More than 500,000 businesses have adopted the Profit First methodology, which is fantastic! It is a game-changer for cash flow management. However, we’ve heard some myths about the system circulating. Profit First creator Mike Michalowicz created a video series to address the following misconceptions, some of which we’ve broken down below.
Myth #1: Profit First can simply be applied to a spreadsheet rather than creating separate bank accounts.
Mike developed the concept of Profit First based on our natural human behavior. Business owners have a tendency to check their online bank balances very often. This isn’t a problem if you have separate accounts earmarked for specific purposes. If your accounts are separate, you’ve already allocated what you want to spend in each category, so checking your accounts is extremely wise. Knowing how much you have in each category will inform your business decisions.
Checking your balance often is a problem if all of your funds are kept in a single account. If all of your money is reflected in one balance but you’re trying to track your Profit First categories on a spreadsheet, the balance you’ll see in your bank account will be deceptive. You’ll think you have more money to spend than you actually do. Plus, it is way too easy to simply change percentages on a spreadsheet if you change your mind about how much to spend per category. It’s more difficult to switch actual dollars from one account to another – say moving funds from your tax account to your operating expenses account. You can hope to recoup the tax money later, but will you? Now you’re creating a confusing paper trail, too.
Separating your money into one account per purpose is a surefire way to hold yourself accountable and make sure you only spend what you’ve predetermined to spend in each category.
You could tell yourself not to check the balance, but it’s human nature to look at it! And, that’s okay. If you regularly allocate funds for specific purposes into separate bank accounts, you can continue to log into your bank account and check it as often as you want. Knowing that money is earmarked for a specific purpose will help work with your natural human behavior to keep you on the path to profit.
Myth #2: You don’t need to wait – you can go ahead and claim your distributions early.
Again, Profit First leverages our natural behavior. Can you take out your distributions early? Technically, yes. But should you? It’s not in your best interest. A 90-day rhythm builds momentum. When you receive your share of the profits at the end of the 90-days, it feels like a reward! It’s a reward for building that saving muscle, which is a key muscle to develop and use. Taking your share out early won’t have the same effect or feel nearly as gratifying.
Trust me, just try it. You’ll never go back.
Myth #3: Once I implement Profit First, it takes care of itself.
Profit First is a dynamic system. Work with a Profit First professional that you can meet with quarterly to assess your CAPs – current allocation percentages. Then, adjust them as needed.
Say your target allocation percentage for operating expenses is 70 percent, meaning you would ideally use 70 percent of your total funds for operating expenses. However, “ideal” and “real” don’t always align, do they? Let’s say in actuality you are using 90 percent of your funds for operational expenses. You need to lower your operating expenses so that your operating account will only need 70 percent, not 90 percent, of your total funds.
However, going from 90 percent to 70 percent is a hefty change, so pace yourself. Aim to lower your expenses gradually. Aim to reduce your allocation from 90 percent to 85 percent in the next quarter, 80 percent in the quarter after that, and so on until you’ve reached your target.
The bottom line is that businesses change and evolve over time, so expect to adjust allocations periodically based on your goals and circumstances. Working with a Profit First Professional will help you work towards your goal at a reasonable and healthy pace.
Myth #4: Profit First doesn’t work.
If you hear someone say that, ask about their experience implementing it. Feedback isn’t valid unless they have personal experience. Learn from people who have actually operated with Profit First. But like with anything of value, you get out of it what you put into it. If you set it up and never make the allocations on a regular basis and adjust the percentages based on your business and your goals, it won’t work. You’ll fall back into the same habits you had before. It’s a fantastic way to manage your business, but autopilot isn’t available.
Sometimes, people are hesitant to try a new system because it feels overwhelming and intimidating. Once you understand the principles behind Profit First, you’ll see just how liberating this way of accounting is for you and your business!
If you want to learn more about Profit First or have other myths you’d like to ask about, let’s talk. Schedule a call and lets revolutionize your cash flow so you can keep more of your profits in your pocket.
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