When I first started my business, I struggled for the first few years. Every single month, I did not make any profit. The money that I borrowed with my consultancy salary before I quit had all been spent and the various banks have been calling me every other day to ask for the repayment, money which I didn’t have. I hated myself for being this unsuccessful entrepreneur. This was not what I set out to be when I left my high-paying consultancy job. It was embarrassing to have to skip meals because I didn’t have enough money, it was embarrassing to keep pretending that I am traveling when the banks call me up and assure them that I will settle the payment when I’m “back in Singapore”.

We have all been taught to focus on driving revenue. It’s the first line item in our Profit & Loss Statement. But what if you could flip your Profit & Loss Statement and ensure your business gets profit from the get-go? The solution lies in a simple yet revolutionary concept: budgeting a percentage of your revenue as profit and only spending what remains on expenses. This approach was popularized by Mike Michalowicz in his book "Profit First” and it was a game-changer in my businesses. I highly recommend every entrepreneur who is struggling to make a profit to read this book.

The Profit First Mindset

Traditional accounting dictates that profit is what’s left after subtracting expenses from revenue:

Revenue−Expenses=Profit

However, this method often leads to minimal or non-existent profits, as expenses tend to consume the bulk of revenue. When I started my first business, I knew nothing about managing my finances (although I was a Finance major in university). At end of each financial year when we close our books, I always pray that the previous year was profitable. Even in the years where we closed the books with a healthy profit, I never knew where the money went. I was too ashamed to admit that I, as a Finance student, did not know how to manage my company finances. I was ashamed to admit that I needed help on this.

The Profit First formula changed my life. It teaches us to prioritise profit:

Revenue−Profit=Expenses

By allocating profit first, we ensure that our business remains profitable from day one. This mindset shift can be as transformative as a gardener who harvests the first fruits and then tends to the plants with the remaining resources.

Why Prioritizing Profit Works

• Forces Financial Discipline: By setting aside profit first, you’re forced to manage your expenses within the remaining funds. This fosters creativity and resourcefulness, encouraging you to cut unnecessary costs and operate more efficiently.

• Ensures Financial Health: Regularly setting aside profit helps build a financial cushion, providing security against unexpected expenses and economic downturns.

• Boosts Business Value: Consistent profitability enhances your business’s value, making it more attractive to investors and lenders.

• Encourages Sustainable Growth: Prioritising profit ensures that growth is sustainable and not fueled by reckless spending. It lowers the possibility of high revenue but low profitability.

How to Implement the Profit First System?

• Determine Your Profit Percentage: Decide on a reasonable percentage of your revenue to set aside as profit. Start small if necessary, and gradually increase it as your business adjusts to the new system. For example, if your target is 20% and you are currently not profitable, start with 1% and increase that to 2% the next quarter.

• Set Up Separate Accounts: Open multiple bank accounts for different purposes: revenue, profit, expenses, government’s money for taxes and GST (where applicable), and dividends/owner’s salary. This separation ensures clarity and prevents the temptation to dip into profit funds for other expenses. What you don’t see, you don’t spend.

• Allocate Revenue: Every time you receive revenue, allocate it according to the predetermined percentages. Transfer the designated profit percentage into the profit account every end of the month before addressing other expenses.

• Trim the Fat: Review your expenses critically. Identify and eliminate unnecessary costs, and explore cost-effective alternatives. This could also mean firing or adjusting the work scope of people whose work doesn’t bring enough value for the money they are being paid.

• Monitor and Adjust: Regularly review your financials to ensure the system is working. Adjust the profit percentage and expense allocations as needed to reflect your business’s evolving needs and goals. If you are entering a high growth phase, you may want to allocate more resources to fund this growth.

Why this is so Important?

How we handle your business finance is usually how we handle your personal finance. When I was struggling with my business finance, my personal finance was a mess too. I used to take more business loans to cover the repayment of existing ones, hoping that someday my business will miraculously become profitable and I will be able to get out of debt.

Another way to think about this: why do so many people fail at weight loss? Research has shown that when it comes to losing weight, diet beats exercise 70% of the time. By allocating your calories to healthier options first, you will have little room left for empty calories, making you less likely to indulge in junk food. By setting aside profit first, you’re less likely to waste money on unnecessary expenses.

Tips for Successful Implementation

• Start Small: Don’t overwhelm yourself by setting an unrealistically high profit percentage initially. Most of us set unrealistic targets and give up after a while when we don’t see results. I started a 1% profit allocation and increased it gradually. Make it so achievable that you can barely feel the difference before and after you implement this.

• Celebrate Milestones: Recognize and celebrate when you hit profit targets. This reinforces the positive impact of the Profit First approach and motivates continued adherence. 

• Involve Your Team: Ensure your team understands the importance of the Profit First system. Encourage their input on cost-saving measures and efficiency improvements.

• Seek Professional Advice: Work with a financial advisor or accountant familiar with the Profit First methodology to tailor the system to your business’s unique needs.

• Stay Committed: Like any significant change, implementing Profit First requires commitment and consistency. Stay the course, even when it feels challenging.

The Impact on Your Business

Implementing the Profit First system had a significant impact on my businesses:

• Increased Profitability: By consistently setting aside profit, I ensured that businesses remains profitable, even during difficult times.

• Enhanced Financial Stability: For the first time in my life, I was managing businesses that had a safety net that helped us through economic fluctuations.

• Greater Operational Efficiency: Prioritising profit forces us to scrutinize expenses and operate more efficiently, fostering a leaner, more agile business. It forces us to maximise our ROI for every dollar we spend.

• Improved Business Valuation: Consistent profitability boosts your business’s value, making it more attractive to investors and potential buyers.

• Mental Wellness: During my unprofitable days, I felt dejected and demoralised and I was constantly worried about how I was going to pay the next payroll and rent. It took a toll on my self-esteem and I dreaded going to the place that was “sucking me dry”. All my time was spent thinking about how to survive and I simply had no capacity to think of the strategic side of business. It was exhausting and I never want any of my fellow entrepreneurs to go down the same path.

The Profit First approach has got to be one of the most powerful tools that transformed the way I manage my businesses. By prioritising profit and managing expenses within my means, I ensured consistent profitability, enhanced stability, and sustainable growth. Don’t make the same mistake I did by waiting (and praying) for profits to appear — take control of your financial destiny and start implementing the Profit First system today. Your business will soon yield the fruitful harvest you’ve been striving for.

Let’s make your business as profitable and thriving as it deserves to be.