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The traditional way of accounting for profit is using the formula: sales – expenses = profit. Mike Michalowicz, the author of First Profit, introduced a new method, which flips this method of thinking. It uses the formula: sales – profit = expenses. One of the tools he gives is the Profit First Instant Assessment which allows business owners to see how to allocate money for each account to maximize profit. Here are the steps on how to do it.
Step 1: Find out the actual revenue of your business.
You can find out what the actual revenue of your business is by first taking note of what the total revenue for your business is. This is the amount of money your business made over the past 12 months. Next, find out what is the cost to deliver your product or service.
This usually refers to materials or subcontractors. Subtract this number from the total revenue. The amount that you get is the real revenue of your business.
You should note that the real revenue is not the same as gross profit, even though they are similar. Real revenue does not include labour costs.
Step 2: In the table below, pick the column that corresponds to your real revenue.
|Real Revenue Range||£0-£250K||£250K-£500K||£500K-£1M||£1M-£5M||£5M-£10M||£10M-£50M|
Step 3: Complete the Actual column in the table below with the actual figures from your business for the last 12 months.
|Actual||PF%||PF£||The Bleed||The Fix|
|Top Line Revenue|
|Materials and Subs|
Step 4: Use the percentages in the column you chose in Step 2 to fill out the PF% in the table in Step3.
Step 5: Multiply the Real Revenue number in the Actual column with each PF%. Put the product in the corresponding PF£ row.
Step 6: Subtract the PF£ number from the Actual number in each row. Put the results in the corresponding Bleed column. It is important to note that it is possible to get negative numbers at this point.
Step 7: In the Fix column, write “increase” if the number on the Bleed row is negative. If it is positive, then write “decrease”.
Once you are done with the Profit First Instant Assessment, you can see clearly how your business should allocate its money. First, it answers if it should be decreased or increased. Then the Bleed column will indicate how much for each account.
Using the Profit First method has psychological roots. Not everyone is a numbers person, but almost everyone could understand things more easily if it was laid out clearly. This is something that the Profit First Instant Assessment aims to do—also, changing the mindset of putting profit before expenses signals to business owners that it should be prioritized. Thus, Profit First can be used to ensure business profitability from the very start.