Getting Started With Profit First For E-Commerce Shops

Whether you are a Shopify, Amazon, or Etsy Shop owner, one of the most difficult aspects of managing a shop is dealing with your cash flow.  Will there be enough funds to purchase and replace your inventory when you need to place that next order?  One of the best ways to take back control of your cashflow is to implement the Profit First Method. Read further to find the steps to get started with Profit First.

As someone who used to have an Etsy shop, I know all too well the struggles we had with our cashflow or should I say, lack thereof.  From purchasing our next order of materials to not making a profit to even pay ourselves that much, I never could quite put my finger on what our problem was.  

Since I was an accountant, I made sure to keep up with my cost per product, manage my profit margins, and even would create a budget for my shop.  While it was helpful it never really gave me a true picture of what was happening.  I didn’t have a guideline of what a shop’s financial goals should look like and how did it compare to other shops like mine.

Fast forward to a few years ago when I came across a book that would make things so much clearer for me.  That was the point that I knew I wanted to help other shop owners get a better understanding of how their shops’ financial health truly is.

Implementing a solution that helps get started using Profit First

The book I came across was Profit First by Mike Michalowicz.  Mike had studied over 1,000 companies to get a standard of how these profitable companies managed their cash flow.  He had changed a formula that I was all too familiar with when it came to income.  Instead of using what I was taught in school – Profit = Income – Expenses, he rearranged this simple formula to Income – Profit = Expenses. 

At the time my husband owned a trucking company and I owned a CPA firm.  I implemented the Profit First method to both of these companies.  I started to understand what happens to so many of my clients had also been happening to our businesses.  As income increased, so did our expenses.  It is a natural habit to spend money we see in a checking account. 

Today I help Shopify users gain control over their expenses by using the Profit First method.  The day to day management can become overwhelming until we implement Profit First in the weekly process.

It is easy to get started with five simple steps. If you gradually get started with Profit First, it doesn’t have to overwhelm or cause confusion in the beginning.  If you are ready to make a commitment to changing how you run your shop’s finances, follow below for a simple, “How to get started with Profit First”.  

Step 1: Prepare your Profit First assessment

First you will determine your time frame of your off season for your shop.  This may be January – July for example.  Print off your Balance Sheet and Income Statement for this time frame.  Using the Profit First Assessment worksheet you will enter your information from your financial statements.  You can get this worksheet using the link here: Assessment Worksheet

Gross Revenue – you will pull in any income from your profit & loss statement.  

COGS/Inventory – calculate by taking your Cost of Goods Sold amount on P&L and add the change in your Inventory account on your Balance Sheet.

Profit – this is calculated by taking the change in total assets less change in inventory less the change in liabilities.

Owners Pay – add amount paid in salary plus any distributions less contributions.

Taxes – only include any tax payments related to income tax returns or estimated tax payments made. If you are taking a salary also include the taxes withheld.

Operating Expense/OPEX – Add total operating expense and other expense from P&L statement, less owner salary.

Your Real Revenue should equal the total spent.  Compare your actual spend to the suggested spend based on Profit First amounts.  If you are close, congratulations!  If not, you will have an idea of where changes need to be made on your part to step your company closer to real profit.

Step 2:  Open two new bank accounts

You will need to open two new bank accounts.  The first is a checking account for inventory purchases.  The second a savings or money market account for your Profits.  And yes, you really need to open these accounts!  Trust me, as an accountant I have tried this. I know how to separate accounts in QuickBooks Online and having one account does not work.  We are all creatures of habit and will look at our bank accounts to see how much money we have in our checking account.  This is where the pattern starts to overspend because we believe we have more money than we really do.  

Step 3:  Link these accounts in QuickBooks to their bank feeds 

Then you will decide on the frequency you will allocate your deposits from your payment processors.  If you are paid frequently I suggest you plan to allocate your income from your operating account each Monday.  This will give you a good start to the week and give you a sense of the flow of your income and its relationship with expenses being paid.

Step 4:  Determine the allocation percentages you will use

First you will need to know your cost per product you sell.  Each week transfer the cost of the sold items to the Inventory account. This will leave you with your Real Revenue to base the rest of your allocations on.  

After allocating out Inventory you have your Real Revenue left to allocate.  This is where I would start off slow by allocating 1% to your Profit account.  This automatically sets you up to have a profit.  

Your next steps are to analyze what expenses can be cut out.  

Step 5: Reassess Quarterly

Each Quarter when you are distributing your profit you will reassess how you did with your allocations.  You can run another Profit First Assessment to see if you stayed on track for the quarter.  If so increase your profit allocation percentage by 1% by reducing your operating expenses 1%.  If you didn’t stick wtih your new allocations you will want to dig in and find out why you were not able to stay within the allocations you setup.  You may have to look closer into your profit margin on your items.

I hope by the end of this you will have a better understanding of how to setup Profit First in QuickBooks Online. Once established it will provide more clarity into what is happening within your shops profitability.  

If you believe you need additional assistance with your assessment or allocation setup, reach out to the E-countants for help with your business!  With the complexities in the ecommerce bookkeeping arena, get help from accountants that are experts in both Profit First and Ecommerce accounting.  Schedule a discovery call with us today using the scheduling link below.

www.e-countants.com

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