It’s no secret that I LOVE the Profit First method. But there is a downside to “Profit First” that not enough of us are talking about.
Watch here or read on below.The Downside of “Profit First” for Small Business Click To Tweet
Profit First is probably the top financial or money mindset book that I recommend every business owner reads.
It was completely life-changing for me as it is for so many other businesses. However, there is a downside to Profit First that we need to talk about. There are some upsides. I want to explain the method, the upsides, and the downsides, and then hopefully a potential solution.
So if you’re not familiar with the Profit First Method, let me first explain really briefly what it is.
It is essentially Business Budgeting 101, and it can get a little bit complicated, but his whole method is basically you pay yourself first or your future self first, and then you pay your business.
And what this forces you to do is to take a profit so that you’re not going broke, but then force your business expenses into a percentage that’s leftover versus what most of us do, which is like pay all of our business expenses and then take what’s leftover. But like, we all know if we don’t have a budget, money goes out, money goes out and money goes out, nothing is actually left at the end of it.
He also explains how to do this if you have COGS (cost of goods sold), which is materials and subs, now it can be a little complicated to fully get into the Profit First Method, which is why I did a video on a five-minute business budget. It follows the same principles, but just in the simplified version, you can check that out up here, if you’re interested in it.
Again, I really love this book. It really has been a game-changer for me. It’s been a game-changer for a lot of other people.
The upside of Profit First
So let’s talk first about the upside of Profit First.
Upside #1 – Gets You on a Budget
The number one thing that Profit First is going to help you to do is get your business on a budget, which is absolutely imperative. If we want to actually make any money or know where our money is going, just like with a personal budget, it just helps us to gain control and not let things just go crazy.
Upside #2 – Breaks Habit of “Creating Write-Offs”
Number two, it helps us to break the habit of creating write-offs, which I see a lot of business owners do. “Well, it’s a write-off so I can go ahead and buy that and it’s not a big deal”. Or we think that we need to have more write-offs so that our tax bill is lower.
What we don’t realize is that paying 100% to things we may or may not need is not better than paying a smaller percentage to the IRS and keeping the rest of it.
So it really helps us to just break the habit of overspending in our business, making sure that we’re lean, that we are maybe even a little bit scrappy that we’re keeping things under control and not letting it be that cash-eating monster that he talks about.
Upside #3 – Prevents Burnout by Creating a Profit
This means that it helps you to build a habit of really mindful spending.
You’re really analyzing, “Do I need this? Is this the best solution for my business? Is there a better solution for my business? Or Is there one solution that would replace three other bills in my business?” You’re really getting into the habit of spending mindfully and not just throwing money out the window.
Upside #4 – Builds a Habit of Mindful Spending
Number four is probably the most important one. And that is that it helps to prevent burnout and create a sustainable business by creating actual profit.
It’s really easy to have a business that’s bringing in 6 or multiple 6 or 7 figures in revenue, but you feel broke and stressed out and don’t have a lifestyle that is healthy that will allow you to maintain that business. If you’re not bringing in a profit, if you’re not having your life be filled, be taken care of by your business, what’s the point, right? You will end up burning out because you’re giving, giving, giving, and not receiving anything back from the business.
This was definitely what I did the first, probably 15 years in business over the span of multiple businesses. I really didn’t understand budgeting for a business and all of the upsides to doing that.
I just thought you just pay what you need to pay and you don’t even analyze it. And you just put the money out because it’ll come back. It’s a write-off. It’s not a big deal. And I was broke my business. Couldn’t even give me a stable salary. Once I started implementing Profit First, all of that changed literally within a month, I was making a 50% profit and that was life-changing.
So do I recommend the book? Yes, but we need to talk about the downsides to Profit First as well.
The downsides to Profit First
Here are the downsides to Profit First
Downside #1 -Your Short-Term Profits Can Bleed You of Future Payoffs
The first downside is that short-term profits can actually bleed you of future payoffs, and I’ve definitely experienced this after implementing Profit First for a long time, I got in the habit of constantly taking from my business, taking too much profit, and not having enough profit to put back into my business, to invest in it in wise ways. Which leads to number two…
Downside #2 – Slow Growth in Your Business
Number two is slow growth in your business. If you’re not investing in your business, if you’re taking too much out of it, it’s almost like you’re robbing it of all of its future potential. And this was something that I definitely did. I got into this habit of taking the profit and not strategically putting it back into the business, taking enough profit for myself. I just got in the habit of taking every little dollar that I could, and it really just slowed me down for a long time.
So, I’m still a big believer in the Profit First Method. I’m still a big believer in budgeting and making sure that you’re taking a percentage of your income, your revenue for yourself, and forcing yourself to keep your expenses small, where they need to be small.
So I think the solution to this is to find the balance between profit now, which is going to keep you in business and sustain you and enable you to continue to grow as well as profit later.
I would ask yourself the question, “do I need more profit now? Or do I want more profit later?”. You need profit now, right? But you also need to know where you can draw that line in order to start putting things back into your business.
What I would recommend that you do is build the Profit First habit up to a certain extent, up to the point where your lifestyle is comfortable and then just hold steady at that lifestyle and continue to put additional profits back into the right places in your business so that your business can continue to grow.
I don’t think that this should be all or nothing, nor that you should either love and follow Profit First a hundred percent or hate it and completely ignore it.
There’s so much value in the mindsets and the perspective and the approach that it’s going to teach you. I just think that you need to also be looking long-term and not just short-term, making sure that your long-term goals for your business and for your life are being served. And there’s just a balancing act and you get to decide for yourself.
- “What does that balance look like?”
- “How much profit do I need to have a comfortable lifestyle for now?”
- “And then what can I do to be able to build it later on down the road?”
And here’s the thing, you might be in a place in your life where you don’t need profits from your business. Maybe you have another revenue stream coming in. Maybe you have a partner who is paying all the bills right now. I would still recommend that you get into the habit of taking a profit, even if it’s just a small one, simply because if you get into the habit of never taking a profit, that’s just as unhealthy right now. You’re robbing from yourself instead of robbing from your business.
It’s really about finding that healthy balance for yourself and knowing where that balance lies.
Let me know what you think about Profit First. If it’s helped you, if it’s hurt you, if you think it’s a good idea, a bad idea. And what you think about this solution, this balanced idea or approach to Profit First.
Also, if you want to know more about how to set up a business budget, using software called YNAB, check out this video if you just want a simple five-minute business budget and check out more videos in the description, along the lines of Money Mindset.
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What about you, boss lady?
What do you think of the Profit First method? Do you utilize it in your biz?
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