Money Management: Taking Profit First

We all start out in business with the same purpose in mind: to make money. While the question of “HOW” and “WHAT” you hope to achieve with your business will differ by individual, few people say they went into business NOT to make a profit, right? The biggest rule of thumb in business is, profit comes first!

What is Profit First?

Profit First is a money management system that really focuses on paying yourself first and then paying your expenses. Now this is not to say pay yourself 90% of your sales revenue and not leave enough to pay your bills, but a smart money management system is to pay yourself first.

This blog will cover the different steps to setting up a money management system. Let’s first start with two key separate reports; fixed and nonfixed expenses.

Fixed Expenses:

This report or ledger records all the items that you HAVE to have and pay for in order to run your business. Some examples are your website, a bookkeeping service, insurance, taxes (quarterly or monthly), utilities and labor.

Nonfixed Expenses:

Items to report on your nonfixed expenses ledger are things that help you run your business, but that you don’t need to keep afloat. Things like a bookkeeper, email and text marketing, apps within your website, a third-party business app, social media manager or a marketing manager.

Account types:

Once you have identified your fixed and nonfixed expenses, the next step is to decide how much you need to sell monthly to pay your necessary bills (base this off of a 50% profit margin).  Now it’s time to set up your five different profit first accounts.

Payout Account:

This account will house all your money. This is where your forms of payments will be transferred to for payments coming from website, PayPal, Sezzle, AfterPay, etc. Every revenue making platform will be transferred and deposited into this one account.

Open Account:

Your operating expenses account, or the account that pays your bills is referred to as your open account. Once you know your expenses, and what you need monthly to cover them, you can decide how much to deposit into this account weekly or biweekly to over all your expenses.

COGS Account:

This is your cost of goods account. For drop shipping, this account works a little differently because you need to fund the account to pay for the wholesale cost of your customer orders. Since you will pay customer orders immediately to ensure quick processing and shipping, a good idea is to use a credit card for order payment. Then, pay the balance off weekly or monthly using the profit proceeds placed in your COGS account.

Income Tax/Savings Account:

This account is designed to help you save for taxes. You can run reports within your website platform to see exactly what sales tax your customers have paid, but you can also set aside around 13-15% of your sales into this account to pay any taxes at the end of the year. You will most likely set aside more than you need, but additional savings is always a nice surprise!

Owners Pay Account:

This is your Profit First account, where you pay yourself. The ideal goal is to pay yourself 25-30% of your profit, but it’s okay to start small, especially while growing! Start out by putting 2-3% weekly or monthly into this this account. Remember to do this based off your sales number.

Profit First was established due to the high burn-out rate of business owners when they do not pay or reward themselves first. So many choose to reinvest every single penny back into the business, while not putting themself first.

Think of it this way, you would never hire an employee and not pay them, right? So why would you put yourself to work and get paid? Avoid burnout and pay yourself, don’t work for free!

For questions or feedback, please email info@bloomdropship.com