Why Companies Should Consider Taking Profit First
As a business owner or entrepreneur, your ultimate goal is to make a profit. However, it’s common to see companies focus solely on revenue growth and neglect their profit margins. This approach can lead to financial instability, debt, and even business failure.
In this article, we’ll explore why companies should consider taking profit first and driving their business in a more efficient financial way. We’ll look at common misconceptions around profit, the benefits of a profit-first approach, and practical steps businesses can take to implement this strategy.
Where did this knowledge come from?
Learning about the idea of taking profit first was a new way of thinking for me and I first heard about this from Donald Miller on his podcast ‘Business Made Simple,’ who is an author, public speaker, and business owner from the United States.
His education on, “How to structure your business finances to maximise profit,” with Nike Michalowicz (who wrote the book, Profits First) was game changing for me.
“Not eating from the plate that serves you”, when you sit down for Christmas lunch or dinner do you eat directly from the plate that has the turkey, no you slice it up and allocate a fair portion to each person. This is the recommendation when dividing up your revenue and allocating profit first. No expenses or overheads should be taken directly from the revenue account but from dedicated accounts for each type of expenditure.
By allocating a percentage of your revenue to profit first and into a dedicated account, then dividing up a percentage of the revenue to each relevant core expenditure account you can drive your business more efficiently. (I will break this down in its simplicity in a future blog)
Misconceptions around Profit
Many companies believe that revenue growth is the key to success. They focus on increasing sales, expanding their market share, and investing in new products or services. While these strategies can be beneficial, they often come at the expense of profit margins.The problem with this approach is that revenue growth doesn’t necessarily translate into profitability. In fact, many businesses can experience rapid revenue growth while still operating at a loss. This is because revenue growth doesn’t account for the cost of goods sold, overhead expenses, or taxes.
The Benefits of a Profit-First Approach
A profit-first approach, on the other hand, prioritises profit margins over revenue growth. It involves setting aside a percentage of revenue as profit before allocating funds for expenses. This approach ensures that profit is a priority and that expenses are adjusted accordingly.There are several benefits to adopting a profit-first approach. First, it forces companies to focus on the bottom line and make strategic decisions that improve profitability. Second, it helps businesses avoid debt and maintain financial stability. Third, it allows companies to reinvest profits in the business or distribute them to shareholders.
Practical Steps to Implement a Profit-First Strategy
Implementing a profit-first strategy requires a shift in mindset and a willingness to change the way you manage your finances.
Here are some practical steps businesses can take to get started:
Calculate your target profit margin: Determine what percentage of revenue you want to set aside as profit. This can be based on industry standards, your financial goals, or a combination of both.
Allocate funds for profit first: Set aside your target profit margin before allocating funds for expenses. This ensures that profit is a priority and that expenses are adjusted accordingly.
Adjust expenses accordingly: If your expenses exceed your revenue, it’s time to re-evaluate you’re spending and make adjustments. Look for ways to reduce overhead costs, negotiate with suppliers/vendors for better rates, or consider outsourcing certain tasks.
Monitor your finances regularly: Keep track of your revenue, expenses, and profit margins on a regular basis. This will help you identify areas where you can improve and make strategic decisions that improve profitability.
Your statutory monthly accounts should be with you as early as possible, buy doing so you reduce the risk of financial inefficiencies and reduce the chances of financial wastage.
Companies should consider taking profit first and driving their business in a more efficient financial way. By prioritising profit margins over revenue growth, businesses can achieve financial stability, avoid debt, and make strategic decisions that improve profitability. While implementing a profit-first strategy requires a shift in mindset and a willingness to change, the benefits are well worth it.