because most businesses are run using the traditional model of
Sales - Expenses = Profit
Which gives profit as the leftover, the reminder.
The basic idea of Profit First is that it switches the formula on its head and looks at your business as:
Sales - Profit = Expenses
This means you start putting money aside for Profit and you run your business off the leftovers.
This concept is typically daunting to start with, and many people ask “if I had no profit before, how does it end up magically appearing after I turn the formula around?”
Well, the answer is that it does just appear, but this is the start of the shift towards taking more money home from your business. One exercise that can really help with this too is what we call, our Money Leaks Exercise and you can find that here.
Profit First can be used if you run a limited company or if you are a sole trader.
How Do I Use the Profit First Approach as a Sole Trader?
If you are new to Profit First, you can find out much more about it here.
As a sole trader, we recommend that you operate Profit First via business bank accounts (and not personal accounts). If you are curious about what banks to use for Profit First, you can find out more here
You will need the following bank accounts (or spaces/pots if you are using a Challenger bank, like Starling)
Once sales come in, distribute the funds into different pockets or bank accounts:
The income account. This is where your sales money comes in.
The profit account. This is where you regularly allocate a certain percentage of your sales money as profit.
The owners pay account. This is where the money that goes to you goes.
The tax account. This is where the percentage you owe to taxes falls.
Lastly, the operating expenses account. This is where you keep the money for your business’s daily operating expenses.
While distributing money that came in from your business, you have to pay your profit account first. This way, you don’t treat your profit as an afterthought.
Make It a Habit
Make sure you set aside time each week (or every 2 weeks) to allocate under Profit First. You have to make saving in your business a habit (over spending!). In doing that you will take more money home for you and your family to enjoy.