“I want to make MONEY!”
No, you don’t … you want to make PROFITS.
“No you don’t understand, I want this business to make a million dollars.”
Not at 1% profit margin you don’t. That’s $10,000. You’ll be a thousandaire with a cash flow problem and an overwhelming amount of work.
Does this sound like someone you know? Maybe someone that looks like you and has a name that sounds just like yours?
I get it. We see this all the time with our clients and we’ve done it before ourselves.
You’re putting Money – Income, Gross, Total Sales – First.
“But .. but, they say Sales cures everything!”
If your profit margins are too low, Sales only really cures cash flow problems. You’re still stuck working round the clock for pennies.
Minette and I read Profit First by Mike Michalowicz just after I first joined her in the Path to Profit Academy and it produced a profound shift in our approach to business finances. We understood the part about profit margins but we weren’t truly doing our accounting by taking out profits first.
We were stuck in the traditional model of “profits are whatever is left after all the other accounts are paid up”.
The other key part of the Profit First is that in essence, it is a business system:
- assess and estimate percentages needed for profit, taxes, operating expenses, etc.
- do your accounting on the 10th and 25th of every month
- take specific quarterly steps
- perform specific transfers between accounts based on specific percentages
- take specific cost-cutting measures
- lather, rinse, and repeat.
I was able to capture the subsystems from the book into a set of Google documents, spreadsheets, named bank accounts, files shared with our bookkeeper, and browser bookmarks.
I can now use these systems to reliably process our business finances. They don’t magically create more income but they remove the need for me to think about these details twice a month. Like all effective systems, I can just execute the steps.
I really want to share these with you. I want you to get a head start.
But you need to read the book first! (*hint* the audiobook is narrated by the author and he’s really engaging.)
Seriously, go buy it and speed read it then come back here and pick up the free systems to help you implement it in your business.
OK now that you’ve got that done let’s proceed!
The Profit First Assessment
Once you’re onboard with Michalowicz’s Profit First system you need to take the (almost) instant assessment with your business numbers. I created a spreadsheet in Google Sheets to help with that. You’ll need to follow his instructions to fill in the Target Allocation Percentages appropriate to your business in the PF% column. Once you plug in your numbers the spreadsheet will automagically update the Increase/Decrease columns 🙂
A key system from Profit First is to do all financial work on the 10th and 25th of each month. Not every day, nor once in awhile, rather regularly twice a month. Typically I am able to do this in under an hour and having a system in place is crucial to avoiding billing mistakes and in ensuring that I get eyes on our finances often. I created a simple Google Doc that just details the necessary steps. Combining the system with pre-setup login & password details in my browser makes the process smooth.
This is another Google Doc. There are three main quarterly items in our process:
- change the small plate percentages with the goal of eventually reaching the target percentages
- ensure that our tax accountant has the information necessary to do quarterly tax filing
- review and cut costs (we’re not doing this yet!)
Our Bank account allows us to Nickname accounts which is perfect for the Profit First Systems. We have 4 accounts specific to the business: “Oper. Expenses 30%”, “Profit 5%”, “Tax 15%”, “Owner Pay 50%”. The percentages are our targets and don’t necessarily reflect our current percentages as we adjust on a quarterly basis. To start we did not create completely separate bank setup as Michalowicz suggests but at least with this system it is easy to see our Profit First accounts in the Account Summary and easy to make the transfers. Eventually, we will move these to a separate bank as suggested in the book.
Michalowicz outlines a number of important cost-cutting measures we have to take to make our business more profitable. You’ll see that I pay them lip-service in the Quarterly Steps process but I haven’t documented them thoroughly nor have Minette or I done a good job of actually doing cost-cutting. As the old adage goes, the devil is in the details. That is so true for getting rid of hidden costs to improve our profit margins. I encourage you to add in the Profit First cost-cutting steps into your copy of the process: I’ll do the same!
Not surprisingly we’ve talk about this topic a lot on the blog and the podcast! Click through these to find out more in Episode 2: 5 Big Money Mistakes That Creative Entrepreneurs Make, Episode 89: Creating Real Prosperity with Penelope Jane Smith, Episode 91: 3 Secrets to Pricing Your Creative Products or Services For Profit, and Episode 92: 5 Ways to Improve Your Relationship with Money: Money Mindset Hacks for Creative Entrepreneurs. You can also take a look at our great, free resource, The Artful Profit Planner.
If you are like me, doing the numbers and billing can be a bit of a bear. I’d rather being doing more creative things but I know these are critical parts of our business. I created these systems to allow me do them faster and more effectively so that I can get back to the fun creative stuff that I’m good at. I encourage you to look at how much time you are spending on financial activities, whether they have any direction, and whether they are focused on your profits first. I’m willing to bet that you could read the book, copy and modify my systems, and get underway in half a day. After that it will save you hours every week which means more creative time!