Can you say, right now, how much of your revenue is actually yours? Not roughly, and not once your bookkeeper comes back to you. For most growing businesses that question takes a spreadsheet and an afternoon, and the answer is out of date by the time it arrives.
What it used to take me to find out
Tax time, or just checking how the business was tracking, meant sitting down and updating a spreadsheet to work out exactly where I stood.
Now I glance at my accounts. That is it. I can see exactly where I am at without opening a single spreadsheet.
Profit as the leftover
Profit usually gets calculated the same way. Revenue minus expenses equals profit. Whatever is left over at the end is what you call profit.
For a lot of businesses that number is zero, or close enough to it.
The formula flipped
Mike Michalowicz wrote a book called Profit First, and his fix is to flip that formula around.
Revenue minus profit equals expenses.
Profit is not the leftover anymore. It is the first bill you pay. Then whatever is left is what you are allowed to spend running the business.
What makes it work day to day
That is the idea. The mechanism is what makes it hold.
Every time a payment lands it gets split straight away, into separate accounts. Income comes in, a slice goes to profit, a slice goes to your own pay, a slice for tax, and what is left over runs the business.
Not at the end of the month. Not when you remember. The moment the money lands.
Why a smaller account makes you sharper
There is a reason this works better than a spreadsheet ever did. If there is less sitting in the account you spend from, you spend differently.
You negotiate harder. You cut the stuff that is not earning its place. You think twice before saying yes to something.
Give yourself endless room and you will fill it. Give yourself less and you get sharper.
For me that shows up before the work even starts. Profit is baked into the calculation before I agree to anything. So if a piece of work is not profitable once it has gone through that split, why would I do it at all?
Someone else running the same structure
Judith Hobdell is a fractional CFO. She is known as The eCommerce CFO, and she owns an ecommerce business herself.
She brings Profit First structure into her ecommerce clients.
When one of her clients wants to know how much they can dial up ad spend, they do not need to wait until the end of the month, or worse, guess. Judith can tell them right now, because of this practice.
It is not just my quirky way of doing the books. It is a real practice, running in someone else’s hands too.
The profit account is not for spending
One more thing. That profit account is not there to be spent.
You leave it alone, and on a schedule you take a distribution from it. Not an accident. Not whatever is left over if you remember. A reward, on purpose, on a rhythm.
Where to start
If none of this exists in your business yet, you do not need five accounts and a perfect system tomorrow.
Open one more account. Call it profit.
Next time a payment lands, before you touch a cent of it, move something into that account first. It does not matter how small.
See how it feels to pay yourself before you pay anything else
Start here: virtualdoo.com/products
