Have you heard of Profit First? So, how does Profit First work? Do you have to do what the book says, or can you customize it to fit your needs and your shop?
Great questions! And questions I get pretty often. But first, to ensure we are all on the same page, Profit First is a cash management envelope system for business that has been adapted and modernized using multiple checking accounts.
I love the Profit First system. I use it in my business and help implement and maintain the system in other businesses.
Where the Rubber Hits the Road
So how does the Profit First system work exactly in the day-to-day, where rubber-hits-the-road kind of way?
The day-to-day of the system is simple. Once you have your accounts created, nicknamed, and percentages figured, every couple of weeks, you simply allocate or transfer all the money your quilt and craft shop has earned and accumulated in the INCOME checking account to the other checking accounts based on specific percentages that are tailored to your shop.
You then run your business and make decisions based on the balances of the accounts. Splitting your money into different checking accounts helps you to spend and save appropriately. Ultimately, it will help you be a good steward of your resources and fulfill your responsibility as a business owner.
Finding Your Starting Percentages
You know where you stand today by looking at how you spent and saved your money over the last year. We do this by completing what Mike Micalowicz, the author of Profit First, calls the Instant Assessment.
The Instant Assessment results will give you your Current Allocation Percentages or CAPs and which accounts you will need to incrementally adjust to move toward your Target Allocation Percentages or TAPs.
The details of how to do this are too much for this blog, but you can click the link below to download the exact steps you need to take for free. Today, I will do an overview of the process.
You need to determine how much money you have collected from your customers over the past twelve months. This is typically your sales amount on your profit and loss statement. We call this your top-line revenue or total income.
Now, this is where we customize the Profit First system to be more quilt and craft shop-friendly. In the book, Mike calls this category MATS and SUBS, I just call it INVENTORY because most quilt and craft shops operate around selling physical products or inventory.
You need to determine how much inventory you purchased over the last year. This is cash spent on inventory, not how much is still on the shelf, but actual spend on inventory.
Profit. You need to know how much you have saved specifically for a real emergency over the last year. In most cases, this is zero.
Owner’s Compensation–the amount you paid yourself and the benefits you received (like health insurance and retirement contributions).
Taxes–the amount you have specifically saved or paid for the annual income taxes of the business and owner of the business. This is not company payroll taxes or sales taxes. Again, in most cases, this is zero.
Operating expenses are the sum of all other expenses like rent, employee payroll, sales and payroll taxes, debt payments, and everything else, except depreciation, because it's a non-cash expense.
Once you have these numbers for each category, you do some simple division and multiplication to get your Current Allocation Percentages, divide each category by your top-line revenue, multiply the result by 100, and you have your CAPs.
Again, if you need help getting this done, please click the link below to download the Profit First Starting Guide for free.
Now that you have your current allocation percentages, the next step is to compare them to the standard target allocation percentages and create a plan to advance your shop toward the target percentages.
Again, the free step-by-step Profit First Starting Guide will help you.
Most quilt and craft shop owners are not shocked by their results. They have intuitively known that they have had a bit of a mess. But the good news is that you can use the Profit First system to get you on the path to financial freedom. I know because that is what we did and what I help other quilt and craft shops do.
By simply sticking to the percentages and not spending more than is available, you will start to make that change to financial freedom. I must warn you that it can be very painful at times, but it is well worth it.
Imagine what you could do if you had all your debt paid off. What would you do with that extra cash? How could you impact your customers? Your family? Your community?
Using Profit First saved our shop, and if you stick to Profit First, it can help you, too.
Your Next Steps
Click the link below to download the free step-by-step Profit First Starting Guide.
Email me at email@example.com if you were surprised by the results of this exercise.
If you need help with this and piecing together financial freedom in your shop, please schedule a call with me by clicking the link below.