A Profit First Success Story
It appears the Profit First book that was written by Mike Michalowicz is getting a lot of traction in the UK as I’m seeing more businesses asking for help to implement the methodology in their business.
The system is very simple as it enables you to manage your cash flow, without having to read boring old financial accounts, and more importantly, it pays you what you are worth for running your own business, and every quarter the business pays you a bonus.
So how does it work?
I would recommend everyone to read his book (contact me if you would like a free copy) and then, only once you have read the book and understand the methodology behind Profit First, you should open up 4 bank accounts with your existing bank and name them Profit, Owners Pay, Tax & Operating Expenses (OPEX). You would already have your bank account which you use and you would name it 'Income Account'.
Once you have done this then as one of only a few Profit First Professionals in the UK, I will help you ascertain your current allocation percentages based on your previous accounts and management figures if you have these to hand. This will tell me the % that are currently being allocated to these new bank accounts. The next important part is then looking at what you want your Profit and Owners Pay % to be over the next 90 days with a target to hit in the next 12 months. This would then show what needs to be done to the 'Operating Expenses' to obtain these targets.
The best way to show how this works in the real world is to explain the system for a company that I currently help.
Classroom Secrets Ltd supplies bespoke software to schools to help the teachers with plans and support learning functionality. They are based in Halifax and I provide 100% support remotely. They came to me at the end of 2020 after the director had read the book and wanted to implement Profit First as she did not have a clue where the business was financially, and they were not paying themselves anywhere near what they deserved for the efforts put into the business.
The first thing I did was look at the previous year’s accounts and quickly discovered that due to Covid and schools being closed using these figures to ascertain the current allocation % would not be useful. Forecasts were then prepared which were to be used to ascertain the target % allocations and we used these figures for the 2 weekly allocations. I started to meet with the client online every two weeks to ensure the % allocations were done correctly and to sense check to make sure there were sufficient funds in the OPEX account to cover the overheads for the next 2 weeks. The client quickly discovered how important cash flow was, and the direct impact of schools paying her on time, and the ability to allocate money to herself and to the 'Profit Account'. The director now does the allocations once a week as it enables her to be right on top of the finances and can quickly see if there are any pending cashflow issues if, for example, the schools are late in paying their invoices.
We also discussed the issue of the schools being closed during the summer holidays and decided to open another bank account called the 'Debt Account' to put funds away to cover the summer holidays, so the wages and other overheads can be paid without causing any issues to the cashflow.
The client has already seen the benefit in her pocket as the company paid her a bonus from the 'Profit Account' for the first time last month and to quote her words “I actually look forward to doing the allocations each week as I know exactly how the business is performing and I have clarity over the business for the first time ever.”
If you would like to get in touch with Lee Manning - Partner at Raffingers and Profit First Certified Professional, please email him directly at email@example.com or click here to get in touch with us today.