Why is the Profit First method becoming more and more popular among ecommerce sellers? Because it works! I hear it over and over from clients and other online sellers; once they’ve implemented Profit First as their way of managing their operations, their businesses have grown, their profits have increased and their stress has decreased…considerably!
What’s the secret? No secret, really. Just a sound and proven system of separating your cash into “buckets” (or separate bank accounts) to ensure that all aspects of your business are being planned for and handled properly.
The first steps in our Quick Start approach to implementing Profit First is setting up separate checking accounts for inventory and operating expenses. You can make great strides towards Profit First just by taking these steps! But don’t stop there. Once you have separated your inventory banking activity from your operating expenses and got this working smoothly, go ahead and create your other three primary accounts: Profit, Owner’s Comp, and Taxes.
It’s significant to know why Profit is the first account on our list. As discussed in the book, Profit First by Mike Michalowicz, what comes first gets the attention and the results. In psychology this is called the Primacy Effect and it means that “we place additional significance on whatever we encounter first.” This carries over into our thinking about profitability. In the traditional formula for business profits—Sales – Expenses = Profit, your profit is always what’s left over after all else has been paid. The problem with that is with Parkinson’s Law, which basically states that we will find ways to use the available funds, so there really won’t be anything left over to call profit.
Now, if we use the Profit First formula of Sales – Profits = Expenses, you can see that profits play a more significant role. Profit is not an afterthought; it becomes the focus, and as Mike reminds us, “When profit becomes the focus, it is never forgotten.”
The next account you need is an Owner’s Comp account. Who is your most important employee? Don’t look around the room, look in the mirror! YOU are your most important employee! If you are building a business that will be sustainable and perhaps saleable at some point in the future, you need to pay yourself. You are not creating a stronger business by plowing your income back into inventory. Instead, you are creating a situation that cannot exist long term.
I’ve had several clients tell me that their goal was to be able to leave their day job and operate their e-commerce business full time. Once they created their Owner’s Comp account and began funding it, over time it grew to the point where they could reliably replace their salary from their day job. They saw their goal become a reality and they’ve never looked back!
Finally, while you may not like the idea of paying taxes, it is a sign that your business is profitable. Taxes are your badge of honor for having a successful business, so plan for success! Create a bank account for Taxes and with each payout, fund that bank account with a percentage. You may have to start small, but you should grow it to 15% of your real revenue. I love hearing from my clients in March and April, when we get to celebrate that they owe taxes and they have set aside the funds to pay for them. Each year, I get several calls from clients telling me the same story, “My accountant called and sounded so concerned. I thought something was wrong. Turns out they didn’t want to share the amount I owed in taxes. I told them, no problem, I’ve saved for this. I already have the money set aside.” What a great feeling for them, and for us!
Have you set aside the funds for Profit, Owner’s Comp and Taxes? If not, take the first steps and open the bank accounts you will need. Open savings accounts for Profit and Taxes, and a checking account for Owner’s Comp. These five accounts will set you on the right path to become profitable, but you need to start by opening the accounts and then commit to using them…the Profit First way!
You can learn more about creating and implementing these accounts in my book, Profit First for Ecommerce Sellers. If your ecommerce business isn’t where you’d like it to be in terms of profitability, this book answers important questions about how to put Profit First to work in an ecommerce business. If you run into issues opening your bank accounts, here is a listing of banks that have been Profit First-friendly in the past. Take control of your money and your business, and put Profit First to work for you!