Are you a business owner that has been getting by, client check to client check?
Where one client makes or breaks you?
Maybe you’ve heard of Profit First before and kept thinking “one of these days, I’ll see what all the fuss is about.”
Maybe one day is today.
What the heck is Profit First?
Let me start by telling you what Profit First is not….
It’s not an overly complicated system.
It’s not a system that you need an advanced degree to understand.
However, it’s not a quick fix, either. That’s right, as much as we know it will begin having an impact from day 1, it will not completely turn your business around overnight. That’s just unrealistic.
It’s not something you do once and never look at again. No, it takes work! But, it’ll be worth it, I promise.
So then, what IS Profit First?
Profit First is a cash flow management system based on the book Profit First by Mike Michalowicz.
It leverages our natural behaviors so that we aren’t trying to change ourselves. We know how that typically works for us.
It makes it a lot easier to understand the financial health of your company and how your cash flow looks.
Bank Balance Accounting
If you are like most business owners, when you make any financial decisions – whether it be:
- which bills to pay
- new purchases
- new hires
- employee raises
- how much to pay yourself….
You look at your bank account to see what you can afford.
Sure, you could try to look at your Profit & Loss Statement, but then you have to log in to an unfamiliar system or get the report from your bookkeeper. Then you must decipher it.
Accrual basis vs. Cash basis.
Why isn’t the number at the bottom the same number I see in my bank account? (That’s for another blog post!)
And even after looking at the report, we still might not be confident if we have the funds to cover an expense. Most likely, you again go to your bank account to verify.
What is the benefit of bank balance accounting? It’s easy. You always have access in your pocket or within reach (your phone). I’ll be honest, I’ve used bank balance accounting because it was convenient, and I could tell if I had the funds to cover a payment.
So if bank balance accounting is working, what would you change? We don’t change the natural behavior of checking your bank account. We change the number of bank accounts that you have money in.
The problem with only one bank account
When we have all our funds in one bank account, we don’t think about:
- reserving money for our quarterly estimate tax payments
- how much I should be taking as an owner
- how to guarantee a profit
- what is okay to spend on operating expenses
With only one bank account, we are always looking short term or only what’s coming up in the immediate future, not what’s on the horizon in a couple of months. Most times, we are scrambling to find funds to pay more substantial expenses or transferring balances on credit cards to “make room.” We often feel like a hamster running on a hamster wheel – we keep running and running, but we don’t make any progress.
What are the benefits of multiple bank accounts?
When we use multiple bank accounts, we give our money a specific job, a purpose. Decisions are more thought out because you see a smaller amount available for operating expenses. It changes our mindset.
I know what you’re thinking – But if I see all the bank accounts, can’t I transfer money back from one that has money? The short answer is, sure, if you want to steal from yourself; because that is what you are doing, you are robbing money from yourself and your financial goals.
See, the other bank accounts that we open are all, in fact, for the benefit of you, the business owner.
Now since we also know our natural behavior is to “borrow” from the other bank accounts, we remove that temptation by holding that money at a separate bank. If we don’t see the funds in our primary bank when we look, we forget about them. And that’s the point! We forgot – to protect ourselves from ourselves.
How does it work?
Profit First works by using multiple bank accounts for different purposes:
- Operating Expenses
- Owners Pay
Twice a month (10th and 25th), you take all the money in your Income account (this is all incoming deposits) and allocate it by percentage to your other bank accounts. When it’s time to pay bills, you have only the money in your operating expense (OpEx) account to use.
But what if I don’t have enough money to cover my bills in my OpEx account? That is the wake-up call that you are spending more money than is healthy for your business.
The purpose is that we put guardrails up to ensure we keep our OpEx spending in line.
Now, you will ease into the percentages – and yes, there is a way to calculate your starting percentages – so that it doesn’t feel quite so overwhelming. But do expect to get uncomfortable.
“Get comfortable being uncomfortable – because that’s when the growth happens” – Tonya Leigh
My husband and I own an IT company and have implemented Profit First. He will look at the OpEx bank account (like a typical business owner) and forgets that I do regular transfers to our other bank accounts at our secondary bank. I had just finished doing my allocations and was so excited at the balances building up, that I called him. He could not believe how much we had built up in our Profit, Tax, and Annual Payments account (we solely use this account to save for payments that we make once a year). It felt so good knowing that we didn’t have to worry about how we were going to pay the next quarterly estimated taxes, or to wonder if we were profitable. We could see it.
Our Biggest Wins
Our biggest wins from that – I had over-allocated to the Annual Payments account (thinking that our rate was going to increase), which then freed up extra money we could spend on marketing. We also had over-allocated to our tax account (after having a tax planning meeting with our CPA). That was huge because we were just about to leave for a two-week vacation, and now we knew we had extra money!
See, when you have extra money in your tax account that is not needed for your tax obligation, you can take that as an additional distribution. How great is that?
I highly recommend that everyone reads the book to start. But, if you want more information to see if Profit First is right for you, or you want to get started with it, click here to schedule a 20-minute call. I promise it’ll be just a conversation.Send me the first 2 Chapters of Profit First!