How I’m revamping my finances with Profit First as a creative, UK-based, sole trader that can’t speak corporate American.

Now this blog post is not throwing shade at anyone because I am deeply grateful that a) the Profit First method exists and b) there is a tell all manual readily available to buy for less than the price of a London coffee and slice of cake. (If you don’t know what I’m on about then I’m chatting about this book and I really do recommend reading it). However whilst reading it I found it quite tricky to decode the incredibly corporate American lingo and turn it into a process that I could implement with my spreadsheet hating, creative brain.

After some reading around the subject (I stalked some very helpful blogs, listened to a couple of podcasts and finally it all clicked into place) I got brave enough to give it a go. This is the first month I have actively put this new finance system into practice and although there are definitely going to be some teething issues and some processes to streamline, I already feel like I have taken back control over my money. So I’m going to tell you how I’m putting it into place and maybe you’ll have a eureka money moment just like me.

I was struggling to keep on top of the finances of running a business

I first heard people talking about this mysterious ‘profit first’ method on the small business grapevine and was very curious about what it was in a ‘yes please come and revolutionise my finances before I have a breakdown’ kind of way.

I’m one of these people that sees numbers and the shutters descend on my brain. Can’t hear it, won’t hear it. I’m not particularly bad with money but I definitely do hoard it and then periodically splurge hoping that next month’s pay check (which is always variable, right small business owners!?) can cover my credit card bill.

So I decided enough was enough and I bought the book.

Above: Visual representation of exactly how I feel when trying to deal with money…

Reading and implementing Profit First into my creative, business as a sole trader

A lot of the processes described in the book designed to ‘lock away’ money from irresponsible business owners really felt like overkill to me. Also banking technology is a bit different in the UK so his suggestion of setting up so many accounts just didn’t appeal. However, my business account is with Starling which has this great feature that allows you to keep the money in the same account but splits it into pots. You can also then pay bills direct from a pot which felt much easier to manage and a far more streamlined process.

So I took the essence of Profit First and split it up like this:

• THE VAULT - 3 months worth of operating expenses.

  This is just put aside in a pot in my Starling business account so it doesn’t show up in the main balance. Out of sight, out of mind vibes. This has 3 months of operating expenses in it so if I made no money at all for 3 weeks I know my bills would be covered. It should only be used in an emergency for all those subscriptions or contracts that can’t just be cancelled if I was to do no work or have a really slow period.

  Then once a month I split the income from that month into the other pots via percentages. Because the whole process is based off of percentages and not set figures it is much easier to make sure you always get paid and then you can monitor how your business is doing. The advice from PF is to start with lower percentages and adjust on a monthly basis. I will share with you my starting percentages so that you can see but use percentages that work for you.

• INCOME ACCOUNT

  All my income goes into my sole business account. That’s all sales income, client invoices, everything that makes me money. All money goes into that account.

• THE OPEX POT - 27%

  The “OPEX” account is your operating expenses. With Starling you can pay bills from one of your pots so I have this pot set to pay all my direct debits and subscriptions. I have this set to 27%. I think this may be higher than it needs to be but I was a bit stressed out about not being able to pay my bills so I’m playing it safe.

• THE TAX POT - 20%

  The tax pot isn’t my money - that belongs to HMRC and I’ll move that out into a high interest account every quarter so I can make some money on that before the big bill days. In previous years I have put aside 30% but I found that I have over saved for tax (a way better scenario to be in than the other way round!) so I already have a big chunk saved up.

• THE OWNERS COMP POT - 50%

  This is my salary- the compensation I receive for working in the business. I was finding that I was taking from my business account in dribs and drabs, never the same amount and never with any sort of control. If I earn a lot in a month, yay - payday! But by putting a defined percentage on it, it makes the whole process much clearer and I know exactly how much I will take home when it comes to pay day.

• THE PROFIT POT - 3%

  The profit pot is the place to save for gear, any investment back into the business or take a bonus as a reward for owning a company. Mike recommends that every quarter this is taken for a personal reward so you build up a psychological relationship with saving money and being rewarded. I’m on board (almost) but I am going to leave what it is used for open-ended at the moment. I can’t quite commit to a take and splurge method but maybe i’ll change my mind! But because it’s a percentage of my income, something always goes into the profit account. I'm going to start with 3% for this and tweak as the year goes on. (Mike recommends starting at 1% if you’re a brand new business or trying to clear debt).

Above: Full on business mode. Getting those finances fixed!

Carrying on with Profit First:

I’m really excited to see how it works out for me, where I tweak my percentages and how I feel about money going forward with this year. If you want to keep updated on my journey, please sign up to The Unfiltered Times. It’s my email newsletter where I drop into your inbox weekly on a Friday afternoon with the lessons I learnt, the experiences I had, candid money chat and completely unfiltered thoughts on what it is really like running a small business in the UK. There’s also obviously a weekly cat video to enjoy and to slide you into the weekend in style. Because, lets be honest, it’s what the internet was invented for.

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