Profit First Instant Assessment and Percentages
How does Profit First work? Do I have to do what the book says, or can I customize it to fit my needs, my quilt shop?
Great questions! And questions I get pretty often. But first, to make sure we are all on the same page, Profit First is a cash management system, like the cash envelope budgeting system, but for businesses, it is 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.
Applying it to You
So how does the Profit First system work exactly in the day-to-day, 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 shop has earned and accumulated in the Income checking account to the other checking accounts based on specific percentages that are tailored to your quilt shop. You then run your business and make decisions based on the balance of the appropriate account. Splitting your money into different checking accounts helps you to spend and save appropriately. Ultimately helping you be a good steward of your resources and fulfill your responsibility as a business owner.
First, you must 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, author of Profit First, calls the instant assessment.
The instant assessment results will give you your Current Allocation Percentages or CAPs and what categories you need to change 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.
First we need to determine how much money we have collected from our customers over the past 12 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 shop friendly. Instead of calling it Materials and Subs, I just call it Inventory because most quilt shops operate around selling physical products or inventory.
We need to determine how much inventory we have purchased over the last year.
Next, is Profit. We need to know how much you have saved specifically for a real emergency over the last year. In most cases, this is zero.
Then comes Owner’s Compensation- the amount of pay you received and perks you have benefited from.
Then comes Taxes- the amount you have specifically saved or paid for the annual income taxes of the business and owner of the business. Again, in most cases, this is zero.
And lastly, we have operating expenses. This is the sum of all other expenses like rent, employee payroll, sales and payroll taxes, debt payments, and everything else.
Once you have these numbers for each category, you do simple division and multiplication to get your Current Allocation Percentages, divide each category by your top line revenue, multiply by 100, and you have your CAPs. Again, if you need help getting this done, please click the link below for a free step-by-step guide: the Profit First Instant Assessment.
Now that you have your current percentages, the next step is comparing that to the standard target allocation percentages. Again, the free step-by-step guide will help you.
Most quilt 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.
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 worth it. Imagine what you could do, if you had all your debt paid off, what would you do with that now extra cash? How could you impact your customers? Your family? Your community?
Using Profit First saved our quilt shop. If you stick to Profit First, it can help you too. Click the link in the description below to download the free step-by-step process of starting Profit First the instant assessment.
If you are ready to join the ranks of quit shops that have received professional help with Profit First and bookkeeping, payroll, and taxes, please click the other link in the description below to schedule a call with me.