Raising Capital with Profit First​

If your business raises capital and implements the Profit First methodology, this article is for you. Raising capital is the process of receiving additional money from investors, and Profit First ensures that these funds are correctly allocated to their intended functions.

Raising Capital

The purposes of capital raising will differ from business to business, depending on their size and industry. Capital funds may be in equity, debt, or a combination. Possible functions of capital include funding, expanding, and transforming the business. Capital allows you to buy, maintain, or improve the fixed assets of your business. Specific examples of capital expenses may be purchasing a new piece of machinery, offering a new service, or upgrading your office. Thus, the purpose of raising capital is to grow your business and enhance your profits.

Profit First

Similarly to raising capital, Profit First not only allows you to enhance cash flow and tackle your debt, but also to grow your business. Profit First ensures that your profits grow, meaning your business can subsequently expand as well. Profit First follows the concept that profit = growth. Without that extra money, how would you grow your business? Profit First approaches business growth with the resources available, rather than using growth to make more profits. When you create real business profit, you provide yourself with opportunities of true growth such as raising capital and expanding your team. With Profit First, you will grow your team once your business has available funds rather than expanding your team in an attempt to raise said available funds.

How to Raise Capital with Profit First

Profit First helps your business to grow by physically separating your capital from your income. The capital is not placed into an account(s) with preexisting purposes. Instead, the capital goes into its own outside bank account with its own specific purposes, which may be to sit in quarantine so that it is out of sight out of mind until it is needed. This will make sure that the business owner is confident in their knowledge of when to access these funds. This concept will be foreign to many businesses who consistently and mistakenly classify capital under income despite their differing predetermined uses.

Depending on these predetermined (and ideally, documented) purposes of the capital account, this amount can then be distributed either to the operating expenses account if it’s being used there or to the necessary bank account and it is not included in your usual Profit First distributions. It is recommended that the allocated percentage of your capital account is distributed fortnightly. You could also allocate the quarterly profit distribution for this purpose too. This method provides you with a profit ‘buffer’ that will protect your business and guarantee it does not grow beyond its means. This creates sustainable and achievable goals within your business that will leave you feeling satisfied and accomplished instead of feeling as if you will never reach your targets.

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