Budgeting can be challenging for many business owners, especially when balancing profitability and cash flow. The Profit First system, developed by Mike Michalowicz, flips traditional budgeting by prioritizing profit rather than considering it a byproduct of income and expenses. This guide will show you how to build a budget using the Profit First methodology, aligning it with your business’s financial goals to drive sustainable growth.
Step 1: Understand the Core Concept of Profit First
At the heart of Profit First is a simple concept: pay yourself first. Instead of the traditional formula (Sales – Expenses = Profit), Profit First reorders it to Sales – Profit = Expenses.
This method ensures you prioritize profit and make smarter, more intentional decisions regarding your expenses. Following the Profit First framework forces you to run your business more efficiently.
Step 2: Set Up Your Profit First Accounts
To implement the Profit First system effectively, you need to set up five primary bank accounts:
- Income – All revenue is deposited here.
- Profit – A percentage of your income is allocated here.
- Owner’s Compensation – For paying yourself.
- Taxes – To cover your tax liabilities.
- Operating Expenses – What’s left for daily business operations.
Dividing your funds across these accounts gives you a clear picture of where your money is going and makes it easier to allocate resources.
Step 3: Determine Your Allocation Percentages
Once the accounts are set up, you must decide on allocation percentages. These percentages are based on your real revenue, which is your total sales minus materials and subcontractor costs. Here’s a simple breakdown to start with:
- Profit: 5-10%
- Owner’s Compensation: 10-20%
- Taxes: 15-25%
- Operating Expenses: 30-60%
The exact percentages will vary depending on your business type and needs, but this offers a solid starting point. You can adjust these percentages over time as you review your financial performance.
Step 4: Implement Profit First Tabs into Your Budget
To build a comprehensive budget, expand on your Profit First accounts with more specific budget categories. For example:
- Operating Expenses: Break this down into specific items such as rent, utilities, payroll, marketing, and supplies.
- Profit Account: Consider reinvestment opportunities, debt repayment, or cash reserve building.
- Owner’s Compensation: Make sure this reflects fair market wages for the work you’re doing in your business.
Profit First focuses on profitability, but as you build out your budget, ensure all essential expense categories are covered.
Step 5: Review and Adjust Regularly
Budgeting is not a one-time task. It requires continuous review and adjustment. As your business grows and evolves, so will your financial needs. Set aside time each month to evaluate your Profit First allocations and make necessary adjustments to your budget.
Consider these questions during your review:
- Are your operating expenses staying within the set percentage?
- Are you consistently hitting your profit goals?
- Do you have sufficient cash flow to cover tax liabilities?
Step 6: Utilize Tools and Software to Track Progress
Several tools and software options are available to help you track and adjust your Profit First budgeting. Popular tools like QuickBooks, Xero, or custom Profit First templates can simplify the process and provide valuable insights.
Conclusion: Building Your Budget from Profit First
By incorporating the Profit First framework into your budgeting process, you’re not just managing your expenses—you’re prioritizing profitability. Start small, implement the bank accounts, set your allocation percentages, and build out your budget to reflect your business’s unique needs. Over time, this method will help you make smarter financial decisions and drive long-term growth.