Small Business Budgeting: Putting Profit First

This article starts on a personal note, but trust me, it will make sense for your business. Read on.

I'm a banker, so naturally my friends always ask me about investing. After doing what a typical banker will do — inform them that I am not certified to provide advice on investments (UBT has people who are) — I quickly change the conversation to budgeting. Their demeanor immediately changes and they expect me to tell them to stop buying lattes and shopping online.

I don't do that.

Instead, I provide them with a simple method that is practiced by many personal finance wizards: Pay yourself first.

Sounds great, right? So how exactly do you pay yourself first?

Here’s my personal approach. I started by opening a variety of accounts — some investment, some deposit. Every other week when my paycheck arrives, it’s distributed to 5 different places. Fixed expenses, savings, risky investing, vacation fund, and my 401(k). After all of that is done, I "live within my means.” I let myself spend only what is in that account and do not rely on credit cards.

There is nothing revolutionary about this method; I’ve done this for a long time. What blew my mind was when a business customer approached me and asked to set up essentially the same system for her business accounts. She had just read "Profit First" by Mike Michalowicz and she was tired of reading outdated Profit/Loss Statements that told her nothing about the current health of her company.

What happens when you flip traditional accounting on its head? For far too long, stressed entrepreneurs have been in the mindset that their "Profit/Loss Statement" goes something like this:

Income - Expenses = Profit

But imagine if you could take control of that equation and build a more profitable company. It would look something like this:

Income - Profit = Expenses

What exactly are we talking about? BUDGETING!