The Profit First Method - For Small Businesses and Freelancers

If you're a small business owner or freelancer, money can be a huge stress and an overwhelming task to keep on top of.  After all, you're creative right? Your brain isn't made for all this admin and endless maths.

For me, I've found having simple and straightforward systems in place to help me manage my finances has helped immensely, and really takes the stress out of it all.
It's taken me at least four years of self-employment to get to this point though, so now I'm going to share what I've learnt to help you get there quicker than I did!

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The Profit First Method

I first learned of the Profit First Method on the podcast ‘Wish We Knew’, presented by seasoned business coaches Vix Meldrew and Alice Benham. On the episode, they share finance tips and tricks that they’ve learnt over their many collective years being self employed. 

Put simply, profit first is exactly as it sounds, and involves ensuring you set aside your profits and own wages first before taking any expenses. Most businesses, particularly those starting out, do the opposite. They get paid, pay their expenses, and then hope there might be a little left to pay themselves or set aside as profit. This is how I always did it, but often found there was little to nothing left over to pay myself. 

Of course, you may think paying yourself over your expenses seems like a dangerous game to play, but I assure you that done properly, it's not. Assuming you have factored in all your fixed expenses (website, hosting, insurance etc) into your rates, then as long as you have clients or customers these costs can and will be covered. Additional expenses may occur, but we’ll get to that in a minute. 

How To Use Profit First

Firstly, you will need a business bank account. For sole traders, this is not a legal requirement as you as an individual and you as a business are viewed as the same thing in the eyes of the tax man. However, I highly recommend it as it makes your finances much clearer, and enables you to adopt this method easily.

Many business bank accounts can be easily obtained online nowadays, with banks such as Starling and Monzo. Personally I’m with Monzo, I love their simple interface and the pots feature, which we’ll go into now. 
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On my Monzo app, I have three pots. A tax pot, a wages pot and a profit pot. Any income that comes into my account is divided like this;

20% - into the tax pot

25% - into my wages pot

5% - into my profit pot

Thats a total of 50% of my income being divided among my profit first pots. That leaves, of course, 50% for any expenses, which should be more than enough. 
Dividing like this means you look at your finances differently. For a start, I can see my wages adding up throughout the month, and I simply pay it out back into my main account and then into a personal account at the end of every month. 

My profit pot builds up a nice fund that I can spend on anything from a new course I want to go on, to a new printer or simply just an emergency fund. 

The tax pot, obviously, goes untouched throughout the year until that all important tax deadline, when I know I can pay any tax bill without worry. It’s worth noting though, if you’re in your first year of paying tax you may want to set aside a little more as HMRC will want you to pay that years tax bill, plus 50% of your predicted next years bill too.  Setting aside 25-30% could be a good amount to make sure you're covered.

The wages pot is self explanatory, at the end of every month I pay it out into my personal bank account.  You could pay yourself a fixed amount from it each month and let the remainder build up too, maybe paying that extra to yourself as a nice Christmas bonus, or you could contribute it to your profit pot at the end of the year.

If you didn't want to open a Monzo account or similar account with a pots feature, you could always use separate bank accounts, which could help with removing the temptation to dip into your tax pot before it's time!

Key Benefits of Profit First

- Always have profit available in your business

- Always able to pay yourself

- Prevents you from spending beyond your means

- Builds emergency funds

That's the basics of profit first!  Now I'll go into some good-to-knows and share some more resources to help you get started.

Unexpected Costs and Expenses

It's easy to be hit with an unexpected bill when you're self-employed.  Say for example, your printer dies (why are they literally the most unreliable things ever), and you need a few £££ all of a sudden to replace it.  This could be where your profit pot comes in.  You've been setting aside 5% of your income and now have a nice little buffer of cash ready to spend.  Ideal and stress free! Problem solved! It may sound like a pipe dream but there was a time in my business when I dreaded anything like that going wrong as I had no idea how I would pay for it.  Now I have no such worries!

Want it explaining again? Watch my YouTube video all about it here!

Extra reading:

Profit First for Ecommerce Sellers - Cyndi Thompson - There are many many books related to profit first, including one for specifically for people running micro-gyms and one for tradespeople, but this one written by Cyndi Thompson in 2019 is related to ecommerce in particular.

The Money is Coming - Sarah Akwisombe - Not directly related to profit first or even solely business finances, but this is just a great read and encourages you to feel more posiitvely towards both making and managing money.

You're Not Broke, You're Pre-Rich - Emilie Bellet - I've actually got this on my bookshelf right now waiting to be read, but I thought I'd include it here as I've heard great things about it.  Check back for my review soon!

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