The principles of the Profit First system form the backbone of the world-renowned methodology.
Profit First is a money management system established by Mike Michalowicz. It is designed to work with your natural tendencies, instead of against them.
The Profit First system has 4 main principles at its core
1. Small Plates
The principle of the Profit First system is to use small plates (or as one of my clients likes to call them buckets – it’s nice to have buckets of money!)
Small plates is based on Parkinson’s Law which says that the demand for something expands to meet its supply. An all you can eat buffet is a great example of this – don’t we all eat until we are nearly sick at these? But if you went to a Tapas bar and was served on tiny plates, you would eat less.
When you use small plates, you consume less. When there is less money available, you automatically run your business more frugally.
2. Serve Sequentially
This is based on the Primacy Effect.
We place additional significance on whatever we encounter first. When we eat our vegetables first, we will not only eat less of the remaining meal, but we will also be getting our nutrients from the vegetables.
Likewise, when we follow the traditional formula of Sales – Expenses = Profit, profit becomes an afterthought – the last thing we take out of our business and concentrate on sales and expenses.
When this is flipped to Sales – Profit = Expenses, profit becomes the focus and paying ourselves first becomes our priority.
Serve sequentially is an important second step in the Profit First system.
3. Remove Temptation
When you are on a diet, you avoid buying junk food because you know you will eat it. Willpower is a muscle that needs constant exercise (especially when there is chocolate in the house!)
Remove the temptation of dipping into your profit account to pay your expenses by transferring your profit to an out of sight bank account.
You won’t see it, and it will be harder to access if things are getting a bit tight.
Don’t make it hard on yourself by being able to see what’s in this account and transfer out of it easily.
4. Enforce a Rhythm
If you wait till you are hungry to eat, it’s too late and you are likely to eat too much, when you eat small meals regularly, you never get starving hungry and binge.
The health industry actually recommends that we eat 5 small meals a day, to avoid feeling those hunger pangs and over-eating. It’s the same with your money!
The majority of business do their cash management too infrequently. There is no rhythm or reason to when they pay their bills, the bills are paid whenever the money comes in, and the business operates in starvation mode until the next lot of income comes in. When you consistently make regular transfers to your Profit First accounts you don’t get into a reactive mode of crazy spending when you receive money and panicking when your bank account dips.
Establishing a rhythm will give you clarity over the ebbs and peaks of your cashflow and you won’t go into starvation mode. This is also a great way to measure cashflow just by checking your bank account (which you probably already do every day anyway).
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