Finances are an integral part of running any business, there are absolutely no exceptions. Figuring out how to properly and effectively structure your finances can be confusing, but I’ve discovered a method that has totally changed many businesses!
Profit First
– is a simple and effective formula designed to help businesses stake claim on their income by prioritizing profit above sales and expenses. The system operates as a means to allocate money appropriately so that the business not only runs smoothly, but so the business owner is paid.
Most businesses use the following formula: Sales – Expenses = Profit
I have since realise that but these method defies the human nature.
Profit First is based off the principle that when something is put last, we disregard it’s significance. In order to make a profit, you have to take your profit first. Profit First is Sales – Profit = Expenses. The concept is simple—pay yourself first.
In the current formula, sales and expenses come first, so profit never comes. By taking your profit first, you’re prioritizing what’s important. It’s about thinking of your finances as a business. It’s human nature to be drawn to the familiar; we are creatures of habit. But the current system doesn’t work!
Profit First is so effective because it’s a behavioral system. It works within your natural default behavior! Once you get the system in place, it runs smoothly and effortlessly, and your business becomes more profitable.
Profit First consists of four different divisions for money: profit, owner pay, taxes, and expenses.
Account 1: Profit.
Five percent of your total income is allocated into the profit account. This is set up so that your business is designed to make money; it’s how you build up cash reserves! The profit accrues, and every quarter, half of the money is withdrawn for an enjoyable, non-business expense.
Account 2: Owner Pay.
Fifty percent should be dispersed for owner pay. If there are multiple owners within your business structure, that fifty percent is divided among them. This division is set up solely for entrepreneurs—it is not designed for payroll. Don’t skip this step, it’s important that you get paid!
Account 3: Taxes.
Then, twenty seven percent of total income is set aside for taxes. This allows your business to run smoothly and effectively. This account is to remain untouched until tax time, whether that is quarterly or annually for your business. It’s important to keep in mind that this money is allocated specifically for the government, and it does not belong to you or your business.
Account 4: Expenses.
Finally, thirty percent of total income is distributed for owner expenses. For some businesses, this could be spent on repairs and maintenance. Additionally, this account will also pay the wages of your temporary or even permanent employees.
Please make use of the running costs template, even if it’s an excel spreadsheet or Google sheet. Utilize it for all the transactions that are occurring manually. This is to ensure that at the end of the month when reconciling the bank account at least there will be no omission of some of the transactions.
Compiled by Ms. Dikeledi Seoloane on behalf of Matsobanemetja Business Consulting (Pty) Ltd – Registered Accountant and Certified Tax Practitioner.
Matsobanemetja Business Consulting (Pty) Ltd is your accounting partner that you can entrust with the bookkeping function, right up to financial reporting. We helps you keep accurate records of your business finances.
We have well trained and qualified staff that manages the aspect of both business and individual taxes.
We are the fast growing accounting service-providing agency in South Africa and across the globe.
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