How to use Profit First Accounting System by Mike Michalowicz
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- Опубликовано: 3 окт 2024
- Here's where you can get the Profit First book: amzn.to/2DyQ2D1
disclaimer: I am not a certified Profit First Professional or associated with Mike Michalowicz. I do not teach the Profit First system.
I created this profit first summary video training for private clients to introduce them to profit first bookkeeping and product first accounting method so they could buy the book and grow their business. I decided to share my profit first summary with you too. Get Mike's book to learn more about using the Profit First system and/or hiring a Profit First Professional.
How to allocate the money coming into your business using the Profit First system from Mike Michalowicz
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Here's where you can get the Profit First book: amzn.to/2DyQ2D1
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As a hairstylist this is VERY helpful! I run my own business and I never truly understood where my money was going and what I was making. This method has kept me very organized and on top of everything! THANK YOU!
How long have you been using it?
Love to see another hairstylist here!! So glad I found the book and this system.
I started using this system in January 1st 2019 and it changed my business! Best thing I ever did!
I Keep coming back to this video. It is THE BEST explanation of profits first.
WOW - thank you SO much for the kind words! I am happy this helps!
@@joeyragonacoach your videos are great and your voice is very pleasant brother you have a gift maybe RUclips wasn't ready for you but it is now. You were ahead of your time
@@SLCKaled thank you!! I appreciate the props
1) You saved me the cost/time expense of reading the book. (I came from a bad review of the book)
2) You increased the chances of me understanding this concept by making this video.
There was a bad review on the book saying it kept beating around the bush and that “there is a 20 min video that explains this in clear” which was a hint I was looking for. I generally don’t have a great attention span so it’s important things get to the point. Thank you for making this you’ve changed at least 1 business operating in Denmark.
I came from that same review lol!
Me too. I read that review and the "20 minute video alternative" and off I went. I'm going to implement the system based on your insight. Thank you.
This is great for those who do not know anything about money/business management. Most businesses have no idea what they actually paying for.
Finally someone who broke it all down into real numbers! Thank you!
This is just a more in depth version of the theories from the richest man in Babylon. Very well written out though, and a must use system for every entrepreneur
Richest man in Babylon was an amazing book.
@@clinicafamiliaryprenatal116 I totally agree, I recommend it to all of my clients.
I was thinking the same thing or just man of Babylon is the greatest book
@@clinicafamiliaryprenatal116 What?! *Better than* Rich Dad Poor Dad?! LOL! (j/k) That's the almost book of biblical proportions to most ppl it seems.
As a small business bookkeeper, I try to get a feel for how receptive a client would be to switching their books to the profit first method. Gives them such a better understanding of their money!
Wendy are you taking on new clients?
Using this to run my household. It has changed birthdays and vacations.
great idea
Whoa! Excellent stuff
*It changed birthdays and vacations?* Really?! How so?
@@surveytestmoney2550 I got a better understanding of how to allocate my money.
I absolutely appreciate those individuals that give freely of their time and provide great content like this. Thank you for your efforts. I look forward to your channel.
RUclips pays but I get your point. He is appreciated.
This is great. I'm 6 weeks into using the profit first thing and I've noticed one major change. That is that I actually have money in my account and I'm not worried about the expenses because the money is in the Operating Expense account.
Joey Ragona I’m curious why the profit first system only takes 50 percent out of the profit account every 90 days. Why not take all of it every 90 days?
Hi, I see you posted this comment 3 months ago, how has it been for you after 3 months of using it? I'm just starting...
@@EverAfterEntertainment i am making a guess here when I say it is for reserves. I think he mentions this. It would be for investments or opportunities that come along in you biz. It could also be for catastrophe planning, think COVID or a hospital stay. The reserves will either keep your business going if there is a drastic reduction in revenue out of your control or if you are experiencing a period of growth and need capital.
Found this system in 2019 and love it. It’s more of a cash management system than an accounting system but it totally changed how I make decisions on expenses.
Nice man!! I am just now discovering this Profit First system and hopefully it will change how I make decisions on expenses as well!
I know you had posted this two years ago. But just now learning about this, glad I came across my business becasue I was truly unsure how to pay myself.
You will be a hero if you make another video explaining the same cash flow from PROFIT FIRST FOR CONTRACTORS by Shawn Van Dyke. I'm a carpenter. I readed the two books (PF and PFC) and I loved them and their philosophy. But now i'm in trouble to apply the PFC system to my business. Every project is different and there are many variables that i don't know how to include in the accounting system (Example: tool wear, workshop expenditures, etc). I hope you do a similar video about PFC. Greetings from Argentina
Finally someone explains this is an easy way
@@joeyragonacoach great job, thank you for doing this ❤
Great content joey, I learned this mindset from my entrepreneur professor yers ago.. excellent advice for all business owners, why be in business if your not going to take care of yourself, family first?.. that’s the whole point of being in business
I am a huge fan of profit first. It really helped us put guard rails for our operation expense and had enough for owners pay. I see to many business owners who are feeding the business and not feeding themselves. I also like the way you share your owners pay. What we did was divide what we brought in the year before by half. since we are at the Target allocation. We had enough built up for a few months . We are in a commission only business and some months we are just short of our goal and some months we blow past the goal. Every 6 months We decide if we also need to give ourself a raise or a paycut. The main point is we know our numbers and this system really helps to make sure of that,
Thank you very much for the visuals and such a clear explanation
Thank you for this!
you are so welcome ☺
Wow I just started a business and I’m going to use this method from the beginning to sort my finances
Makes sense, love the idea. I'm going to do that for my business. I am going to open a salon and going to pay myself commission. Good is save for Taxes in a separate account.
I was going to have a saving account anyway for the business now I know how much to put in it.
Awesome explanation! Currently reading the book but this summarizes the system! Thank you for sharing. We’ll be incorporating this system early 2021 to try to get organized and manage our financials better. We’ve grown in scale this year and feel like money is flying out without us knowing where it’s really going. Thank you!
Can we have an update?
What jack said ^^
any update?
Most people have no idea that the WEALTHY use a similar system [with the inclusion of Holding Companies and multiple LLCs with multiple bank accounts]. This is a really smart model; I’ve got the book and I’m going to put this into practice ASAP.
Mind blown. I will have to start using this method for our business!
As a Realtor, I am currently taking each commission check and splitting it like this, and this works for me: 15% to Business Acct, 15% to IRS Acct., 40% to House Acct (to pay bills), 20% to Savings, 10% for Mutual Funds. What are your thoughts for these splits?
Thanks for sharing! Local realtor in Charlotte and was trying to figure out percentages!
Cap ex?
amazing breakdown of this system
thank you 🙏
SUPER VIDEO!!!!!!!!!!!!!! Fantastic!!!!!!!!!!!!!!!!!!!!!!!!!! You made this so unbelievably relevant!!!
Glad it was helpful! thank you!!!
I have a new health care business and I have already begun to set up my accounts so that I can implement this by the 25th! The great thing is that I have NOVO which allows you to create reserves within the checking account with these exact categories. They must have been inspired by the book I bet.
Joey this was really helpful and CLEAR thank you. And it’s nice to get a video from a Canadian perspective.
I just found you Joey! I am reading the book PROFIT FIRST on Audible. What attracted me to listen to you was your audio quality. I am an AUDIO VISUAL guy. I appreciate good video and good audio on RUclips. You sound like you know what your talking about too...
can you share the audiobook with me through we transfer or direct email: engr.ahsankhan@outlook.com
Thanks for this. You’ve made it easier to understand the concept.
I’ve read the book and listened to the audio book but your explanation is easier to understand. Thanks
You're very welcome!
Great summary video! Keep it up!
thanks so much for the kind words
it's an amazing system. Thanks a lot for Sharing.
you are so welcome ☺
Perfect Joey!
thank you!!!
Nervous about the transition but I finally opened an account with Relay and will take it one step at a time. My new bookkeeper is getting my mess straightened out so it won’t be too much longer until I actually know where my money is going.
best thing you can do :-) - it's crucial to know where the money is going...and the health of the business. Congrats on the move!
Hello Joey, thank you for the informative video. Much appreciated!
thank you for watching!
Thank you for solidifying this information. The question is, from which account should retirement investments such as IRA be paid? I believe I've yet to encounter this info, and I'm unsure if it falls under Owner's Comp.
you are welcome. You will probably need to set up the advanced PF. Check out Mike's book for those tips. But from what I understand, your personal pay funds personal stuff. Including retirement investments
@@joeyragonacoach thank you 🙏🏽
Hi, thanks for this summary. I've listened to the audible version of the book twice, but I need to see it simplified in a chart the way you have done to really get this. I became an S-Corp this year, and I now pay myself through a payroll service, this helps b/c the company also pays my payroll taxes at the time of the pay check.
Wow...I never would've thought to do that! I wonder though, once I set up my business as an LLC S Corp can I do this too?
Thanks, I will start tomorrow! What a mindset shift!
@@joeyragonacoach yes, with your video, I don t have to read the book first, anyway we always need experience first, then we can dive more deep and maybe change things a little bit. Tomorrow is 10th and I will start dividing. 😊
I found this video pretty useful. I think it's the same strategy from the richest man of Babylon but your example it's pretty cool. I like the way you explain everything. Good video. Thanks from Dominican Republic! 🇩🇴
I have a equipment rent business and I have been doing something similar to this but the idea to get the profit first it's something that I really wanna try to see actually good its my business.
This was so informative and insightful learned a lot and will definitely apply this method to both my e-commerce business and my social media marketing agency business
To provide more clarity, because I was so confused for a minute, the existing operating account is the checking and the 4 other accounts should be opened as savings accounts.
Thank you!
you bet
AMAZING VIDEO, thanks!
This is a really great explanation of Profit First! I have one question though: Shouldn’t the 30% for tax be calculated after operating expenses? So income minus OpEx = n. Then, n X .30 = Amount saved for tax.
@@joeyragonacoach Thank you!!
I think you are thinking about it the same way that I do. If for every project that me and my employees perform we get the check for it and automatically take out the 30% for tax, then at the end of the allocations I wouldn't have enough money to replenish what I invested on materials and payroll (opex). I think it's a great idea to allocate the income in different accounts to assure a profit at the end. But it just doesn't click with me to not replenish all that I spent on materials and payroll for a specific project. I would do it like you say. Ive read PFContractors twice. I agree that this is a great video though
Agreed, tax should be calculated on net profit before tax, not gross profit (sales-cogs) or even worse, gross sales. Granted the concept is for cash flow, not proper accounting, but if you aren't accounting for basic deductions to determine actual taxable income you are doing a disservice to yourself using this method.
Maybe recalculate the %'s using what an estimate would be from prior years actual accounting numbers, simply derive what your % of actual sales was paid in tax, owners pay, net profit after tax, etc. I don't know anyone that allocates taxes, based on sales numbers. Tax is determined after deductible expenses, not sales.
Agreed Jason!
This is great. I cant wait to try this! Thank you for doing this.
Great explanation!! Read the book and you do an excellent job of breaking it down. Thank you so much.
Excellent video. I was looking this info up for my business but I may do this for my personal finances
Should have better explained on last example
$1,800 first paid out $100 to Owner to bring prior month up to $2,000 - this then left $1,700 to pay out for current month - leaving owner short by $300
Thanks for this! Ugh I feel like this would be great if I actually knew how to implement it. Managing my finances as a freelancer is hard enough as is, switching everything up feels super intimidating...
CPA
Thanks for the high quality video! Reading the book and the visuals in your videos help! Please do more videos on Profit First topics, thanks!
This was excellent!
Maybe I don't understand it correctly, but Profit First seems to work only on service related industries instead of buying and selling
Thanks for this informative video. When opening accounts do they have to be business checking accounts or basic?
you are welcome!! The only business account I have is the main OPEX. All the others are personal
Thank you Joey for sharing this!!
Whoa, this was helpful! Thanks!
Wow that’s amazing! Thank you for dropping the knowledge. One question as far as the quarterly distribution, are you take 50% of the total profits account balance or just 50% of the new deposits since the last distribution?
What if you run payroll weekly?
Hi. Thanks for sharing this video. Would this method work in a single member LLC?
What is the HST account?
Great video!!
It is a provincial tax (like a state tax)
Thank you very much for your Video!!! However, the was no instructions on how I manage my expenses with the remaining 40%. Thanks a lot for your information.
You have to find ways to cut your costs. You can increase sales, but you better make sure each additional sale is profitable. For many businesses, more revenue leads to bigger losses! You may need to source your products from cheaper suppliers or cut your overhead spending.
Thank you very much for your clarification@@profitanswerman
This is gold! Thanks man!
aww thanks! appreciate the kind words and glad it helps :-)
Simpley thank you
you are so welcome ☺️
if youre a one person company with yourself as an employee, do you pay your salary out of owners pay, or operating expenses?
Thank you so much! just starting with the minimum of the profit first system, I had a covid-19 nest egg…
That’s funny, I’ve been working on a business plan and it seems I’ve organized it roughly the same way. However, as its for the transportation industry I built my salary into the company overhead as we primarily operate on Cents Per Mile and Daily Rate and it tells me where I need to be to be “happy” aka I can pay my personal overhead, then I double back and work through this situation. Think, I am me and I work for my business; we are not the same and require separate disciplines.
Many thanks!
This was great! I love the way you explained it. Thank you so much. I am lost with the profit check, though. What is that exactly?
You've just visualize the whole concept in an awesome video. Thanks man! If ya all want to read the whole book check out Profit First: by Mike Michalowicz
I can see that the other accounts should be business accounts but does the owner’s compensation bank account have to be a business bank account?
Thanks for this! Super helpful
Hey Joey, LOVE THIS! Thanks for going over this. One question I can't answer. Shouldn't tax be POST operating expenses? It seems Profit First takes tax from gross revenue.?
@@joeyragonacoach yes! Emotions get in the way. Perfect and candid answer. Happy 2021!
@@joeyragonacoach I'm not even in business yet and (already) reading this answer makes me feel like a mental 2 ton Elephant has been lifted *off* my chest!
@@joeyragonacoach Ok!😆I'm going to call it my *"Taxes BEFORE Profits!"* system!🤣
Hey Joey! Thanks for the great content. Question: In the final example what do you do with your final balance every two weeks? Does that money sit in your owner's pay account accumulating, while using your personal willpower to not touch it until you've reached you're required bi-weekly $2,000? Thanks!
Great video
appreciate it
Now I get it no wonder most places I work pay the 10th and 25th of every month
Good examples. Thanks. Helps me understand his comments on MorrisInvest channel.
Thanks Joey for explaining this 😊
Does Mike make any mention on business partners in the book? Does this affect % split in any way?
he does - all of the advanced stuff you can catch in the book :-)
Why 10th and 25th? Is there significance in doing it these days rather than 1st and 15th or any other two days?
🤜🏾💯🤛🏻 THANK YOU
Great info. Much appreciated. So, just for clarity, There are 5 accounts in total? A checkings account where all the money is coming into and then the 4 savings accounts--Profit, Owners Pay, Taxes, and HST? Just in bank 1? Does the remaining 40% stay in the checkings? Sorry if I missed that somewhere.
how do you reduce your expenses and increase your sales if your sales depend of your expenses? If you're expenses are marketing for example?
This is a great question and harder to answer in one response. First, if you haven't read the book, you will get more insight on how to build a healthy business. But from my opinionated experience, if your expenses are driving sales, then you don't reduce them. You reduce other expenses. I suppose the question to ask first is, IS your business healthy? Are you able to pay yourself first? Do you have profit? ETC?
How re-investments or savings are managed?
I understand percentage for taxes but how do you come up with the percentages for profit and owner’s pay?
Joey Ragona thank you, I purchased the book and started reading.
So owners pay is how much you pay yourself? If so what is a good percentage to pay yourself?
It is. And what you pay yourself depends on
a. what the business can afford at the moment
b. what the market value of the job you do (if you had to hire someone else to do it)
where you start is by doing the business assessment to see how much you need to allocate to each piece of the puzzle.
Mike has free resources on his site to help
so this only works if your revenue is over your breakeven? I already know my exp are too high & know the weak health of my biz
Is there any software to use to figure this all out for us mathematical dummies out here?
@@joeyragonacoach Thank U so much!😊
Thanks for the video, hopefully you’re still monitoring the comments so you can help me with my question! I’m not understanding the purpose of a “profit account”. It sounds to me like it’s an additional personal savings account to use quarterly for a “bonus”. Why wouldn’t I just roll that profit percentage into “owner pay”? What’s the benefit of my company making any money at all, since it’s purpose is to put its profit into my pocket?
So, right now I'm just starting my business, and it's got a very low expense cost (planning to keep it that way for a little while). I only have a business checking account and credit card. When I open these additional accounts, do they need to technically be 'business' checking or 'business' savings accounts from the bank's perspective? I ask, because high yield personal savings accounts have higher interest rates than high yield business savings accounts, and I don't know if my bank will allow me to open multiple business checking accounts.
I think thats why he said to open multiple savings accounts due to the restrictions of opening multiple checkings.
@14:40 I don't know why you would have to not pay yourself. Why not just pay yourself what is there since it's there for you anyways. Of course, that should be motivation to make sure you are hitting the number you set for yourself by getting more sales or raising your pricing.
For me it's a discipline thing and a reality check. If the business cannot support my pay, then it means the business is on a downward slope. Or, I am truly working for free to keep a failing business afloat Because I'm taking money for me that should be going to paying bills and debt. And the more I take and let the bills slide and debt build up, the faster the business goes downhill.
Everything begins by telling the truth. This process made me see and tell the truth about my business :-)
Hi, please explain what account do you pay any employees, that would be expenses, correct?
Great video but as a e commerce business with us having to purchase inventory would you take these allocations from your income gross or from your net gross for ex if I made 10k but only 6k was profit
In Mike's book, he talks about different businesses and the extra / different allocations needed. In your case, you need another account for inventory. Just as someone with employees would need an account for payroll :-) . I highly recommend you grab the Profit First book so you can apply it to your specific situation. And most importantly, learn how to do the allocation splits specific to your business
So basically pay your business, yourself and the government first. If you're not making enough in sales to cover that, then your business is in jeopardy! Because that means that you don't have enough cash flow to
A) Pay your business. This is the positive cash flow. You need at least 3% or more to keep up with inflation. You need to invest at least this 3% back into the business to grow your business. If you're not growing you are dying man!
B) Pay yourself. You have non business bills to pay. You gotta eat! One idea is to try to make as many of your personal expenses into business expenses though. The less salary you take in, the less taxes you have to pay. But still, there will always be non business expenses so you need money to take care of them.
C) pay the tax man. An utter nuisance, but it's part of life. Try to reduce this as much as you legally can (business expenses & tax breaks)
D) Maintain your business. All the expenses to run your business day to day. If you have already forced a positive cash flow by paying your business and self first, paid the expense that could land you if jail if you don't, and you don't have enough money to cover the day to day then you gotta look again at your business and see what you are doing wrong. Refinance some deals, get that liability as low as possible. Restructure payments, reduce costs as much as you can so that instead you can spend the money into growing the business, more than running it.
Plus you know leaving the life of your dreams is a huge plus
This was great and incredibly helpful. I do have a question though ... Where would you put payroll taxes? I’m assuming the ‘Taxes’ account you refer to here is for corporate income tax?
@@joeyragonacoach Thank you for such a quick reply! I have read the book, but I think I was overwhelmed. I'll probably just set up another account for Payroll. Can't hurt. I'm worried about what the RBC is going to think of me tomorrow when I walk in to open so many accounts!
but what if expenses exceed revenues?
if you take out profit first there's not enough cash to pay expenses...
Thank you
its hard to find banks with free business checking accounts.
Question: If I'm doing a project and the overall pay ill get is $4,000, but materials cost $2,400. Do I split the $1,600 into the accounts or the $4,000?
This is one of those confusing parts of Profit First. If you read the section on real revenue, Mike suggests that in your situation your real revenue maybe $1,600. So the suggestion is to split the $1,600 in the accounts because that's really what your business is based off. The $2,400 is just a pass-through of costs.
Hi.. Sorry I have a question .. I do Design , so I finish the book and have everything ready to start this new accounting . But Have a question , I have a lot of sales where I dont make money, I get pay only Hr ... So If I get 10,000.00 and I have to pay my vendors first , and that is $9000.00 , So should I just do it with what is only my Hrs?..Sorry Im confuse
Thank you .
In the book Mike talks about real revenue. In your case your 10,000 sales only has 1,000 in real revenue. Pay the 9,000 out and then use the system for the remaining 1,000. I hope you have a ton of revenue!
Hi Joey,
super Video! I live in Germany so I had to change profit first a little.
Since I'm starting to implement it, I downloaded your spreadsheet. Thanx a lot for making it!
But I think there is a mistake in the formula on calculating Sales tax. In Germany it is 19%, so I changed that percent number.
But for Example, if I make 2300€ (income) + 437€ (19% Sales Tax) = 2737€ in total.
But the remaining column shows 1863€. I don't understand the "remaining " column. SInce the number seems to be wrong.
I would guess that the remaining column should be:
Income 2737€ (Income incl. 19% sales Tax) - 437€ (19% sales Tax) = 2300€ and NOT 1863€.
I think you made the mistake of taking 2737 -19% (520,03) = 2.216,97.
But when subtracting percentage, the formula is:
2737 / 1,19 (430) = 2300.
Could you please verify that?
And also, could you please correct the forlmuar and point me to the correct place on how to edit it?
In case I'm correct at all ;-)
@@joeyragonacoach Awesome, works now. Thank you!
I have another question though:
What Income Number do I put in the 25th date rows?
I mean, if I only make 2300€ per month (excl. sales tax), and put that in the 10th of every month,
I cannot put another 2300€ in the 25th date rows and subtract all the CAPs % again like 2%, 35% etc. Correct?
So what amount do I put in the 25th rows? Whatever is left after subtracting all caps on the 10th? In other words, the amount that is calculated in the "remaining" Column?
I hope you understand my question.
@@joeyragonacoach Yes, answered it. Great, thanx :-)