Business Profitability: Advantages and Disadvantages of the Profit First Method

Many entrepreneurs have adopted the Profit First method in recent years. This approach developed by Mike Michalowicz has been of the hottest trends in business accounting. Be sure to read our first two articles in this series for more insight into how the Profit First method works (part 1) and how you should manage your cash flow (part 2).

Today, we want to go through some of the advantages and disadvantages of Profit First. This cash flow management system may not be right for all business owners. Or, it may be just what you need to increase business profitability over time while also ensuring your own consistent income as the business grows. Here are a few pros and cons that you need to understand before adopting this approach.

Advantage: It’s Easy to Implement

Profit First is a relatively simple system. The cash flow accounting and use of multiple accounts will take some effort, as well as determining how much you should put into each account. However, once you get going, it is very easy to manage. For every sale that comes in as revenue, you are disbursing a certain percentage into each account. It enables you to covered a desired amount of profitability, owner compensation, operating expenses and business taxes. As income and profitability increase, you can adjust your percentages to fit your growing business model.

Disadvantage: Employee Pushback

Because a key part of the Profit First method is putting away a designated amount of profit and owner compensation, some employees may not understand. Some may push back or have trouble implementing the system because they don’t see the immediate rewards themselves. Not everyone is comfortable with profit being the top priority. You may need to invest some extra time in training and educating employees on the long-term benefits of Profit First. Eventually, they may see the light when business profitability goes up and everyone starts benefitting from the growth and prosperity.

Advantage: Immediate Profits

One of the biggest benefits of Profit First is the immediate results you will see as a business owner. Your profit and loss (P&L) statements will look attractive (at least on the profit side) as you have a dependable amount of profit coming in from month to month—even if the net profit isn’t that great right away. A portion of each sale is designated for profit and that is a good feeling to know that cash is being put in an important place. Your compensation as owner will also be more consistent and reliable.

Disadvantage: Short-Term Business Challenges

Short-term businesses and startups may find the Profit First method difficult to implement. If you are looking at your profit in terms of monthly cash flow, this system could create some challenges. It may not work to prioritize profit over expenses when the margins are super thin.

The Profit First approach is a long-term business strategy that offers some short-term advantages and disadvantages. However, this is true for just about any business model. There will always be some pros and cons. The important thing is to figure out what works best for your business and what will help you grow to the level of profitability you want to achieve. Profit First is just one way you can get there, but it may not be right for every entrepreneur and every company.

To develop your business plan and ideal profitability model, contact Illumination Wealth. We can help you find the right business, tax and wealth management solutions for immediate returns and long-term success.