When managing your personal finances, we’ve talked about how important it is to pay yourself first-to put money into savings and then budget and spend what is left over. This creates a stable financial foundation to build from and rely on. When running a business, it’s important to follow the same principle and put your profit first. To have a successful business you need to make a profit. The strength and longevity of your business only lasts while it’s profitable. When you put your profit first you are determining to stay in business.
What does it mean to put your profit first? Traditional accounting says, expenses are deducted from sales and what is left over is considered your profit.
[Sales – Expenses = Profit]
But, just like paying yourself first, you take a percentage from each sale as profit and then use the remainder to pay for expenses.
[Sales – Profit = Expenses]
The overall goal is to develop a system that will build your business in a sustainable way in order to create long term success. Big picture, you would be grouping portions of the business sales and putting them into separate accounts. These will be comprised of profit, taxes, operating expenses, and owner’s pay. To make this system work you will put predetermined percentages of your sales into the various bank accounts starting with the profit account. How much you put into each account is determined by your Target Allocation Percentages (TAPs). This will be a shift from the Current Allocation Percentages (CAPs).
At first this may be a difficult thing to do, as it goes against the traditional model, but making the shift mentally and committing to the future of your business will make all the difference. When you consciously put money into your separate accounts it makes you more aware of how you are spending your money and helps you to spend more wisely. All of the accounts together can help give you a visual map of where your company is at and help you see how to get to where you want your company to go.
Perhaps the hardest part of this process is managing your expenses. Initially, you may need to cut back on your unnecessary expenses. This is a hard thing to do, but remember it’s a lot easier to cut expenses than it is to conjure up new sales. When making purchases or analyzing expenses the key thing is asking yourself, “do I (or my business) really need this?” If you’re able to determine that it isn’t necessary, or could potentially hurt your profits, cut it from your spending. It could take a few months to pay down debts, but by whittling down your expenses and being more conscientious you will start to build your cash reserves.
Eventually the goal is to learn how to enjoy saving your money as much, if not more, than spending it. When something makes you happy, you’ll keep doing it. Celebrate the moments when you opt out of spending unnecessary money, make it a big deal. Over time, you’ll build momentum and you will enjoy those moments and establish good, healthy money management.