The Ultimate Guide to Implementing Profit First in a UK Business
Whilst most business have a transaction management system (eg Xero, Quickbooks), many do not have a Cash Management System (eg implement Profit First); and for a business to be financially healthy, it needs both in place.
Profit First is a cash management system that flips traditional accounting equation on its head. Instead of calculating profit as what’s left after expenses (Revenue - Expenses = Profit), the Profit First method ensures your business is consistently profitable by prioritising profit first (Revenue - Profit = Expenses). For UK business owners, this system can be a game-changer, providing clarity, control, and confidence in managing cash flow.
In this guide, you’ll learn how to implement Profit First step by step, with insights tailored specifically to the UK business environment. Let’s get started.
Why Profit First Works
The Profit First methodology is built on behavioural principles that make it easier to manage finances effectively:
1. Allocating First
By taking profit off the top before dealing with expenses, you’re forced to run a leaner, more efficient operation.
2. Smaller Plates
Allocating money into different accounts creates constraints, encouraging smarter spending and better financial decisions.
3. Visibility
Separating money into multiple accounts makes it easier to see where your cash is and how much is available for each purpose.
For UK businesses, this approach helps business owners address common pain points, such as irregular cash flow, tax bills, and difficulty paying themselves consistently.
Step 1: Open the Right Bank Accounts
To implement Profit First effectively, you’ll need to set up multiple bank accounts; or if you are using Challenger banks such as Starling or Monzo, you can use their pots/spaces functionality. Here are the five essential accounts for UK businesses:
1. Income Account
- This account receives all incoming revenue.
- It acts as a holding account from which funds are distributed to other accounts.
2. Profit Account
- Set aside a percentage of revenue as profit.
- This account is not to be touched except for quarterly profit first distributions.
3. Owner’s Pay Account
- Allocate funds to ensure you pay yourself consistently.
- This helps eliminate the “pay-yourself-last” mentality.
4. Tax Account
- Reserve funds for taxes, including VAT, Corporation Tax, and PAYE - I recommend a different tax account for each tax.
- This ensures you’re never scrambling to cover your tax bills.
5. Operating Expenses Account
- Cover all regular business expenses from this account.
- The constraints on this account will drive efficiency.
Most UK banks, such as Starling, Monzo, or traditional banks like Barclays and Lloyds, offer the ability to create multiple business accounts or “pots” for this purpose. Ensure the accounts are free or have minimal fees to avoid unnecessary costs.
Step 2: Determine Your Profit First Percentages
The next step is to determine what percentage of your revenue will go to each account. These are referred to as Target Allocation Percentages (TAPs). Here’s how to get started:
1. Assess Your Current Situation
- Review your income and expenses for the past 12 months.
- Identify your current percentages for profit, owner’s pay, tax, and operating expenses.
2. Set Your Initial Percentages
- Start with realistic, incremental percentages based on your current financial position. For example:
- Profit: 1%
- Owner’s Pay: 40%
- Tax: 15%
- Operating Expenses: 44%
3. Work Toward Target Percentages
- Over time, gradually increase the percentages for profit and owner’s pay while reducing operating expenses.
- Typical target percentages for a UK service-based business:
- Profit: 10%
- Owner’s Pay: 50%
- Tax: 15%
- Operating Expenses: 25%
Step 3: Allocate Funds Consistently
Profit First is a habit, not a one-off task. To ensure success, stick to a consistent allocation schedule:
1. Frequency
- Allocate funds every two weeks or weekly. Align this with your revenue cycles for consistency. I recommend weekly - and chose a day of the week so you can remember and stick to it more easily.
2. Process
- Transfer the allocated percentages from your Income Account to the other accounts.
- Pay bills only from the Operating Expenses Account. Do not dip into other accounts.
3. Discipline
- Resist the urge to “borrow” (aka "steel" - because no matter how much you want to pay it back, trust me, people very rarely manage) from your Profit or Tax Accounts. Treat these as untouchable. The tax money is not your money - it belongs to HMRC, it's just resting in your bank accounts for now.
Step 4: Address UK-Specific Considerations
Implementing Profit First in the UK comes with unique challenges and opportunities. Here are some tips:
1. VAT Management
- VAT is not part of your revenue—it’s collected on behalf of HMRC. Create a separate VAT pot to avoid confusion and make sure the VAT money is there each quarter.
2. Handling Seasonal Cash Flow
- If your business has seasonal income, adjust your allocations during peak periods to build reserves for quieter months.
3. Bank Fees
- Some UK banks charge fees for multiple accounts. Use online banks like Starling or Monzo, which often provide fee-free accounts and pots. We use Starling for business (and Monzo for personal) banking.
Step 5: Review and Adjust Regularly
Profit First is not a set-it-and-forget-it system. Review your allocations and financial health regularly to ensure it’s working effectively:
1. Quarterly Reviews
- Reassess your percentages and adjust them based on your progress and financial goals.
2. Annual Check-Ins
- At the end of each financial year, evaluate your business’s performance and update your TAPs (target allocation percentages)
3. Work with a Certified Profit First Professional (hello!!)
- Collaborate with an expert to fine-tune your system and address challenges specific to your business.
Common Pitfalls and How to Avoid Them
1. Skipping Profit
Even if cash is tight, allocate something to the Profit Account—even if it’s just 0.5%. Building the habit is more important than the amount. And if you cannot allocate 0.5% then you need to examine your expenses.
Doing our Money Leaks exercise (below) can help with that.
2. Dipping into Reserved Accounts
Treat your Profit and Tax Accounts as untouchable, no matter the temptation. The tax money is not your money!!
3. Ignoring Expenses
If your Operating Expenses Account is constantly short, it’s a sign you need to cut costs or increase revenue. Again, you can try the Money Leaks exercise in the video above.
Action Plan: Start Implementing Profit First Today
1. Open your essential bank accounts.
2. Calculate your current allocation percentages (CAP).
3. Set realistic initial percentages and transfer funds.
4. Allocate revenue consistently, adjusting over time.
5. Regularly review and refine your system.
Implementing Profit First in your UK business is a powerful way to achieve financial clarity, build sustainable profitability, and take control of your cash flow. By prioritising profit, paying yourself consistently, and planning for taxes, you’ll create a thriving business that supports both your professional and personal goals. Start today—your future self will thank you.
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