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The Profit First Formula

The formula that your accountant uses to determine Profit is the ‘GAAP (Generally Accepted Accounting
Principles) formula: Sales – Expenses = Profit. It is simple, logical and clear, and it is typically the formula
that business owners are raised on. Unfortunately, it’s inappropriate for our purposes here - the
formula, while logically accurate, does not account for human behaviour. In the GAAP formula profit is a
left over, a final consideration, something that is hopefully a nice surprise at the end of the year. Alas,
the profit is rarely there and the business continues on its cheque to cheque survival.

Sales – Expenses = Profit

Sales – Profit = Expenses

With Profit First you to flip the formula to: Sales – Profit = Expenses. Logically the math is the same, but
from the standpoint of the entrepreneur’s behaviour it is radically different. With Profit First, you take a

predetermined percentage of profit from every sale first, and only the remainder is available for
expenses.

The Profit First system utilises the ‘Primacy Effect’ – we put more importance on what comes first. This
means that in the Profit First formula, we put more importance on Profit, than we do Expenses. Sales
has to come first in the equation (without sales we have nothing). Profit needs to be baked into the
business, and behaviourally we need to be primed for Sales AND profit – by taking our Profit first, it
becomes a priority.

The 4 Core Principles

There are 4 core principles that underpin the Profit First methodology. Each is designed to reflect and
reinforce natural entrepreneurial behaviours.

Small Plates
This is based on ‘Parkinson’s Theory’, which states that:
“Based upon the availability of resource, our consumption will increase or decrease accordingly”. Simply
put - “…when there is less available to consume, we consume less of it…”

The theory is applicable to many things, but two obvious examples relate to time and money (both
valuable to us as business owners). When we have more time available, things tend to take longer, and
with less time available (think – ‘tight deadlines’) our efforts become more concentrated, we become

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