Common Profit First mistakes and how to avoid them

Common Profit First mistakes and how to avoid them

Are you an Australian business owner who wants to implement and manage Profit First and are keen to avoid common mistakes?

The book ‘Profit First’ was written in the USA, so Australian tax and corporate structures need to be taken into account to ensure you are successful. Furthermore, there are some common traps that all businesses can avoid.

Profit First should be easy to implement and manage and with this guide, you can make sure you get it right. As a Chartered Accountant and one of the first Profit First accounting firms in Australia, I’ve written this guide to help you understand how to avoid common Profit First raps with a twelve step guide.

Common Profit First mistakes – Mistake No. 1. Not Including debt repayments when working out your percentage allocations

Many business owners base their percentage allocations on the profit and loss statement (P&L), however the P&L doesn’t include debt repayments.

So that you ensure you factor in all your cash payments when calculating your percentage allocations, add the amount of debt repayments to the list of what gets spent.

Common Profit First mistakes – Mistake No. 2. Not calculating the GST percentage allocation correctly

The GST percentage can be difficult to calculate because each quarter your expenses and the amount of GST you claim will vary. So that you can correctly calculate the percentage allocation, do one of two things;

Refer to prior BAS’s and the net percentage of GST you have paid and apply this percentage to your Profit First tranfers. This works well for businesses with relatively steady cashflows, such as hospitality businesses. An example of the way you calculate it is as follows;

	March 18	Jun 18	Sep 18	Total
Sales including GST	80,000	75,000	85,000	240,000
GST paid to ATO after taking into account GST on purchases	4,800	5,250	4,675	14,725
Net GST %	6%	7%	5.5%	6.1%

In this example, the business would put aside 6% of cash receipts for GST and be prepared for some variations between what was put aside and what was paid when lodging BAS’s.

For businesses with more variable cashflows, such as builders receiving intermittent progress payments, a second method is to base GST on up to date financial figures and forecasts for the remainder of the quarter.

Common Profit First mistakes – Mistake No. 3. Not taking GST into account when calculating your percentage allocations

Similarly to the issue with debt repayments not being on the P&L, the GST on expenses that you pay doesn’t show on the P&L. If you don’t take this into account, your percentage allocation for materials and operating expenses will be incorrect.

So that you can correctly calculate the percentage allocation, go through a quick exercise with your P&L to work out which items have GST and which don’t so you can see the total cash payments you need to make (wages, superannuation, interest paid, hire purchase charges and bank fees are the main expenses without GST). Then calculate your percentage allocation based on these amounts. To do this exercise, you can come up with a table from the P&L similar to this;

	Profit and loss statement $	Actual Cash received or paid with GST $	GST treatment
Sales	10,000	11,000	GST on sales

Expenses
Bank fees	20	20	GST free
Hire purchase charges	400	400	GST free
Materials	3,000	3,300	GST on expenses
Motor vehicle expenses	700	770	GST on expenses
Printing and stationery	200	220	GST on expenses
Rent	800	880	GST on expenses
Superannuation	95	95	GST free
Staff wages	2,000	2,000	GST free
Total expenses	7,215	7,685
Profit First % for Expenses		70%

The table shows that the overhead expense allocation should be 70% as we use the figures from the ‘actual cash received or paid with GST’ column. If we hadn’t gone through this exercise and based the figures on the first, unadjusted column from the P&L, the percentage would have been 72%. Not a large percentage difference but small differences and the habit of putting more funds in the profit account add up in the long term.

Common Profit First mistakes – Mistake No. 4. Not correctly calculating the tax on profit to set aside

Calculating tax on profits can be complex as it’s affected by what structure you use (trust, company or sole trader), what accounting method you use to calculate tax (cash or accruals basis) and what year-end accounting adjustments you will make, such as depreciation.

So that you can correctly assess how much tax on profits you will pay and whether you are putting aside enough funds to cover this, take these factors into account with a template that automatically calculates your tax liability for the year to date and compares this liability with what you have put aside.

Common Profit First mistakes – Mistake No. 5. Not paying dividends each quarter

Running a business is hard work and when you are putting aside funds into a profit account, you may be tempted to either take money from this account for yourself intermittently or use it all for debt repayments. However, the motivation to keep focusing on and working towards your business goals can be significantly affected by whether you reward yourself at regular, designated intervals. For this reason, it’s important to pay yourself a quarterly dividend and celebrate this, no matter how small the amount.

Common Profit First mistakes – Mistake No. 6. Not having clear goals for profit

A common trap is to have a vague notion of what amount you want to have in your profit account and by what date and for what purpose. So that you can be fully motivated, nominate an amount you want to put aside, when you want to achieve this, the key reasons for having this amount and the key ways you will achieve this.

A good goal is to have three months of operating expenses set aside, to ensure you can fund yourself if unexpected problems occur, though each business will have different requirements and risk profiles.

Common Profit First mistakes – Mistake No. 7. Not having an ‘overflow’ bank account for unexpected or ‘lumpy’ cashflows

If you receive unexpected or infrequent payments, such as builders with intermittent progress payments, have an ‘overflow’ bank account that stores funds until you need to allocate them across your different bank accounts. This will ensure that Parkinson’s Law and the temptation to spend what is available doesn’t come into play and that you have the funds when you need them.

Common Profit First mistakes – Mistake No. 8. Not getting started straight away and being put off by the thought of lots of bank accounts

Profit First can seem complex and this can scare you off starting. However, you can start reaping the benefits of paying your profit first straight away and learn to deal with the complexities as you go. Start with a ‘profit’ bank account straight away and make payments to this account from now. Making profit is a habit and there’s no reason not to start. Even if it’s just one percent, it gets you into the habit of paying your profit first and gives you something to build on.

You don’t need to start with lots of bank accounts. If you are unsure about how to get started, then start with the bare minimum number of accounts such as the Profit account, a tax account and an expenses account and you can build on this as your familiarity with the system grows.

Common Profit First mistakes – Mistake No. 9. Trying to do it all yourself

We all know how time-consuming and demanding running a business is. If you try and manage all aspects of Profit First yourself you risk overextending yourself. Making the transfers at regular intervals can be hard when the demands on your time are so great, whilst the emotional issue of paying significant sums to the tax office can mean transfers are regularly missed. Furthermore, there may be complexities with the calculation depending on the nature of your business.

So that you can ensure your Profit First setup is quick, easy and successful, ensure you get the help of a Profit First Professional. Book a Profit First setup call with me and we can discuss any issues you may have and start helping you design your Profit First system. Calls are 15 minutes and are limited each month so book through this link to ensure you don’t miss out, http://bit.ly/2Bf344a

Your Business and Getting it Right

There are a few traps to avoid but none are so dark and dangerous to stop you getting started. With the benefits of helping create cash in the bank, paying off debt, increasing profit and managing, it’s certainly worth having a crack. Good luck with your Profit First setup and don’t hesitate to contact me with any queries.

Other articles

<a href=”https://www.morrisonabs.com.au/calculating-your-profit-percentage-for-profit-first/”>Calculating your profit percentage for Profit First</a>

<a href=”https://www.morrisonabs.com.au/news/”>Blog articles</a>

Refererences and links

<a href=”https://www.profitfirstaustralia.com.au/product/profit-first-book-paperback/”>Profit First book</a>

<a href=”https://www.profitfirstaustralia.com.au/podcast/”>Profit First podcast</a>

<a href=”https://www.profitfirstaustralia.com.au/portfolio-item/angus-morrison/”>Profit First – my details</a>