We all do. The truth is, Debbie is far from a fool. Fools never seek out answers
The old, been-around-forever, profitless formula is: Sales – Expenses = Profit The new, Profit First Formula is: Sales – Profit = Expenses
colossal growth without financial health will still kill your company
when we operate check-to -check and sales slow down, we don’t have enough to cover expenses
As our income climbs, expenses quickly follow
secure your profit first, and run your business on the remaining cash you have left.
My commitment to you is that, if you follow the Profit First system, your business will become permanently profitable from the moment of your next deposit
What is the only way out we can see? Growth. It is the battle cry of nearly every entrepreneur and business leader. Grow! Grow! Grow! Bigger sales. Bigger customers. Bigger investors. The only problem is, it doesn’t work
(Generally Accepted Accounting Principles). GAAP IS KILLING YOUR BUSINESS
Never forget the power of your “monster”—you just have to understand how to direct and control it
Most business owners try to grow their way out of their problems
It’s human nature to look at what you have right now and make decisions based on that information. This is called the “Recency Effect
Also in our nature as entrepreneurs is the desire to find problems and fix them
First, any sale feels like a good sale, because sales help to temporarily lift you out of crisis. Now look at the figure. You can see that many of the decisions we make around “just selling” in fact take us farther away from our vision
The Survival Trap promises fast wealth, but when we’re caught in it we rarely think about the massive cost of opportunity
Instead of being the world’s best at one thing, mastering the process of delivering perfectly and super-efficiently, we end up doing a greater variety of things and become less and less efficient at each step
when the money dries up again the following day, and as the expenses grow the following week or month, we find ourselves in crisis again and the pattern repeats
Second, the Survival Trap is deceptive because it fools us into thinking we are at least inching toward our vision
Last, when we’re stuck in the Survival Trap, we focus our attention on revenue generation first and foremost
Sustained profitability depends on efficiency. You can’t become efficient in crisis
GAAP both supersedes our natural behavior and makes us believe bigger is better. So we try to sell more. We try, and try, and try to sell our way to success
Throughout this haphazard, often desperate, growth process, our expenses are lost in the wash—we just pay as we go
We try to spend less without considering investments versus costs
No matter how much income we generate, we will always find a way to spend it
A secondary flaw is this: GAAP teaches us to focus on sales and expenses first
There is only one way to fix your financials: by facing your financials
what we really need are simple lifestyle fixes that do not require us to change our natural tendencies, changes that make an impact before we have a chance to screw it up
The solution is not to try to change our ingrained habits, which is really hard to pull off and nearly impossible to sustain; but instead to change the structure around us and leverage those habits.
I could do all that stuff with practically no money because I didn’t have any. As the business grew, I started to spend. The more I made, the more I spent, and I believed that all expenditures were necessary
After losing it all, I discovered that I work with whatever is put in front of me.
The only time I would have a profit was when income jumped up and I didn’t have time to spend at the same rate
whatever money I took off the top would have to go into a separate account that would not be easy for me to see, let alone access
Investment accounts charge penalties for early withdrawals to dissuade investors from drawing from their accounts, and I needed something similar in place to stop me from borrowing from the separate account
Use Small Plates
People are driven by convenience
Enforce a Rhythm
eat frequently so that you never get hungry
When money comes into your main operating account, immediately disperse it into different accounts in predetermined percentages
one is for profit, one for owner pay, another for taxes and another for operating expenses
Always, always move money to your Profit Account first, then to your Owner Pay Account and then to your Tax Account, with what remains to expenses
And if there isn’t enough money left for expenses?
you can’t afford those expenses and need to get rid of them
Make it really hard and painful to get to that money, thereby removing the temptation to “borrow” (i.e., steal) from yourself
Do your payables twice a month
Get into a rhythm of paying bills twice a month so you can see how cash accumulates and where the money really goes
Keep the checking account as your Operating Expenses Account and set up Tax and Profit as savings accounts (these are simply holding bins), with Owner’s Pay as another checking account
The goal is not to get a little extra interest; the goal is to hold money temporarily and remove temptation
Set up two more external savings accounts with a bank other than the bank you use for daily operations
One account will be your no-temptation Profit Account. The second will be your no-temptation Tax Account
You don’t need or want to view these accounts online
You just want to deposit your income and forget it
more than just hiding the truth of their financial situations, people aren’t just kidding the world around them; they’re kidding themselves
It’s a common refrain among check-to- check entrepreneurs. One more big sale. One new client. Someone to just throw a lot of money at them.
It doesn’t matter how much money you have coming in, if you’re only focused on growth, you aren’t going to have much to show for your “big” business.
Buyers, investors, vendors and clients, too, are attracted to healthy businesses
we can’t sustain that growth—or enjoy the fruits of our labors—if we keep putting profit at the bottom of our to-do list
How healthy is your business
Big business is great, but only if there are healthy profits. Small is great too, but only if there are healthy profits. Medium is great, but only if there are profits there, too
the fact that you are still in business means we can turn it around
to simplify things, we categorize any employee that you have, full or part time, as a cost of the business operations, not as a cost of the good sold.
If you think you have a profit but it is not in the bank and was never distributed to you as a bonus, this means you don’t really have a profit
regular payroll distributions
The Instant Assessment brings clarity fast, and it can be a rude awakening
A financially healthy company is a result of a series of small daily financial wins, not one big moment. Profitability isn’t an event; it’s a habit
rather than focus on actual numbers alone, look at percentages. Percentages show the relationship, giving you an accurate picture of what’s really happening with your business.
When a company is doing less than $250,000 in revenue it typically has one employee: you
Many freelancers are at this stage and if they elect to stay there (just them and no employees) they should be able to increase the profit and pay percentages even more than what I have listed, because they don’t have the expense of employees or the need to incur the expenses necessary to support multiple employees
the growth from $1M to $5M is the hardest. You want a little reserve.
Often the biggest investment into the business needs to happen at this time, as all the knowledge in your head needs to be converted to systems and processes and check lists
a significant portion of your time is spent working on the business (not in it), and the rest of your time is spent selling the big projects.
Cutting cost has become almost enjoyable. It has become strategic in a way
How does Profit First work if you just launched your business and have no revenue?
A baby is a poor indication of what a person will look like as an adult; the same is true for a brand new business
in the early stages of building a business, you need to spend as much time as possible on the selling and the doing; systems and processes come later
Simply use the percentages in the Instant Assessment for your target allocations, but start at 1% allocation for the Profit Account, 50% for Owner’s Pay and 15% for the Tax Account. Use quarterly adjustments to step up to higher percentages and nudge your business closer to the TAPs recommended in this book
But do this one thing: set up a Profit Account at a separate bank and, every time you make a deposit, move one percent into that account
5% profit allocation = 3 weeks of operating cash 12% profit allocation= 2 months of operating cash 24% profit allocation = 5 months of operating cash
“If all three of your employees decided to leave on the same day, what would you do?” I asked. “I would do all of the work myself and my partner would come back.” “So why don’t you do that?” I asked. “Because then I would be stuck doing the work and it would not be able to grow,” Rodrigo explained. “I don’t want to do the work; I want to grow the business.” Rodrigo had the right idea, but he was executing it in the wrong way
If your annual revenue is under $500,000 and you have an employee or two, you are still the key employee. And that means you must be doing 90% of the work. You’re bringing home the bacon and frying it up in the pan. The other 10% of the time you spend documenting everything you do so that you can systematize it for your other few employees or contractors to do the work without your input. Basically, you are a true entrepreneur (building systems) 10% of the time, and a hardworking, hard-selling employee of your own company 90% of the time
Now we are going to determine the percentage that stays in your Operating Expenses Account, after you move money to your Profit Account, your Owner’s Pay Account and your Tax Account. The amount left over for expenses is likely going to be somewhere between 40% and 60%. This is the money you have available to pay all your expenses. Next, subtract that percentage from 100%. So, if your total Operating Expenses Account is at 55%, you’re left with 45%. That 45% is the amount you will be taxed on. (More often than not, expenses are not taxed
Going full-throttle Profit First on the first day is like donating five gallons of blood at your first blood drive
The key to successful Profit First implementation lies in stringing together a series of many small steps in a repeating pattern. So take it easy
Entrepreneurs typically manage their money in an erratic, noisy rhythm that causes confusion and panic
The goal is to make your PF as high as possible. However
Owner’s Pay is the amount you and the other equity owners take in pay for the work you do. (Equity members of your company who do not work in the business just get a profit distribution.)
Determine your salary based on what you are doing 80% of the time, and what you would reasonably pay employees to do those jobs
you just need to work with your accountant to make sure the money flows out properly and legally
Working on the business does not mean hiring a bunch of people to do the work and then spending all the livelong day answering their never-ending questions about how to do the job (the job you used to do)
Working on your business is about building systems
even if you are a master of building systems and spend 80% of your time in that magic zone, you’ll still spend roughly 20% of your time handling the big sales.
getting back in your business is the best way to create systems
Don’t cut your salary to make the numbers work
Your martyr syndrome is not doing anyone any favors; making yourself the sacrificial lamb does not promote efficiency, it hinders it
Profit First is not about accounting to the exact penny (that’s what your bookkeeper and accountant do).
One goal of the Profit First system is that the company takes care of all forms of tax responsibility
Cancel whatever you don’t need to help your business run efficiently and keep your customers happy. 2. Negotiate every remaining expense, except payroll. I
I would much rather you take a small step closer to your target Profit Percentage than take a big leap toward it, only to step it back a month later. If you are adjusting and tweaking your percentages conservatively, I suggest that you account for three percentage points each quarter
your Target Allocation Percentages (TAPs) for your Profit, Owner’s Pay and Tax Accounts are simply targets—you aren’t going to start with them, you are going to build toward them
generates profit on every deposit, no matter how small
no matter what the number is, if you work toward it and believe it’s a possibility, you will not only achieve it, you will blow past the “reasonable” numbers others have set.
We’ll start at our historical contribution levels for each account and then add 1%
the primary goal here is to establish a new, automatic routine for you.
This very moment we will make a profit for your business, and we will be profitable every day going forward. Please don’t just read this and move on to the next chapter. I want you to take action now
you made sure you addressed your profit, your personal income and your tax responsibilities. That’s a big deal
Increasing sales is very doable (you did read The Pumpkin Plan, right?) and is the key for colossal profitable growth. But it takes time and it won’t happen overnight
Now add up all the expenses and then multiply that number by 10%. You must cut costs by 10%. Now! No ifs, ands or buts! So why cut by at least 10%, when we “only need 3%”? Because cutting costs doesn’t mean the bills go away overnight
I got into a rhythm. I did my accounting every 10th and 25th (or the business day prior, if the 10th or 25th fell on a weekend or holiday).
little bit of magic started to happen. I became less and less reactive about bills.
Profit and Tax money will be accumulating at your “no temptation” second bank. As new deposits come in, you will deposit them in the Operating Expenses Account, and on every future 10th and 25th you will repeat these same seven steps.
When you don’t have enough money left over to pay your bills, it is your business screaming at the top of its lungs
Even if you can’t pay everything on the 10th and 25th, you must get into this rhythm
You are going to take a distribution check every quarter. Every ninety days, profit will be shared to you
Tally the total amount of profit in the account (don’t add any quarterly distributions percentages from deposits you received this day, yet) and take 50% of the money as profit. The other half remains in the account, as a reserve
what matters is that you get into a quarterly rhythm
Quarterly is a great rhythm, by the way. It is a long enough time between distributions that you start looking forward to them, anticipating them. But it isn’t so frequent that they come to feel like a normal part of your personal income.
If your company has multiple owners, the distributed profit is divided up based on the percentage owned by each equity owner
The key is this: The profit distribution may never go back to the company
Your business must run on the money it generates for its operating expenses.
Whatever it is, you must use your profits on you! Why? Because this is how you turn Frankenstein, that cash-eating monster, into a cash cow that keeps giving to you and supporting you
Every quarter, you will also pay your quarterly estimated tax
Each quarter, you need to evaluate your current percentages and move them closer to your TAPs
the goal is to never take a step back
you can’t “undo your percentages,” because that will undermine this new habit you have established
If you owe more than you have in your tax account, a few things likely went wrong. You probably didn’t save a big enough percentage in your tax account, and/or you didn’t check in quarterly with your accountant to see how you were doing throughout the year with your tax reserve.
If you owe taxes at year-end and don’t have the money in your tax account, this is the one time you can pull from your Profit Account for a reason other than profit distribution
When you adjust your tax percentage, reduce your profit percentage by that amount. Yes, you are taking a hit on profits, but next quarter you will work on getting those profits up again
If you have too much money left in your Tax Account, congratulations—you can move that money to your Profit Account and take a profit distribution
As your profits accumulate in your Profit Account, and you only take half as a profit distribution, the remainder will act as a rainy day fund. You sort of become your own bank
This is a good thing, but too much cash on hand can be a liability (people like to sue deep pockets); and money should be invested, not allowed to sit and stagnate month after month and year after year
First accumulate a three-month cash reserve for your business, so you have enough cash saved to operate unscathed for three months if all sales came to a screeching halt and not another penny came into the business
put money back into the business, to make some appropriate capital investments that will bring a lot more growth and a lot more profit
If you can, push for 22% profit, or higher, or cut expenses down to 15%.
write down the tasks you have. Code each of them with no symbol (if it doesn’t apply to the three categories above), or one of the symbols above. In some cases, a task will get two symbols or all three. Then prioritize your to-do list based upon the symbols in this order:
In many cases, as you think of tasks and write them down, you will notice that most are blanks—they don’t or won’t make money in the near future, they don’t serve clients and they aren’t building systems. Do these things last.
This is the ultimate survival moment. If you focus all of your energy on paying down debt, that is all you will ever achieve. You’ll still be caught in the trap of top line thinking, which will likely result in more debt.
We can trace almost every major change to a pivotal moment when the pain of staying a certain way is greater than the effort to make awareness of it go away
When life “calls the line,” we take action. The problem is, most of the time the action we take is a reaction, a narrow, driving focus on the alleviation of immediate pain
as soon as they reach their goal, they revert to old habits
Once the pain is gone, the action we decided to take in that pivotal moment falls away
you must establish a habit of putting your profit first. You must still (and always) pay yourself first.
When you get into the habit of fiscal health based on this system, you will fix the problem permanently
The Profit First system I’m teaching you will keep your focus on a super-healthy business, working in your sweet spot to produce goods and provide services for ideal clients. This laser focus will automatically keep your costs down, allowing you to pay off debt faster and eventually increase your Profit Percentage. The tweak is, when you distribute profits, ninety-nine percent of the money goes to paying down debt. The remaining one percent goes toward rewarding yourself
A profitable business happens when you save your pennies at every turn
You must consistently spend less money than you make.
This is the challenge all of humanity faces: We know what we have to do, but we still don’t do it
get more enjoyment out of saving your money than you do spending your money.”
It all comes down to the story we tell ourselves about what we’re doing.
When something makes you happy in the moment, you’ll keep doing it
But pain just gets you to take enough action to get out of immediate pain. Then it stops working
The premise is simple—we avoid pain and move toward pleasure, putting a significant emphasis on the moment (remember the Recency Effect) and very little emphasis on the long term
the only way you will be able to make this work forever is if you get immediate pleasure each time you exercise your new habits
The problem is assuredly linked to your emotions. You are getting instant—albeit momentary—pain relief, because your mind believes that your investment will bring results
When this doesn’t happen, you slip back into panic, sell like a mad dog and spend (more often using the friendly term “invest”) to grow. You find momentary pain relief in making some type of progress. But when it fails to yield more cash in your pocket, the pain comes back. It’s a nasty cycle.
Give yourself more joy when you choose not to spend money than you do when you choose to spend it
you must train your mind to find joy in implementing the Profit First system
When you opt not to spend money, acknowledge it. Give yourself a pat on the back. Do a happy dance. Celebrate every time you save
When you do have to spend money, reward yourself for getting the best deal possible
Paul understands the formula, spend less + make more = wealth. He also understands that for this formula to work, both factors in the equation must provide him with an emotional win
to achieve real wealth you also have to train yourself to feel happy when you spend less
When Paul needs to purchase something, he plays the “Just One More Day” game. He challenges himself to go just one more day without the item
Sometimes, while playing this game, Paul discovers that he no longer needs the product or service he intended to buy
you are giving
If you’re like most entrepreneurs, your personal income is wildly unpredictable
Until your best month becomes your average month, it’s not the norm; it’s the exception
When you base decisions on your best revenue month, you will run out of cash—quickly
As an entrepreneur, your income varies. Some months are great; some months suck
Percentages are based on real results—the cash in the bank. No games, no hypotheticals
If you have more money in the account then you take in salary, the difference in money stays and accumulates. This way, when (notice I didn’t say if) a slow month happens, money has accumulated in your Owner’s Pay Account and your salary stays consistent
So how do you predict the owner’s salary your company will likely support? Look at your slowest three months and average them
I am simply asking you to commit to a spending freeze that will free you from debilitating debt
you don’t want to cut out the muscle, the stuff that you absolutely must have to deliver your product or service
You can’t change what you don’t acknowledge, so you need to know exactly what you’re dealing with. And when you know what you are dealing with, your mind doesn’t drift nearly as much
draw a box around any labor costs
highlight expenses that were required to generate immediate revenue
highlight any expenses that are absolutely necessary to keep your business open
With a red pen, circle expenses that repeat every month, quarter or year and will continue to do so
Add up all the expenses for the year; include everything you highlighted, circled, boxed or left blank. Exclude tax payments and owner’s distributions or salaries. Divide the result by twelve to determine your monthly “nut”—the total amount you have decided you need to cover each month
Determine the difference between your current monthly operating expenses and the number it must be according to your Instant Assessment
Band-Aids come off more easily when you tear them off. Chipping away a little debt here and a little debt there prolongs the agony
it’s best to plan to cut expenses until you are operating at 10% below the target number on your Instant Assessment
when you cut expenses, you may realize that something has a negative effect on your business, and you can’t replace it with a timely alternative
You may need to take a few expenses back on. I call this “expense bounce-back
If your company is racking up debt, it is all too often because labor cost is too high
the company will tank without them (super unlikely), and if I get rid of them I won’t have people to do the work (hardly ever true
It’s time you get back to actually doing the work, and in the future we will slowly transition you from in to on.
Overstaffed entrepreneurs have either tried to get themselves out of doing work as quickly as possible (they like to think they are managers now, or better yet, they need to spend extraordinary amounts of time on the corporate “vision”) or believe that systems aren’t core to a business (which they are).
I had to lay off nearly half my staff, not because they did anything wrong, but because I did—I mismanaged the numbers; I hired quickly and often and unnecessarily.
in letting these people go, you are freeing them to find a job that is a better fit
Never, and I mean never, proceed with terminations or layoffs without talking with your attorney first
Do not, I repeat do not, ask people to take a pay cut
Asking all your people to continue to work just as hard or harder than ever for less money is worse for the emotional welfare of your company than letting just one more person go
The point is this: Cutting costs is something that is very easy to put off for another day. It’s the mañana syndrome—I’ll get to it tomorrow
Recurring bills are sneaky; they seem small and insignificant until you look at how much you spend cumulatively, over time
Renegotiate the highlighted expenses. Everything is up for negotiation
Find alternative, less expensive providers and be prepared to go to the alternatives
being a hard-ass isn’t always the most effective approach
The goal is to get the same results at a lower cost
Put a big check mark next to each highlighted expense you successfully negotiate or replace
the relief you feel once you complete the Debt Freeze is way more powerful than the embarrassment you fear
most profit, generated through the fewest employees and with the least-expensive office space
Make the game one you win based upon efficiency, frugality and innovation, not on size, flair and looks
When it comes to fixing things, we need to build emotional momentum
Momentum rarely occurs after one crazy effort. Momentum builds slowly but relentlessly
Ramsey explains that you should sort all your debts from smallest to biggest, regardless of interest rates. Only when two debts are a similar amount should the one with the highest interest rate be paid first
But the trick to Ramsey’s method, and Suze’s, and mine (and anyone with one iota of sanity) is this: You cannot add new debt as you pay off old
Step 1: Start the Debt Freeze. Stop any recurring payments and kill off anything you don’t need. Do whatever it takes to get your “monthly nut” down to 10% lower than your Instant Assessment suggests it should be. Step 2: Start the Debt Snowball. Pay off your smallest outstanding debt first. As you wipe out each bill with recurring payments, use the freed-up money to tackle the next smallest debt. Bonus: Join the “How healthy is your business?” club. Make your Profit First t-shirt and then post a selfie of you wearing that shirt on Facebook, Twitter or Google+. Be sure to tag me when you do it.
CLONE YOUR BEST CLIENTS Just for a moment, I want you to think of your favorite client: the call you will always take, the person or company you say yes to without hesitation. This is the client who pays you what you’re worth, on time, without question
Selling more is the most difficult way to increase profits, because in the best-case scenarios, the percentages stay the same; and in the worst-case, more common scenarios, expenses generated to support sales increase faster, resulting in smaller percentages and a smaller profit margin.
I have yet to meet an entrepreneur who hasn’t wanted to hire a “rainmaker”—that magical salesperson who, like the companies that say they can give you access to your great-grandmother Sally’s unclaimed fortune, will save the day by bringing in big sale after big sale
Never mind the fact that we, the owners and leaders who love our companies and what we do, are the ultimate rainmakers
it is this top line approach to solving a cash flow crisis that holds companies back
Cranking up the sales team in order to “make it rain” is not going to help your company if you don’t have efficiencies in place, because ultimately, whatever new client revenue you generate will have corresponding costs. And these are likely to go unchecked
If you want to increase profitability (and you’d better friggin’ want to do that), you must first build efficiencies
Because 95% of your company’s profitability is contingent on what goes on beneath the surface (after the sales), not what happens in the sky (the sales themselves
as businesses become more profitable, the competitive pressure sets in and prices drop to attract more customers.
When you figure out a big leap in profitability, the competition will sniff it out, and it is just a matter of time before they do the same thing. Then someone drops prices to get more clients, and everyone else, including you, has to do the same to stay in business. This is how profits get squeezed
even if you think you’re good with profit, you’re not
By now you’ve figured out that focusing solely on top line thinking (sales, sales, sales!) does not lead to profitability. In fact more sales, without efficiency, lead to further inefficiency
more sales make you less profitable
increased profit margins will boost your company’s profits without the need for increased sales
achieve greater efficiency first, then sell more, then improve efficiencies even more and then sell even more
you need to look at efficiency in every aspect of your business
Serving the same types of (great) clients with the same or very similar problems, using your one consistent solution to fix the problems, is the route of efficiencies.
You want to duplicate your best clients, because that means they have a consistent need; and in turn, you want to reduce the variety of things you do to the fewest that will best serve your best clients’ needs
The fewest things you can do repetitively to serve a consistent core customer need—this spells efficiency.
How do you get two times the results with half the effort?
Innovation in business and innovation in efficiencies comes from big, bold questions
But the more you focus on substantially improving efficiency (like with a design for a plow that can move snow twice as fast), the closer you’ll get to achieving double the results with half the effort
FIRE BAD CLIENTS
Letting go of clients who suck us dry and eat up our profit margins is a way of making space for clients we can serve exceptionally well by doing what we do best and with fewer resources
it took the same amount of effort to serve a big-revenue client as it did a client who barely affected revenue at all
Strategex’s profit analysis showed that the top quartile generated 150% of a company’s profit
In the end, the profits generated from the top clients are used, in part, to pay for the losses accrued in serving the bottom clients.
I’m sure you know this scenario all too well. Those clients who barely pay you peanuts, yet constantly complain about how much you charge and how you do nothing right; the clients who demand you rework everything you’ve done for the third time and then never pay you for your work, or never pay you on time—those clients are costing you money. Get rid of them. Fast
If you remove your worst, unprofitable clients and the now-unnecessary costs associated with them, you will see a jump in profitability and a reduction in stress, often within a few weeks
pursue and clone your best clients
profit is about the percentages, not a single number
This is the client who trusts you, respects you, and follows instructions. This is the client you love, and they love you. Now imagine if this client had five identical twin companies that all wanted to work with you
your best clients hang out with other business leaders who have the “best client” qualities you’re looking for
lost money on me, but he grew his sales by a lot. Tomorrow he intends to use his new equipment and tools to take care of other clients and will, in theory, earn his money back and then some. The problem is, that rarely happens
As the bills mount, the pressure grows to sell more and more; and you end up working on projects in which you have limited experience and sometimes little interest.
You get stuck in the Survival Trap and end up not doing a very good job at any one thing
stumbling across success is cool, but making a process for finding profits under the surface is the real success
Step One: Focusing on one aspect of your business (one that benefits your best customers), challenge yourself to figure out how to get two times the results for half the effort. Just pick one component and figure it out. Set a goal of accomplishing this task for a different aspect of your business every week, until you’ve looked at the full scope of your company and found ways to ensure you are running it with maximum efficiency. Shoot for the stars and you just might hit the moon. Step Two: Using the parameters outlined in this chapter, identify your weakest clients. Fire the weakest links. I’m not suggesting that you get into ‘Take This Job and Shove It” mode. Don’t burn any bridges. Just politely end the relationships. You’re not dating anymore, but you can still be friends
The science behind losing weight is simple: Consistently eat fewer calories than your body burns. Just as with Profit First, however, if your resolve falters, the system falls apart. This is why everyone— including me, including you—needs an accountability group
Incidentally, Thomas Edison was part of accountability/ mastermind group
your Profit First buddy has to want profitability as badly as you do
The goal of accountability is to be integral to your Profit First system, not to punish each other for doing (or not doing) certain things
It’s best to meet on the 11th and 26th
As a leader, by default I held myself accountable.”
It set the tone for the rest of my life. I’m a risk-taker now
HOLD YOURSELF ACCOUNTABLE
Say you get a big project (congratulations, by the way), and you receive $120,000 from the client up front for work you will complete every month over the period of a year. That means that each month, you will really be earning $10,000
A smart tactic is first to move this account to a third-party bank that you don’t see, and then change the name of the Tax Account to “The Government’s Money
Massive goals feel exciting when you declare them, but can quickly become de-motivating factors because they seem so hard to reach and the chance to celebrate is so far off in the future
Small wins lead to big wins
You need to be in shape and all stretched out before you do it
don’t implement this stuff until you have completed at least two full quarters with the core stuff you learned about Profit First
While it may not seem like opening additional accounts simplifies anything, it absolutely does
Whenever you can get a clear, accurate picture of how much you have to spend on a specific aspect of your business, you will make better decisions and be less likely to commit to projects, vendors and expenditures that do not fall in line with the balances in those accounts
In this account, you collect all of your income deposits so that you can clearly see how much cash you collected between your 10th and 25th allocations
This will separate incoming from outgoing cash
the Operating Expenses Account will transition to only paying the expenses for operations, so you will have an accurate picture of how much money is flowing out of your business at any given time
allocate all remaining money in the Income Account to the other accounts: Profit, Owner’s Pay, Taxes and Operating Expenses. And possibly a few others suggested below.
It’s critical that you adjust to your Real Revenue. If you have material and subcontractor costs, allocate these fixed amounts first, before you do the percentage allocations
The question isn’t if you will have a dark day (your supplier goes out of business, your biggest client goes bankrupt, your best employees leave to start a direct competitor and your clients decide to go with them, etc.). The question is, when will your dark day come? The Vault is there for that.
At a certain point, leaving 50% in your Profit Account to act as a rainy day fund is not prudent since the money flow is a little unpredictable
when you have a situation so dire that you need to access this money, you also have instructions written in advance on how to proceed
The idea behind The Vault and the entire Profit First system is that it puts your decisions well out in front of any money crisis
it is really about forcing important decisions early, so your business doesn’t go into a cash crisis
Estimate how much you might have to spend on future equipment purchases, divide it by the number of months you have to save up for it, divide that number by two and allocate that amount every 10th and 25th to accumulate enough money for that big purchase
You don’t touch any of the balance in the Drip Account. You only make allocations when you drip a portion of the funds—in this case, the $10,000 each month—into the Income Account.
The Drip Account will help you manage the true cash flow of earned money, so that you can manage your expenses and costs
Set up a bank account and get a debit card for petty cash purchases, such as client lunches. Then, allocate a regular dollar amount from your Operating Expenses Account to petty cash
if it’s not in my Petty Cash Account, it ain’t in my budget
never, ever treat that money as income
If your business collects sales tax, every single, stinkin’ penny of the sales tax you collect is immediately allocated to this account
Sales tax isn’t even legally your money
Next to each name, in parentheses, I put either the dollar amount or percentage that goes into each account at the allocation times (the 10th and 25th). You should do the same.
Create a single-page document that defines the function of each account. Explain what purpose each account serves, and the process you will follow
This process is a system, so it needs to be documented. Your bookkeeper might have to take this over for you; otherwise, you might drink too much one night and forget the rules you set up for your accounts
PICK YOUR PAY TO FIND THE NECESSARY BUSINESS INCOME
The “monthly nut” is a focus on—you guessed it—expenses, not profit. The concept of the monthly nut makes you focus on expenses and do everything you can to earn your “nut” with enough sales. In other words, it has us put costs first and makes the goal to cover expenses, not to improve profitability
You get what you focus on, so stop focusing on expenses. Focus on profit and the expenses will be taken care of by default
focus on your Required Income For Allocation (RIFA)
Take your monthly, required personal income and divide it by two, since you are getting paid twice a month
Every two weeks the Income Account drops to zero when it is allocated, and I need to rebuild it
If you have a partner or multiple partners who are also getting paid, you need to add up the total income requirements for the company
you may notice that no bank summary “grand total” is shown in the table. The accounts aren’t all automatically added up to show a total combined balance. Many banks do this for your convenience, but I suggest that you disable the option (if you can)
Pareto’s Principle also applies to your clients, in that 20% of them yield 80% of your revenue
80% of your profit is derived from 20% of the products and/ or services you offer.
The key to this advanced strategy is to connect the two—your clients and your offering
Once you see the overlap, the decisions become very easy. Get rid of the “bad” clients who only want your least profitable products and services
Find a new way to manage the weak clients who do buy your most profitable offerings. Often, “bad” clients can become better clients if you meet with them to set new expectations and methods of communication
Not only do you save money by cutting expenses related to serving weak clients, who don’t buy profitable offerings; you also free up your time, energy and creativity to focus on the clients you love, who bring in the profit
those beloved top clients, who routinely buy profitable offerings? You are going to rock their world. Get to know them better than they know themselves
These are the clients and customers you want to clone
Efficiency is always the goal. Always.
your Real Revenue must be two-and-a-half times the total labor cost if you’re running a tech business
If, on the other hand, you are in a “cheap labor” field, such as the fast food restaurant example I used above, your Real Revenue must be four times your total labor cost
Some banks allow you to “hide” accounts so that you can’t see them on first view when logging in to online banking. Try hiding all of your accounts except for the Operating Expenses Account
set up all your outside income accounts so that any income is transferred to your main Income Account on a daily basis
Until we see that a payment has cleared, we still think of the money is ours. And sometimes we forget we wrote the check
Choose one of the advanced tactics or strategies detailed in this chapter and add it to your to-do list for six months from now
my business actually started to grow faster when I started paying myself and focusing on the profit first
Everything you just learned about creating a Profit First business also applies to your personal life
you need to pull that money out before you spend a dime on other things
the big vision you have for your life does not have to hinge on luck or fate—it can be earned, not with a dollar for the Powerball, but with a simple change in habit, practiced consistently
This small change you made, putting profit first, is the entrepreneurial equivalent of winning the World Series, the Super Bowl and Stanley Cup
The path to financial freedom is paved with simple, small habit changes that become systematized and apply to both your business and personal finances
your business is your Siamese twin
you need to apply everything you’re doing right now (and planning to do) to fix your business with Profit First to your life, too
Add up all of your monthly bills, plus your annual bills and the debt you owe.
If you have any debt at all, stop accruing more. Put a freeze on all purchases you cannot pay for with cash
Establish a personal Profit First habit
Set up your “small plates.” Create four core accounts and multiple Day-to-Day accounts
The Vault Account. Initially, this is the “oh shit” account, the amount of savings you must have on hand to get through the month if—scratch that— when something dire happens
A good starting balance for The Vault is one month’s rent or mortgage payment
The Vault will grow and grow, with the intention of having the cash you save here eventually become a source of income. This is where money makes you even more money
Determine the monthly average for your varying recurring bills, plus 10%. Then total your fixed recurring bills
Set up a Day-to-Day Account for anyone in the house who’s responsible for paying for these types of expenses, and transfer the amount that each person needs every 10th and 25th from the Income Account, based on spending requirements
Debt Destroyer Account. This account receives all remaining funds and goes toward eradicating debt
I believe in keeping one credit card line to buffer you in dark months
Put the credit card in a sealed envelope labeled “emergency only” and give it to a trusted friend to hold onto
Every quarter, as you make progress paying down debt, reduce your credit limit by 50% of the amount you paid down
Keep following this method every quarter until your credit card balance is zero and your credit limit is $5000. Put that credit card in a sealed envelope and store it in a safe place (your wallet, it goes without saying, is not safe
The goal here is to remove financial stress from your life by eradicating debt, not to get better rates on more debt
Endowment Effect—the theory that states that we place a much higher significance on something we possess than on an identical thing that we don’t possess
we have a far greater desire to avoid losing something than we have to acquiring something
the best way to celebrate when you have mongo personal debt? Have a death-to- debt party
paying down debt is winning, and winning is fun
start using 45% of your quarterly profit disbursement to kill remaining long-term debt and keep 55% for your splurge item or experience
It’s more gratifying to get the bigger chunk of the fruits of your labor and spend it on whatever the hell you want than to take the smaller chunk
After you own your cars and home outright and have wiped out debt from every nook and cranny of your life, one hundred percent of the profit disbursement goes to you
if you have ten dollars in your pocket, you will spend ten dollars. As our income increases, Parkinson’s Law takes over and we spend every extra penny we earn
you need to live within your means
you will not expand your lifestyle in response
For the next five years, you will lock it in and live the lifestyle you are designing now so that all of your extra profit goes toward giving you that ultimate reward: financial freedom
in order for Profit First to have a permanent impact on your life, you need to build as big a gap as possible between what you earn and what you spend
Money yields interest and returns from investments
once the money you have collected yields more new money every year than you spend in a year, you have achieved financial freedom.
Always start by looking for a free option
Never buy new when you can get the same benefit you would if you bought used. (It’s used as soon as you buy it, anyway.
Never pay full price if you can avoid it
Negotiate and seek alternatives first
Delay major purchases until you have written down ten alternatives to making the purchase and have thought each one through. Save your splurging for Profit First quarterly disbursements! Yay!
the frugal lifestyle is not the same as a cheap lifestyle
frugality removes financial stress
The idea of the Wedge Theory is to only gradually (and mindfully) upgrade your lifestyle as your income increases
Every time your income increases, you set aside half of the increase in savings so that you don’t expand your lifestyle
Half of every income bump over and above $100,000 will go directly into The Vault
Regardless of how you get your money, the universe seems to find a way to make us earn it
chore list with corresponding pay rates
One for the big dream
One to help support the family
The key is to have a recurring fee so they get used to having to pay out something on a regular basis
One for impact
charity of their choice
One for The Vault
One envelope for mad money, to buy whatever they need or want—toys, music, books, etc. Let them earn money and have fun
He is the master of the envelope system. He divides every day’s take among envelopes appropriate for his business
Let your children get burned a little within the safety of your parenting, rather than scorched in the unsafe and often cruel world
living the Profit First life does not have to be excruciatingly painful
if you want true financial freedom, you will have to let go of your preconceived notions about what you “need” and start placing a higher value on financial independence than you do on your stuff. It’s not rocket science. And it won’t kill you
the biggest hindrance to a successful implementation of this powerful plug-in is our own perception of limits
The fastest way to screw up Profit First is to start sliding back into old belief systems that got you into trouble in the first place
It is extremely common for entrepreneurs new to Profit First to start putting 20% or even 30% into their Profit Account right out of the gate. The next month they realize they can’t afford it and pull the money back out to pay bills, which defeats the entire process
you’ve got to be sure that your business can handle the reduction in operating income.
To increase your profit, you need to become more efficient, to deliver the same or better results at a lower cost
Start with a small percentage to build the habit
Every quarter, move your Profit First allocation percentages closer to your goal by increasing them by an additional one or two percent
be sure to correct it as soon as possible or you’ll find yourself slipping back into the Survival Trap
not all expenses should be cut. We need to invest in assets
Money is made by efficiency—invest in it
find ways to get the same results with different or discounted equipment (or resources, or services) rather than cut the cost.
When you don’t have enough money in your Operating Expenses Account to cover expenses, it is a big red flag that your expenses are too high and you need to find a way to fix them fast
Using a credit card to cover what you can’t afford is also a red flag that your expenses are too high
As your profitability grows, your taxes will too. In fact, paying more taxes is an indicator that your business health is improving
Tax estimates are based on your prior year’s income. If you make more profit this year (which you will), you will pay more taxes, but your tax estimates will not change
implementing Profit First is going to hurt in the beginning
The government gives you a tax break on expenses but does not consider the money you reserve to pay down debt an expense
The man who can drive himself further once the effort gets painful is the man who will win
The Only Step: Sit down with your accountant, preferably a PFP trained in this system, and come up with a game plan to ensure that you don’t end up allocating too much revenue to your Profit Account and you do allocate enough to your Tax Account
changing habits is possible but is also really, really hard. Instead, simple systems that capture the good parts of our habits and guard us from the bad parts will bring about positive and permanent change, fast
Financial freedom really is just a few small plates away.