Ep #10 Profit First Chapter 6 – Putting Profit First Into Motion

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Hello and thank you for joining us today on the Profit Scale Thrive Podcast, where we guide attorneys to overflowing profits, scaled growth, and thriving lives. I am your host, Kelley Brubaker.

We have a secret though - this is a special place because we don't work with every law firm owner, we support the solo attorneys who are single parents because we know the special challenges you face, and we know the business advice out there is not always practical for you and your firm.

Each week we will talk about things that will give you the insight you need to stop feeling overwhelmed, to gain back your confidence, and to finally enjoy your law firm and your life again.

Podcast Episode #10: Profit First Chapter 6 – Putting Profit First Into Motion

Hello and thanks for joining me today for podcast episode number ten. 

Welcome back, or for those who don't know me yet, my name is Kelley Brubaker. I'm a business coach who supports solo attorneys who are single parents. 

I'm also a certified Profit First Professional, which means I help my clients implement the cash management system presented in the book Profit First written by Mike Michalowicz.

A few weeks ago, starting with episode 5 of my podcast, I began a dedicated series of episodes to share with you in detail chapter-by-chapter the book Profit First. If you have read the book, please follow along as I will share tips not in the book along the way. If you have not read the book, but you are curious about it, please stick around as we go through chapter by chapter.

This week we are talking about Chapter 6 – Putting Profit First Into Motion. Ok – we are halfway through the book! How are you feeling so far with Profit First? I’m always happy to connect with listeners. Please feel free to send any questions or comments by email to [email protected].

Mike starts this chapter by featuring Jorge Morales and Jose Pain, the co-owners of Specialized ECU Repair, who Mike credits as the very first business to implement Profit First – which was actually before the book Profit First was written. See, Mike’s first book, The Toilet Paper Entrepreneur, included a few paragraphs about the concept of Profit First.

Jorge and Jose opened their business in 2007 with dreams of enjoying decent profits from their business while working less.  Pipe dream? Nope!

They immediately embraced the concept of Profit First and worked to tweak their TAPs to support their vision of their business. The result? As the business has grown, they constantly have enough cash in the business ready to fund the growth. New equipment that will immediately provide more efficiency in their production has been paid for in cash - meaning they will eventually have even more profit!  Money has always been available to hire new staff when needed.  Additionally, they reported they increased their salaries annually and they pay their staff above industry averages. All while being able to take time away from work so they could enjoy their personal hobbies.

The statement I love best from this chapter: “Once it was up and running, Profit First enabled them to quickly make purchasing decisions without worrying about whether or not they could afford it.” How do you make spending decisions now? Isn’t one of the main questions, how am I going to pay for this? Can you image that not being an issue? 

They admitted that their accountant was NOT on board with their use of Profit First, but now their accountant is convinced. Baking profit into every transaction is the way to a sustainable and profitable business.

Before we get into the nitty gritty about the day-to-day use of Profit First, I want to remind you again that the TAPs provided in the book are a suggestion. Please spend time with Chapter 5, episode 9 of this podcast, making your TAPs your own.

Day One

Here are your tasks to complete on day one:

1. Tell Your People
   While Profit First may make sense to you, many bookkeepers and accountants don’t get it. Without reading the book, they confuse the concept as a different bookkeeping method. It’s not! It’s truly a cash management system. You CAN use Profit First without the support or blessing of your bookkeeper or accountant. Remember that they are not financially responsible for your business – you are.
   
   But, to appreciate your bookkeeper’s opposition, understand that they were taught the longstanding rules of accounting. Accounting is how it is because that’s how it’s always been. If he/she is still adamant that Profit First doesn’t work, ask them if they have hands-on experience with implementing Profit First. If he/she has implemented Profit First, ask why specifically did it not work. Honestly, if they have used Profit First, he/she will know it works. Every time.
   
   If your accountant’s response is that nobody uses Profit First, that means that none of his/her clients do which is fine. But their small client base is nothing in the grand scheme of things as there are approximately 33 million small businesses just in the US as of 2023.
   
   Another question for a skeptical accountant, “How many of your clients are consistently profitable under your direction?” Let them think about that for a few minutes.
   
   Most accountants using the old GAAP method of accounting as a way to manage cash are lucky to have profitable clients. I know when I operated my firm as a full-service CPA firm, I only had a handful of profitable businesses. Most, like 85%, were constantly struggling to make payroll, desperately could not afford to hire much needed staff, had no money to pay taxes or pay their operating bills on time.
   
   If they do get on board, great! Having support is a key ingredient to a profitable and sustainable business.
   
   If your bookkeeper and/or tax person just can’t get onboard, I’m happy to help! While I am a CPA, these days I only work with clients in an advisory and coaching capacity, but as a Profit First Professional, I know many Profit First trained bookkeepers and tax people who will happily support you.
   
   
2. Set Up Your Accounts
   Ok – we talked about doing this episode 6, but if you skipped this step, now is the time. And, if you are just now opening these accounts, there’s a lot of tips in episode 6 – go back and listen again!
   
   I promise you that Profit First without the bank accounts will make this soooo much harder! I have spoken to so many people who tried to use a spreadsheet or force their QuickBooks to create a Profit First system that just fails without the underlying bank accounts.
   
   As a reminder, once you have your 5 foundation accounts set up (income, profit, owner’s comp, tax, OpEx), you’ll need your 2 “no-temptation” accounts as a different bank (Profit hold, Tax hold).
   
   Next you’ll need your CAPs & TAPs from your Instant Assessment – go back to the spreadsheet I gave you in episode 8 to get these. We will do our very first allocation based on your CAPs. And those allocations will be as follows:
   
   

Profit CAP + 1%
Owner’s Comp CAP +1%
Tax CAP + 1%
OpEx CAP -3%

Remember this is a marathon – not a sprint and TAPs are your long-term vision. Adjusting CAPs faster than 1% at a time will be too much of a shock to your business. Start with CAPs that are at a level where there is no excuse to not stick with Profit First.

These CAPs will be your allocation percentages you use for the next 3 months.

If you have any questions about how to compute your allocation percentages, please listen to episodes 8 and 9.

1. Make Your First Distributions
   Today is the first day of the rest of your life. You are changing your life right now. This is the moment that you are making your business profitable. If you opened your new bank accounts when we discussed it in episode 6, you should have some money in your income account. Good for you! If you just opened your new bank accounts today, I’ll assume they currently have $0 except for your original bank account. Then, take your original bank account balance, subtract all outstanding payments from the bank balance, transfer the remaining balance to your new income account.
   
   Keep in mind that you may have a minimum balance required by your bank for each account. Take your income account balance, subtract a minimum balance required by your bank. Now apply your CAPs to this amount and make your allocations accordingly.
   
   When you see the dollars moved to their new “homes”, it may be a rude awakening for you. But, feel good knowing that you are now on a path of financial clarity despite the immediate picture looking a bit ugly. This is day one of many where you will make educated financial decisions with clear numbers. You are now on a path to begin to reduce expenses and increase your profitability. Your money now has a purpose, and you will make better decisions to improve the health of your business.
   
   
2. Our First Day, Our First Celebration
   Congrats!!! You have just taken a huge first step. Seriously! I am proud of you. Instead of burying your head in the sand when it comes to money, you are now in control of your money.

Week One: Cut Expenses
I have seen so many of my clients struggle to get their bank accounts open. The next struggle is what comes next: when the OpEx account does not have enough money to pay your bills.

Let’s talk about how to manage this account. You can either increase sales (which by default puts more dollars in this account) or you can decrease expenses. Increasing sales is very doable (if you need help, check out Mike’s other books: The Pumpkin Plan and Surge). But it takes time.

On the other hand, cutting expenses can be done with quick results. Many of my clients easily cut 10% of their operating expenses on frivolous things like unused recurring membership fees, extra staff who are not productive, or unused office space.

Don’t get me wrong. Cutting unnecessary expenses might bring you psychological pain but I promise it is easier than creating new sales if you don’t have a full sales funnel to work.

Take a stab at cutting expenses. Ask your bookkeeper to print a report of all overhead paid in the last 12 months. If possible, sort this list by vendor name or by expense type. Scan this list and:

• cancel whatever you don’t need to help your business run efficiently
• cancel whatever you do not need to keep clients happy
• negotiate every remaining expense, except payroll

We’ll talk more about cutting expenses in episode 12, but this will get you moving in the right direction until then. You are on a journey to become a frugal entrepreneur – don’t confuse this with being cheap. You are going to learn to use what you need and not be wasteful. You will pay fairly for what you use but you will being using less. And, I promise, you will love it!

Twice A Month: The 10th and 25th

This is something that I deviate from the book. Mike suggests making allocations and paying bills on the 10th and 25th of each month. 

For my allocations, I have them setup on automatic processing. I use Relay Fi for my business banking, and they have a feature that lets me put my allocations on autopilot. Check out my podcast episode 4 for more info.

While I agree to not pay bills immediately upon receipt, rather let them pile up for a few days and then queue up payment based on the due date, I personally struggle with paying on the 10th and 25th because many times these fall on the weekend when my laptop is off.

My firm is set up as an S-Corp – so I regularly run payroll every other Monday for me and my staff. I chose to leverage this long-standing recurring task to become when I also pay any other bills I have due.  It just works better for me.

Mike presents a long example of allocating $10,000 to the various accounts. You can check it out on pages 104-106 of the book, but I think the lesson is more important that the specific percentages and dollars being allocated. When you do your allocations, you will start to clearly see how much money you have coming into your business and how you are spending it. 

Remember, we will be adjusting your CAPs quarterly. So, what may be painful now, you will adjust to over the next few weeks and then, we’ll slowly stretch to eventually reach your ultimate goals.

Be sure to include in your allocations, your transfers to your profit and hold accounts!

A word of caution – there is a real possibility that you will not have enough money to pay your operating expenses or to pay yourself. This should be a major wake up call! When you don’t have enough money, this is your business screaming at you. Your business is telling you that your business can’t run the way you have been running it. Profit First did NOT create this crisis – it helped you notice it exists. You are spending more than you can afford.  Don’t panic. Continue to make your allocations and pay bills on your rhythm, whether that is weekly, bi-weekly or on the 10th and 25th of each month. You will being to accumulate money and have a flow that you can manage.

As a heart pumps blood rhythmically, forming a heartbeat, the lifeblood of your business, money should flow in a similar rhythm, not in a random, panicky pump here and there whenever you have funds.

Quarter One

Quarterly Distribution

The new quarter has arrived! When you initially implement Profit First, this will be the first calendar quarter-end that occurs. All future distributions will happen on calendar quarter ends: March 31st, June 30th, September 30th and December 31st. 

This is where your Frankenstein monster starts to become a powerful and loveable beast and serves you a fine meal on a silver platter! 

Your profit distribution is your reward as owner of the business for having the courage and risk tolerance to start the business. Don’t confuse profit distribution with owner’s compensation! Owner’s comp is your payment for working in the business. Profit is ownership reward.

Your quarterly profit distribution will be 50% of the balance in the profit hold account. Leave the remaining 50% in the profit hold account as it will serve as a cash reserve for emergencies.

The amount of the profit distribution will be allocated among all equity owners based on the percentage owned by each equity owner.  But, here’s the thing: the profit distribution can never go back to the company. It doesn’t matter what you may call that: reinvest, plowback, profit retention. Nope. If you need to put the money back into the business, then it is not a true profit distribution and it indicates that your business is not operating as efficiently as you can be. As efficiently as you should be. 

Celebration Time!

Use your profit distribution for you. For your family. It’s celebration time! Profit is intended to be your reward for having the guts to invest in your business. Take your family to a nice dinner. Fund your retirement account. Go on your dream vacation.

Remember Jorge and Jose from the beginning of this episode? They have taken several dream vacations: Bermuda, Europe, Central America, Australia and have gifted vacations to loved ones. Jorge told Mike, “Before we started using Profit First in our business, we were a little bit lost, and wondered when the business would take off and improve our lifestyle. I don’t think anyone wants to work just for the paycheck. You need more incentive. Now, at the end of the quarter, we really look forward to planning what we’re going to do with the extra money.”

This is how you will fall more and more in love with your business. Enjoy your profit.

Pay Uncle Sam

Be sure to check in with your tax preparer every quarter about paying quarterly estimated payments!

One Small Step

Each quarter, we’ll need to move our CAPs by 1% towards our TAPs. Move TO your TAPs, not AWAY. If you feel comfortable, the maximum change in any CAP can be up to 3%. But, remember if you are too aggressive, it will cause you heartburn.  Slow and steady wins the race here.

This is all about continuing to build your habits and moving closer to your goals.

Year One

By now, you should be on a quarterly rhythm of evaluating and moving closer to your TAPs, celebrating your profit distributions and reassessing your expenses. So, at the end of the year, nothing extra needs to happen.  What you can do is look back at where you thought you would be at the end of the year to see if you beat your estimate or fell short. If you beat it, how? If you fell short, why? Review and learn.

As you get your taxes finalized, you should have the money sitting in your tax account. If not, this is the only time you can pull money from your profit hold account to cover your tax bill. If this happens, you will need to meet with your tax preparer to determine what went wrong and how you need to change your allocations to prevent this situation from happening again.

If you have too much money in your tax account after finalizing your tax return – congrats! Move the excess to your profit account – consider it a bonus! Check with your tax preparer if your tax CAP was too high and if it can be downsized for this upcoming year.

Rainy-Day Fund

So, remember our profit distributions are only 50% of the profit hold balance? The remaining 50% becomes our rainy-day fund. Be sure to review this balance periodically. Ideally, keep a minimum 3 months of operating expenses in this account and invest the excess. We have some additional suggestions for this excess, but that’s going to be discussed in a future episode.

Profit First Is A Way Of Life

Profit First is a simple and impactful way to manage your firm’s cash to ultimately fund your lifestyle. It is a way of life.

Listener’s Question of the Week

And now, it’s time for our Listener’s Question of the Week!

Same as the last few weeks, instead of a listener’s question today, I’ve been using this segment to highlight tips about what we covered in today’s episode.  Today I want to remind you that this episode is putting into motion the tasks we completed over the last few episodes.

Here’s a recap of where you can find these items:

• Episode 5 we discussed why accountants resist Profit First – because they are confusing historical accounting rules built for large corporations with cash flow management for a small business.
• Episode 6 we discussed the four core principles of Profit First:
• Use small plates (our 5 core bank accounts & Parkinson’s Law)
• Serve sequentially (making our allocations in order of profit, owner’s comp, tax and then opex & the Primacy Effect)
• Remove temptation (our 2 inconvenient bank accounts for profit and tax hold because out of sight is out of mind)
• Enforce a rhythm (make allocations and pay bills on a set schedule to smooth out the peaks and valleys)
• Episode 7 we discussed that Profit First isn’t new – it’s also called the Envelope System or Cash Stuffing but what is new is that it’s a concept for personal cash management that has been applied to small business cash management. We talked about which bank accounts you need and why you need them.
• Episode 8 we discussed the Instant Assessment – how to complete it and what the results mean for you (hint, in this episode, I gave you a link to download my spreadsheet that does all of the math for you!).
• Episode 9 we talked about customizing the TAPs, your Target Allocation Percentages, from your Instant Assessment to best fit you and your business.

If you would like to submit a question for a future episode, please send an email to [email protected] – and no - by sending an email you will not get added to an email distribution list, there will not be a phone call and there will not be a sales pitch. We follow the golden rule – treat others how you wish to be treated!

Inspirational Quote

This week’s inspirational quote is from John Dewey, “Arriving at one goal is the starting point to another.”

Final Thoughts

Final thoughts for today! I hope you are enjoying this approach to the book Profit First! Today we finally put Profit First into motion. We made our first allocations and talked about our allocation and bill paying rhythm. We have prepared for what our first quarter and first year with Profit First will look like.

Next week, we will be crushing debt. 

Before next week, I want you to do two things:

1. Start a “celebration list”. List ideas of how you will spend your future quarterly profit distributions. Post this list where you can see it daily.
2. Decide on your allocation and bill paying rhythm. Block it out on your calendar in perpetuity. Plan for 5 minutes to make your allocations and delegate the bill paying to your bookkeeper.

If you have any questions about today’s episode, feel free to comment if you are watching on YouTube or send me an email to [email protected].

If you know someone who might need to hear this information, please share this episode with them or if you are on YouTube, tag them below! 

Be sure to follow and subscribe to get notifications for future episodes.

Did you enjoy this episode? Please consider leaving a review. 

And before I go – remember - profit is something you intentionally plan for in the beginning. It is not a potential bonus at the end of the year!

Thanks, and have an amazing day!

If you have not read the book “Profit First” written by Mike Michalowicz, today is your lucky day! This episode is the 6th installment of a series that dives into the book chapter by chapter.

Be sure to follow and subscribe to get notifications for future episodes!

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