Profit First is a transformative cash management system. Profit First leverages our natural behavior — bank balance accounting — to make profitability a habit. Bank balance accounting refers to the common small business owner habit of deciding when and how much to spend based on your bank balance. When we implement Profit First with our bridal shop clients, we use Profit First to build profitability and financial sustainability into every aspect of financial planning and strategy.
In this lesson, we’re going to introduce you to the Profit First method, and what to consider when planning implementation.
Profit First Method Key Takeaways for Bridal Stores:
- Profit First is a cash management system that uses human behavior to build profitability into businesses from the beginning.
- The old accounting equation Sales - Expenses = Profit puts profit last. Profit First flips the equation: Sales - Profit = Expenses so that you take your profit first.
- Profit becomes a habit that happens on a weekly basis instead of something that happens some day in the future.
- It is far easier to carve out a sample inventory budget when using Profit First to view all of the financial needs of the business as a whole.
- A dress deposit hold account sets aside the money to pay for customer orders when the bills come due — typically the biggest liability for bridal shops.
- Surprise tax bills are never a problem because money is always set aside in dedicated accounts.
- Owner pay is given priority within Profit First so that you are compensating yourself well for the hard work you do to grow your company.
- Profit First makes payroll decisions easier by making it clear how much you can carve out of the business at any given time.
- The seasonal nature of bridal becomes a non-issue when we use a seasonal stability account to protect against lean periods.
- A debt destruction plan can be set at the right amount when balanced against the other needs of the business.
- For a successful Profit First implementation, consider working one-on-one with a certified professional such as BridalVision Financial.
What exactly is Profit First? As a business owner, you know how critical cash management is. Profitability and growth depend on having access to cash at the right time. Going on bill-pay autopilot is only a recipe for debt. With multiple demands within your business, divvying up financial resources requires strategy and foresight.
The Profit First framework finds the balance between periodic careful planning that we absolutely need in order to ensure financial sustainability, and the auto-pilot that we need in order to function in the day-to-day.
By creating a Profit Assessment and rollout plan in advance, you have an allocation plan that you can follow on a weekly basis while feeling confident that your money is going in the right “buckets.”
Imagine how it would feel to know that every quarter there is already a budget — and more importantly, the cash — in place for designated costs such as sales tax and payroll. Profit First is a solution that tackles cash flow challenges head on to make this your reality.
Entrepreneur and author Mike Michalowicz wrote the book on Profit First to help other business owners simplify and improve their cash flow and profitability. BridalVision Financial is the only Profit First Certified Firm dedicated to specializing in bridal shops.
Profit as a Habit, Not an Afterthought
The classic equation for determining profit is Sales - Expenses = Profit. In this equation, profit is a leftover. The primary (or at least one) goal of a business is to make money. So why do we learn to treat profit like it’s something that (hopefully) just happens after we pay for inventory, vendors, rent, payroll, and Starbucks?
This is where Profit First comes in. In Profit First, the equation is flipped to Sales - Profit = Expenses. You focus on profit before expenses.
You eat your veggies before dessert. Not because you want to; because you know that will result in a better outcome. And it works. Our Profit First clients are financially healthier than other bridal stores.
You know you base spending habits on what is available in your bank accounts. Profit First doesn’t try to fight that behavior. It recognizes that we are overwhelmed humans. The system leverages our natural behavior to make profitability and ongoing financial health a habit.
How is it possible to achieve results such as increasing owner’s pay by 42% in the span of a year? It’s all about forcing tradeoffs. When we implement Profit First with our clients, we have many many conversations about tradeoffs and priorities. And we are constantly driving toward the more profitable, more financially sustainable choices. Skeptical of scarcity? A little scarcity can be a good thing! Scarcity (in small doses) can foster innovation and creativity.
What if I Am Already Profitable?
A common misconception is that Profit First is only for businesses that have never been profitable. Profit First is a system that can fuel growth in businesses at every stage of the profit and growth journey. In fact, the fun really begins once businesses hit their target allocations — meaning they are at an optimum level of financial health. This is when we can use Profit First to take your vision to the next level!
The setup behind Profit First is similar to the cash envelope system that your grandparents may have used. In this classic personal finance system, income gets divided up across several envelopes — rent, groceries, gas, savings, emergency fund, etc.
Profit First uses a similar bucketing system, but instead of envelopes, you use bank accounts. The five primary Profit First bank accounts include Profit, Owner’s Pay, Tax, and Operating Expenses.
All of the revenue flows into an Income account, and is regularly distributed to the different accounts based on percentage allocations determined in your Profit First Rollout Plan.
If you have questions about finding a bank that works well for Profit First, read this blog post.
This simple overview and the Profit First book is a great starting point, but it’s important to point out that it was written for a general audience. And as you are well aware, bridal stores are different.
Industry-specific solutions for implementing Profit First are determined by Profit First Certified firms such as BridalVision Financial due to the inherent differences between industries.
There are several factors that add an extra layer to Profit First for bridal stores:
- Seasonal cash flow challenges can be more extreme.
- You have to manage both your sample inventory and your special order inventory.
- As a result of 1 & 2, many bridal shops have significant debt.
These factors make Profit First all the more valuable for bridal store owners. By addressing seasonality, inventory, and debt, in addition to guaranteeing profit and owner pay, Profit First is a must-have for bridal store financial sustainability.
We’ve only just scratched the surface of Profit First. You can read all you want about the Profit First method, but how do you actually implement it for your business?
Bridal store owners tend to DIY a lot of aspects in their business—which is completely understandable! But there are some parts of your business that shouldn’t be something that you string together after doing some online research. Profit First is one of them.
For bridal shops especially, it’s recommended to hire an experienced finance professional who has helped other bridal store owners through the process. Bridal stores are a different beast than other small businesses. Most store owners require one-on-one support for a successful Profit First implementation.
If you’re looking for expert guidance in getting up and running with Profit First, learn more about the Profit First JumpStart Program. As a certified Profit First Professional, Ingrid Heilke of BridalVision has worked with Mike Michalowicz, the Profit First community, and bridal shops across the country in developing Profit First methods that work specifically for the bridal industry.
As one of our clients, Emmy Gorman of Blush Bridal, shared, “When starting out with Profit First, hang in there. It is not something that is going to fix your business or make significant changes within 30 days, and it’s best to go into the process with the expectation that this is an ongoing implementation—And it is totally worth it!”
Now that you have an introduction to a stellar cash management system, our next lesson is all about getting your accounting and bookkeeping in line to help you make profitable business decisions.