Ep #13 Profit First Chapter 9 – Profit First Advanced Techniques

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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 #13: Profit First Chapter 9 – Profit First Advanced Techniques

Hello and thanks for joining me today for podcast episode number 13. 

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 9 – Profit First Advanced Techniques. 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. And, we only have a few chapters left to review!

What we are going to talk about today are advanced techniques to customize Profit First even more for your business. But, I caution - make sure you can answer yes to the following questions:

• Have you been following Profit First for more than 180 days?
• Are you making your allocations on the schedule you set - typically every other week?
• Are you building a balance in your profit account, no matter the balance?
• Have you taken at least 2 profit distributions?

If you can really, honestly say yes to all of these - if you have mastered *not* breaking the rules, then let’s move forward!

The book is great at laying the foundation of the Profit First cash management method, but with over 33 million small businesses in the US, there are nuances that can’t be covered in the book. This chapter addresses some of the more common complexities we see when working with businesses implementing Profit First.

The common answer to many different situations is going to be – “when in doubt, open an account”. 

Advanced Simplification

Does any of this apply to your business:

• Some deposits you make are not from a sale – maybe you get a retainer or reimbursement of expenses
• You know you have a large purchase coming up in the future

I know on the surface, opening a new account may not seem simple. But it is.  When you can easily get clarity on your numbers, you can make better decisions faster. And you will become less likely to commit to projects, vendors or expenses that do not fall in line with the balances in your accounts.

Here are ideas for additional accounts to help you simplify your business.

The Vault

The Vault is an account to hold excess cash, in an interest earning account that you can use for short-term emergencies. The goal of this account is to eventually hold 3 months minimum of your operating expenses. It’s not a question of whether you will ever need it. It’s a question of when. I hate to invoke negative memories, but think back just 3 short years ago to March of 2020.  Enough said.

When you create a vault account, you must define your rules for this account. Written rules. For example, if you have a drop in income, you know in advance that this will trigger to you also cut certain expenses if your income flow does not recover in 2 months. The key here is thinking through your rules before you need them. I know when I’m in panic mode, all logic flies out of the window. This step is trying to prevent irrational reactions in a panic.

Your cash inflow may not improve for many reasons beyond your control. But, we are putting plans into place to put up the best fight possible. The goal of the vault account is not to buy you time, but puts you in a position to make important decisions early so you don’t go into a cash crisis.

Stocking Account

While my clients are law firms or other service-based businesses, you may think to skip it because you don’t hold inventory, but let’s talk about it. Yes, if you need to buy batches of supplies, large batches, that will be used slowly over time, this account can help smooth out that outflow of cash. 

Mike’s example is for a Roofing and Decking company. They need basic nuts and bolts for every project – maybe 100 for each project. But, their supplier requires a minimum order of 10,000 at a time at a price of $5,000. This quantity is expected to last 10 months. So, this company will allocate $250 to this account every other week to fund the next purchase. The math on this is $250 per allocation when making allocations every other week for 10 months is 20 allocations. $250 * 20 is $5,000.

For my service-based businesses – think about using this account for your professional liability or malpractice insurance and software renewals that you pay annually.

It’s less of an impact to allocate $250 every other week than a one time hit of $5,000.

Pass-Through Account

My attorneys who are listening will understand how this account works. This functions the same as your IOLTA account. This account is to capture deposits you receive from clients that are not earned upon receipt. Meaning, you need to do something per your contract to earn portions of the deposit over time. 

While your IOLTA account is required by your state bar, you may want to open a pass through account for your client costs advanced and here’s why. The client reimburses you for costs you paid in advance. This is not revenue to you. It’s a refund of expenses you have already paid. 

This account functions by transferring the money received in your income account that represents refunds – dollar for dollar – to this pass-through account immediately upon receipt. This is done so you do not allocate this money to your profit, tax, or owner’s comp accounts.   Then, allocate the money to the OpEx when you do your normal allocations.  Alternatively, if you have the ability, deposit the money you know to be a deposit or reimbursement directly into this special account upon receipt.  Some payment systems will let you do this if the invoice is setup a specific way.

Materials Account

Remember back when we did the initial assessment? We took our total income and subtracted an amount for materials? Here’s the account you place your money to pay for those materials. Never allocate this money to profit, tax or owner’s comp. Use it to fund your OpEx as you complete each job or project.  This account is separate so you know this money is off limits for anything except materials.

Subcontractor or Commission Account

Along the same lines as the materials account, if you have subs or pay commissions, use this account to hold that money until you pay it. Payments will be made from the OpEx account. So, reimburse your OpEx as these obligations are paid out.

Employee Payroll Account

For many businesses, payroll is relatively the same every pay day. Allocate money to fund this account that will cover your next payroll. Because payroll is typically paid on your behalf by a third-party vendor and the payments are routine and frequent, I recommend setting up this account as the payment account for your payroll directly. Do not allocate to this account, pay from your OpEx and reimburse your OpEx.  

Equipment Account

Similar to the stocking or inventory account, the equipment account should be used to save for large purchases such as replacing your phone system, computers or printers.  Estimate the cost of these purchases. Take that amount and divide by the number of allocations you will be able to make between now and the expected purchase date. The result is your fixed amount to transfer every allocation day.

Drip Account

We mentioned retainers earlier. This account is for retainers, but not how law firms handle retainers.  For law firms, a retainer is deposited into the IOLTA account to keep the funds segregated from firm money. Invoices are issued to clients for work performed and money is transferred from the IOLTA to the firm’s operating account to pay each invoice issued.

A drip account would be used for companies that collect non-regulated retainers, deposits or advanced payments from clients for future work. To protect your cash flow, use this drip account to transfer the portion of the money you earned each allocation period to your income account for further allocations.  

To better explain – a website designer receives a deposit of $40,000 on a website re-design project that will take 4 months. Treat this deposit as a percentage of completion – meaning every other week, you earn $5,000 which is $40,000 divided by 4 months and further divided by half to represent 2 weeks. If you place the entire $40,000 into income and allocate it upon receipt, it will skew your accounts.  Additionally, what if the project is canceled without completion and a portion of the money is owed back to the client as a refund. Play it safe and let the money drip into your income account over the life of the contract.

Petty Cash

This was a common account when I first started working in the real world. I think now, companies will issue company credit cards as needed. But, this account could be set up as a checking account – so you don’t have cash in the office – and a debit card would be temporarily provided to an employee who needs it for small, unexpected purchases. Things like flowers for Admin Day, a welcome box for a new employee, a retirement gift or lunch as a reward for performance.

Being a small account with a debit card, this functions to keep these types of expenditures less than they may be with a high balance credit card.

Prepayment Account

Some vendors will give you a discount for paying in advance or paying for a longer term instead of monthly. Use a prepayment account to set aside money to benefit from these discounts.

Sales Tax Account

This is a big one for me if your business collects sales tax. This money is NOT your money. Sales tax collected on your sales is ALWAYS the government’s money. You are acting as a collection agent on behalf of the government. Never treat this money as income. Always keep it segregated from your company’s money and remit it to the government when due.

What This Looks Like

Please appreciate that not all of the accounts mentioned today will be in your account mix. Use the golden rule here, when in doubt, open an account. 

On page 155 of the book, Mike shows an example of what his accounts look like.  I will put a copy in the transcript for reference (check out my blog for this podcast episode).

The thing that I want to point out is how Mike names his accounts. I do something similar. His naming convention is the account description, the current CAP and the TAP. This makes it easier when viewing your accounts online. Also, if you are trying to do your allocations away from the office and away from your allocation spreadsheet, you can see from your account names what your CAPs are.

Write Down The Process

Once you have decided which accounts you want to use, take one page and write down the purpose of each account. Also note how money is added to each account and how money leaves that account. Be sure to include the current percentage or dollar amount of allocations.

Profit First is a system and systems need to be documented for efficiency. This will help you to transition the allocations to your bookkeeper at some point. It will serve as a reference point for him or her as well as a guide to help you keep them accountable.

Shift Your Focus From The “Monthly Nut”

Many business owners I talk to refer to this – their “monthly nut”. The old school idea that simply tells us how much money we need each month to keep our doors open. This is nonsense. Because when you focus on the minimum to operate, guess what – you are focusing on your expenses not profit. Get out of the survival trap now and forever! 

Stop focusing on expenses!! Focus on profit and the rest will fall in line. Focus on your income required for allocations. This is the money you need to deposit every other week to fund your next allocation. This is different because it includes money to fund your profit, tax and owner’s comp accounts!!  To have a healthy business, to pay your adequate salary and take the profit you deserve, this is your focus.

When You Have More Than One Business Owner

Here’s something to consider with your Owner’s Comp account – if you have multiple owners being paid, be sure to adjust your TAP for owners comp to cover all owners who work in the business.

Why Profit And Tax Are $0.00 At Bank 1

For those who looked at the transcript for the image of Mike’s bank accounts and saw Mike has $0 in his profit and tax accounts at bank 1, this is simply because at bank 1, these are hold accounts. Money is allocated to them during your normal allocation process, but it takes 2-3 days for your bank to complete the transfer to the inconvenient bank (AKA bank 2).

Bank 2 has profit and tax accounts where the allocations are accumulating until needed.

Mike adds a note and I agree with this- if you have the ability to customize your online dashboard to NOT show the grand total of all account balances, please take advantage and turn it off. Easily seeing the grand total of all money can mess with your mind. So, don’t do it.

Raising Capital

Here’s a unique situation – raising capital for expansion. Mike cautions against this. I do too. It’s risky and if you are navigating this path, I hope you have an experienced team of financial experts working with you on this.

If you are currently or planning to raise capital for future expansion, be sure to open a new account dedicated to hold these funds.

How To Determine Whether You Can Afford A New Employee

You know that nagging feeling when you are over or understaffed, right? But, when you are understaffed, how do you know when you can afford to hire? Here’s a general rule – your company should generate $150,000 to $200,000 in **real revenue** minimum per employee. This is a ballpark number; every business is different. Use this as a guide. Please note the emphasis on real revenue here.

Efficiency is always the goal. Always. Not hiring your spouse’s cousin who is down on her luck and could use a job.  

Remember that Real Revenue is the amount of income left after paying for materials and subs.

If you think your business may be one of the unique ones that the general rule doesn’t apply, use this backup rule: Real Revenue needs to be 2-1/2 to 3 times the amount of your labor cost.

Mini Power Tactics

You know as soon as a book is published, there’s more discovered, right? As new tweaks to Profit First are discovered, Mike shares them on his blog. I share them on mine to at ProfitScaleThrive.com. Here’s some of Mike’s favorite tweaks:

The Government’s Money

It is so easy to “borrow” from our Tax account. PS – it’s really stealing!! The money is so tempting…just sitting there laughing at us. The problem is when we use the tax money today, we feel immense pain when your next tax payment is due.  Remember that the IRS has the ability to put you in jail over tax issues! 

And, when you are late paying the IRS, the penalties and interest can almost double the amount you owe.  Bottom line – never borrow from your tax account.  This is why we recommend moving your tax allocation to an inconvenient bank for holding. Go even further and rename that account online to “The Government’s Money”. Put the roadblocks you need in front of you to not spend this money on anything except taxes.

Hide Accounts

Following the “out of sight, out of mind” theory, you are less likely to justify transferring money for an unintended purpose if you can’t see it. If your bank allows you to hide accounts from your dashboard, you may want to use this strategy for all accounts except your OpEx account.

Outside Income Accounts

As online transactions have evolved, many businesses find that they have money coming into their accounts through a variety of sources: PayPal, Square, Stripe, etc. Don’t let these accounts accumulate funds. These are income accounts holding money that needs to be allocated. Be sure to set these accounts for daily transfers to your income account. If you can’t make these transfers automatically, then be sure to include a step in your allocation process to transfer these funds to your income account. The money you transfer today will be included in the next allocation cycle.  

Account Snapshot

Does your bank have the ability to text or email you a summary of your account balances? Consider setting up these alerts strategically for your income and OpEx accounts on the day you do your allocations and 5 days later after all payments have been made from your OpEx.

If you set up a petty cash account, you may want a daily alert for this balance.

Bank Checks

Depending on how you issue checks, you may write a check but the money is still in your account until the check is cashed. If you use a bill payment service such as Melio Payments or Bill.com, they will pull money from your account the same day you approve payment. But, if you mail checks you print from your office, you may consider using bank checks. 

Bank checks essentially have you paying the bank the day you write the check and a check from the bank is sent to the vendor. The bank will make money on the float but if it helps clarify your account balance, it may be worth employing this tactic. Trust me, the money you may make on the float is going to be less than $5 - $10 annually.

Listener’s Question of the Week

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

Instead of a listener’s question today, there is something mentioned in Chapter 9 of Profit First that is something I would like to address here.

We talk a lot about where money will be used or allocated, but what about total income. Are we bringing enough money into the business to support both your business and you personally?

When I work with clients, I refer to this exercise as reverse engineering their owner’s comp.  

Here’s the thing – if your business doesn’t make enough to pay its bills AND your bills as it’s owner, your business is not healthy or successful.

So, I challenge you to do a checkup to make sure that you are not setting yourself up for failure with a billable rate that is way too low.  Download my Billing Profitably Calculator now to calculate the minimum hourly rate you need to bill in order to PROPERLY and PROFITABLY pay yourself AND keep your business financially healthy. The link to download this easy calculator will be in the show notes or you can find it here in the transcript: 

Click here for the -> Billing Profitably Calculator

Download the calculator and let me know your results!

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 an unknown source, “I’m not saying building a business is easy, but making it hard doesn’t mean you’ll be successful.”

Final Thoughts

Final thoughts for today! I hope you are enjoying this approach to the book Profit First! Lots of ideas for advanced Profit First techniques which all follow our golden rule of “when in doubt, open an account”. 

Of everything discussed, the thing you need to do immediately is to stop focusing on your “monthly nut” and be sure to focus on your total allocation amount instead.

Then, for your homework this week, put a task on your to do list for 6 months from now to revisit this episode. I know that’s far away, but much of what we talked about is for use after you have your initial accounts set up and have a good routine on your allocations.  Once this is old hat, you’ll have a reminder to put your business on a path for the next level.

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!

After you have implemented Profit First for at least 6 months, you may be ready for additional customization. Today we will talk about how to take your business to the next level! 

Profit First is not only about managing expenses. We need to manage income too! As mentioned in today’s episode, grab your copy of my free “Billing Profitably Calculator” now to calculate the minimum hourly rate you need to bill in order to PROPERLY and PROFITABLY pay yourself AND keep your business financially healthy. Click here for the calculator: Billing Profitably Calculator

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