Profit First Method: A Practical Guide for SMB Owners Looking For Consistent Owner Compensation

Many entrepreneurs find themselves in a paradox: their business shows revenue growth, yet their personal bank accounts don't reflect it.

And it’ll make you go nuts. Even hyper-successful entrepreneurs struggle with their sanity, even when their business is paying them. Don’t believe me? Look at this.

So, now you know that any entrepreneur can struggle, but it gets even worse when you’re watching money move between accounts, and seeing none of it hit your personal account.

It’s stressful, it makes you feel like your work is getting you nowhere, and it’ll eat you alive.

So, why does this happen?

This often stems from the traditional accounting formula:​ Revenue – Expenses = Profit​

This approach often leaves the owner's compensation as an afterthought.​ Enter the Profit First methodology by Mike Michalowicz, which flips the script:​

Revenue – Profit = Expenses​

By allocating profit first, this system makes sure that you are compensated before addressing operational costs.​

This isn’t going to fit perfectly into everyone’s system, but everyone can take ideas from it.

Whether you adopt the entire system, one aspect, or you’re just going to take a bit of advice, take a look at the main principles:

Implementing Profit First:

1. Set Up Multiple Bank Accounts:

• Income Account: All business revenue is deposited here.

• Profit Account: Allocate a fixed percentage (start with 1-5%) of income here.

• Owner's Pay Account: Allocate your salary percentage here.

• Tax Account: Set aside funds for tax obligations.

• Operating Expenses Account: The remainder covers business expenses.​

2. Determine Allocation Percentages: While percentages can vary based on business size and goals, a common starting point is:

• Profit: 5%

• Owner's Pay: 50%

• Tax: 15%

• Operating Expenses: 30%​

These can be adjusted as your business evolves.

4. Regularly Allocate Funds: Twice a month, distribute the funds from the Income Account to the other accounts based on your set percentages.
   

5. Quarterly Profit Distributions: Every quarter, take 25-50% of the Profit Account as a reward for your hard work. The remaining 50% can be reinvested into the business or kept as a buffer.

Why This Works:

The Profit First system leverages behavioral economics, particularly Parkinson's Law, which states that work expands to fill the time available.

Similarly, expenses tend to rise to match income. When you limit the funds available for expenses, your business will become more efficient and intentional with spending.

Then, when you do start to profit (and get paid), everything might start to feel… well… Great

Have you tried the Profit First system or a similar approach? Reply to this email and share your experience.

See you Wednesday,
Lundin
Ensuring founders get paid, one newsletter at a time.