Setting up the Foundations to Get Profit First Installed Into Your Business
I want to give a little bit of an overview of Profit First as well today, because some people will have heard of the book, perhaps even purchased the book, but perhaps it's just sitting on your bookshelf, not quite read, or perhaps you read and flick through the first few pages, but you haven't digested exactly what it's all about. Even though you know from the messaging that you want to make sure that you get that into your business.
Profit First is a Cash Management System
Most businesses don't have a system for managing cash. Most businesses, when it comes to the financial systems and controls in their business, they have a transaction management system. So whether that be QuickBooks, Xero, or even using Excel or Google Sheets, spreadsheets, they have a system to manage and track the transactions in their business. But most small business owners, and by most I mean the vast majority of small business owners don't have a cash management system installed in their business. Often because they don't even know that they need to have one or perhaps that they understand they need to have one but it's scary. It's a big thing. They're worried they don't know about doing it wrong. They're scared they can mess it up. All those things are so many reasons that people don't.
But nonetheless, for a financially healthy business, we do need to make sure that we have a cash management system installed in our business as well as a transaction management system, so like I said, your Xero, your QuickBooks, even your spreadsheets, that's a transaction management system. That is legally required for both sole traders and UK Limited companies to comply with the rules around keeping accurate books and records. But the thing that's not legally required is a cash management system. But in reality, that's the thing that makes sure that your business lasts, makes sure that your business can keep going and not run out of money, make sure that your business can remain profitable, so that you can keep on trading.
Dave Ramsey's Envelope Method for Personal Finances
Profit First uses a very similar methodology to Dave Ramsey's envelope method for personal finances. Perhaps you didn't even see this from Dave Ramsey himself. Because it goes back a lot further than that.
I used to see my granny and granddad and when my granddad would come home from work on a Friday, he would have his paycheck in his hand. And in those days, that was cash in an envelope. And what he would do is when he came in, he would hand it to my granny. And my granny would divvy up the money into separate envelopes. What she would do is she would put some in the rent envelope. She would put some in the utilities envelope, some in the food envelope, some in the kids stuff, envelope, etc. And she would partition out their individual paycheck every single week, so that she knew that when rent time came, she would have the money in the rent envelope.
And that is what Profit First does. But for business.
What it says is, when money comes into your business, you need to put some in the profit pot, some in the owners pay pot, some in the tax pot and some in the operating expenses part of your business.
And you do that in set percentages. Then when it comes time to make payments, you have the money there so that you are not in a panic. You know that everything is covered in your business.
That is the cash management strategy that really we want to have installed in our business. So we are not waking up in the middle of the night panicking about cash flow, so that we know that when it comes time to make our tax payments, the money is sitting there. We don't take the cash out of our business and put it in envelopes, instead, what we do is we have separate bank accounts in our business.
Profit First Bank Accounts and Why You Need Them
Now, if you are with a traditional bank, one of the traditional high street banks, then those separate bank accounts, the setup for that is that you have your income bank account, which is where all the money comes in, and your expenses bank account, which is where all your direct debits go out, set up as current accounts. And then the other three as minimum accounts that you require are profit, owners, pay and tax. We would have those set up as savings accounts. This is because it's easier with banking and it reduces your bank fees.
The rules, definitions, and framework could make all the difference between profit first helping you or forcing itself out of a job.
This may sound daunting if you've never included this in your business, but the initial steps are exciting, and they include setting up those financial foundations that will then lead to a full-blown Profit First implementation.
If you're interested in joining this sprint as well, do make sure that you join our Facebook group and catch up with the sessions.
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