The Benefits of Using the Profit First Method in a Construction Joint Venture
As a construction joint venture, it’s vital to prioritize profitability to ensure your business’s financial success. One way to do this is by implementing the Profit First method, a cash management system developed by Mike Michalowicz that helps companies allocate a certain percentage of their profits to savings and investments.
The Profit First method’s basic premise is to change how profits are distributed, such that a portion of profits are set aside rather than being used to cover expenses or reinvested back into the business. This helps ensure that the business has a positive cash flow and can withstand financial setbacks.
To use the Profit First method, construction joint ventures should set up separate bank accounts for different financial priorities: one for income, one for profit, one for owner’s pay, one for taxes, one for materials and subcontractors, and one for operating expenses. Each time the joint venture generates revenue, that revenue should be transferred into the income account. From there, a predetermined percentage of the income can be transferred into the appropriate account. For example, a certain percentage might be transferred into the profit account, while another percentage is transferred into the materials and subcontractors account to pay for direct costs on a job.
By following this system, construction joint ventures are able to prioritize profitability and make better financial decisions. It also helps business owners see clearly how much money is available for various expenses and investments, rather than just relying on overall profit numbers.
Overall, the Profit First method can be a valuable tool for construction joint ventures looking to improve their cash flow and prioritize profitability. By setting up separate accounts and following a predetermined distribution plan for profits, joint ventures can make more informed financial decisions and set themselves up for financial success.