There has been a lot of discussion this past week in the Profit First world in response to some recent articles that imply the system is detrimental to business growth. As a Profit First Professional who has spent the last two years talking to business owners about the system I want to address these accusations.

These claims are coming from professional advisors who either lack sufficient understanding of the system to comment or, worse, lack the foresight to see what you can do with this simple system and some creativity.

Profit First – The target market

To me, the Profit First book is written in a way which will do the greatest good for the greatest number of Entrepreneurs. The number one complaint from small business owners, world wide, is that they never get paid enough. They put in an enormous number of hours each week, never get holidays and are not earning anywhere near enough profit to compensate for it. If you are a small business owner I know you’ve felt that way yourself at least once.

The Profit First book seeks to combat this problem by launching a full frontal assault on Parkinson’s law. We do that by:

  • Limiting spending (eliminating waste);
  • Avoiding tax debts; and
  • Maximising business owner return (you get paid!).

The result is a solid foundation on which any entrepreneur can break out of their feast to famine cashflow cycle. The book is written that way because that is what entrepreneurs around the world have been asking for. They want more profit from their businesses to fund a better lifestyle for themselves and their families.

Unlocking the potential in the system

The current narrative around the system being bad for business growth shows me that many business advisors have decided to comment on a system they have never really implemented. I’m sure they at least attempted to read the book but I doubt they fully absorbed the material let alone considering what could be achieved with a customised application of the principles.

Profit First can help you achieve any business objective, so long as you are clear on your own priorities, realistic in your expectations and generally consistent in your approach to business. Do you want to:

1. Generate more personal income?
2. Build a business that pays it’s staff well?
3. Divert a lot of income toward philanthropic activities?
4. Fund the rapid growth of the business?

Profit First can help you achieve any one of these outcomes if you understand it well enough to make appropriate adjustments.

Profit First & Business Growth

Want to beat Parkinson’s law and focus on business growth? This is how I do it, Profit First Australia style!

The allocation percentages straight from the book will need a tweak, but the system works the same as it would otherwise. Rather than focusing our attention on driving up the owner’s pay account we turn our attention to the profit account. Currently, one of my clients (i will call her ‘Jane’) is running the following percentages:

– Operating expenses: 20%
– Owner’s pay: 20%
– Tax Account: 20% (includes GST)
– Profit Account: 40%

Jane wasn’t looking to draw a huge salary from her business. She was content to draw enough to pay her rent and put food on the table. Her primary objective was the growth of the business.

By implementing Profit First in this way Jane has achieved the following:

1. Prevented Parkinson’s law from eating her cash reserves through excess operating expenses;
2. Ensured her desire for business growth doesn’t result in the business spending the small amount she needs for personal living expenses;
3. Avoided a tax debt cycle by still setting aside the require amount to pay the Australian Taxation Office, and
4. Started to accumulate a Profit ‘Warchest’ ready to fund growth.

The required growth can be achieved through marketing activities, developing new product lines or even buying out a competitor. You can do whatever you like as long as you have completed the appropriate researched, and you are making a clear, strategic decision to allocate your Profit account to the project.

One final point

While this article has primarily focused on how to use Profit First to ‘fund’ growth I also wanted to talk about innovation. Humans will always look to do things the easy way. We could take the stairs but we use the elevator. We know diet and exercise are crucial to weight loss but we’re spending millions looking for a pill instead. It’s really just how we are!

In business humans are no different. If a problem comes up we ‘throw money at it’. This kills any hope of building a truly innovative organisation. It’s only when we create an environment in which problems need to be solved through creative thinking, rather than blanket spending, that great innovations come to the surface.

Why is that point relevant for this article? By limiting your ability to throw cash at problems the Profit First system will drive innovative. It will challenge your business model and the way you’ve always done things. To me, that’s a business environment in which you can create both efficiency and profitability.

My own experience

Profit First doesn’t undermine or prevent business growth. In fact it does the complete opposite. The system can be the foundation for smart, sustainable grow for any small business. If my time working with the Profit First Professionals network has shown me anything it’s that the book is the starting point, not the finish line. Be clear about your long term goals for your business, consider the financial health of yourself and your family and make the system work for you.

Further Information

Read our comprehensive review of Profit First here

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