Lawrence is using credit cards to cover operating expenses while following Profit First allocations. Mike advises a temporary shift: allocate more to OPEX, reduce profit and owner's comp, and cut costs if debt keeps growing. Once cash flow stabilizes, gradually readjust allocations quarterly to eliminate debt and rebuild profit.
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 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 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 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 times, 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.
