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.
Knowing why Profit is the first account is crucial. In psychology, the Primacy Effect states that what comes first gets the most attention and results. In the traditional formula for business profits, profit is what’s left after all expenses are paid. However, Parkinson’s Law suggests that available funds will be used up, leaving little to call profit.
In contrast, the Profit First formula of Sales – Profits = Expenses places more emphasis on profits. It becomes the focus, ensuring it is never overlooked. By prioritizing profit, you can achieve better financial results for your business.
Next, you need an Owner’s Comp account. Remember, the most crucial employee in your business is you! If you want your business to be sustainable and potentially sellable in the future, you must pay yourself. Plowing all your income back into inventory is not a sustainable approach.
Many clients aspire to leave their day job and run their e-commerce business full-time. By creating and funding an Owner’s Comp account, they can eventually replace their day job salary, making their dream a reality.
Paying taxes may not be pleasant, but it indicates a profitable business. Treat taxes as a badge of honor for your success and plan accordingly. Set up a separate bank account for Taxes and fund it with a percentage of each payout. Gradually grow it to 15% of your real revenue. Having saved for taxes brings relief and a sense of accomplishment.
To achieve profitability, open separate savings accounts for Profit and Taxes, and a checking account for Owner’s Comp. By using these five accounts, you can follow the Profit First method and embark on a path towards financial success. Open the accounts and commit to using them to see your business thrive!
You can learn more about creating and implementing these accounts in my book, Profit First for Ecommerce Sellers. 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!