The Profit First approach to law firm budgeting prioritizes putting profits in partners’ pockets.

Hopefully you’ve read our post about budget forecasting versus budget earmarking.  And now you’re interested in learning more about budget earmarking.  Today, we’re going to learn about one kind of budget earmarking: Profit First.

What is Profit First?

Profit First is a budgeting method Mike Michalowicz developed and described in his best-selling book, Profit First (affiliate link).  In short, the idea is that business owners do business backward; they pay all their expenses, and pay themselves whatever is leftover.  In other words, they’re taking their profit last.  Instead, Michalowicz encourages business owners to take their profit first.  Then, the business can run on what’s left over.

This is a great concept.  Because none of us started our law firms just so we could work hard and pay the law firm’s bills and go home empty-handed every night.  We started our firms so that we could make a paycheck for ourselves, on our own terms.  So, we need to prioritize that paycheck, and take our profits first.

How Does Profit First Work?

Profit First is a way of budget earmarking for your law firm.  In other words, Profit First is one method of taking the money you’ve made, and allocating it to different bank accounts within the firm, with each bank account having a specific spending purpose.  And of course, the first allocation you make is to yourself – you take your profit first.

It works well for a lot of business owners because it presents your firm’s finances to you in a way that many business owners naturally run their businesses – by bank account.  It’s common for a busy law firm owner to make financial decisions by simply logging into their bank account and seeing what funds are there.  If the bank balance covers the expenditure I want to make, then I make it.  If not, then I don’t.  

The problem with “bank balance” financial decision-making is that we tend to rob ourselves of the opportunity to save up and really invest in both ourselves and in our firms.  It’s like the “see-food” diet – if I see food, I eat it.  Except in this case it’s “see-money” spending – if I see money in the account, I spend it.

There’s nothing wrong with a “see-money” mentality – it’s probably one of the most common money mentalities among small business owners.  What Profit First does is harness that “see-money” instinct to help us manage our money smarter.  It does this by allocating money to different bank accounts, so that I don’t see all my money in one place.

Does Profit First Work Long-Term?

Profit First gives law firms a budgeting tool that works wonders short-term, as firm owners begin to implement a budget that actually works for them.  But, it’s even better long-term.  Because typically, when we start a Profit First plan, we need to meet our firm where it is, and not where we want it to be. 

Oftentimes we’re overspending on operating expenses and underpaying ourselves, so over time we want to slowly reduce our operating spending and increase our own paychecks.  By making small, incremental changes in how we run our firm, and how we earmark our money, we’re able to make those long-term goals a reality.  And Profit First gives us the framework we need to see where our money is, where it’s going, and what those changes are that we need to make.  It helps us forge a path from where we are now, to where we want to be.

Who Is Profit First Great For?

Profit First is great for any law firm owner that tends to engage in “see-money” spending.  It’s also great for firm owners who don’t like to (or more often don’t have time to) deal with more granular budgets or more detailed numbers. It does this by dividing your money into just 6 or so different budget categories.  Finally, it’s hugely helpful to those of us who need to see real money in real bank accounts, because theories or allocations on paper just don’t cut it.

But Profit First isn’t the only method of budget earmarking. Stay tuned to our blog to learn about the YNAB budget, and see if it might be right for your firm.

How Do I Implement Profit First At My Firm?

If you’re not already on our mailing list, be sure to sign up.  We’ll soon be posting a DIY step-by-step intro to getting started with Profit First. 

For those of you who’d like a little more support and guidance, as well as a plan to make Profit First work for you both short- and long-term, Skepsis would love to help.  Book your free discovery call today.