Profit First. An obvious phrase? Yet for many small businesses, it’s an increasingly popular method to manage your cash flow to take care of the business owner, makes sure taxes get paid, and finally takes the pit-in-your-stomach feeling out of payroll.
Profit First, founded by entrepreneur and author Mike Michalowicz, encourages business owners to take a percentage of all sales and set it aside in a profit account. The general idea behind Profit First accounting is that businesses pay themselves first — and let what remains to dictate how much they can spend on operating expenses.
It’s become more than an accounting method — it’s a movement.
Wayne Stewart, owner of Catonsville-based Stewart Design Agency, first heard about Profit First when he read a magazine article. He bought Michalowicz’s book, “Profit First: Transform Your Business From a Cash-Eating Monster to a Money-Making Machine,” and read it cover-to-cover.
“It made sense to me,” said Stewart, who recently celebrated his business’s fourth anniversary. “A lot of times as business owners we’re trying to figure out how to pay taxes, how to pay ourselves.”
Stewart divided his business accounts into four: owner compensation, operating expenses, profit and savings, and taxes. “What we do, is we take every transaction that comes in, and separate it into those buckets.”
For example, in Stewart’s case, he puts 30 percent of every transaction into the tax bucket.
“That works out really well for us, because at the end of the year, we have a bucket of money for taxes,” he said. “We now exactly how much I can pay myself, and we know how much we have in terms of profit and savings.”
Some financial managers — who help business owners like Stewart — are certified in the Profit First method.
Linda Stapf, owner of Stapf Financial in Sykesville, is not affiliated with Stewart Design Agency. She first heard about Profit First in one of Michalowicz’s earlier books, “The Toilet Paper Entrepreneur.” The book’s subtitle — “The Tell-It-Like-It-Is Guide To Cleaning Up In Business Even If You Are At The End Of Your Roll” — expressed how many entrepreneurs feel on a day-to-day basis.
“I’ve been working with business owners for 30 years now,” said Stapf. “Profit First makes sure they get paid, and makes sure they have the funds to pay taxes,” she said. “When I saw what Michalowicz was doing with different bank accounts, that just totally made sense.”
In fact, Stapf not only helped business owners adopt Profit First — she did it herself. “It brings so much peace to business owners,” she said. “I’m a CPA, but I’m also a business owner and I know firsthand how hard it is to pay yourself, and determine how much money goes into the tax budget. For some business owners, it’s phenomenal just being able to pay your taxes from your business account and not have to dig into your personal accounts again to fund that bill.”
She also knows firsthand from her clients that business owners don’t always keep great records. This method is a shortcut to help business owners navigate through difficult times. “I know that the Profit First method saved businesses through COVID-19,” she said.