Profit First - Core Concept

Core Principle: Businesses spend whatever money is available to them. To ensure profitability, take your profit FIRST, before expenses.

The Five Foundation Accounts

1. Income: All revenue enters here
2. Profit: First money out from income
3. Tax: For tax obligations
4. Owner Compensation: Owner’s salary
5. Operating Expenses: All other business expenses

Key Percentages by Revenue Range

Revenue Range	Profit	Owner’s Comp	Tax	Operating Expenses
$250k-$500k	5%	35%	15%	40%
$500k-$1M	10%	20%	15%	50%
$1M-$5M	10%	10%	15%	65%
$5M-$10M	15%	5%	15%	65%
$10M-$50M	17%	3%	15%	65%

Implementation Steps

Step 1: Account Setup

• Create the five foundation accounts
• Set up external accounts at a different bank for profits and taxes
• External accounts prevent impulse spending by creating transfer delays

Step 2: Current Assessment

• Calculate your current percentage spending in each category
• Plan quarterly adjustments of 3% total toward target percentages
• Distribute the 3% across categories (e.g., 1% each to profit, owner’s comp, and tax)

Step 3: Expense Reduction

• Immediate Action: Cut operating expenses by 10%
• Review all expenses with these categories:
  • Profit generating
  • Necessary but replaceable with cheaper alternative
  • Unnecessary

Regular Money Management Schedule

Daily Tasks

• Deposit all revenue into income account
• Review account balances to track cash flow trends

Bi-Monthly Tasks (10th and 25th)

• Transfer funds from income account to other accounts
• Move profit and tax funds to external bank
• Pay owner salaries
• Handle bill payments

Quarterly Tasks

• Distribute 50% of accumulated profit to owners
• Pay tax obligations
• Review and adjust target percentages

Special Considerations

Profit Account Structure

When carrying debt:

• 99% to debt repayment
• 1% to distributed profits

After debt repayment:

• 99% to rainy day fund (until 3 months of expenses saved)
• Then 100% to owner distribution

Owner Compensation Calculation

• Base on average of lowest 3 months from past 12 months

Team Management Guidelines

• Revenue per full-time employee should be $150k-$250k minimum
• Total revenue should be 2.5x labor costs (4x for low-cost labor industries)
• Evaluate each role for profit generation
• Better to remove one position than implement team-wide pay cuts

Expense Management Best Practices

• Cancel all automatic withdrawals
• Request new credit cards to break automatic payment cycles
• Negotiate with vendors, starting with smaller expenses
• Focus on serving best clients, consider firing problem clients
• Streamline services/products to reduce variety

Action Items for Year One

1. Create celebration list for profit distributions
2. Block 10th and 25th of every month for account management
3. Complete debt freeze analysis
4. Review and optimize team structure
5. Implement expense management system