How You Can Maximize Your Business Profit
Do you want your business to be acquired? Maximize your business profit. Because your profit dictates for how much money and how quickly you can sell your small business. In this article, I will show you how to maximize profit and why it is the key to increasing your business's value if you decide to sell it.
After trying different approaches to managing the money in my businesses, and being frustrated by them because they were either too simplistic or too complicated, a few years ago I started using the Profit First model by Mike Michalowicz and never looked back. Focusing on profit, rather than revenue is one of the 7 lessons that got me from small entrepreneur to investor.
The strategies from the book matter because they transform how you manage your finances and ensure your business is not only profitable but also attractive to potential buyers. Small business buyers want to see profitable businesses, so if you want your business to be acquired, prioritize profit. Let’s work on that today.
Transform Your Finances with the Profit First Model
Follow these steps to implement the Profit First model and increase your business value:
Set Up Multiple Bank Accounts
Allocate Your Income Consistently
Prioritize Profit Over Expenses
Regularly Review and Adjust Allocations
Step 1: Set Up Multiple Bank Accounts
I agree, this first step in the Profit First model sounds like a lot of work, and quite frankly, it is. But once you are done setting up multiple bank accounts, it’s done. Having multiple accounts helps you allocate money efficiently and ensures that you are always prioritizing profit. You create separate accounts for Income, Profit, your Owner’s Compensation, Taxes, and Operating Expenses.
Practical Tip:
Visit your online bank and open these accounts today. You shouldn’t have to pay to own multiple accounts and you should be able to do this from your phone. If you need to pay or go to a physical bank office, now might be a good time to switch to a bank that operates in the 21st century. Label each of the 5 accounts clearly, based on the labels above, to avoid any confusion. This physical separation of funds is crucial in maintaining discipline in your financial management. If you don’t take this step, none of the following ones matter.
Insider Tip:
Besides having the above 5 accounts, I also have one called Subcontractors. As our business models rely on freelancer support and it’s a large monthly expense for my businesses, I have this as an extra account. In his book, Mike Michalowicz, explains which types of businesses could or should have more than the above 5 basic accounts.
Step 2: Allocate Your Income Consistently
The next step is to make sure all your revenue is deposited into one account, your Income account. Make sure the details of this account are on all your invoices, are linked to your Stripe and PayPal accounts for your pay-outs and every other platform you receive revenue through. All incoming money should lead to your Income account as quickly as possible.
Twice a month, I do it on the 10th and the 25th as Mike suggests, you allocate a percentage of the income to each of the 4 other accounts. For example, you could allocate 10% to Profit, 30% to Owner's Pay, 15% to Taxes, and 45% to Operating Expenses. You can start by using these percentages, or by analyzing your business expenses for the last 12 months, dividing them into those 4 categories and see what the historical percentages for your business have been, and start from there.
Expert Advice:
Mike highlights that most small businesses will have a historical profit of 0%. This might be because there is literally no profit left at the end of the year or it might be your accountant is advising you to have no profit to avoid paying taxes on it. That’s ok. You then start with a 0% allocation for your Profit Account. This will change in the next step.
Step 3: Prioritize Profit Over Expenses
The whole system of Profit First is based on an important paradigm and mindset shift. The traditional accounting formula (Sales - Expenses = Profit) leaves profit as an afterthought. The Profit First model changes this, from Sales - Profit = Expenses. This ensures you always set aside profit first and manage your business on what’s left. Hence the title of the book. This paradigm shift is a game changer for every single business owner I have worked with in preparing their business for an exit. It takes a while before a small business owner embraces this new concept and embodies this profit first principle.
Case Study:
A client of mine, Jamie, the owner of a graphic design agency, transformed her business by adopting this model. By prioritizing profit, she was able to grow the business, stabilize the business’s finances and eventually sell the business for a life-changing amount of money.
Step 4: Regularly Review and Adjust Allocations
Once you’ve set up your system of having revenue arrive into 1 Income Account and you splitting it up twice a month into the 4 cost accounts based on the percentages you have allocated, the magic can happen. From my experience, 3 things will happen:
You will make more conscious investment decisions: your bigger investments will be paid the money that is in your Profit Account. Not enough money there? You wait a little longer to make the investment. Your business hasn’t made enough profit yet to justify the expense.
You will be more conscious about your business expenses: now that you pay expenses out of 3 accounts (Owner’s Pay, Taxes and Operational Expenses) you actually know where your business money is spent on and you will never have to worry about the tax bill coming, as you’ve already set aside money for it in the previous months.
You won’t stress out, not sure if you’ve paid an invoice late or not. You make payments twice a month, on the 10th and the 25th, after you’ve done the allocations. It’s as simple as that. You don’t spend time or energy paying invoices in between or when they arrive.
After all this magic happening, Mike gives one final piece of advice. Every quarter, you adjust your percentage allocations. The percentage for Taxes, Owner’s Compensation and Profit goes up, each by just 1 percent, and the percentage for Operational Expenses goes down by 3%. It sounds like small adjustments that won’t make a difference, but over a 12 month period, you will have increased your profit margin by 4% which is a game changer for most businesses.
Expert Advice:
Consistency is key here. Adjust the allocations each quarter. Stick to the allocations without fail. If that’s hard, adjust your business accordingly, rather than adjusting the allocation percentages.
Practical Tip:
Set a bi-monthly reminder in your agenda on the 10th and 25th of each month, to split what is on your Income Account into the 4 other accounts and pay your bills. Set up a quarterly reminder in your agenda to review your percentages and adjust them. This keeps your financial strategy dynamic and responsive to your business’s growth.
From Freelancer to a 7-Figure Valuation: Chris’s Journey
Chris started as a freelance financial advisor, managing all his finances from a single account. When he grew the business to a financial consulting firm with a small team, he implemented this Profit First model. At that time, Chris wasn't planning on selling. It was only after reading why every entrepreneur needs an exit strategy that he was called to create a longer term strategy of getting his business exit-ready in the next 5 years.
By consistently allocating the business income and prioritizing profit, Chris was able to grow his profit margins from 24% to 35%, turning his business valuation from $696,000 to over a million. Because of that, his business became more attractive to potential buyers, and recently got acquired.
Interactive Element: Your Profit First Challenge
Set up the necessary 5 bank accounts: Open separate accounts for Income, Profit, Owner's Compensation, Taxes, and Operating Expenses.
Determine your initial allocation percentages: Either use the default allocations in this article or analyze your historical percentages to get more accurate allocations for your specific business.
Implement and stick to the system: Bi-monthly, allocate your income according to these percentages and pay invoices from the respective accounts.
Review and adjust regularly: Adjust your allocations by 1 percentage each quarter.
Read the book: it will provide more nuance to the basic system I’ve explained in this newsletter. And reread it every year to fine-tune.
Take these steps over the next 6 months and see how your finances transform. Remember, prioritizing profit is not just about making money; it’s about ensuring your business’s long-term success and increasing its likelihood to be sold for maximum value.
