Leslie, a home-staging entrepreneur, bought furniture on credit and worries the debt kills profitability. Mike explains the only way out is generating profit, then allocating 95-99% of it to debt payoff while keeping 1-5% as a reward to reinforce the profit habit. Once the debt is gone, 100% of profit goes to the owner.
I love this question I got from Leslie. She's a home stager. And she said, "Mike, to start my business, I had to buy tons of furniture. To pay off that debt, I can't be profitable, right?" And the answer is technically that is correct. You need to pay off your debt first using the Profit First system. But we do it by allocating profit. And So, understand that those purchases were an expense incurred that you didn't have the money for. The only way to pay off debt is to make more money today than you're spending, aka profit. So, we're still going to allocate money to the profit account. When it comes to profit distribution time, 95% to 99% of that money comes out to pay off that debt of that furniture you purchased, but a small portion, 5% to maybe as little as 1%, comes out to reward you so you're in the profit habit. Feels good. Then once the debt's paid off, every profit payment goes to you, Leslie. Die! This is so stupid.
