Profit First – How to manage your money
Around 2 years into running Tekkers IT Solutions, I came across a method called Profit First, for managing money. Turns out this was a huge game changer for me, our business and our personal finances.
I was never bad at managing money. We had always made a profit, always paid our staff and suppliers on time, but we were managing everything from one single account.
Let me tell you how CRAZY that is by the way.
WE WERE TURNING OVER UPWARDS OF £50K PER MONTH AND IT WAS ALL COMING IN AND GOING OUT OF A SINGLE BANK ACCOUNT.
Every time we wanted to buy something like new equipment for new staff, we would take a look at the bank balance, hold a finger in the air, and decide whether we actually had enough to cover it. Of course, we would have to factor in money we owe to our suppliers and other payments like VAT and Corporation Tax. It was essentially holding a finger in the air and hoping that we made the right decision.
The method I learnt below is so simple, and you can implement it in both your business and personal life. It’s had a dramatic impact on both our business and personal finances.
Following the exact process below, we now have a pot of money sat there, waiting for any office costs such as new laptops and furniture, with no stargazing required!
Essentially, what you’re going to do here is open a number of bank accounts, each one with its own specific purpose.
Each month, you’ll transfer funds into each of these accounts, building up funds in each account to cover that purpose.
You’ll need to open a number of bank accounts. Most banks will allow you to do this online or from their mobile apps, but you might need to visit the bank to get this done.
As a starting point, the accounts we opened are as below. These of course can be changed to fit your specific needs and can be as many or as few as you wish. The accounts you MUST have, are shown in bold.
With the bank accounts open, proceed to step 2.
Now you have the bank accounts open, the next thing we need to do is figure out what your overhead costs are.
To calculate the percentages, follow the guide here.
Profit – If you are unsure as to what you can afford to take as profit each month, simply enter 1% in here.
Owners Pay – There are 2 ways of doing this. Either have a fixed amount you transfer to owners pay each month – or set this as a percentage. We decided to set this as a percentage, which of course means you benefit when things are going well, but you receive less when things are not.
Opex – Everything left in here should pay for your operating costs, unless you have created other accounts for them. Your rent, salaries, marketing spend, office equipment, literally anything that is needed for you to operate. Over time you will get comfortable with this account going from full to zero as money passes through the account.
The beauty of this system is that it is easy to correct in future if you have made any glaring mistakes, and can adjust every month or so if required.
Now your accounts are set up, and you know how much to transfer into each account – the fun begins!
Download our template Excel Spreadsheet and enter your account names and the percentages.
Now, every 10th and 25th of each month, you do Profit First.
Sit down and add up all of the income your business has received either since the last time you ran profit first, or since this is the first time you could decide to either start with your bank balance as the headline figure, or alternatively add up the income since either the last 10th or 25th.
Once added up, enter the final figure into the top of the spreadsheet.
This then calculates the amounts which you must transfer to each other account.
The great thing here is that over time, you will start building up your war chest.
Pension funds will slowly grow, meaning you can overpay into your pension.
Staff will also benefit directly from the company performance, which you can then tie into achieving personal development goals if you wish.
Funds for purchasing new office equipment for new starters, desks, refreshing your IT equipment every few years all becomes easy, because the funds will be sat there ready to spend. Safe in the knowledge that your VAT and corporation tax are taken care of by the other accounts.
Once you have completed the transfers, there is one rule when it comes to your profit account.
Always keep 50% of the profit in the account, building up gradually.
This builds you a great rainy day fund and must continue building until you raise enough to cover your operating costs for 6 months – or more, or less, depending on what you are comfortable with.
The remaining 50% can then be paid out to shareholders at their allocated % ownership.
Transferring this to Personal Money
This exact process works for personal finances too.
Take the same spreadsheet as above, but instead your accounts will be along the lines of:
The percentages for these accounts again take some tweaking, but similarly to this process being a game changer for our business, it’s equally made a massive difference on our personal finances.
It takes everything me and my wife earn each month, pools everything together – and means we work as a family.
I hear so many stories of married couples living with separate finances and I find that crazy.
Using Profit first for this purpose means that collectively, working together each month, we:
Pay the bills
Have an allocation of personal spending money
Cover the weekly food shop
Save a little for holidays
Save a little to do up the house
Put money aside for each of our children
Save for the unexpected.
It doesn’t matter who earns the most, it just means that your whole family is working together. Personally, even though I earn the most my wife actually gets more ‘personal spending money’ than I do – because she spends most of her week looking after the kids, which typically involves spending more money than I would.
Want to pay off your mortgage quickly?
Following the same Profit First method for business, when you have a good month then you’ll have a little more money in each account.
Spend more personally
Get takeaway or a nice meal out
Pay more off the mortgage
Redecorate a room in the house
Whatever you set your mind to!
As mentioned before, this whole methodology has come from a book that I read (or rather listened to) by Mike Michalowicz called Profit First. Thanks Mike, you’re a genius.