Once upon a time, I was a small business angel investor… and lost everything.

When I met Debbie Horovitch at a speaking engagement, her struggles resonated with me. After going through her business’s financials, she broke down, saying, “I’m a fool. I am a FOOL.” It hit hard because I’d been there too – facing the painful truth about my bank account, my strategies, and my shattered dreams.

My own financial come-to-Jesus moment was the start of a transformation. That’s how Profit First was born- initially to solve my own financial problems. And it worked, not just for me but for countless business owners facing the same economic stress.

Most businesses follow the traditional accounting method, GAAP, which encourages spending first and paying yourself last. But that’s how I fell into a financial doom spiral. GAAP is essential for analyzing your business, but as a cash management tool, it fails most entrepreneurs.

Look at a typical income statement. Revenue at the top, followed by expenses, with profit left at the bottom. No wonder most businesses struggle to make a profit.

Profit First flips this script. You take your profit first, pay yourself, and leave expenses to be managed with what’s left. This method forces frugality and puts profit at the forefront. It’s simple but effective – deduct profit first and control expenses accordingly.

Since implementing Profit First in my own business and for my clients, the results have been life-changing. Profit First allows you to consistently grow while staying in control of expenses. I’ve seen it work for 21 consecutive quarters, and it can work for you too.

1. The core concept

• Flip the traditional formula:

  • Old way: Sales – Expenses = Profit

  • Profit First way: Sales – Profit = Expenses

The idea is to prioritize profit by taking it out first, forcing you to run your business on what’s left.

2. Setting up your bank accounts

• Separate Accounts:

  • Income account: All revenue goes here.

  • Profit account: A percentage of your income is transferred here immediately.

  • Owner’s pay: Another percentage goes to paying you, the owner.

  • Tax account: Set aside money for taxes so you’re always prepared.

  • Operating expenses: The remainder goes here, and this is what you run your business on.

3. Allocating income

• The allocation process:

  • At regular intervals (e.g., bi-weekly, monthly), transfer percentages of your income from the Income Account to the other accounts.

  • Suggested starting percentages (can vary based on your situation):

    • Profit: 1% to start, gradually increase over time.

    • Owner’s pay: 50%.

    • Tax: 15%.

    • Operating expenses: 30%.

4. Pay yourself first – Prioritize your compensation: The system ensures you pay yourself first, reinforcing the idea that your hard work deserves reward and sustainability.

5. Adjust and improve – Regular review: Every quarter, review and adjust your percentages based on your financial health. Aim to increase profit and owner’s pay over time while controlling expenses.

6. Celebrate your success – Profit distributions: Quarterly, take half of the money in your profit account as a reward for yourself. Use the other half to reinvest in your business or build a safety net.

7. Control your expenses –Lean operations: By restricting what you spend on operating expenses, you force your business to be more efficient and innovative.

8. Stay disciplined – Stick to the plan: It’s easy to be tempted to dip into your other accounts, but the key to Profit First is discipline and consistency.

When I faced financial struggles and felt the weight of my mistakes, I thought I was at the end. But that moment became the turning point. Profit First saved my business and allowed me to regain control, and I’m honored to share it with you today. Remember, you don’t have to be perfect, but you do have to take that first step toward financial clarity. Let’s keep moving forward, together.

Wishing you profit, success, and peace of mind.

-Mike

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