Episode #26 A Look Into How Profit First Works In My Business

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Welcome back. I'm so excited about today's topic. I want to revisit Profit First. So I know at the beginning of my podcast series, I invested a lot of time going through every single chapter of Profit First.  And then I kind of set it aside on purpose because there were lots of other things that I wanted to talk about.

But if you follow me in real time, we're approaching the end of September, which is a magical thing because it's the end of a calendar quarter. It's the end of the third quarter, and a couple things in the Profit First world are going to happen on September 30th/October 1st.

We're going to do two things. We're going to take our next quarterly profit distribution. And, we're going to re-evaluate our allocation percentages to bump them closer to our ultimate goals.

But, I've been doing something on my YouTube channel that I've not shared with my podcast audience. And so I'm actually going to do one video today, and I'm going to share it with both my podcast audience and my YouTube audience.

If you're listening to me on a podcast app, I'll drop a link to the video in YouTube so you can go back and look because this is something I purposely put this in YouTube because it's a visual aspect. So what I've been doing about two months ago, I thought you know, I talk about Profit First, but it's hard to show you Profit First. And I came up with a spreadsheet that's an over my shoulder look at what's happening in my business in real time with real numbers with Profit First and the spreadsheet is not fancy, but I at least do have some graphs that make it a little bit easier to see what's happening in my bank accounts.

So it's week nine that I've been doing this and my bank accounts are listed. I've got a spot where I'm going to place my deposits that went into my income account and then I have the five foundational Profit First accounts but I have a sixth account.

So I've got my profit account you know, obviously I have my income account, my profit account, owner's comp, tax, opex, but I have a special account for my mastermind. And the reason being is that it's a significant expense for me. And not only is it the membership dues but my group meets several times a year in person.

So I also set aside every week when I do my allocations, I set aside money into my mastermind account that's going to pay for my travel expenses. My airfare when we meet up, my meals, any entertainment because we always do at least one activity, and my hotel.

So I have six accounts. And what I'm going to do is I'm going to run through how this is working. Again, I'm in week nine of doing this on YouTube. It's not week nine of me doing Profit First. I've been doing Profit First for years, but I started this series on YouTube nine weeks ago. So two months ago, but here's how this works.

The spreadsheet is going to do some calculations for me automatically. As soon as I type in my deposit amount from last week, the spreadsheet is going to automatically calculate 4% of that deposit amount goes to my profit account. 47% is going to go to owner's comp. 9% is going to go to my tax account. 

And let's just take a side note here. In the book, it talks about 15% being set aside for taxes. Now, I am a CPA and I've done some math off to the side that I've converted - and if you talk to a tax accountant, they're probably going to shake their head - but what I did was I took my effective tax rate and that's kind of a fancy term that just means the percentage of the actual total tax you paid for one year divided by your taxable income. On your 1040, you enter your wages, you enter your business income, however that combination is for you. If you're an S corp owner, you would have a W-2 from your business. If you're an LLC that reports on Schedule C, you don't have the wage part. But any business is going to have the LLC or an S corp is going to have business income that's added. But we have standard deductions or itemized deductions that lower your income amount. When you pay tax, the percentage, you pay a percentage of your income, right? But what you're paying on is not your total income for the year. It's your adjusted income. It's your income minus your deductions. And I'm simplifying this, okay? Because there's some other things that could potentially be happening here.

But basically it's your income minus your deductions. And that number is the number used to multiply out against the tax brackets to determine how much tax you owe, okay? So effectively you're paying your total tax divided by your taxable income.

Now I did another step. And I did some math to figure out, okay, if that's true, if that rate's true, then how much of my gross income, so forget about my deductions, but how much of my gross income and the reason I did that is all because of Profit First, because I need to know when money comes in, my deposits are my gross income, so I need to know how much of that to allocate to taxes.  So when I did that math, it turns out to be 9% for me. And everybody is different. Then my spreadsheet's going to calculate out 33% is going to go to OpEx, and 7% is going to go to my mastermind.

Essentially what I did is my operating expenses are 40%, but I wanted to make sure that I intentionally set aside money and protect my budget amount for my mastermind. That’s why I split and put my mastermind at 7% and my opex at 33%.

Last week I was $6,325. I’m going to type that into my spreadsheet. If you're watching on YouTube, you'll see that in column F, my allocation column allocates, it did the math for me.  So it was just the deposit amount multiplied by my percentages. That's it, okay? So I've allocated that $6,325.

But what else is going on in my business? Now if you've been following me on my YouTube series, where I've been doing this every week, I've talked about, I only have one check that I write once a month for my office rent. I rent an office. That's the only check I have to write.

Every other expense, normally in my business, in thenormal course of things that happen in my business. Every other expense goes to my credit card. And then at the end of the month I get my statement and I pay my credit card statement in one payment.

Now, randomly there is going to be times where I make a donation or I pay for an ad that I have to write a check that I can't charge it.  Those are not normal for me. That is random, normally I don't have to write extra checks. I just have one check a month.

And then I pay my credit card statement for everything else. Beyond those two transactions, paying off my credit card statement and my rent check, monthly, I run payroll every other week.

And so this just happens to be a payroll week. I have a VA. So I pay her hourly and she's part time -  couple hours a week helps me out with stuff. She's amazing. And I've got to pay myself. So this is payroll week. So the first thing that I had to do was do my allocations.

And so you'll see how on my spreadsheet that I started off with my bank balances from last week. And then I've done my allocations. I now need to report my payroll. And so my total payroll, and this sometimes gets a little confusing, my total payroll, so me and Reychelle, our money comes out of my OpEx accounts. I am going to withdraw the total payroll for both of us. Payroll and taxes. So that total is $5,246.17. So you'll see how my OpEx account started off at $3,562. I subtracted the total payroll of $5,246.17, but I have my allocation this week of $2,087, and that puts my OpEx account down to $403. But here's the next step that I do, and this is where sometimes I lose people, which is part of the reason why I want to do this visually as a video to look over my shoulder to see how I do this.

So I did my step where I made the payroll, but I've been setting aside money for my owner's pay in my owner's comp account.  This next step is to transfer money from that account to replenish my OpEx account for the amount of my payroll and taxes. I pay myself I'm a I'm taxes and S corp. I am an LLC but I'm taxed as an S Corp so I get a W2 paycheck from my business in addition to distribution but I pay myself a salary and the total with taxes the payroll taxes is $4,140.38. I'm going to take that money out of my owners comp account and I'm going to add it to my OpEx account.

When I do that, my OpEx account is now $4,543. 55. That's it for my allocations. It takes me longer to talk through them.  I actually, I bank at Relay. And so I cheat a little bit because Relay does percentage allocations for me. Most banks these days will let you set up recurring transfers between bank accounts and that's awesome.  But I don't know of any other bank that lets you do percentage allocations. Any bank I've ever banked with lets you set up automatic transfers between bank accounts but on a fixed dollar amount and that just doesn't work with Profit First because my income is never the same. 

With Relay letting me set up percentage transfers, I just have it automatically set up that every Monday morning the transfers happen. What I could do but I don't, just in case I want to change my fixed salary for the year, but just in case I want to change it, I don't do an automatic transfer for my owner's comp piece to replenish my OpEx.

I do actually run the payroll first and then transfer that money over. Just in case I want to change it. What you see at this point is all the allocations I've done, the transfer that I did from my owner's comp into my OpEx account, and I reported my total payroll spend for this week. 

That's it. That's all that's happened in my bank account. But I now know when I go in and I look at my OpEx account, I know that $4,543 is a good amount because next week I'm going to have to pay my credit card statement and rent.  And I'll have one more deposit that comes in that's going to allocate more money there. 

But what I like about how I've been doing this on YouTube is that I added graphs for my bank accounts because I've been tracking the week-end balances of each account.  And what I love about it is you can see how each account has reacted with Profit First. 

For example, my profit account is build, build, build, build, build. It's up, up, up, up, up, up, up, up, because I started this two months ago which was a couple weeks into this third quarter. It's done nothing but go up because I've not pulled any money out. Okay, because that's gonna happen in a week and a half, two weeks from now, when September ends.  So, you see the graph of money in my profit account. My profit account has just been going up, up, up.

My owner's comp and this, I love this, okay? It goes up because I contributed to it and then it goes down and then it goes up and then it goes down and it goes up because I contribute and don't pay payroll and then it goes down the weeks that I, even though I do contribute, I have paid myself, okay?

Owner's comp is just going to go up, down, up, down, up, down, up, down. But I feel good that my balance, I've got money in there that if I have weeks where I have very little money coming in, I still have enough money set aside to pay myself my payroll and I always have money to pay Reychelle.

My tax account, and this is similar, this tax account is going to show you what's going to happen in a couple weeks with my profit account.  My tax account, same thing, I started you know, we started a couple weeks into this quarter, so I already had a balance and it's been up, up, up, up, up because I didn't have any payments, but while I do have a W-2 paycheck, I don't necessarily have enough being pulled and withheld for taxes out of my paycheck, so I still have to make my estimated quarterly tax payment. I paid that in early September and you can see how the tax count went up, up, up, up, up and then it dropped because I made a payment.  Now it's starting to go back up again. 

Now my OpEx, this is what we normally see with every business, okay, up, down, up, down, up, down.  It's erratic. There's no trend here. It just is what it is because I've got bills. I put money in there when I do my allocations, but then I've got bills to pay and I pay them.

Now my mastermind, the way this account works a little bit differently because as to how I do it.  So it is an expense for me, because remember I said it's my monthly membership dues, plus any travel expenses to be able to meet my mastermind in person. 

But what happens is all of my expenses for my mastermind are on my credit card. My monthly dues, process on my credit card and my travel expenses. Now I'm actually going next week to New Jersey for ProfitCON and my group's going to meet because my group is related to ProfitFirst.

I'm actually going to be in New Jersey for a week and the conference is only a couple of days and then my mastermind is going to meet after ProfitCON ends.

I already booked my airplane tickets months ago. I booked I don't know, maybe in May. That's already paid for and that went to my credit card and I had to deposit it on the hotel. So some of my travel that's going to happen for next week has already been paid for on my credit card.

But what I do is when I get my credit card statement, I go through it and say, Oh, that's mastermind. That's mastermind. Okay. So just like I did today where I pulled out from my owner's comp account and transferred money to replenish my OpEx account, next week I'll do the same thing when I get my credit card statement in, I'll go through and circle a couple of things that are on that statement that are for my mastermind and I'll pull the money out of my mastermind account and I'll add it to replenish my OpEx account and then I will pay the credit card statement in full from my OpEx account. 

That is an overview of Profit First working for me. We're now in week 9 of this overview. Let me know what you, you know, what your experiences have been with Profit First and what is working for you, what is not working for you.

Let's tweak it. Let's, let's fix it so that it's working for you. And hopefully this insight into my world shows you how you can have better control over your money. Stop letting your money control you. Let me know. I would love to hear your thoughts and feedback on this.

Listener’s Question of the Week

Now it's time for our listeners' question of the week. 

And, this is a good one from Jake: I have multiple businesses. Do I need to set up the 5 foundational accounts for each business?

Hi Jake, the answer is yes! For each EIN you have, you will need one Quickbooks file, one tax return and one set of bank accounts - because each of these things are tied to the tax ID number.

For example if you own three businesses, you would have five accounts for the first business, five for the next, and five for the last. With each business having its own distinct accounts you will clearly understand the cash flow for each business.

If you share accounts, you are blending the cash flow of the businesses and it will be impossible to know how each business is performing or what actions to take.

I hope this helps, but if there are more questions or follow-ups, do not hesitate to reach out. Also, if you have a question you would like me to answer, you can email me at [email protected]. Thanks!

Inspirational Quote

This week’s inspirational quote is from anonymous, “Opportunity does not knock. It presents itself when you beat down the door.”

Final Thoughts

Final thoughts for today: Reading the book Profit First was transformative for me. It really resonated with me. I had been advising clients to use pieces of it before I knew the book existed for years.

But, I know that is not the same reaction every reader has. And, that’s why I speak every chance I get about Profit First. I have the hope that if I present it slightly different or explain sections a little more in depth than the book, I can make that transformation happen for another business owner.

I’d like to share with you an event I am speaking at this week about Profit First. It’s a virtual event hosted by the Solo and Small Firm Section of the Florida Bar is hosting a Book Club where I will be leading the group on the book! I’m so excited to share my thoughts and experiences of the book! The event is not restricted to Florida Bar members. If you are interested in attending this free event on Thursday, September 21, 2023, please RSVP here.

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 I will be revisiting the concept of Profit First and sharing some insights that I haven't discussed before. I will be explaining how I manage my bank accounts and allocate funds using a spreadsheet. Throughout the episode, I will show the calculations and percentages I use to distribute my income. By the end, you will have a better understanding of how Profit First can help you gain control over your finances. I would love to hear your thoughts and feedback on this!

I’d like to share with you an event I am speaking at this week about Profit First. It’s a virtual event hosted by the Solo and Small Firm Section of the Florida Bar is hosting a Book Club where I will be leading the group on the book! I’m so excited to share my thoughts and experiences of the book! The event is not restricted to Florida Bar members. If you are interested in attending this free event on Thursday, September 21, 2023, please RSVP here.

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

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