Busting Myths: I Can't Grow My Business if I take Profit First

In his book Profit First, author Mike Michalowicz discusses the concept of flipping the standard accounting equation of Sales – Expenses = Profit, and instead working on the principle of taking your profits first. Effectively, Sales – Profit = Expenses.

As a Chartered Accountant and Profit First professional, Ian has seen how beneficial the Profit First approach is for all sorts of businesses. In my ecommerce business, using the Profit First system meant that I consistently took profits out of my business each and every month. I’m not kidding when I say it changed my life.

However, one of the most common objections we hear from business owners is that Profit First won’t work for them because they’re trying to grow their business.

It seems to me that this is a fear based around the idea that if you take profits out first, it will hinder your ability as a business owner to invest in marketing, or buying new equipment or even employing new staff.

The Profit First method doesn’t stop you from growing. On the contrary! Did you know that most businesses fail because of cashflow problems?

When you’ve got a financially stable business, you’re confident in the way you’re managing your business finances, and you’re running efficiently, you’re much more likely to be able to grow a business that’s sustainable. You won’t be running up massive debts, and you’ll be creating an asset that you can sell when the time is right.

Not convinced yet? Okay, let’s dig a little deeper.

Change Your Mindset - Profits Are a Necessity, Not an Afterthought

Far too often, profits are treated as an afterthought. I’ll put my hand up here – I have definitely been guilty of that in the past. It’s understandable. As business owners, we find ourselves caught up in the day to day, trying to deliver our product or service, making more sales, and we’ll spend money on whatever we think is going to make those first two happen more easily.  

When we flip that, change our mindset and recognise profit as a necessity, we start to lay the groundwork for sustainable growth. Instead of waiting until the end of the year to review our profitability, we change the way we think about things within our business. When we think of profit as essential right from the start, we change the dynamics of our decision making. We start to plan strategically, and allocate resources that prioritise our long term success.  

Creating Financial Stability and Confidence 

So often I hear people say, oh, I’m not good with money or I’m not good with numbers. This lack of confidence becomes a bit of a vicious circle. If you don’t have a good cashflow system, you don’t have solid knowledge to make good financial decisions, so things don’t always go well and you’re struggling for cash again, so you blame yourself which reinforces your belief that you’re not good with numbers.

No one is born knowing this stuff. And as I like to say, success is not a secret, it’s a system.

When you use the Profit First system to consistently take profits in your business, you:

• get clear on your cashflow - exactly where your money is coming in and out of the business
• are able to make informed decisions about expenses, investments and growth strategies
• truly understand your business’s financial health
• learn the levers you need to move to create even more profit
• create a safety net to safeguard against downturns and unforeseen events (hello, 2020!)

When you’ve got that financial stability and a cushion to fall back on, your confidence in your abilities improve. Which means you make better decisions. 

Greater Efficiency and Resource Allocation

Taking profits first forces you to improve your efficiency and your resource allocation. With the Profit First method, you also take out your taxes and your owners pay first. Which means that whatever’s left over is what you have to spend on expenses. And when you’ve set yourself those constraints, you have to get really good with working out what things are truly essential to your business. That applies to both expenses and how you spend your time.

The thing about business expenses is that they tend to grow with your business. That’s why it’s so difficult to grow yourself out of a profit problem.   

Making sure that you’re using both your time and expenses efficiently early on means that you’re building a business on solid foundations.

Working this way also means that you’ve got a structured framework when it comes to allocating resources, whether they’re time or money. When you’ve got a clearer understanding of what’s available to you, you can make informed decisions on where to allocate. That could be on marketing spend, on a new employee, or on a new piece of equipment that will make your business more efficient.

Rather than just throwing money around and hoping it sticks, you start to evaluate options based on their potential return on investment, and whether it’s aligned with the business’s long term growth.

This deliberate approach to allocation means that you’re directing resources into areas that will have the most significant impact on your business growth.

High Growth Businesses Can Still Benefit From Profit First

I have heard people say that you shouldn’t use Profit First if you’re just starting out in business and/or in a high growth phase.

That you can't take profits when you're not making any money. Or that there's no tax to pay if you're not making any money because you're still in the start up phase. 

I have even heard someone say that money is the fuel of the business and if you take it all out there's  no fuel. But that ignores the fundamental principles behind Profit First. 

At it's core, Profit First is about understanding your expenses, being very deliberate about what you’re spending money or time on, and making sure that your products or services are profitable.

If you ignore all of those things and just keep spending money, you might have a high growth business, but you'll be working super hard without even knowing if your business is sustainable. And if you can't show that you have a profitable business, good luck getting any finance or investment in your business. 

Here's some ideas of how you can implement Profit First right from the start in your business: 

• you could choose to take a very low percentage of profit (but not zero - that's your reward for risk!)
• choose to have very low % of owners pay if someone else is supporting you while you’re trying to build the business
• you might choose to have lower profits if you want to buy yourself some time with a virtual assistant
• or to have lower profits while you invest in equipment to make you more efficient

What you need to do though is to look at the return on investment for everything you spend on and to be very deliberate about spending for long term growth.

You also need to know that you're not out there flogging products or services that are fundamentally unprofitable - that's one of the issues with focusing on revenue, not profit. Why work your backside off to create a business that's inherently unprofitable?

Profit First helps you to focus on on long term sustainability by giving you a system and a framework to keep checking in on all of those things. 

Want to know more? Download the One Page Profit First Guide, here.