Profit First calculator

Want to find out how much money you need to put aside every month for business expenses and tax – and how much you can afford to pay yourself? Use our Profit First calculator.

How to use our free Profit First calculator

Here’s how to use our free Profit First calculator. To start you need to know your freelance income or business turnover. Add this to the ‘Income box’. Next you need to know your operating costs – everything from your WiFi to materials and salaries. Put this into the ‘Labour and materials’ box.

Then you just add percentages for Profit, Pay, Tax and Operating costs (we cover how to work this out further down). You can see, as you go, how much is left out of 100% to make this easy for you. Finally, the calculator will show you how much money each month you need to allocate for each. Easy!

What is Profit First?

So what is the Profit First method? Profit First is a simple formula that helps business owners prioritise profit in their accounting. The system was pioneered by Mike Michalowicz in his book, Profit First, and is designed to help you improve your company’s cash flow.

Using the Profit First formula is proven to help business owners take control of their company’s liquidity and make their operations more profitable.

How does Profit First work?

Here’s how Profit First works, and why it’s different to ‘traditional’ accounting.

Usually businesses use this formula for accounting:

Sales – expenses = profit

The Profit First formula turns this approach on its head, putting profits literally first! It works like this:

Sales – profit = expenses

Why does Profit First work?

Why is this change important? Under the traditional accounting approach, business owners could only pay themselves once all expenses were taken into account. However, under Profit First, you decide how much profit you want to make, and then run your business with the budget you have left for expenses.

This is a far more proactive approach to earning money that encourages you to be much more aware of your profit margins and expenses. Which in turn motivates you to identify opportunities to cut down unnecessary expenditure. It forces you to run a leaner business.

How to use Profit First

To use Profit First you need to work out percentages of your outgoings for:

• Profit
• Expenses
• Tax
• Your pay

So how do you work out what they need to be? It can help if you have already been tracking your monthly profit and loss (we have a free spreadsheet you can use for this here).

If you have records you can see what your average turnover is, and what percentage of that goes on running expenses and tax. From what is left you can decide how much you want to keep in the business as profit – for cashflow or investment – and how much you want to pay yourself.

We would also recommend auditing your expenses as part of this exercise.

Why you need to audit your expenses when starting Profit First

The principle behind Profit First is that you maximise the amount of money your business earns, while minimising expenses. So it can be helpful to start by ensuring your expenses are as low as possible. And an audit will help you to do that.

Here’s how to audit your expenses:

• Make a list of everything your business spends money on each month
• Identify if it’s essential or not
• If it’s not essential, assess whether you can get rid of it
• If it is essential, look for ways you can reduce the cost, maybe by renegotiating or shopping around 

Sometimes you will find you’re paying each month for software that you only need every so often. Or the company has changed their plan and you can save by switching. Or even that a new competitor with a cheaper product has emerged. 

I recommend auditing your outgoings at least once a year and making sure that you are running as leanly as possible. One small business we helped go through this exercise was able to save £400 a month on unnecessary expenses. 

How to work out your Profit First percentages

Our calculator makes it very easy to work out how much you need to put aside for tax and expenses, and how much you can pay yourself. But for it to work you need to know your percentages.

So how can you work out your Profit First percentages if you haven’t been tracking your finances to date? As a starting point, this is the range that businesses typically use for the Profit First method:

• Operating expenses: 30% to 65%
• Profit: 0% to 20% 
• Tax: 15% to 25%
• Your pay: 0% to 50%

Go back over your bank accounts for the past two to three months, and try to work out what your business running costs and expenses are. And check what you are paying in tax each year. To start with you might have to do a bit of guessing when working out your percentages, but over time you’ll build a more accurate picture.

Set up your Profit First bank accounts

If you want to follow the Profit First method strictly, you’ll set up separate bank accounts for tax, profit, expenses etc – in addition to your current account.

This enables you to clearly divide your money so you can see what you have for each, and the money is ready to pay where needed. You will also quickly see if your percentages are out, and need to be re-calculated.

The pros of using the Profit First method

Here are some of the advantages of using the Profit First method:

• You’ll get more control over your expenses
• You’ll have more visibility over your cash flow
• You’ll be more aware of your finances – and can be more proactive
• You can save up for bigger investments to help your business grow
• You can pay yourself every month (even if it’s a modest amount)

The cons of using the Profit First method

Here are some of the disadvantages of using the Profit First method:

• It can take time to work out your percentages (this is where our calculator will help!)
• It can be tricky for startups and low-profit margin companies to set up

Even if you are starting out, or have low margins, it is still worth implementing Profit First. It is the principle of paying yourself that is important, not the amount. Getting used to your business paying you is a good habit. And the disciplines of the method can help your business to grow and become more lean, so you can increase your profit percentage.

Use our free Profit First calculator to make it easier

Our free Profit First calculator makes it easier to work out how much you need to put aside each month for expenses, tax, profit and pay. Just enter your turnover and expenses, work out your percentages and it will tell you how much you can pay yourself every month, and how much you need for tax and outgoings.