Are You Making This Profit First Mistake?
There are several mistakes that a business owner can make while implementing the Profit First system into their business. And chief among them: not following the instructions to a “T.”
A bit about me: My wife loves it when I cook (which I could do more often), and she often likes what I cook. And I tell her, “I don’t cook. I simply follow the instructions.”
Now I’m nowhere near my mom or grandma’s level of culinary genius; they don’t use or need measuring utensils the way I do. But, my food almost always comes out good because I follow the instructions to a “T,” despite my lack of experience.
The same is true for following the Profit First system. It works well. And I suspect you know it works well too, or you wouldn’t be reading this article. It works because it’s based on time-tested, solid financial principles.
(It also works for personal finances, if that’s something you struggle with.)
Now, in terms of which points in the system should be adhered to the most closely, at the top of the list is limiting business spending to what’s available in the OPEX account.
In my humble opinion, being able to keep business spending to what’s available in OPEX (i.e. making the hard decisions when it’s low, avoiding using funds from other accounts to handle the business’s spending, etc.) is the crux of the entire system. If everything else is done correctly except for compromises in this area, you will not get the promised results. It’s that simple. We guarantee our profits by keeping strict limits on what the business can spend as a percentage of revenue.
It is super important to be watchful and vigilant over monitoring your business’s monthly expenses. We must be proactively innovative and creative when it comes to limiting our expenses. I’m not suggesting we be cheap, but we should cut all unnecessary spending and make sure we are receiving maximum value for every dollar spent. And if it comes to it, we must make the hard choice to cut or reduce whatever is necessary to stay within the amounts of the OPEX account whenever there are more expenses than cash available within that account (with emphasis on “within that account”).
Life will happen, and there are times when we’ll have to adjust, although not frequently. And that’s OK. But there are also ways that we can preempt large or unexpected expenses:
- In using the Profit account, 50% will stay in this account as an emergency fund. So, any emergency funds needed should be available to your business if you’ve been running the system for a few months/quarters/years. But you can only use it for business spending if it’s a true emergency.
- Establish a special account for large expenses. For example, if you have an annual recurring expense that you often forget about until after they take funds from your account, you can consider opening an annual expense account that will hold the funds for the purchase each year without sacrificing the OPEX budget, your pay, profit, or taxes. Also, If you need to purchase expensive equipment or have regular maintenance needs, you can establish an account that will have funds available for your equipment purchases or routine maintenance.
- While this isn’t a direct Profit First strategy, proper insurance will protect you from certain emergencies and allow your business to stay viable under extreme duress. We recommend having a conversation with a legal representative and having a quality insurance policy to protect yourself and your business.
So, follow the system. Don’t take shortcuts when implementing Profit First. The system is already simple and broken down to its simplest form for maximum results; there’s nothing added to it that isn’t necessary. If you want the results that the system promises, just follow the system and instructions to a “T.”
If you need help implementing Profit First in your business, let’s talk!