Does the Profit First Method Work?
There's much buzz around the profit first method, and I've been asked many times if the profit first method works. I have some pretty strong opinions about the profit first method, so bear with me.
The Profit First method has received a lot of attention over the years, with many business owners successfully implementing it to increase their profits significantly. However, not everyone is convinced that this method is the right choice.
Many accountants, for instance, argue that it is too complicated and difficult to use, and that traditional accounting methods are more effective. So, does the Profit First method really work, or is it a passing fad?
Being a traditionally trained Chartered Professional Accountant (CPA) and having read the book Profit First, I have some arguments against using the profit first method. I have worked with clients, some who have used the profit first method and others who never heard of it, and made some observations of my own.
Running a business is an incredibly complex process. There are many aspects to keep track of, and managing the finances can often be overwhelming. You may have heard of the Profit First method, which promises to make it easier to manage your money and stay profitable. But does this methodology actually work? Let's take a look at the profit first method and whether it can help businesses grow.
What is the profit first method?
Profit First is a book by Mike Michalowicz, a business consultant who has written several books on entrepreneurship. The profit first method focuses on creating financial systems that prioritize profits first instead of simply trying to maximize revenue or minimize costs.
In simple terms, this means setting aside a portion of your revenues for profits before you pay yourself or any other expenses associated with running your business. That way, you can ensure that you always have enough profit left over at the end of the month to cover any unexpected expenses.
How does the profit first method work?
The profit first method establishes four separate accounts: income, operating, profit, and owner's pay. The income account is where all incoming payments go, while the operating account pays for all operating expenses such as rent, supplies and utilities.
The profit account is where you place a specified percentage of each incoming payment to ensure that you have enough set aside for future profits. And the owner's pay account ensures that you are paid a fair wage every month regardless of how much profit your business made that month.
Benefits of using the profit first method
The main benefit of using the profit first method is that it forces businesses to prioritize their profits over other monthly expenses. By setting aside money for profits first every month, companies can save up funds more quickly and invest in growth opportunities later on down the line.
This method helps businesses avoid relying too heavily on credit cards or loans when things get tight financially. This system also helps keep businesses accountable by ensuring that they make enough money each month to cover all necessary costs while prioritizing profit margins in their budgeting plans.
The cons to using the profit first method
Despite the hype about the profit first method, it's not all sunshine and roses. To put it simply, this accounting strategy isn't for everybody – whether it's because they prefer a different approach or don't have enough profit to set aside. This can be discouraging to entrepreneurs who are looking to grow their businesses.
The profit first model leaves no room for exploration and experimentation when using profits, making it more difficult for companies to evolve with changing times and trends. The profit first method may be beneficial for some, but for others, trying something else may be the best way to go.
Through working with my clients who have used the profit first method and failed, these are some of the observations I’ve made:
1. It can be confusing
The profit first method of accounting can be quite confusing, particularly for those not well-versed or experienced in financial matters. This approach tries to reinvent the wheel when it comes to financial analysis. It also prioritizes setting aside money into an account, making it readily available when needed and preventing it from being used on other non-business-related matters.
Although the profit first method sounds simple enough in theory, it can be challenging to comprehend and incorporate into existing business practices.
2. Why not use the traditional method of accounting?
If you do have the ability to learn the profit first method, why not just use the traditional way of accounting? They take the same time and effort to learn, so why not use the accepted method with lenders, bankers, businesses, and your government?
3. The profit first method is not the language of business
Traditional business owners have a unique understanding of accounting that has been passed down over generations. They understand the ins and outs of the traditional bookkeeping method and how to track financial records by speaking the language used in accounting.
This knowledge can be invaluable when running a small business; every successful entrepreneur must be able to interpret their finances accurately, and traditional business owners are exceptionally well-informed on this subject.
Modern businesses need to understand this traditional approach to make the most effective decisions regarding understanding the complexity behind financial activities.
4. Too many accounts
The profit first method recommends using a variety of bank accounts to help manage finances. However, this strategy can be counterintuitive, complicating the process and making it far more convoluted than necessary. By utilizing more aware and careful budgeting techniques, you can gain better control over your finances with minimal effort.
Is the profit first method effective?
The answer is not really. Many businesses have found success using this system because it helps them stay organized and ensure they always have enough money set aside for future profits, even if their current profits are low. Still, you can do that with the traditional method as well. Because traditional business owners know this, they have a competitive advantage when speaking the universal accounting language.
How I feel about the profit first method
I had to read the book to find out what the buzz was about. I gathered my opinions and discussed the book with many of my CPA colleagues. I have yet to meet a CPA who values the profit first method. It's a clunky system that wants to reinvent something that can't be reinvented.
Let's think about this for a minute – government bodies assess your taxes using traditional means of accounting. You must submit your annual taxes to that governing body as a business owner. You might want to be well versed in traditional accounting methods because I'd bet that if you need to speak to someone from the IRS or CRA they would not understand the profit first method.
Per Warren Buffet, accounting is the language of business and you want to be proficient in that language.
Alternatives to the profit first method
Cash Confident by Melissa Houston could be the perfect book for you if you're looking for an alternative to the profit first method for managing your business finances. This comprehensive book provides step-by-step guidance on handling cash flow management, from creating a financial strategy to understanding the ins and outs of your balance sheet.
Written in an easy-to-understand style, it offers reliable advice on how to keep up with your accounts while maintaining healthy profits and long-term financial stability. You'll get expert guidance from a CPA supported by valuable Excel tools to help analyze both income and expenses. Whether you're just starting or have been running a business for years, Cash Confident is packed with sound strategies that anyone can follow.
Why you need Cash Confident
If you're looking to take back control of your finances and learn the money-managing skills you've been avoiding, look no further than the Cash Confident book. This comprehensive guide will give you everything necessary to become an all-star regarding budgeting and personal wealth. Not only is this book full of tips and tricks on how to maximize savings, but it also contains advice on creating realistic financial goals that are attainable and explicitly tailored to your current life situation.
So why wait? Get Cash Confident today and start building a brighter future from the comfort of your own home!
The bottom line is that the profit first method may be popular among entrepreneurs, but there are more suitable substitutes for traditional accounting. Profit First ignores some of the key accounting principles, such as keeping track of assets and liabilities necessary for creating long-term financial stability.
Furthermore, keeping up with the tracking and calculations required to adhere to the system can be challenging, thus introducing additional overhead costs that negate its suggested cost savings. Business owners need to understand where their money is going and how much they have in reserve - traditional accounting processes provide this insight more effectively than Profit First.
As an accountant, I always strive to provide my clients with the most effective and understandable methods for managing their finances. That being said, I have come across the Profit First method and personally, I am not a fan.
I have seen some of my clients who have tried it experience more confusion in their finances and increased losses overall. While I understand the appeal of this approach, I believe in offering my clients well-researched and time-tested financial strategies to ensure their long-term success.
I believe I am responsible for equipping them with the most effective tools to build a stable financial future, which is why I avoid implementing the Profit First method.
I recommend using the traditional method of accounting, which is easier to learn and much more valuable and applicable. You can check out the many courses and offerings for the Cash Confident products to help you learn how to optimize the profit in your business now!
