Lawrence's business can't cover operating expenses and is using credit cards to survive. The problem isn't the allocation percentages from Profit First, it's that the business doesn't generate enough cash. Temporarily shift money from profit and owner's pay into operating expenses, then gradually tighten those allocations once the bills are covered and debt stops growing.
So I got an email in from Lawrence. Lawrence was asking about the implementation of Profit First, and specifically he was doing the allocations according to the TAPs, or Target Allocation Percentages, that I specify in the book. He said there's one problem though. He doesn't have enough money flowing to OpEx to cover his bills, so he's using a credit card and other forms of loans to to pay for it. His question was, "Should I simply allocate more money toward OpEx, or what should I do?" And the answer is this: if you are accumulating debt, meaning you can't pay your operating expenses, if your business can't pay its bills, it can't afford those bills. So there's something fundamentally wrong. Now, the other thing is, if you go fully into the TAPs, the Target Allocation Percentages, and you have an established business, jumping so much to such a cost-cutting situation may be too abrupt of a change for your business and hurt your business. So my suggestion is this: allocate, as Lawrence was asking, a little more money to the OpEx, a little less money to profit, owner's comp, and perhaps even tax for now, and see if you can cover your bills. If you still can't cover your bills and you're accumulating debt, you need credit cards and so forth, that's a fundamental problem. We've got to cut costs. We just have to. Then, once we're stabilized, we're able to pay our bills out of the OpEx cash flow, slowly over time, On a quarterly basis, readjust to squeeze your OpEx down a little further, increase your profit, owner's comp, and tax. And that's how you get your business on track and once and for all eradicate your debt. Oh, and drive a lot of profit.
