Profit First Calculator

Calculate how much to transfer to your business accounts using the Profit First method. Created by Charles Burdett

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⬇️ Income

πŸ“Š Allocations


πŸ’° Results

What is the Profit First accounting method?

The Profit First accounting method was developed by Mike Michalowicz and is a habit-driven way of understanding the financial health of your business - and most importantly: taking profit before paying expenses.

Most of us run businesses by checking our bank balance and hoping for the best. Profit First takes advantage of this habit and turns it into a robust way of ensuring your business is profitable and healthy.

Why is Profit First worth trying out?

The truth of most business owners is this: you rarely, if ever read (and understand) your cashflow statement.

Instead, you habitually check your business' bank account balance. You use intuition on how much cash you have available.

Most of the time, you are handling your company's finances by the seat of your pants.

When you adopt the Profit First habit into your entrepreneurial repertoire, the benefits are enourmous:

How to use the Profit First method

The central principle behind Profit First is splitting your business' revenue into different pots, twice a month.

Step 1. Open six bank accounts

It is essential that you open multiple business savings accounts. Having money seperated not only creates clarity, but stops you stealing from yourself. Instead of opening new accounts, some banks like Monzo or Starling allow you to create Pots within one account (I'll show you exactly how I do this later).

The accounts you need to create should be named the following:

Step 2. Determine your allocation percentages

Go and get the past quarter's (or which ever period of time you feel is relevant) finances.

You need to know/work out how much:

Once you have these figures (they only need to be approximate, but the more accurate, the better) - you need to add them all up so you have a total, then work out the percentage of each one. If you don't know how much tax you owe, or if you haven't paid yourself anything - you can work those out by deduction from your income and expenses. Everything needs to add up to 100%.

For example, last 30 days:

So, for the sake of rounding up, my allocations are:

It's advisable to actually put your allocation percentages in the name of each bank account (most places let you create a nickname), so you never have to remember them.

Step 3. Update your bank details for income and expenses

It's vital that every source of income arrives in your Income account. This account exists purely to accrue your income so it can be distributed to the other accounts. No cash is left in here after you've done your allocations (more on this in the next step).

Likewise, you'll want to go and update the payment details of all your expenses to ensure they are paid out of your OPEX account.

This way, you know that bills only come out of your OPEX account, and that income is only paid into your Income account. Things are already getting a bit tidier and clearer!

Step 4. Decide on your starting allocation percentages

It's wise to continue using your allocation percentages as they are currently. The crux of Profit First is making gradual, incremental adjustments to your ratios. For example, if you discover that actually, you are making 0% profit - you'd set your starting allocation to 1% profit.

This is powerful, because it sets you on the road to being profitable in a fairly painless way. The idea is this: surely you can run your business with 89% expenses instead of 90%? And when you do, and you start to find innovative ways to cut costs and increase profits. By slowly turning the dial, you can transform your business from a cash guzzling glutton, to a lean, profit generating beast.

It's good to set aspirational percentages (called Target Allocation Percentage or TAP for short.) You might have your OPEX at 80%, with a TAP of 70%. So, once a month, you reduce your percentage by a few points until you hit it. There's no big sudden adjustments which deride the stability of your operations. Likewise, you actually want to INCREASE your tax percentages, as that's a healthy sign your profit is increasing too. Remember: paying tax is a good thing.

Here are my TAP goals

Step 5. Allocate your income

The cashflow frequency of every business is different. I have remittance for sales every few days as I run a product business. If you run a service business, you likely get large lump sums sporadically throughout the month.

Depending on your cashflow frequency, you can do your allocations weekly, or twice monthly. But ideally you want to keep a consistent cadence that becomes a habit (and doesn't leave you in a sticky spot without enough cash in your OPEX account.)

Using the calculator above, it's a simple case of inputting the total income that's sat in your Income bank account. Then, plug in your allocation percentages, and transfer the resulting value to each account.

Step 6. Move profit and tax into holding accounts

Remember how you set up a fifth and six account called Profit HOLD and Tax HOLD? At the end of each month, you move the cash from your Profit and Tax accounts into these holding accounts. They should be as inaccessible as possible. They should only be used when it comes time to pay the taxman, or when you make your quartlery profit distribution (either as dividends, or as a reinvestment into your business).