Profit Comes First

The first expense category in holistic financial planning is called Profit, and it is usually abbreviated as ‘P’.  We plan profit first because that is what the business is about.  Even if you are not a business, it remains important to make sure that the funds available are used wisely.

Worldwide, conventional thinking considers that profit is what dribbles out the bottom when all other expenses have been met.  The psychological difference in attitude when profit comes first rather than last, cannot be over estimated.
Conceptually, you can view the situation like this…

There are several ways you can set your planned profit:
  1. As a fixed sum. 
Set it at a level that is ‘difficult but achievable’.  Set it too high and unrealistic and you may lose the will to strive for it, because it simply becomes impossible.
  2. As a percentage of your turnover.  Whilst it is difficult to nominate a correct figure, generally you should aim for somewhere around 25% of turnover as a minimum.  After a few years you will probably raise this to around 50% - in other words, for every $2 you turn over you will retain $1.  The only cost that will come out of the Profit is tax.
Note: Your drawings and living expenses are included later on.  They do not come out of profit!

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