🍦 Be the Master of your Profits

Hey friend —

Today, let's dive into a game-changing approach to managing your finances – the Profit First Method. In the hustle of running a business, it's easy to get caught up in day-to-day expenses and forget to set aside for crucial things like taxes, team events or new equipment.

The Profit First Method flips the script, ensuring you not only cover your costs but also secure a healthy profit. Let's explore how this method can work wonders for both companies and sole traders.

What is the Profit First Method?

The Profit First Method, pioneered by Mike Michalowicz, flips the traditional accounting formula. Instead of focusing on sales - expenses = profit, it shifts the priority to sales - profit = expenses. The idea is simple but powerful: allocate profits first, and then manage your business with what's left.

Setting Aside for Taxes

One common pitfall for small businesses, especially sole traders, is the tax bill surprise at the end of the year. With Profit First, you proactively set aside a percentage of every sale for taxes. This ensures y

ou're not scrambling when tax season arrives. It's a game-changer that turns tax time from stressful to smooth sailing.

Equipment and Upgrades

How many times have you thought, "I wish I had the funds for that new Macbook as my one is on it’s way out"? Profit First helps you earmark money specifically for equipment and other essential upgrades. You could use the same thing for putting money aside for your team for a Christmas party at the end of the year, or perhaps performance bonuses. By prioritising these allocations, you're able to respond quickly to the needs of the business and uplevel when you need to.

How to Implement Profit First

1. Determine Your Percentages

Decide on a percentage to allocate for profit, taxes, and equipment/upgrades, etc. Start small and adjust as needed.

As a starting point, we recommend around 30% for sole traders from your net revenue (revenue excluding VAT). So if you charge £100+£20 VAT for something, we only want to put 30% of the £100 away. Make sense?

You can put the VAT away in it’s own pot as well - you could do the full £20 (100% of the VAT) or aim for 50% or so and top it up if needed. If looking at the total figure, usually around 10-15% of the total is a good starting point for ease.

If you’re a company, the VAT applies the same but the corporation tax, instead of 30% I would recommend 10-15% as well on your net revenue or 15-20% if you’re company earns above £150,000 per year in profits.

2. Set Up Separate Bank Accounts or spaces

Open different bank accounts for each allocation – one for profit, one for taxes, and one for equipment, and basically as many as you need. Fun fact, if you’re using a digital bank like Starling Bank or Monzo then they have the Spaces or Pots feature respectively that let you easily ringfence the money into savings without having a million savings accounts all over the place. Really good for keeping control of it all! Starling Bank is free whereas Monzo tax pots are a paid feature on their paid plan I believe.

3. Transfer Funds Regularly

After every sale, transfer the allocated percentages into their respective accounts. This ensures you're consistently building towards your goals. It’s not going to do itself so all this prep is for nothing if you don’t actually do the transfers. Starling Bank (not an ad, by the way, we just ♥️ them) have a feature where you can select the money coming in and choose to automatically split it by setting a % to allocate to each of your existing spaces. Saves a lot of time!

For example, we have 10% for VAT, 10% for corporation tax, to keep it simple, and then 5% for team, 5% for workation, 5% for equipment and then a 5% overflow of just ‘profit’ which is just bonus for when the company may need to dip into it.

4. Live Within Your Means

Manage your business expenses based on what's left after you've set aside for profit, taxes, and essential upgrades. This is key - The Profit First method can really help if you’re someone who has a tendency to spend all the money but it still requires an element of self control.

The Benefits for Your Business
Financial Clarity 🔭

Say goodbye to financial fog. With separate accounts, you have a crystal-clear view of where your money is going.

Peace of Mind During Tax Season 💆‍♂️

No more panicking about a looming tax bill. You've already set aside the funds, making tax season a breeze. The idea is that when you or your accountant works out your taxes and you find out what that figure is, ideally you have most, if not all of it already set aside in a savings space so there’s no stress or drama. Peaceful night’s sleep ahead.

Smart Investment in Your Business 📈

By earmarking money for equipment, team and other upgrades, you're making a strategic investment in the growth and efficiency of your business.

Getting Started👟

Follow the above steps but remember to start small and adjust as you go - if you’re constantly oversaving for your VAT return and it turns out that really only 8% is needed instead of 10% for your business, then you could start putting that aside moving forward instead.

Likewise, if you feel like it’s too low then you can adjust at any point for peace of mind. This is not a set in stone rule but more about what makes sense for your business and each business is different and has different needs.

The Profit First Method is more than just a financial strategy; it's a mindset shift that puts your business's financial health at the forefront. By prioritising profit and planning for taxes and upgrades, you're not just managing your money; you're making it work for you.

Just FYI for Cone’s Christmas hours that we will be shut from Tuesday 19th December 2023 and will return on Monday 8th January 2024.

I wish you all a Merry Christmas and a Happy New Year!

Written and edited by Ben Nacca