Running a business is tough, but running a naturopathic clinic can be tougher. You don’t want to be weighed down by financial decisions and constantly wondering how to better manage your cash flow. You want to focus on the patients who need your help.
I’m here to tell you the traditional means of managing your business’s books won’t get you to this goal. There’s a better way to approach the financial needs of your practice that focuses on paying yourself before the bills. It’s called Profit First, and it really works.
In this article, I’ll teach you how to use the Profit First approach in your practice and how the Profit First allocations percentages can keep you earning profits year in and year out.
What is Profit First?
Before we dive into the nitty-gritty, let’s cover some background. Profit First was created by Mike Michalwicz in 2014. The formula it uses actually reverses the age-old accounting formula from revenue – expenses = profit to revenue – profit = expenses.
It might seem tough to wrap your head around this new equation. After all, we’re all taught that good money management means paying the bills before lining your pockets. But the truth is, this equation was set up for accountants who look at numbers as black and white. Your business isn’t black and white to you. You have an emotional connection to your practice and you want to see it thrive.
The Profit First equation teaches you to pay yourself first and structure your practice to operate with the remaining revenue. This switch lets you see where your money is coming from and how it’s being spent so you can put your energy into preserving your bottom line.
What are Profit First Allocation Percentages?
Traditionally, allocation percentages are taken from cash or capital to be put toward a final investment. But with Profit First, an allocation percentage refers to what percentage of your business income you put toward different costs.
Things like your office rent, office management software cost or the cost of supplies can eat up most of your budget. So if you aren’t planning your profits into monthly revenues, you could be left without for yourself each month. Taking your profit first makes sure you get paid and establishes your budget for these operating costs. That’s how the program forces you to make the hard decisions and operate within a smaller budget.
With Profit First allocation percentages, you use your sales to make money before worrying about expenses. For example, the infographic below shows that for a business worth less than $250,000, the first 5% of funds should go to profits.
This is an important differentiator from other money-making tactics because it forces you to worry about your success before your expenses. If you’re focusing on paying yourself, then it’s easier to put more money in your pocket over time. You aren’t waiting for the sale that makes you break even or the client that pushes you into profitability. You’re making money from day one so you can put your energy into healing patients and not managing finances.
Infographic
Profit First helps you establish target allocation percentages for your revenue. In other words, it gives you a goal to shoot for when managing your money.
The allocation percentages are divvied up into four different areas of any enterprise: profit, owner’s pay, taxes and operating expenses. Your current percentages will show you the direction of your cash flow now, and the target percentages show you where you want to be to see more profits.
You’ll notice that profit is listed first on this list. In fact, the list is designed to show you the hierarchy of allocations. By prioritizing your profits and pay, you ensure you’re making money from your revenue. Taxes are typically non-negotiable, and what’s left over will go to operating expenses. The idea behind this hierarchy is that if you’re short on cash flow, you adjust the operating budget of your practice before you take money out of your own pocket.
Closing
If you’re ready to revolutionize the way you handle the book-end of your business, then try implementing Profit First allocation percentages. It’s an easy way to make sure you protect your profits while still managing the operational expenses of your practice.
I know changing the way you handle your finances can be an overwhelming task. That’s why we’re here to help. Check out our Profit First guide for easy steps to get started and maximize your profits.