So you have read the book “Profit First by Mike Michalowicz” and it all rings true to you as an entrepreneur.
Maybe you completed the Profit First Instant Assessment as you progressed through the book, or maybe you avoided that part, anticipating that your allocation percentages wouldn’t match up to the target levels outlined in Profit First.
What you have realised though, is that the concept behind Profit First is as straightforward as it gets when it comes to managing your money as an entrepreneur or business owner. And you would be right – it is, even for those amongst us who think of themselves as not being ‘numbers people’. The Profit First system is designed for you!
The implementation of the Profit First method is essentially straightforward. However, once you have taken the leap and committed to implementing Profit First into your business, sticking to the Profit First system is the hard part – after all, you have (probably) decided to fundamentally change how you interact with your money – and more than likely, that is going to turn out to be a great decision that you have made.
Profit First – Sticking With It
As a Certified Profit First Professional, part of my job is to make sure you stick with the Profit First system in your business, hold you accountable to your goals of running a more profitable business and paying yourself more – and to help you navigate the unique challenges (and temptations!) that inevitably present themselves – and that is what I’m covering here for you.
In this post, I’m going to help you by giving you a ‘heads up’ on some of the mistakes and common pitfalls that tend to crop up when people are implementing Profit First into their business without the help of a Certified Profit First Professional – if not initially, over the course of time – and then give you some hints and tips about how to avoid making the same mistakes, or falling into the various traps that may appear along the way…
Top 10 Profit First Mistakes
Mistake #1 – The Instant Assessment
The Instant Assessment (diagram below) is where the practical journey begins with the Profit First system – it is typically the tangible beginning of the process of feeling like you are taking action (the first real step is actually a mindset based issue – recognising that your business is not as profitable as you want it to be, and that you aren’t paying yourself enough…and you never seem to have that all important tax money set aside in time…).
So what could possibly go wrong with the Instant Assessment?
It all seems straightforward enough, but there are two elements that tend to catch people out:
- Mis-calculating ‘Real Revenue’ – this is more common with product based or ‘brick and mortar’ style businesses. The mistake normally arises as a result of including employed ‘direct labour’, whereas it should only be third-party sub-contractors that are included within the ‘Materials & Sub-contractors’ section. The ‘Materials element is typically easier to identify, and this tends to cause less of a problem in the calculation.
- Making sure that it adds up. This mistake is more common than people would ever believe, and tends to arise as a result of forgetting to include the ‘direct labour’ in ‘Operating Expenses’ having removed it from the ‘Materials and Sub-contractors’ section. Another common issue is ‘double counting’ Owner’s Pay within both the ‘Owner’s Pay’ section and then not deducting it from ‘Operating Expenses’.
So make sure to remember that:
- Top Line Revenue – Materials – Sub-Contractors = Real Revenue
- Real Revenue = 100%
- Profit + Owner’s Pay + Tax + Operating Expenses = 100%
- Test by: Real Revenue – Profit – Owner’s Pay – Tax – Operating Expenses = 0 (zero)
Mistake #2 – Using The Wrong Real Revenue Benchmark
We use the Real Revenue number as the benchmark number that allows us to compare businesses of different sizes and assess the appropriate levels for Profit, Owner’s Pay, Tax and Operating Expenses. Those levels are different for different levels of Real Revenue attributed to a business as it grows, and as a consequence of what ‘Profit’ and ‘Owner’s Pay’ represents (as a business grows, it is typical for a business owner to work more ‘on’ than ‘in’ the business – Owner’s Pay therefore decreases as a business grows proportionately, but this is replaced by an increasing allocation of Profit by way of dividend / distribution).
It is therefore important that we select the correct Real Revenue range when assessing where our business currently stands compared to where we need to get to in terms of matching up to the Target Allocation Percentages.
Make sure therefore that you are using the Real Revenue number when assessing which category your business falls into rather than the Top Line Revenue number (although for many online entrepreneurs and service based businesses, it is quite possible that these two numbers will either be the same, or very close to each other, which is absolutely normal and fine).
Mistake #3 – Too Much Too Soon
An underlying principle of the Profit First system is that you must allocate Profit and not touch it – this means that you need to be sure that your business can handle that. To increase your Profit allocation over successive quarters, we will become more efficient and deliver the same or better results at a lower cost. Using the Profit First method means that we work from the goal backwards.
We start with small percentages to build the profit habit (remember that Profit First is a behavioural system), and then gradually increase the Profit allocation every quarter to move closer to your goal. Start slowly and increase slowly – this will deliberately still force you to look for ways to become more efficient. Adjust the percentages until your reach your Target Allocation Percentages (as defined by the ‘Real Revenue’ range for your business in the diagram above). The power of reverse engineering profit is that you identify the elements that support the profit – you can remove everything that doesn’t.
Mistake #4 – Grow First (and Profit Later)
Too many entrepreneurs believe (incorrectly) that you can only have either Profit or Growth. It is not a trade-off.
The healthiest companies figure out how to consistently be profitable first, and then do everything to grow that.
Implementing the Profit First system in your business will automatically show you the path to efficient growth when you put profit first.
Mistake #5 – Cutting The Wrong Costs
It is often the case when people complete the Profit First Instant Assessment that they discover that a large proportion of their Real Revenue is allocated to Operating Expenses. In order to be able to increase the Profit, Owner’s Pay and Tax elements we will need to inevitably restructure and reduce our Operating Expenses.
If an expense incurred is going to help contribute to the growth of your profit and create significant efficiency, then find ways to cut costs elsewhere and consider different or discounted equipment, services or resources rather than sacrifice efficiency for what you think are savings. Almost all businesses have expenses which do not contribute to the generation of profit – we need to make sure that we cut those out, not the ones that do have a positive effect on profit growth.
Mistake #6 – “Plowing Back” & “Reinvesting”
‘Real Talk’ time – “Plowing Back” and “Reinvesting” are ‘fancy’ terms to justify ‘borrowing’ from our dedicated accounts to cover expenses. Using a credit card to cover what you can’t afford should be a ‘red flag’ that your expenses are too high – we need to deal with the problem and cut the expenses, not use the credit card more.
The Profit First system is designed to help us establish the parameters of how we allocate our money – and helps to show us the path to greater profitability and higher pay for the business owner. Make sure that you remain disciplined and guided to achieve your goal of reaching those Target Allocation Percentages.
If you think that you need to ‘plow back’ profits into the business, you should reassess the situation – inevitably, there is a more sustainable way to maintain the health of your business. Reinvest thought, not money.
Mistake #7 – Raiding The Tax Account
The Profit First method is designed to counter one of the most common entrepreneur and business owner issues – having enough money to pay taxes when they are due. The temptation to ‘borrow’ from the Tax account arises due to the timing differences between when the money is set aside and when you actually need to pay it to your local tax collection agency. The temptation comes with the belief that we will have time to replace the borrowed funds by the time they are required, but that rarely happens…#justsaying
Paying more taxes is an indicator that your business health is improving – as your profit grows, so will your taxes. By all means consult with your tax advisor to mitigate taxes wherever possible (apart from splurging on additional costs for things that you don’t need and won’t improve your profitability in the long run), but don’t ‘borrow’ from your Tax Account – that money does not belong to you, it belongs to your Government and you need to make sure that you have it available when they need it. If you get left with a surplus in this Account at any point, it will be reallocated to your Profit Account, not your OpEx Account!
Mistake #8 – Adding Complexity
The Profit First system is a cash based system (none of that ‘fancy’ / ‘incomprehensible’ accountant talk and terminology).
Cash is cash – you either have it or you don’t. That is why Profit First does not need to be more complex than people think.
The system is easy and is designed to work with your natural behaviours. It doesn’t need to be overthought, or be more complex. It doesn’t need to be outsmarted. It is simple for a reason.
Mistake #9 – Skipping The Bank Accounts
This is one of the most tempting pitfalls, but is central to the Profit First method. Attempting to ‘simplify’ the Profit First system by not setting up the bank accounts is a recipe for failure – using a spreadsheet to emulate the various accounts inevitably ‘falls over’ at some point, and the immediate reaction tends to be that Profit First ‘didn’t work’, ie the system takes the blame – the problem however is that the system wasn’t used properly in the first place…
Profit First is a behavioural system – the act of actually transferring money from your Income account to an account with a dedicated purpose will focus your mind without a shadow of a doubt – it will teach you to amplify the behaviours and activities that create the greatest benefit to the profitability of your company (ie your Profit account has more real cash allocated to it), and to your own Pay (more real cash will be allocated to your Owner’s Pay account).
Open the Bank Accounts – don’t be tempted to miss out this step or think you can ‘shortcut’ the process at this point. The Profit First system works when you follow the methodology.
Mistake #10 – Going It Alone
Avoid this mistake by working with an accountability partner – the benefits are numerous:
- Your sticktoitiveness skyrockets because someone else depends on you
- When you go through a painful process with others, the pain is diminished
- Enforcing or implementing a plan with someone else ensures you are more likely to do your part
- When you meet regularly, you get into a rhythm that makes it easier to stay on course and achieve your goal – big aspirational goals get broken down into smaller achievable milestones
The Best Remedy To Counter Mistakes #1 to #10
Profit First and The Importance Of Accountability
The Profit First system provides stability and freedom, and importantly, a plan to help you meet your goal(s). The Profit First system is simple, but it requires discipline to implement it consistently – and that’s the most common reason that the people who try and implement Profit First alone fall short – they go it alone. Sad but true – the worst enemy of Profit First is (probably) you.
The Profit First method works, and being held accountable whilst implementing the system will help you to succeed. Working with a Certified Profit First Professional Coach who has been expertly trained to help you drive profitability in your business will make the process easier. And we all like ‘easier’. You want to work with someone who has seen and understands the pitfalls before you discover them for yourself. Working with a Certified Profit First Professional Coach will get you to profit faster and with fewer problems.
Working with a Certified Profit First Professional Coach means:
- We will make sure that you Initial Profit Assessment is correctly analysed, and that it adds up!
- We will make sure that your Target Allocation Percentages are appropriate to the Real Revenue range that your business fits within (and that as your business grows that appropriate allocations are applied to your business)
- We will stop you from taking too much too soon – we help you grow into the changes that may need to be made
- We will focus on making sure that you have a profitable business model that is primed to grow. Profit will show us the way.
- We will help you review and assess your cost base and help you to decide on which costs are the right ones to cut
- We will balance your desire to reinvest and plowback profit into your business – we will reassess the cost base, and we will think harder about a more healthy and sustainable way to achieve the growth that you desire for your business
- We will stop you from raiding your tax account – we will however help you reallocate any unrequired Tax Account surplus to your Profit Account. With pleasure.
- We will make sure that we keep the system as simple as possible, but also relevant to your business
- We will make sure that you don’t try and ‘cheat the system’ – the system works, and we are there to keep you accountable to it. That means following the system, and that means a greater chance of success for you, and that’s what we are all working towards
- You will not be ‘going it alone’, but you will be held accountable – we want you to achieve your goal(s)
Hi there, I'm Jason!
As a Certified Profit First Professional Coach, I specialise in driving profit growth in ambitious entrepreneurial and owner managed businesses.
Profit is the commercial non-negotiable. I want to help you to create a more profitable business so that you have the freedom to make the choices that you want to make, to create the impact that you want your business to make - be that within the business, in terms of your own personal life satisfaction (and that of your management team & staff), and socially.
As a profit growth strategist and mentor, I help business owners get clarity over their finances - specifically as it affects their profitability. That means that we focus on getting intentional about improving business profitability with simple strategies.
Together we make sure that the business is baking profit into every sale, that business owners and stakeholders are able to receive a commensurate reward, that money is set aside for taxes (corporate and personal as appropriate) - and we create a buisness model that fits around those three priorities.
25+ years of commercial experience are blended into a hybrid mix of business growth coach, consultant and CFO, bring strategic and tactical support to businesses looking to transform their profitability.
I graduated with an Accounting & Finance degree, have been the Bookkeeper, Financial Controller, Financial Director, CFO & Commercial Director, Financial Strategist, Consultant, Coach and Business Mentor. That has covered business turnarounds, corporate SME/SMB growth, and external roles including being a registered business finance growth coach on the UK Government's 'Growth Accelerator' scheme.
What does that all mean for you?
Knowhow. And absolute dedication to the transformation of the profitability of your buisness.
So, make the decision to invest in your profitability and book your call here.