Many entrepreneurs try to force themselves to become better at accounting and to become more disciplined in their fiscal management by pure willpower. But much like a muscle, willpower can be drained. And in a moment of financial stress, or bigger than expected expenses, the entrepreneur will break their own fiscal rules and spend the money they have.
The Profit First principle does not try to change your habits, because that is nearly impossible. Profit First works with your existing habits. By first allocating money to different accounts, and then removing the temptation to “borrow” from yourself, your business will become fiscally strong and you will benefit from regular profit distributions.
The Profit First Formula
The GAAP (Generally Accepted Accounting Principles) formula for determining a business’s profit is Sales – Expenses = Profit. It is simple, logical, and clear. Unfortunately, it’s a lie. The formula, while logically accurate, does not account for human behavior. In the GAAP formula, profit is a left over, a final consideration, something that is hopefully a nice surprise at the end of the year. Alas, the profit is rarely there, and the business continues with check to check survival.
Sales – Expenses = Profit
Sales – Profit = Expenses
With Profit First, you flip the formula to Sales – Profit = Expenses. Logically, the math is the same, but from the standpoint of the entrepreneur’s behavior it is radically different. With Profit First, you take a predetermined percentage of profit from every sale, and only the remainder is available for expenses.