Want to find out a little more?
Netbooks Accounting Services is Your Profit First Professional!
Is your accountant stuck in the old way ...
What does this mean for you? We will guide you with the methods to greatly increase the profitability of your business. Of course, we will manage your accounting and help you with your books – but any accountant can do that. We also provide the most important financial factor – maximizing your profits.
Give us a call (or send us an email) for a free consulting session. No strings attached.
PROFIT FIRST OVERVIEW
THE PROFIT FIRST FORMULA
The GAAP (Generally Accepted Accounting Principles) formula for determining a business’s Profit is Sales – Expenses = Profit. It is simple, logical and clear. Unfortunately, it’s a lie. The formula, while logically accurate, does not account for human behavior. In the GAAP formula Profit is a left over, a final consideration, something that is hopefully a nice surprise at the end of the year. Alas, the profit is rarely there and the business continues on its check to check survival.
Traditional Method: Sales – Expenses = Profit Profit First Method: Sales – Profit = Expenses
With Profit First you to flip the formula to Sales – Profit = Expenses. Logically the math is the same, but from the stand point of the entrepreneur’s behavior it is radically different. With Profit First, you take a predetermined percentage of profit from every sale first, and only the remainder is available for expenses.
Author and historian C. Northcote Parkinson theorized that our demand for a resource increases to meet the supply of it. That is why when we are given two weeks to do a project it takes two weeks, and when we are given eight weeks to do the same project it takes eight weeks. That is why when given $1,000 to complete our work we get it done with $1,000 and when given $10,000 to complete the same work, it takes $10,000. Profit First makes Parkinson’s Law an asset. By taking profit first the money available forexpenses lessens, and we are forced to find ways to get the same things done for less money.
BANK BALANCE ACCOUNTING
Most entrepreneurs don’t have the time or gumption to read the different accounting statements necessary to manage the financial aspect of their business. Theoretically you should review and correlate your Income Statement, Balance Sheet and Cash Flow Statement monthly (or more frequently), but few entrepreneurs do. Most resort to “bank balance accounting,” where we check our bank balance every day and make financial decisions based upon what we see. Per Parkinson’s Law, we consume what we see in our bank account. Profit First encourages the entrepreneur to continue “bank balance accounting” by first allocating money to Profit (and other accounts) so that the entrepreneur sees the actual portion of deposits that are available for expenses and they automatically adjust their spending accordingly.