“Work expands so as to fill the time available for its completion.” If something must be done in a year, it’ll be done in a year. If something must be done next week, it’ll be done next week. If something must be done tomorrow, it’ll be done tomorrow. This notion was first introduced by Cyril Northcote Parkinson, a British historian, and is now known as Parkinson’s Law.
We plan based on how much time we have, and when the deadline approaches, we start to make choices and tradeoffs to do what must be done to complete the task by the deadline. As small business owners, we can all testify to this. Now apply Parkinson’s Law to your business. Financially, what are you trading off?
The GAAP formula has taught us that SALES – EXPENSES = PROFIT. A very simple and straightforward statement. Unfortunately, it’s a lie and only looks good on paper. In the GAAP formula, profit is a left over or something that is a hopefully a nice surprise at the end of the year.
Imagine flipping the formula. SALES – PROFIT = EXPENSES, also known as Profit First.
The concept of Profit First accounts for the entrepreneur’s behavior. With Profit First, a predetermined percentage of profit from every sale first is allocated to a separate account (pay yourself) and only the remainder is available for expenses. Parkinson’s law, by taking profit first, the money available for expenses lessens, and we are forced to find ways to get the same things done for less money.
Most entrepreneurs don’t have the time to read the various accounting statements necessary to manage the financial aspect of their business. The Income Statement, Balance sheet, and Cash Flow statement should be evaluated monthly, at minimum, but few entrepreneurs do. Instead, “bank balance accounting” is used and the daily balance in the bank is used to make financial decisions. Per Parkinson’s Law, we consume what we see, thus leaving entrepreneurs in poverty.
Many entrepreneurs try to force themselves to be a better at accounting and become more disciplined in managing their finances - relying on a whole lot of will power.
Profit First does not try to change your habits, instead, Profit First works with your existing habits. By first allocating money to different accounts, and then removing the temptation to “borrow” from yourself, your business will become fiscally strong and you will benefit from regular profit distributions.
Our motto at 3 Pillars Bookkeeping is to be, “The Partner you can Count on.” In addition to our existing services, we would love to help you utilize Profit First to guide your small business to greater profitability.
Alex Bulmer - Three Pillars Bookkeeping and Business Services