The Profit First Method for Tradies: How to Make Every Dollar Count
As a tradie, you might be handy with the tools, but running a profitable small business is a different challenge altogether. That's where the Profit First method comes in. Profit First is a system designed to help you take control of your finances and boost your profits. Separating your revenue into different bank accounts and prioritising profit ensures your business is always in the green.
In this blog, we'll explore how tradies can implement the Profit First method in their businesses and the role of accounting and bookkeeping in this system. Plus, we'll share some tips and best practices for success. If you're ready to take your small business to the next level, read on and discover how Profit First can help. And, if you're looking for automated accounting solutions to help you implement Profit First, sign up for Thriday today.
Understanding Profit First
Before diving into how tradies can apply Profit First to their businesses, let's take a closer look at what Profit First is and how it works.
At its core, Profit First is an accounting method that helps you achieve a profit. Rather than treating profit as an afterthought, Profit First requires you to allocate a certain percentage of your revenue to a separate Profit bank account. This ensures that you always have money set aside for profit rather than simply hoping there will be something left over at the end of the month.
"Profit First is an accounting method that helps you achieve a profit. Rather than treating profit as an afterthought, Profit First requires you to allocate a certain percentage of your revenue to a separate Profit bank account."
In addition to the Profit bank account, Profit First also involves creating separate bank accounts for other expenses, such as taxes, owner's compensation, and operating expenses. By separating your revenue into different accounts and allocating funds accordingly, you can ensure that you always have enough money to cover your costs and prioritise profit.
Now that we have a basic understanding of Profit First, let's look at how it works for a tradie business.
Applying Profit First to Tradies' Businesses
Now that we understand the basics of Profit First let's explore how tradies can apply this system to their businesses. Here are some steps to get started:
Determine your target allocation percentages
The first step is to determine the percentage of your revenue that should be allocated to each account. For example, you might give 10% to the Profit account, 15% to the Tax account, 50% to the Operating Expenses account, and 25% to the Owner's Compensation account. These percentages can be adjusted as needed, but having a starting point is essential.
Open separate bank accounts
Once you have determined your allocation percentages, you must open separate accounts for each one. This can be done through your bank or financial institution. Keeping these accounts separate from your personal accounts is vital to track your business finances accurately.
Set up automated transfers
To make the process easier, consider setting up automated transfers between your accounts. This will ensure that the money is allocated correctly without you having to transfer funds manually.
Track your expenses
It's important to track your expenses carefully to ensure you stay within your budget and allocation percentages. Use accounting software or bookkeeping services to help you stay organised.
By implementing these steps, tradies can start to prioritise profit and ensure they always cover their expenses. However, tradies might face some common challenges when implementing Profit First. Let's explore some of these challenges and how to overcome them.
Common Profit First Challenges and How to Overcome Them
Implementing Profit First can take some time to get right, especially for those used to traditional accounting methods. Here are some common challenges that tradies might face when implementing Profit First, and some tips for overcoming them:
Difficulty sticking to allocation percentages
Sticking to the allocation percentages when you first start can be challenging. To make it easier, consider starting with lower percentages and gradually increasing them over time as you get more comfortable with the system.
Overspending in one account
It's easy to overspend on one of the bank accounts and neglect the others. To avoid this, track your expenses carefully and review your accounts regularly to ensure you stay within your allocation percentages.
Lack of financial education
Only some have a solid financial background, which can make it harder to implement Profit First effectively. Consider using accounting software like Thriday that automates it all for you.
Resistance from team members
If you have employees or other team members, they might resist the changes that come with implementing Profit First. To overcome this, communicate the system's benefits and involve your team members in the process.
By recognising these challenges and taking steps to overcome them, tradies can successfully implement Profit First and see the benefits to their business. Now, let's explore some best practices for using Profit First effectively.
Best Practices for Implementing Profit First Effectively
To make the most of Profit First you should follow some best practices. Here are some tips to help you use Profit First effectively:
- Get coaching: Profit First Australia & New Zealand oversee the local chapter of coaches and mentors that can train you on implementing Profit First correctly and maintaining the correct percentages for your business.
- Start small: Implementing Profit First can be tricky at first, so it's important to start small. Begin with a few accounts and gradually add more as you get comfortable with the system.
- Be consistent: Consistency is critical when it comes to Profit First. Stick to your allocation percentages and review your accounts regularly to ensure you stay on track.
- Use automated accounting: Automated accounting software can help you stay organised and save time. Consider using software like Thriday to help you track your expenses and allocate funds to the appropriate accounts.
- Revisit your allocation percentages regularly: Your percentages will need to be adjusted over time as your business grows and changes. Revisit your percentages regularly to ensure they are still appropriate for your business.
- Separate personal and business accounts: Having separate personal and business bank accounts makes monitoring your Profit First accounts extremely easy. If you have everything under one umbrella, it can be very confusing.
- Involve your team: Profit First is not just for business owners - it can benefit your entire team. Involve your employees in the process and encourage them to prioritise profit too.
By following these best practices, tradies can effectively use Profit First to prioritise profit and ensure the financial stability of their business. Now that we've covered the basics of Profit First, how it can benefit tradies' businesses and some best practices for implementing it, let's look at how Thriday can help.
How Thriday Can Help
Thriday is a powerful tool for tradies who want to implement Profit First effectively. Here are some ways that Thriday can help:
- Sub-accounts: With Thriday, you can set up your bank accounts* for each Profit First account in seconds. You can name the accounts, colour-code them, and order them however you prefer.
- Visa Debit card: You can link your Thriday Visa Debit card* with your Opex account to automatically deduct any expenses from this account.
- Easy allocation: Thriday makes it easy to allocate funds to your Profit First accounts, ensuring you always prioritise profit.
- Transfer Funds: With Thriday, you can quickly transfer funds between your accounts as income comes in. There is no need to use different systems.
- Automated accounting: Thriday has an in-built double-entry accounting system that makes it easy to automate your bookkeeping and ensure that your accounts are up to date.
- Real-time visibility: With Thriday, you can see your financials in real-time, giving you a clear picture of your business's finances at all times.
- Expert support: Thriday is the official software partner of Profit First Australia, so you can get specialist help through Thriday's partnership with Profit First Professionals.
- Financial insights: Thriday provides valuable financial insights to help you make informed business decisions and maximise your profits.
Profit First FAQs
What is Profit First?
Profit First is a cash management system designed to help businesses improve profitability by prioritising profit in their financial management practices. The system advocates for allocating profits first rather than relying on leftover funds after expenses.
How does Profit First work?
Profit First works by establishing a system of allocating funds to different bank accounts based on the purpose of the funds. The accounts include a Profit account, an Owner's Compensation account, a Tax account, and an Operating Expenses account. This system ensures that profit is prioritised and allocated before expenses are paid.
What are the benefits of using Profit First?
The benefits of using Profit First include improved profitability and financial stability, better cash flow management and increased accountability and discipline in financial management practices.
Who can benefit from using Profit First?
Profit First can benefit any business, regardless of its size or industry. The system is handy for businesses struggling with profitability, cash flow management, or financial stability.
How do you implement Profit First in your business?
To implement Profit First in your business, you can start by assessing your current financial situation, including revenue, expenses, and profitability. Then, you can create a plan for allocating funds to the different bank accounts based on your business's unique needs and goals. Working with a certified Profit First professional is recommended to ensure effective implementation and ongoing support.
Implementing Profit First can be a transformative step for tradies who want to take control of their finances and make a profit. By allocating funds to separate accounts for profit, taxes, and opex, tradies can always prioritise their financial health and make strategic decisions for their business's long-term success.
"Implementing Profit First can be a transformative step for tradies who want to take control of their finances and make a profit."
By using automated accounting software like Thriday, tradies can make the process of implementing Profit First much easier and more efficient. With real-time visibility into their financials, easy allocation of funds, and expert support, Thriday can be a valuable tool for any tradie looking to implement Profit First effectively.
So, whether you're just starting out or looking to take your business to the next level, implementing Profit First can be a powerful step towards achieving your financial goals. And with Thriday, implementing Profit First has never been more accessible. Join Thriday for free today to get started on the path to financial success.