Erika Jones, CFO, CCTAProfit First Professionals · Certified Fractional CFO and Profit First Professional

Ask Mike- Allocating Debt With The Profit First System

17 Jun 2020 · 1 min

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1:00

In this brief advice segment, Mike answers a question from Leslie, a home‑stager who bought a large amount of furniture on credit to launch her business and now worries she can’t be profitable. Mike explains that, under the Profit First system, the correct approach is to first pay off the debt, but to do so by allocating a portion of the profit rather than cutting the profit habit entirely. He outlines the mechanics: the purchases are treated as expenses, profit must exceed spending, and during profit distribution 95‑99% of the profit is directed to the debt (the furniture) while a small slice (1‑5%) is set aside as a reward to reinforce the profit habit. Once the debt is cleared, 100% of future profit distributions go to the owner. The tone is conversational and supportive, with a hint of humor at the end.

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I love this question I got from Leslie. She's a home stager and she said, mike, to start my business, I had to buy tons of furniture to pay off that debt. I can't be profitable, right? And the answer is, technically, that is correct. You need to pay off your debt first using the profit first system. But we do it by allocating profit. So understand that those purchases were an expense you incurred that you didn't have the money for. The only way to pay off debt is to make more money today than you're spending, AKA profit. So we're still going to allocate money to the profit account. When it comes to profit distribution time, 95 to 99% of that money comes out to pay off that debt. Of that furniture you purchased. But a small portion, 5 to maybe as little as 1%, comes out to reward you. So you're in the profit habit. Feels good. Then once the debt's paid off, every profit payment goes to you. Leslie, this is stupid.