Ep #11 Profit First Chapter 7 – Destroy Your Debt

My digital course for the Debt Freeze exercise discussed in today’s episode can be purchased by clicking on this LINK. The first 20 people who click on the link will get the course for FREE!

Listen here

Subscribe To The Podcast Here

 Watch here

Read here

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 #11: Profit First Chapter 7 – Destroy Your Debt

Hello and thanks for joining me today for podcast episode number 11. 

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 7 – Destroy Your Debt. We have done a lot of work so far to understand why Profit First works, how to use it, and how to customize it perfectly for our own business. But, I love these next few chapters because this is where so many of my clients have huge “Ah-Ha” moments.

And, I’ll admit, while I fell in love with Profit First from the start of Chapter 1, this chapter about debt had me in tears. Ok – I tear up at the slightest of things. I always have – when Professor Hinkle melted Frosty in the greenhouse, when any rock ballad from the 80s starts playing on Spotify, and every day when One Drive emails me my “Memories From This Day” photo review (I can’t believe my kids were so tiny and huggable once upon a time!). 

But, this chapter really spoke to me. I mentioned some of my story as a business owner in the first episode of this podcast, but in the beginning of owning a business, I did everything wrong. It’s still hard to talk about even though it’s been almost 20 years since I became a business owner.

I opened my first CPA firm while employed at my last job. I easily picked up a few clients without even trying. It gave me the confidence to quit my job without having a full book of business to support me. But, at the time, I was single. I had my dog, Mr. Sanders, and my cat, Mopar, counting on me to make it. I knew I could easily sell my Harley if I needed money, and I lived in a decent area – I could probably sell my house quickly if I needed to also. Admittedly, if I failed, it would suck to sell my house and move in with who knows who and go back to working for someone else. But, it was low pressure for me.

I quickly picked up consulting work in addition to a few small businesses I did bookkeeping, payroll and taxes for. The consulting work was nice because it kept me in a familiar corporate environment, but it left me with the courage to stop networking for my next gig.

I was making almost double the money I had at my last job.  Life was good.

After a few years, I acquired enough work that I was able to hire a CPA to help me serve the clients I had. It was a flexible arrangement with a CPA I trusted. She was a long-time family friend who had long been on her own with a dwindling book of business as her clients were selling their businesses or retiring all together.

We were peas and carrots. She loved taxes and I loved the bookkeeping.  We had another staff person who helped in a mixed capacity to support both us and keep the office running smoothly.

I grew the business exponentially – primarily through word-of-mouth referrals. I felt loved. That is until I had a client complain about the bill for the work we did for them. What hurt is that I purposely priced my services just below the average for our area – so we weren’t the cheapest nor gouging clients either. I had local competitors wearing expensive suits and driving brand new luxury cars around town – it made me uncomfortable as if they were bragging about the wealth they accumulated from charging high fees to their clients.

My goal with my firm was to work when I wanted and to be financially stable. I wasn’t looking be mega rich from my firm and buy a mansion or a Lamborghini. I took pride that I was able to offer my quality services to hard working mom & pop businesses.

Because money was constantly rolling in, I took my eye off the ball. I felt comfortable that I had a full book of business and money in the bank. I didn’t pay attention to the fact that my consulting work was paying for most of my overhead. I didn’t pay attention to the fact that some tax and bookkeeping work was taking longer than budgeted. Work that was billed at flat rates with delays caused by clients. Delays that I should have managed better and billed as out of scope work.

And, then, I got pregnant unexpectedly.  And, my consulting work started to dwindle as I stopped networking because I knew it would be too much for me to work on larger projects once the baby arrived. Oh, and this all happened at the start of the Great Recession of 2008.

Clients started taking longer to pay my bills. Many closed their businesses. Desperately, I started to add new services to my clients. Overextending myself by doing more work at the same fees for my long-term clients I knew were struggling because I had faith that they would stay with me and it would even out eventually when the recession ended.

When all I wanted to do is welcome my newborn into this world, my business was crumbling.

I put on a brave face and buried my head in the sand about my business for as long as I could. And, then I had to take a distribution from my 401k to make payroll. I still remember the shame of it as if it were yesterday. By this time, I had gotten married but could not bring my proud, independent self to hint about the financial disaster I had become to my husband, family or friends. Here I was as a CPA – a numbers person. A college-educated person with a business degree. Failing. Big time.

The thing is, now there are college degrees for entrepreneurship, but I graduated college in the 90s. Nobody taught me how to be a business owner. I learned that through the school of hard knocks.

I did raise rates. I terminated relationships with clients who owed me money with no hint that I was going to be paid any time soon. I started networking again – really begging for work they didn’t want. Placed ads in the local paper. Redesigned my website. Mailed letters and postcards to targeted local mailing lists.

Everything I tried was the equivalent of 1 step forward, 2 steps back. But, the recession was ending and it started to feel like 1 step forward was actually 1 step forward. 

But, I wasn’t the best at saying no to potential clients who I knew from the beginning were not a good fit. You know the ones – they want to pay nothing but need you on call 24/7? Desperate for new clients, I didn’t weed out the bad prospects.  Those clients ate up so much of my time and bickered about paying every bill I sent. The debt began to grow out of control. I checked my online bank balances multiple times a day hoping someone who owed me money would decide to pay me. I took more distributions from my 401k until it was gone.

 My breaking point came when my largest client, about 30% of my revenue, worked out a deal with my employee. He offered her slightly more than I paid her which saved him money. Not only was this bad enough, because I was such a nice person, I was always introducing my clients to each other where I thought there was an opportunity for one to support the other. To give my employee the target revenue to make this move valuable to her, the client heavily encouraged the other clients I had networked to support him to also move their business from my firm to my employee. Within one week, 50% of my book of business walked out my door.

Now, because she was a family friend and because I was naïve, I did not have a non-compete agreement in place. Eight years into my journey as a business owner, and my firm was decimated. I was in debt up to my eyeballs. I was determined to survive as I vowed long ago to never work for anyone else ever again.

I took a hard look at the clients I had left. I decided to niche how I work with clients. I stopped doing the type of work I despised doing or was not efficient at. I weeded out unprofitable clients – even if they had grown to be friends. While it did not happen overnight, I was able to slowly recover financially.

Older and wiser, I was set on the right path though, right? Nope.

I had a second baby with my husband. We both worked as much as possible to save to build a new home. We even sold my house and moved to a mobile home to live as cheaply as possible while we saved and drew up the plans for our dream home. 

Moving to a mobile home that was less than 1000 square feet from a 4-bedroom home with a garage, shed and basement meant most of our belongings were placed into storage. We had access to a building owned by family for free. It was going to work out perfectly. Until the building received an unsolicited purchase offer. We had 3 months to move our stuff. In a rush, we knew we couldn’t get a home built that fast. So, we abandoned that dream and purchased a house.

As we settled into our new home, I was able to cut back my work hours. My oldest was getting ready to start school and I wanted to be the mom who was always available to help at school. I was blessed to be able to work part time. 

That is until my husband moved out. We had been fighting, but I chalked it up to stress from moving, the kids getting older, us getting older. But, I came home from work one day and he announced he was leaving by the end of the week.

I immediately took over the full mortgage and all household bills. All the while freaking out because I had been working less than 20 hours a week and filled the rest of my time volunteering at my kids’ school and in the community.

I sunk into a deep depression while putting on a smiling face for my girls. I felt trapped under my commitments – how was I going to get out of this???  Well, it took a few years because I was going into debt more every day, but I eventually grew my business to a profitable level – a size that let me live comfortably and pay off my debt.

All of this happened before I discovered Mike Michalowicz. Not that Mike’s books would have prevented any of this from happening, but I do think I could have corrected my path sooner and substantially minimized the financial impact of what I lived through.

Now, I didn’t just pour my heart out for no reason; I shared it to tell you that I’ve been there. I get it. I truly do. The sleepless nights that left me as a walking zombie the next day. Packing on a ton of weight from the stress. Both of which I am still dealing with years later. I was kicked in the ass more than once, and I survived. Not only survived, but now I’m thriving. Which is why the name of my firm is Profit Scale Thrive.

And, my story of how I started my journey of business ownership is why I cried when I read Chapter 7 of Profit First about debt. Let’s get back to the book!

You Can’t Crash-Diet Your Way Out of Debt

The first paragraph of this chapter:

“Well-dressed still poverty. Just because your business is making lots of money doesn't mean you're hanging on to it. Too many entrepreneurs believe the top line is what defines success, and then they behave accordingly. Another big client comes on board and the entrepreneur expands the office. A big sale rolls in, and with it a fancy dinner. It's like putting Frankenstein's monster in a tuxedo and having it dance and sing to “Puttin’ on the Ritz”. The monster may look like it has its act together, but it doesn't. One tiny bit of faulty wiring - as when the big client decides not to pay his bills - and the monster goes on a rampage, and everything falls apart.

Oh yes. Everything falls apart.

Mike shares his phone call with a friend, Pete, who had his business line of credit called by the bank unexpectedly. A $1 million line. When there was no money in the bank.  Pete asked Mike for advice.  Mike taught Pete about the principles of Profit First.

Pete’s reaction? Confusion – why focus on profit when he was in serious debt and no money in the bank? As Mike explained to Pete, yes – focus on profit because by focusing on paying down debt will only accomplish that: paying off debt. You’ll still be stuck in the loop of top line thinking which will most likely result in more debt.

Every major change in life can be traced to a pivotal moment: a turning point, a come to Jesus moment, a wake-up call. The moment when the pain of staying a certain way is greater than the effort to make awareness of it go away. The choice is yours: will you fix the crisis or the root of the problem?

The problem, as Mike points out, is that most of the time the action we take is a reaction to alleviate the immediate pain. We move heaven and earth to bail ourselves out with little thought of creating permanent change to prevent a recurrence in the future.

Why do so many people who have lost a lot of weight eventually put it back on? Because once they reach their goal, they revert to old habits. The pain of being overweight is gone. So, grapefruit for breakfast is replaced with our favorite cereal. Water is replaced with our favorite sugary drink. Skipping one day at the gym turns into a week, then a month.

Your mind knows you can fix the pain of being overweight. You did it once, you can do it again. So, your mind lets up on the strict habits that helped you reach your weight loss goal. It’s the same with debt.

Pete had the equivalent of a financial heart attack. His focus was how to quickly get rid of his debt. In other words, how could he go on a crash diet to lose the excess weight. There was no thought to how to make his business permanently healthy.

The lesson here? If your business is in debt, it is critical that you put profit first – pay yourself first. This is the first step that leads you to a healthy and sustainable business. 

So how does paying off debt work in the Profit First framework? There is not an allocation for debt payments!  Here’s the solution to destroy debt: 

Manage your cash as we’ve discussed following Profit First. But, when you have your quarterly profit distribution, you are going to take 99% of your profit distribution will go to pay off debt. The remaining 1% will be your reward. This way debt gets paid down while you strengthen your habit of following Profit First.

Enjoy Saving More Than You Enjoy Spending

Mike seems to get great ideas while channel surfing tv! He caught a program where Suze Orman was explaining personal financial strategy to a small group of people when she stated: “The solution to debt is this simple: If you want to get out of debt, you must get more enjoyment out of saving your money than you do spending your money.”

Mike’s attention couldn’t move away from that declaration – he says in the book, “Wealth is a game of emotion. Business success is a game of emotion. Profit First is a game of emotion. It all comes down to the story we tell ourselves about what we’re doing. Is what I’m doing making me happy or not?”

His thoughts continued about we do what makes us happy in the moment. If spending makes you happy, you’ll find ways to spend money. If you enjoy saving, you will find ways to save more. When you reach your pain moment, your kick in the ass, is when you finally say enough is enough.

For Mike, his pain moment was his daughter handing him her piggy bank, for Pete it was a call from the bank to pay his line in full in the next 30 days. For me, it was draining my 401k balance to $0. 

But the pain just gets you moving enough in a different direction to stop the immediate pain. Whereas Suze pointed out the other half after moving away from pain – you need to move towards pleasure.

Immediate pain gets the ball rolling and pleasure keeps the ball moving forward. The only way to make a new habit work forever is if you continue to get immediate pleasure from your new habit.

Give yourself more joy when you choose to NOT spend money. More joy when your bottom line grows. More joy when your profit percentage grows.

Acknowledge and celebrate when you do not spend money! Whether it’s $5 or $5,000. Every time. This is how you will train your mind to equate happiness with choosing to save money over spending it.

Preparing For Your Worst Month

By nature, business owners are optimistic. We must be, right? It takes a lot of courage to do what we do. That optimism serves us well until it fails us.

The trap so many of us fall into is believing our most recent record-breaking month is now our new normal. When we don’t repeat the same performance again in the following month, we are caught off guard.

Mike warns – until your best month becomes your average month, it’s not the norm. If you take one outstanding month’s income and begin to spend out of faith it will happen again, that’s when debt will start to pile up and you’ll revert to the old standby of sell more to grow fast. The old survival trap.

I say this to point out that Profit First is based on percentages and on cash actually in the bank for this exact reason. Income varies in dollars. You will always have some outstanding months, bad months and average months. Don’t tell yourself that your outstanding month is permanent.

This is why you will pay yourself a consistent owner’s wage from your owner’s comp account and the bank balance will grow and grow some months, your outstanding months, but will be able to continue to pay you in your bad months.

How do you know what to pay yourself as an owner? There’s the IRS definition of “reasonable salary” but then there’s the Profit First way: 

1. Over the last 12 months, add up your 3 lowest monthly gross revenue amounts and divide by 3 to get the monthly average. 
2. Multiple this monthly average by your current allocation percentage for owner’s comp. The result is your current monthly salary.

You can pay your monthly salary once per month, twice per month or even weekly. Just keep within the guidelines of the amount you computed in step 2 above.  Then, as you raise your CAPs each quarter, do the 2 computations above again to give yourself a raise.  As long as your owner’s comp account continues to accumulate money or stays even, you are taking a health salary (meaning a salary that your business can financially support).

The Debt Freeze

This is not as crazy as it sounds, but now that you are convinced that Profit First is the way to manage your business cash, here’s how you are going to get out of debt: the debt freeze.

Don’t panic. This does not mean sell everything you own. Nor does it mean to stop spending money entirely. It’s about cutting the fat out of your business – the stuff that is not generating or supporting income for your company. Don’t cut out the muscle though – the stuff that you absolutely must do to deliver your product or service.

Grab a list of expenses your business has paid for the last 12 months. Now review every transaction and determine which items can be eliminated or reduced. Review EVERYTHING.

Here’s your goal: get your total 12-month expenses to be 10% less than your OpEx TAP amount from your instant assessment we did a few episodes ago.  Remember, your TAP is your target allocation, not your current. Meaning – if your instant assessment indicates your OpEx TAP in dollars is $50,000 annually, we want to eliminate or reduce your expenses to $45,000 ($50,000 * 10% is $5,000).

Yes, this is 100% do-able. It may take a few months to reach your goal to cut 10%; it most likely will not happen overnight.

While the book simplifies this exercise, I feel that more information is needed to do this. I’ve created an online course called “Maximizing Profit by Minimizing Expenses”. I’ll walk though in detail how to do this review, giving tips throughout the course. Additionally, there is a module where you can watch over my shoulder as I do a review in real time while talking through why I am doing what I’m doing.  I normally sell this course for $97, but the next 20 people who want it can get it for free by clicking on this LINK.  For those listening or watching, the link will be posted in the show notes.

Build a Leaner Team

The debt freeze looks at all of your expenses, but labor costs need to be analyzed a bit differently.  Labor costs are usually a significant driver of debt. It’s hard as a business owner to defend and justify who to cut. You know you can’t do all of the work alone.

Sometimes the high overhead is from a business owner tried to get themselves removed from the daily operations too fast or there are not solid systems in place. It could be a combination of both.

For labor costs, truly evaluate each employee. If they directly contribute to profit, keep them. If they are not, can you move them to another area of the business where they would directly contribute to profit? If not, they need to be let go.  It’s not personal. You are doing this for the long-term sustainability of your business.

I know how devastating this can be.  I’ve done it personally. But, it is necessary. 

Find solace in knowing that you are freeing them up to find a better fitting job. To keep a few extra on staff will mean that all employees and you will be looking for jobs when the business abruptly closes from lack of cash.

Once identified staff are let go, have a staff meeting with those staying to share what you have done and why. Express how difficult it was but you are taking responsibility for the financial problems the company is in and for fixing it. Assure them that you have taken actions to immediately stabilize the company.

PS – don’t ask employees to take pay cuts to keep more people on staff. This will quickly backfire.

A few strategies to wrap up your debt freeze exercise:

• To put an immediate end to recurring auto-charges, call you bank and ask them to treat your card as being comprised (it was by you). Ask for the card number to be voided and a new card number be re-issued to you. This will prohibit recurring charges from being charged to your card. You can turn on the ones you want to pay one-by-one.
• Use the “just one more day” technique. Delay a purchase for “just one more day”. Make due without it today. Repeat daily. This will test how badly you really need something or you can make due without it.
• Promptly eliminate the expenses you identified as being able to eliminate. 
• Negotiate the price of all other expenses – everything can be negotiated: rent, credit card rates, software licenses, internet, vendor bills. Be prepared – research alternatives before calling. The worst is they say no and you move to a different provider at a lower cost.

Keep in mind that no matter how much debt you have, there is a way out. You are not the first and won’t be the last. Shoot, love him or hate him, Trump-owned businesses filed bankruptcy 6 times. He still became President of the United States and The Trump Organization owns approximately 500 businesses in 2023.

The new definition of success is not about the most revenue, employees or office space, but instead is about the most profit, generated with the fewest employees and with the least expensive office space. Make the game of winning based upon efficiency, frugality and innovation, not on size, flair and looks. Let’s make our mission to be “save a lot” instead of “make a lot”.

If You Owe The Bank A Million Dollars

A follow up on Pete and his million dollar line of credit. After implementing Profit First and doing the debt freeze exercise, he called the bank. He was able to negotiate a payment plan that he could stick to and within 3 months had paid off 5% of the total as well as turning a profit. Through the power of a series of small actions, Pete was able to overcome his darkest business moment.

One of my favorite Profit First stories included in the second edition of Profit First is from a business that has dominated social media and the hearts of people around the world in recent years: the Savannah Bananas. 

Jesse Cole is the owner of the Savannah Bananas, a Minor League Baseball team. Upon receipt of a note from Jesse, Mike called Jesse and asked to interview him for the second edition of Profit First.

Jesse, who also owns another team, the Gastonia Grizzlies, told Mike his story. Jesse was able to overhaul both teams by shifting their focus to entertainment instead of baseball. While the other teams in the league were busy working on building better baseball teams, Jesse changed his teams’ goal to entertain the fans. Jesse brought in a choreographer to teach the players dances to perform on the field between innings. He added granny beauty pageants and new interesting food choices. Within months, the franchise was able to go from struggling to sell 200 seats per game, to selling out 4,000 seats per game!

But, this all came at a cost: more than $1 million in debt in less than 2 years.

Jesse and his wife were able to use Profit First and the Debt Freeze to end their stressful days and sleepless nights and pay off all debt. Both teams they own are profitable. The distinction is that they are using their profit distributions to pay off debt. They are not spending beyond their means. And the biggest reward? Innovation by necessity.

For example, most ball clubs automatically purchase a ticketing system that runs about $30,000 per season plus kickbacks to the software company for every ticket sold. Though Jesse had the money to follow status quo, as Profit First entrepreneurs, they knew they had to find an alternative to this pricy ticketing system.

To accomplish their mission, they purchased 100,000 printed tickets shaped like bananas for $6,000. It was easy, on brand and cheaper than the industry standard. And, the tickets serve another purpose: they are souvenirs. 

For every expense, Jesse asks himself whether it fits with who they are as a brand (entertainment over baseball) and whether he absolutely needs it. If he does need it, he finds a way to trade for it or get it at a deep discount.

Jesse’s success from innovation and ingenuity is outstanding! Hopefully, this encourages you to implement Profit First today and use your profit distributions to crush your debt like Jesse has.

Listener’s Question of the Week

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

This week’s question is from Chris – I am on board with Profit First, but I still don’t understand how I’m going to pay off all of my debt. Help!

Absolutely, Chris! While Profit First provides a way to find the cash to pay off debt, you can use a popular method made famous by Dave Ramsey - the Debt Snowball method. The Debt Snowball method will help you to gain momentum and get your debt paid off.  

The Debt Snowball method works by paying off your smallest debt first while making minimum payments on all other debt. As the smallest debt is paid off, start making larger payments on your next smallest debt while continuing to make the minimum payments on all other debt. Continue until all debt is paid off.

But, regardless of if you use the Debt Snowball or another plan to pay off your debt, one thing is certain: you cannot add new debt as you pay off old. That’s just shifting money around. Do the Debt Freeze and then destroy it once and for all!

Thanks, Chris for your question! 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 Napoleon Hill, “A goal is a dream with a deadline.”

Final Thoughts

Final thoughts for today! I hope you are enjoying this approach to the book Profit First! While it took us a few episodes to get to the heart of Profit First, we have now shifted to tackling other things that can put a damper on your cash flow. Today we talked about how Profit First can be used to eliminate your debt when combined with the Debt Snowball method.

Next week we will be talking about how to find other money hiding in your business.

Here’s your homework for next week:

• Whether you have debt or not, do the Debt Freeze exercise. Don’t forget to grab my digital course (LINK) to go through this in detail. The course is free to the first 20 who grab this special deal!
• If you have debt, use 99% of your profit distribution to wipe out your debt. Celebrate with your 1%. It may not be a large celebration, but you need to reward yourself for sticking to your plan.
• Use the Debt Snowball to pay off your debt.

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!

Today we are eliminating business debt, how the Savannah Bananas use Profit First, and the Debt Snowball method!

My digital course for the Debt Freeze exercise discussed in today’s episode can be purchased by clicking on this LINK. The first 20 people who click on the link will get the course for FREE!

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

✉️ EMAIL: [email protected]
📞CALL: (234) 207-5772
💻 VISIT: www.ProfitScaleThrive.com

#entrepreneur #soloattorney #singleparent #attorney #lawyer #sololawfirmowner #profitscalethrive #moneymindset #business #moneypodcast #sololawyers #smalllawfirms #cashstuffing #envelopemethod #profitfirst #relay # SavannahBananas #DaveRamsey #DebtSnowball