Profit First Implementation Plan in 7 Easy Steps - A Guide for Australian Businesses

Profit First Implementation Plan in 7 Easy Steps – A Guide for Australian Businesses

Have you read or heard about Profit First, think it’s a brilliant idea and want to set it up for your business in Australia, but are unsure about how it can work in an Australian setting?

The book ‘Profit First’ was published in the USA and doesn’t detail how it works for Australian taxes and corporate structures, leaving many Australians unsure how to set it up and frequently not taking action. This is a waste as Profit First First is an easily implementable system that can work for Australian businesses if you know how.

Australian conditions are different to the USA. As a Chartered Accountant based in Melbourne and one of the first Profit First accounting firms in Australia, I’ve put together this guide to show you what you need to do to take into account Australian conditions, so that you have your own Profit First Step 7 Step Implementation Plan.

Step 1. Choose your bank accounts, including your accounts for Australian tax

Profit First starts with setting up different bank accounts for different parts of your business. There is no set rule for what accounts to use, however the standard accounts include income, profit, owner’s compensation, operating expenses and a materials or stock account for businesses dealing with materials and stock. Once you have decided upon these, you need to decide what accounts to use for tax.

Many business owners are confused about how Profit First works with Australian taxes. So that you can keep things as simple as possible, I suggest you set up only two tax accounts, being;

A GST account
A tax on profits account

With two tax accounts separated, you will be clear about how much you need to put aside for each and easily compare how much you have put aside with how much you owe.

Step 2. Manage Payg withholding tax on wages and superannuation a little differently to the standard Profit First method.

Profit First advocates transfers to different bank accounts for taxes such as payg withholding on wages and payments such as superannuation, however this can lead to these funds being spent on operations or owner’s drawings, resulting in financial difficulties when the BAS is due. So that there is never a problem making payg and superannuation payments, these amounts can be paid directly to the ATO and to employee’s super funds when you do each payrun, meaning you won’t need to make transfers to separate bank accounts for these items.

Step 3. Calculate your ‘GST percentage’ based on previous BAS’s or your up to date financials and forecasts

Managing GST can cause a lot of confusion with Profit First but it can be very easily managed. So that you are putting aside the right amount of GST, you can 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. If the business did this, the variations would be as follows

	March 18	Jun 18	Sep 18	Total
GST to pay	4,800	5,250	4,675	14,725
GST put aside with 6% transfers	4,800	4,500	5.5%	6.1%
Variance, $ put aside versus actual BAS liability	0	750 owing to ATO	425 refund from ATO

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. If you receive a large, one-off payment, you can review how much GST is due for the BAS period to date and the likely expenses for the remainder of the period and then set aside this much GST. This requires up to date, accurate accounting figures and putting together a detailed cashflow forecast and thus takes more work than applying a percentage based on prior BAS’s, however it can be more accurate.

Step 4. Calculate your operating expenses and remaining percentages taking into account GST and debt repayments

If you work out your percentage transfers based on your profit and loss statement, you won’t be taking into account either GST on operating expenses or debt repayments, because the figures on the profit and loss statement exclude both GST and debt repayments.

To overcome this issue, when setting up Profit First percentages with clients, I go through a quick exercise with the profit and loss statement, working out which items have GST and which don’t (wages, superannuation, interest paid, hire purchase charges and bank fees are the main expenses without GST) and then adding an extra row for debt repayments. This provides a complete picture of actual cashflow and the percentage allocations can now be correctly worked out.

It might look something like 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%

Principal repayments on debt	1,000	1,000	GST free
Profit First % for Debt		9%

From the table, the profit first percentages for operating expenses is 70% and debt repayments is 9%. From step 4, the GST percentage is 6%, so now we have accurately calculated the percentages for GST, operating expenses and debt repayments.

Step 5. Ensure the tax on profits you are putting aside is accurate by having monthly tax forecasts and comparisons with what is in your ‘tax on profits’ account.

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, implement a monthly tax forecast and report that takes into account these considerations and compares the tax liability accrued to date with what has been put away.

Accounting and tax knowledge is required, but it is not an onerous calculation and a template can be set up which you can use, meaning you don’t need to incur accounting fees each month. Better still, consider using an outsourced service such as my Profit First implementation and management service and have this taken care of.

Step 6. Consider the Frequency of Transfers and Payments to Suppliers Based on the Payroll Cycle

The Profit First book discusses making payments twice each month, on the same days each month (eg. 10^th or 25^th). This is a reasonable system, however it is unlikely to match the payroll cycle, meaning you are spending time making payroll payments and supplier payments at different times. So that you can spend less time managing payments and get into a rhythm of making all your payments at the one time, consider making your Profit First transfers and paying suppliers when you are paying wages.

Step 7. Start straight away

There is often the trap of thinking that all the different bank accounts and managing GST and Australian tax makes setting up Profit First too hard. 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.

Your Profit First Step Implementation Plan

In summary, Profit First will work for Australian businesses once you follow these seven steps. Make sure you manage tax with the right accounts and percentages, calculate your operating expenses and debt percentages with the correct figures, ensure you keep on top of tax on profits with regular forecasts and reports and get started straight away are you will be home and hosed.

To ensure you get your Profit First system right for your business, book an obligation-free, no charge ‘Profit First Setup Call’. This is a one on one call designed to help you identify any issues with setting up Profit First and to help design your Profit First system, so you can stope worrying about cashflow. 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

Profit First Implementation Plan

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>

Profit First Implementation Plan