Ep #7 Profit First Chapter 3 – Setting Up Profit First For Your Business

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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 #7: Profit First Chapter 3 – Setting Up Profit First For Your Business

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

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, I began a dedicated series of podcasts to share with you in detail chapter by chapter of the book Profit First. So if you have read the book, please follow along as I will share tips 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.

The Envelope System (AKA Cash Stuffing)

This week we are talking about Chapter 3 - Setting Up Profit First For Your Business. Mike starts this chapter by describing how his mother used the envelope system to manage her paycheck for paying household bills. For anyone who is unaware of the envelope system, which is also called “cash stuffing”, it is a way to budget money by using different envelopes to store your money. You will have one envelope for each spending area for your household, for example: mortgage, groceries, clothes, car payment, utilities, etc.

When you get paid, the idea with the envelope system is to cash your check and then allocate your money between the envelopes. How the money is divided is based on your pre-determined budget. When you are ready to spend on a specific category, for example, groceries, you grab your groceries envelope and head to the store. This shopping trip is limited based on the amount of money currently held in your groceries envelope. 

The method forces you to spend within your budget.  Ok – so let’s see how we can apply this to your business.

Bank Balance Accounting

The default cash management system for most businesses is what Mike calls “bank balance accounting” meaning you log into your bank account online, check your available balance and then make money decisions based on the account balance you see.

And for every business that does this bank balance accounting is an accountant warning the business to look at their bookkeeping system. And, here’s why: your bank does not know about checks you have written that have not yet been cashed.

Your bookkeeping system - many businesses use QuickBooks - contains a complete and up to date listing of all transactions for your bank accounts – regardless if the bank has cashed your written checks or not.

I am sure at this point you are saying, but…I don’t know where to find the information you are telling me, or I hired a bookkeeper, so I don’t have to look at my books. This is why bank balance accounting exists.  It’s the easiest and most familiar way for most business owners to keep a finger on the pulse of their business, financially speaking.

Believe me – I’m a CPA and I don’t like to look at my books daily or weekly either.

All of this is to explain Mike’s driving force behind writing Profit First – bank balance accounting is a habit that you will harness to continue to run your business, but with some changes that will create a situation where bank balance accounting will begin to provide you with meaningful information.

How? By opening multiple bank accounts – each single bank account will represent an envelope in the envelope or cash stuffing system. Each account will have a specific purpose and contain your budgeted money for that purpose.

The Five Foundational Accounts

Last week your action item was to open one new bank account called “Profit” and to begin depositing 1% of your incoming money to that account. Now we are going to open the remaining accounts needed to run Profit First in your business.

In total, you will need to have a total of five bank accounts open:

1. Income
2. Profit
3. Owner’s Comp
4. Tax
5. Opex (Operational Expenses)

All of these bank accounts should be checking accounts in the business name (not personal accounts). Once opened, I like to rename or add nicknames to make it easier for me to manage. I like to name accounts “1 – Income Bank Name last 4 digits of the account number”.

Your original one bank account should now be used for your Opex account because you most likely have a lot of bills already being paid from this account.  You should have substantially less sources of deposits to update.

Once opened, review your history for your original bank account to identify all sources of deposits. Check deposits are easy to change. Just use the correct deposit slip going forward. But, for each electronic deposit, identify the source and update it to the new income account number. This usually takes about a half hour, one hour at the most and it is very much worth doing!

Two “No-Temptation” Accounts

Now that we have our five foundation accounts, we need to set up two additional accounts. The reason for these accounts is to get certain money out of sight so it is out of mind!

These two “no-temptation” accounts will be the long-term storage place for your profit and tax money.  I know it sounds redundant to have two additional accounts that are already part of the original five foundational accounts, but again – it’s about the impact of “out of sight, out of mind”.  

When something is not available for you to consume, you don’t consume it. It’s that simple.

Mike recommends going to a new bank you have never had an account at and open two business savings accounts (or money market accounts depending on the interest rates, monthly fees and minimum balance requirements).  These accounts will be renamed or nicknamed “Profit Hold” and “Tax Hold”.  

Personally, I recommend opening these at a credit union because often times, your local credit union has the lowest fees and pay the highest interest rates.  It’s not always true, but I do find this to be commonplace.

You will have a total of 7 business accounts: 5 checking accounts at your primary bank and 2 savings accounts at your “no-temptation” bank.  The advantage to having these 7 accounts is two-fold:

1. Transfers between two different banks are not instantaneous - it can take a few days or longer (and weekends and holidays add more time). If you log into your main bank before the transfers to the hold accounts are completed, it will appear as if the money is still available.
2. The goal with Profit First is to give you instant and accurate knowledge of where your cash stands. Transfers between accounts at the same bank usually happen in real time. So, moving your profit and tax money to your designated accounts at the same time as your owner’s comp and opex allocations, you will instantly see where your money stands. Your money will be on the correct “plate” at your primary bank so you can initiate the transfer to the “no-temptation” bank.

Picking the Bank

Your primary goal is convenience for your five main checking accounts and INconvenience for your two savings accounts. 

I chuckle at the story Mike shares about his longtime friend, Peter, who opened his new “no-temptation” accounts at a new bank. The branch manager was excited and shared the wonderful and convenient ways Peter would be able to access his money. Peter’s response: “I don’t want any of that. I am seeking the most inconvenient options you have. In fact, the only way I want to withdraw money from this bank is if I visit this branch and ask you to write out a certified bank check to me. And when that day does come, just to make sure I am only using it for the right reason, I want you to slap me in the face a few times when I ask you to write the check.”

As someone who has worked in a bank before, I wish I could have been a fly on the wall in meeting!

And, Mike mentions this reminds him of the scene from Young Frankenstein when Dr. Frankenstein locks himself in a room with his monster and says, “No matter what you hear in there, no matter how cruelly I beg you, no matter how terribly I may scream, do not open this door or you will undo everything I have worked for.”

If your bank has reasonable minimum balance requirements and no monthly fees on checking accounts, then you are good to go. But some banks require a large minimum balance or have large monthly fees per account. That’s no bueno. 

Keep in mind that banks exist to serve you. If your bank does not serve your needs, it’s time to move on. My top recommendation is moving to Relay – check out podcast #4 for information about Relay or you can see a list of other Profit First friendly banks HERE.

If you have been following along with the last few podcasts, by now you have taken 3 steps toward a profitable business:

1. You emailed your commitment to me (Chapter 1/podcast episode 5)
2. You set up one Profit First account (Chapter 2/podcast episode 6)
3. You transferred 1% of your money to your new profit account (Chapter 2/podcast episode 6)

You have the momentum; now it’s time to kick Profit First into gear and experience the simple, yet powerful transformation for yourself. It is amazing to watch your profit and your business grow day by day, deposit by deposit. Don’t stop now. Take action!

Take Action: Get Your Business Profit-Ready

1. Set up the 5 foundational accounts: Income, Profit, Owner’s Comp, Tax and Opex.
1. If you are staying at your current bank, keep your existing account as your Opex account.
2. These accounts should be business checking accounts.
3. If your current bank has unfavorable fees or minimum balance requirements, negotiate the fees and requirements with the bank manager. If unsuccessful, find a new bank.
2. Set up 2 hold accounts at an inconvenient bank: Profit Hold, Tax Hold.
1. These accounts should be business savings accounts or business money market accounts depending on the interest rates your bank offers.
2. Link these 2 hold accounts to your primary bank so money can be sent from your primary profit and tax accounts to your profit and tax hold accounts every other week.
3. Do NOT enable any of the “convenience” options for your 2 hold accounts. You do not need or want these accounts to be accessible online. And you do not want ATM or debit cards for these accounts. You just want to deposit money into these hold accounts and forget it for now.

Listener’s Question of the Week

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

Same as last week, instead of a listener’s question today, there is a side note in chapter 3 of Profit First that is something I would like to address here because I feel many people have these same two questions. These are the 2 most frequently asked questions when Mike speaks about Profit First at conferences, webinars and lectures:

1. I haven’t ever been profitable in the past, so how can I take my profit now?

Mike has a great response to this question:

“People have difficulty accepting the notion that they can start taking profits right away because it seems like some kind of woo-woo accounting trickery. It's not (in fact, it's regular accounting that employs trickery). By taking profit first, you're fundamentally changing the way you run your business. When I hear this question, I always explain Parkinson's law: you spend every penny you have available and stretch every dollar in the lean times to keep your business moving forward. I'm simply asking you to remove the profit and operate on less. You've done this already, and you've found a way. There is a saying “Nothing changes if nothing changes.” If you don't change the way you take your profit, you will never take a profit.”

1. Can’t I just do this on a spreadsheet or in my accounting system? Why do I need to do this at the bank?

Mike’s response to this question is:

“I answer this question by asking a question: How has that served you so far? Aren't you already following your cash flow every day on a spreadsheet? Are you not checking your accounting system daily, reviewing the numbers? No? Exactly. So setting up Profit First in your accounting system is only a slight modification over something you are supposedly “doing” already and failing at. 

No matter what those spreadsheets or monthly reports say, your current bank balance is always going to be a stronger determination of your behavior. The reason you must set up your Profit First accounts at your bank is because it is the only way to insert the system into your normal path of behavior. By setting it up at your bank, you cannot miss your allocations when you log into your bank.”

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!

This week’s inspirational quote is from Jim  Fortin – “Nothing has any meaning except for the meaning I give it.”

Final thoughts for today! I hope you are enjoying this approach to the book Profit First! Today we talked about the bank accounts needed to implement Profit First in your business. Also, we talked about how each account is for a specific purpose comparable to the envelopes used in the envelope or cash stuffing system.

Here are your action steps for this week:

1. Set up your 5 foundational bank accounts: Income, Profit, Owner’s Comp, Tax and Opex.
2. Set up your 2 hold accounts: Profit Hold and Tax Hold.
3. Do not enable any of the “convenience” options for your 2 hold accounts.

Next week, we are going to talk about how to assess the health of your firm. This is a great chapter because we will see how your business has been operating over the last 1-2 years and how healthy it could be with Profit First. Also, I will be sharing with you my worksheet that will let you easily compute your instant assessment.

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! 

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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 third installment of a series that dives into the book chapter by chapter.

This is the link to the list of banks referred to in this podcast: CLICK HERE

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