The Problem With Profit First Bookkeeping

Profit first, it might sound great but it’s often done incorrectly. In this video, Matt shares his honest opinion about the idea. As someone who understands accounting and bookkeeping, he knows a thing or two about what really helps business owners.

There are tons of people out on social media giving business advice. Some of it is good advice, but most of it isn’t good. In this series watch CapForge’s owner react to different advice videos. He’s an expert in all things business and has 20+ years of experience under his belt. Some of the things he reacts to might even surprise you!

Video Transcript: 

Business Advice Video: 

Guy one:

It took me six years of business before I read the book Profitt First. He says exactly what you’re saying. Pay yourself day one. I had like by chapter 2, I’m like, this guy is watching me over my shoulders.

Guy two:

Right Mike Michalowicz, he’s been reading my mail. 

Guy one: 

Right, right. We’ve never met before today. We found the same book, because what he says is it’s martyrdom. And I suffered that for years. I’m like “Well I don’t pay myself” and then you get spiteful. You get frustrated. Your household bills aren’t getting paid. And so pay yourself day one. Figure out what that is. Use your percentage or a fixed amount, and then it grows and scales with your business overtime. Because when you do that, you can now separate your personal money from your business money. Day one.

Matt’s Review: 

Okay, so this is about profit first. And I definitely have an opinion on profit first. My opinion is that for 99% of the people trying it, it doesn’t work and doesn’t help. And I say that because we have tons and tons of clients who come to us having set up profit-first bank accounts. Which is the idea is you set up a bank account for your operating expenses as a bank account. For setting aside money for taxes. A bank account for setting aside profit to pay yourself. A bank account for setting up and setting aside payroll and so on. So you end up with five or six bank accounts. And you’re supposed to take money into one and then break it out and transfer to each of the other accounts. And somehow the idea is that you pay yourself a portion before you pay the rest of your bills. 

But there’s two big problems with that. Problem one is, just because you have five bank accounts instead of one doesn’t mean that you actually have any more profit, right? The same amount of money came in before you set this up as after. So it’s not really increasing your profit. And the other problem is you have the same bills as you had before the day before you set it up the day after you set it up doesn’t change the amount of bills you’re paying. So fundamentally you have to run your business in a way that after you paid all your bills there is money left over for you and then you are setting that aside for yourself and you’re setting some aside for taxes. You don’t need five bank accounts to make that happen. You can do it with one bank account and good bookkeeping. Keeping track of what’s coming in and what’s going out and knowing what your margins are will help you not overspend on things that you shouldn’t be overspending on, and keeping track of what’s going on. More bank accounts isn’t gonna do that. What I often see happen is people get NSF and overdraft charges because they forget to transfer money between one or the other. They transfer too much out and they have bills to pay and they have to transfer money back, it doesn’t happen in time, and then they bounce checks.

So profit first to me is a is a way of trying to organize your business and understand your numbers, but a much better, more effective way that’s gonna give you much better detail without risking all the overdraft charges is to have good bookkeeping. Accurate accounting will tell you how much is going out to what and then you can start to control it. “Oh, I’m paying too much in payroll. I’m paying too much in marketing. I’m not being careful here. I need to be more careful there. I need to bring more money in. I need to cut my expenses.” Good accounting is what’s gonna tell you that, not having five bank accounts. Because at the end of the day, if you have a pizza and you cut it into two slices or you cut it into four slices or you cut it into 50 slices, you haven’t made the pizza any bigger. You haven’t provided any more food. You’ve just cut it differently. And that’s what profit first is. It’s not creating more revenue and it’s not creating more profit. It’s just taking your pizza and cutting it into a bunch of small pieces, but it’s the same pizza. It’s the same amount of food as you had when you started. And it’s less helpful than just having more details to understand how your business works. 

So for those few people that have found this system and found it to be super helpful, like this guy. It sounds like it changed his life. It made things work better for him, helped him get organized. Great but for the vast majority of people who hear about this and then sort of try to do it but don’t really, it doesn’t help and it’s not an improvement and it doesn’t make a difference. But what they have found to be really helpful is just getting more organized in their accounting and taking a little bit of time to understand their numbers. And that does make a huge difference.