Two people explain the Profit First accounting system, which prioritizes cash profitability over traditional bookkeeping. One speaker shares how the method worked even when their accounting was wrong, making it practical for business owners who struggle with standard financial management.
Put that coffee down. What is that? Profit first accounting? Because I, I remember we did a whole video that people should do it and then one of the comments on it was like, oh, but you're not doing it right. And then I was like, hang on. And you were like, no, you don't understand it. You didn't watch the video. So, yeah, explain to us what.
So Profit first is a methodology by a guy called. I think it's like Michael K. Something or other. I'm sure we'll link it somewhere. There's a book. You should definitely buy it. Right. I'm sure we can set up an Amazon affiliate link to make money off that somehow. But it's, it's really worthwhile now. Is it perfect? No, it's not. But it's a accounting methodology that a business owner can use. Yep. Right. And that like a controller can use and you can have in a business that like, will just ensure that you just don't fuck it up. Okay. So like what it is, is you have revenue. It can get more complicated depending on the business. Right? But the basic structure is you have a revenue account. So all of your money that's incoming goes to one place, right? So you've got one collection point. Then you have a profit account. So profit first is the first distribution is profit. Okay. Then you have a tax account and then you have like an owner's pay account. But like that can kind of go away depending how big you are or how you pay yourself. And then you have an operating expense account. So what you do is it basically tells you they went through like hundreds of thousands of businesses and they looked at all different revenue points, like 0 to 500K, 500 to 2 million, 2 million to 5 million. You know, all the way up to like $50 million, right. A year turnover. And they were like, these are where your allocation should be. And it's like, you know, at $50 million a year, probably 65% of your revenue is going direct to operating expenses. Like direct. Right. But at like 500k, it's probably more like 35%. Right. So what you do is you figure out what distribution you have. And obviously every business model is different, but it's a decent place to start from. Like, you have a starting point and you can just adjust from there. Is like, okay, how much profit? Like, if I'm going to be conservative, let's just say it's 10% profit. So sweet. A thousand dollars comes into the business. The first thing I do when it comes in on my weekly distribution Is I go, boom, a hundred bucks. I've got that a hundred bucks away. I'm now accountable to putting away $100 profit, right? And then I have my tax. Let's say my tax is Overall, it's like 18% or whatever. So you're like, boom, 180 bucks goes into tax. And then you've got. Okay, sweet. You've got owner's pay. Owner's pay cover is whatever percentage you've decided. Then you get operating expenses, but you need to make sure you have enough in your operating expenses. So your owner's pay is going to be dictated. That's the variable a little bit by that, right? Because depending on business model. And so, like, it gives you an opportunity to sort of look at your business and go, okay, sweet. So I have. We had a series of terrible bookkeepers and terrible accountants. Like, really bad. And they gave me so many misleading metrics and so many, like, things that just didn't seem right. And I couldn't put my finger on it. Like, I remember I had a look at our balance sheet and our foreign exchange. Our foreign exchange losses and gains was astronomical. And I was like, how is this possible? Like, this is. These are crazy numbers. Like, you can't lose that much on foreign exchange. Like, there's just no way. We're not enough money to lose hundreds of thousands of dollars in foreign exchange. It's impossible. And so, like, I started looking at things and I was like, I don't understand anything that's going on here. And sure enough, it was all bullshit, all incorrect. Like, these guys were so stupid, they even misallocated their own fees, right? The accountancy practice ex. Accountancy practice, right? And it said, like, it said unknown. It's like, that's your business, bro. Like, that's retarded. So, like, it put me in a position where I had zero knowledge of how the business was actually running. However, I used profit first, and I was. I was the one controlling or the banks at that time. So I would just go, bang, bang, bang, bang, bang, bang, bang. So although the books were wildly inaccurate, the business maintained cash profitability.
Put that coffee down.
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