Tips and Updates
|Posted on 8 January, 2015 at 17:20|
Here is an interesting article by Dave Kerpen based on the idea of paying yourself FIRST from your business by setting profit targets.
Many entrepreneurs don't understand GAAP and author Mike Michalowicz makes the point that changing the formula to
Sales - Profit = Expenses encourages business owners to focus more effectively on their goal of making money and to eliminate
unnecessary expenses. What do you think?
Dave: How has putting profit first and expenses last benefited your own business?
Mike: I always thought that I could run my business on the idea that I should sell as much as I could and spend as little as I could and that profit would "just happen." It never did. I realized that I run my business by looking at my deposits (sales) and then paying my bills from what I deposit (expenses)... and always could justify spending/investing every penny I had. Profit was always put off to a future date, and that date never happened.
By taking my profit first, from every deposit, profit is now a habit not a hopeful "one day" event.
Dave: Why can the GAAP accounting method be so problematic?
Mike: GAAP ( Sales--Expenses = Profit ) is logical. And that, ironically, is the trap. Logically it works, but people aren't logical. We are driven by emotion and habits. GAAP puts us in the habit of selling as much as we can and they paying expenses first. Expenses become a focus and for most businesses grow just as quickly as sales. Profit is a "left over" in the GAAP formula. It's an after thought.
As the experts say, we get what we focus on and GAAP has us focus on expenses. That's the problem. We need to focus on profit and that is what Profit First does.
Dave : You mention the concept of TAPs in your book. What are TAPs and why are they important?
Mike: TAPs stands for Target Allocation Percentages. It is the percentage of money that is allocated to the different banks accounts from the deposits generated by sales. The core accounts that every business should have is a Profit Account, a Tax Account, an Owner's Pay Account and an Operating Expenses Account. Then on a periodic basis the money that has been deposited into the business gets distributed to these different accounts based upon the TAPs. I have found that, as a generalization, the ideal TAPs vary based on the size of the business. I have also found that a business should not necessarily start allocating the full TAP amounts right away. It can be too much of a shift for the company. A business just starting out with Profit First, should define their TAPs but also realize that it is a target and not the starting point. Start smaller and build your way up over time.
Here is the link to the full article:
Categories: Small Business