Many small and medium sized Companies use a traditional approach to taking salaries and dividends from the company. They look at the profit available and take out what the Company can afford.
SALES – EXPENSES = PROFIT
They simply look at their sales deduct their expenses and arrive at the profit.
But there is a different approach pioneered by Mike Michalowicz and detailed in his book, Profit First. This method enables small businesses to improve their profitability by rethinking the way they run and manage their business.
SALES – PROFIT = EXPENSES
So how does Profit First work? It requires businesses to deduct their profits from revenues before expenses. So instead of paying themselves with the residual after expenses have been deducted from revenues, they take profit first and then work on expenses and revenue. You will need to ensure that you organise what is left to cover all your expenses and taxes etc… Not going to go into this methodology in detail but worth reading the book. Lots of ideas in there and we can certainly assist in helping you set up this approach. It is not suitable for all businesses but it can work for many businesses.
The benefits are:
- It helps you focus on reducing your expenses.
- Increases revenue streams by eliminating waste.
- As the title suggests “Profit First” it encourages business owners to put profit ahead of everything else.
- Results in stricter budgeting and tighter cost control.
- Supports a proactive approach in setting the profit margins on products and services.
- Focuses the business on profitability first.
The disadvantages are:
- Difficult to implement.
- Difficult for new startups and not suitable for all businesses.
- Training required. May take time to understand and adopt the new approach.
As Accountants & Business Advisors, we are experts in advising businesses on making the right choices on how they run their business. If you need advice on how to improve profitability, please contact us for a no obligation consultation.
020 7118 4422