Based on the excellent book by Mike Michalowicz.
In this training topic, we cover the 3 most important aspects of Profit First.
This is something I have used in both my business and personal life.
BANK BALANCE ACCOUNTING
Most entrepreneurs don’t have the time or gumption to read the different accounting statements necessary to manage the financial aspect of their business.
Theoretically, you should review and correlate your Income Statement, Balance Sheet and Cash Flow Statement monthly (or more frequently), but few entrepreneurs do.
Most resort to “bank balance accounting,” where we check our bank balance every day and make financial decisions based on what we see.
Per Parkinson’s Law, we consume what we see in our bank accounts.
Profit First encourages the entrepreneur to continue “bank balance accounting” by first allocating money to profit (and other accounts) so that the entrepreneur sees the actual portion of deposits that are available for expenses and they automatically adjust their spending accordingly.
Profit First Method
THE PROFIT FIRST FORMULA
The GAAP (Generally Accepted Accounting Principles) formula for determining a business’s profit is Sales – Expenses = Profit. It is simple, logical and clear. Unfortunately, it’s a lie.
The formula, while logically accurate, does not account for human behaviour.
In the GAAP formula profit is a leftover, a final consideration, something that is hopefully a nice surprise at the end of the year. Alas, the profit is rarely there and the business continues on its check-to-check survival.
Sales – Expenses = Profit
Sales – Profit = Expenses
With Profit First, you flip the formula to Sales – Profit = Expenses.
Logically the math is the same, but from the standpoint of the entrepreneur’s behaviour, it is radically different.
With Profit First, you take a predetermined percentage of profit from every sale first, and only the remainder is available for expenses.
Target Allocation Percentages (TAP's)
These are simply the % of the income we allocate to the different accounts.
I used a 5% TAP to start with, to which has taken care of the VAT bill without us noticing.
I suggest the TAP's from the book, however, you may want to use your own TAP's.
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