Ep #15 Profit First Chapter 11 – How To Keep It From Falling Apart

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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 #15: Profit First Chapter 11 – How To Keep It From Falling Apart

Hello and thanks for joining me today for podcast episode number 15. 

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 11 – How To Keep It From Falling Apart. 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, this is the last chapter!

Mike holds no punches in this final chapter. He’s blunt about it. The single biggest reason Profit First falls apart for someone is because they did it alone. And, really, the bigger reason is lack of discipline.

We are the worst enemy of Profit First. We don’t do the Debt Freeze all the way. We don’t cut back on staffing expenses or move to a more affordable office. We don’t challenge the industry norms and try to innovate.  What we do instead is steal from ourselves. We take our profit balance to pay bills. We steal from our tax account to pay our salary. We borrow, beg and steal (from ourselves).

Mike shares a story told to him by his good friend, Anjanette Harper, about when she went to a winter camp in Minnesota with her classmates when she was 13. It’s important to note that the kids were city kids being shipped to camp in the woods in the coldest month of the year – January.

They were restricted from using the one indoor bathroom except to brush their teeth. They had to put on 3 layers of clothes plus coats to trek out to the outhouse for potty breaks.

Anjanette shares that after the first night’s dinner, the camp counselors scrapped the leftover food from their plates into a bucket that was then weighed. It was several pounds of food. 

Of course, being spoiled teens, nobody cared.  They were then lectured about how a few pounds of waste repeated daily would add up quickly to a few tons and eventually a full landfill. The counselors challenged the kids: get the waste per meal down to a few ounces by the end of their week together. If they did not beat the challenge, the kids would have to square dance together on the last night.  Funny how much punishment square dancing was to a group of 13-year-olds!

Over the course of the week, the kids naturally started holding each other accountable for the amount of food waste at the end of each meal. With some strategy, kids realized that they could combat this by taking smaller portions to begin with. And, if someone had leftovers, they would share them with someone looking to get seconds.

By the last meal together, the campers surprised the counselors and themselves with ending the meal with zero waste.  By working together and holding each other accountable, they met their goal!

While there are many benefits to accountability partners, here are the top 4:

1. Your ability to stick with something will skyrocket because someone else is depending on you. Friendly competition at its best.
2. When you go through a painful process together, the pain is diminished.
3. The action of enforcing a plan with someone else ensures that you are more likely to do your part.
4. When you meet regularly with your accountability partner, you get into a rhythm that makes it easier to stay the course and achieve your goal. There’s a natural process for big aspirational goals to get broken down into smaller, achievable milestones.

The bottom line is that Profit First works and getting an accountability buddy will make sure you let it.

Let’s talk about some common mistakes so you can avoid these setbacks.

Mistake #1 – Going It Alone

Going it alone is the biggest mistake business owners make when implementing Profit First. But, there are a few other mistakes that we see and hear about too.  Let’s talk about how you can avoid them.

Mistake #2 – Too Much Too Soon

I know how exciting it is to see the TAPs and drool over what your profit and owners comp account balances will look like. But, being too aggressive in the beginning will result in the need to raid your profit account and maybe your owners comp account to pay for operating expenses.  This defeats the purpose of Profit First.

What does work is starting slow – that’s why we do the Profit Assessment to determine where you currently are – your CAPs – and adjust from there. 

Profit First works when you see your goal, your TAPs, and work backwards to reach that goal. Add 1% - 2% each quarter to your CAPs. Start slowly and deliberately to build this habit. Force yourself to look for ways to become more efficient that will make the next quarter’s bump up easier to adjust to.

Too much of a good thing is possible. Don’t raid your profit account! Don’t slip back into the Survival Trap!

Mistake #3 – Grow First (And Profit Later)

One of the most frequent pushbacks we hear when talking about Profit First is this: “I like the idea of Profit First, but I want to grow my company.” And, what’s sad is that too many business owners think they can have only one or the other: profit or growth. This is complete bunk.  Profit and growth go hand in hand! The healthiest companies figure out how to be consistently profitable and do everything to grow that.

And we understand why business owners are disillusioned by this. It’s the one-in-a-million success stories of Google and Facebook that make many believe it’s common and highly possible for them. Hint – their stories are rare! And, what doesn’t help, is nobody ever talks about the millions of businesses who tried to follow in the footsteps of Google and Facebook and failed.

Would it surprise you to know that Twitter is wildly unsuccessful financially? In the 10 years between 2012 to 2021, Twitter posted a net loss in eight out of the 10 years. At one point, the total for 10 years was a net loss of $2 billion. $2 billion!!  These are losses funded by investor capital.

Prior to being acquired and taken private by Elon Musk, Twitter was routinely hiring new management teams, new leadership, new anything to figure out how to become profitable. 

Uber has a similar story of putting profit on the backburner in the name of growth. From the start, Uber has not ever posted an annual profit.

This is what growing first and then trying to become profitable can do to you. Without a huge source of investor capital to keep going, your business will crash and burn.  When profit comes first, your business will automatically show you the path to growth.

Mark Cuban offers in his February 2009 blog post titled “The Mark Cuban Stimulus Plan” his outline of what it takes for businesses to thrive and for him to invest money in their growth. The two most important items he lists:

• It can be an existing business or a start-up.
• It must be profitable in 90 days.

Let that sink in.

Mistake #4 – Cutting The Wrong Costs

Over and over throughout each chapter of this book, we have talked about cutting costs, but I’ve always emphasized that we are aiming to be frugal, not cheap. Here’s another mistake – cutting costs to the point where we are being inefficient.

Mike’s example is that he toured a knife factory. The owner bragged about how he saved money by using processes and equipment from the 1960s. Why spend money when things work, the owner bragged.

The problem was the factory was inefficient and quality was not consistent with the knives produced.

Here’s the secret: money is made with efficiency – invest in it.  If a purchase increases your bottom line and creates significant efficiency, find ways to cut costs elsewhere. Do not sacrifice efficiency for what you think are savings.

Mistake #5 – “Plowing Back” And “Reinvesting”

We’ve seen some Profit First users try to justify taking money from our different allocation accounts to cover expenses by using fancy words. The most common are “plowback” and “reinvest”. These are just other words to say you are borrowing from yourself.

The truth is that when you need to borrow from any of the allocation accounts to pay for operating expenses, 99% of the time your expenses are too high, and you need to fix them fast. That 1% of the time could mean that you’ve been too aggressive with your CAPs for profit and owner’s comp.

Review your numbers and determine the cause. Then correct.

If you are overspending, be careful not to rely too much on your credit cards. Remember that credit cards are debt. It’s money you don’t have. Control your spending within your budget – within your Opex account balance.

Mistake #6 – Raiding The Tax Account

You remember that your tax preparer telling you that your quarterly payments will be $5,000 this year, but you just realized that you have been putting enough away to support $8,000 per quarter. Do NOT assume that this means you have over allocated to your tax account!

What happens with Profit First is that as you become more efficient and grow your business, you will owe more in tax. This is not bad! Profit First allocations are based on percentages because as your business grows, you will continue to allocate funds that will support that growth. 

In other words, when your tax preparer quoted you the $5,000 per quarter, he or she did not anticipate your current growth. While you may be remitting $5,000 per quarter, when your annual tax return is prepared, you will have a large balance due. That is why the excess money is in your tax account – to cover that bill.

Do not touch your tax account until your annual tax return is prepared and you know without a doubt that the account has excess funds.

Mistake #7 – Adding Complexity

An unexpected thing that has begun to happen with Profit First is users making it too complicated – with the belief that they have always struggled with their business. So, they conclude that Profit First cannot be simple.

Don’t fall for it! Do not add rules to add confusion. For example, trying to factor in depreciation or amortization into your allocations. FALSE! Neither of those things are cash. Cash is cash. You either have it or you don’t.

Profit First is easy. It has been designed to work with your natural behaviors. Do not overthink it. Do not add complexity. Do not try to outsmart the system. Just get comfortable with the fact that sometimes getting the results you want is actually way easier to achieve than all the hard work you have put in to get the results you don’t want.

Mistake #8 – Skipping The Bank Accounts

This is the last mistake that we are going to talk about. Some people try to simplify the system by not setting up the bank accounts. They use a spreadsheet, notebook, or ask their bookkeeper to track it for them.

This approach quickly falls apart because it will take time to track the information manually. Then, the person gets frustrated and is quick to declare that Profit First doesn’t work. The fact is, they did not actually do Profit First. That’s why what they attempted did not work.

Profit First must be set up to be directly in the path of your natural behavior. You log into your bank accounts online and make decisions based on what you see. That is why you must have Profit First visible at the bank.

Spreadsheets and notebooks are too late. They are not always easily accessible nor updated in real time. 

Profit First at the bank will be in your face every time you log in. This will enable you to manage your profitability and cash flow decisions in real time. Set up your accounts so you cannot avoid them and that is exactly how it needs to be done.

Profit First Professionals (PFPs)

Hands down, readers of the book CAN implement Profit First without professional help. Getting help from a Profit First Professional will make it easier though. Profit First Professionals are accountants, bookkeepers and coaches trained and certified to help you drive profitability to your business. They have seen problems with other companies before you discover them yourself.

It's like working with a trainer at the gym rather than going it alone. Trainers help you reach your fitness goals faster. PFPs get you to profit faster and with fewer problems. Having a trainer at the gym you have built-in accountability, and your workouts will be safe and more effective as well. It’s the same with PFPs.

If you have a hard time getting support with Profit First from your bookkeeper or tax preparer, please consider working with a Profit First Professional. You can reach out to me for help. If I can’t help you because I do not do bookkeeping or tax work, I can connect you with a PFP who can help you. You can also contact ProfitFirstProfessionals.com directly for assistance with locating a PFP to work with.

It’s easy to fall off the wagon with trying to convince ourselves that it was easier before Profit First (hint – it wasn’t) or we were happier doing things the old way (hint – we weren’t). There was a time when it was generally accepted by many in the world that people would never run one mile in less than 4 minutes until it was done by Sir Roger Bannister who was quoted as saying, “The man who can drive himself further once the effort gets painful is the man who will win.”

Listener’s Question of the Week

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

Today’s question is from Elijah. My business is a brand-new startup. When should I implement Profit First?

Thanks for your question, Elijah. The answer is - immediately. In fact, the sooner you start with Profit First the sooner you will master financial discipline and force your business to run efficiently. No matter how new or established your business is, you should not wait to implement Profit First.

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 Zig Ziglar, “A goal properly set is halfway reached.”

Final Thoughts

Final thoughts for today! We did it! We broke down every chapter of the book, Profit First. Taking it step-by-step or chapter-by-chapter makes it less daunting, I think.

Please let me know if you have enjoyed these episodes and the tips and tricks I’ve added throughout our journey.

So, here’s your homework for this week – get real with your bookkeeper, tax preparer and coach. Come up with a game plan with your support team to ensure you do not allocate too much revenue to your profit account or not enough to your tax account.  Get your team together quarterly for check-ins to make sure you are consistently building up your profit and other allocations while reducing your operating expenses.

Like Nike says, “Just do it!”

Next week we will be talking about leveraging technology in your firm. What is the role of technology in streamlining your operations, how to use technology to improve productivity of your firm, and how to enhance the client experience. 

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 will discuss Chapter 11 of the book Profit First by Mike Michalowicz. This final chapter is all about how to avoid the biggest reason why Profit First falls apart for someone: doing it alone. We will talk about the benefits of having an accountability partner and common mistakes to avoid when implementing Profit First, such as going it alone, cutting costs too much, and reinvesting profits. Lastly, I explain how Profit First Professionals can help you drive profitability to your business.

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

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