How To Implement Profit First | Incite Tax
A four-meeting framework for setting up Profit First, Mike Michalowicz's cash-flow system. You'll open separate accounts for owner pay, profit, taxes, and operating expenses, then allocate money twice monthly based on target percentages for your industry. The system removes temptation by segregating cash and forces regular discipline around what gets paid first.
Chapters
How do you implement Profit First into your business? Feel free to check out our resources that go into more detail on what is Profit First, but to summarize, Profit First is a cash flow management system that harnesses our natural behaviors, that allows us to manage our cash more effectively, that helps our business become more profitable. As opposed to forcing ourselves to adapt something, a behavior that's unnatural that most business owners don't have, which therefore, unnatural, they don't have it, often doesn't get implemented. In our company, when we're helping a client implement Profit First, we have 4 meetings with them. And over those 4 meetings, we go over 7 different steps. I'm going to walk you through what those steps are. The first thing is we got to make sure that the bookkeeping is good. So we do a bookkeeping review. Because the issue is, on Profit First, a lot of the cash flow management stuff we do is going to be based on our financial bookkeeping and our bank account balances. So if our financial accounting isn't good, we're going to have a hard time identifying certain things that aren't helping the business, which I'll get into in one of the other steps. But having accurate and consistent books is the number one step because it doesn't make sense to do anything else until that foundation has been established. So that's number one, get your books in order. The next thing we do is we're going to review the Profit First principles together. These are things like smaller plates, the idea being over time in the U.S., our plate size has gradually gotten larger, and that is also correlated with the obesity rates in the U.S. They've done some experiments that show that if people just use smaller plates, They'll consume less calories but still feel equally satisfied. We kind of do the same thing with our bank account balances. Instead of having one giant bank account that has all of our money in it, we're going to create smaller plates. Another thing when it comes to eating healthy, which also relates to Profit First and cash flow management, is that eat the healthy stuff first. So eat veggies first. If you fill yourself up on the veggies, then it's less likely that you're going to overeat on carbs or even have the desire to continue eating delicious desserts afterwards. In this case, the veggies are things that benefit you as an owner, like making sure you're paying yourself, making sure you're giving yourself a distribution, a return on your investment from profit distributions, Making sure you're setting aside money for taxes. Those are kind of eating your veggies first. And then removing temptation. Through the process of the Profit First system, certain of these smaller plate bank account balances are going to get larger. Those could become a temptation. So in the book Profit First by Mike Michalowicz, he suggests removing the temptation by putting those accounts with larger balances that are used less frequently but have specific purposes That are not paying for your business's bills, setting those aside in a different bank so you don't see the temptation. Another healthy correlation with dieting and cash flow is having rhythm days. So instead of being a bear and eating a giant meal and then going into hibernation, being more like a horse and grazing. So in this case, we want to graze our cash flow management So we want to do it once a week at most or twice a month. So those are the core Profit First principles that we review with everybody because it makes— it helps all of us grasp better what we're trying to do with cash flow management. The next thing that we do is we want to decide what accounts are going to be used. So there's some bare minimums that we consider. They're going to be an income account, An account for owner's pay, an account for profit distributions, an account to cover taxes, an account for operating expenses. If you're a gym owner, you're also going to have an account for team member expense. You're also going to have an account for equipment. Those are the bare minimum. But outside of that, when in doubt, add an account. Meaning if there's something specific that you know you're going to have down the road, it's better to pull the money out of the operating account and put it into this new smaller plate. But so that's something that we review based on the goals of our clients. So based on your goals, you'll want to come up with a variety of different accounts that make sense for your cash flow management system. Then the 4th step is cash flow analysis. This is where we take your financials and your actual cash flow of the past We want to give ourselves a before picture of basically what it looks like right now from a financial health standpoint. How much have you been paying of your income? What percentage of your income have you been paying to your owner's pay account, to your profit account? How much have you been saving for taxes? How much of your revenue as a percentage is going towards your overall expenses? That's the before picture. And then based on your revenue, there's a table that Mike Michalowicz created for general businesses and that I created for gym owners. We look at one of those tables to determine what percentages should you be at if you were a healthy business. And so the cash flow analysis gives us that before picture where you're at now and where we're striving to go. So it gives us kind of that target vision we're going for. The 5th step in the Profit First implementation is then to schedule your rhythm days. These are the days that you're actually going to sit down and move money from your income account into your other smaller plate accounts. As I mentioned before, you don't want to do this more than once a week because it's overkill, but at least twice a month is recommended. As an example, I had a client, mechanic, got in trouble with sales tax because if you don't know, sales tax isn't your money, but the government requires you to hold on to it. If you end up using that for business expenses and therefore don't have it to pay, the government doesn't really like that. So he was on a payment plan. In order to do that payment plan effectively, we had him pay his back— an amount towards his back sales tax once a week. More than that, again, would have been unnecessary. After that, so that was the 5th step. The 6th step is to analyze your expenses. Now, we have a handout. Ultimately, here's the summary of what you're looking at when it comes to your expenses. Does the expense help me get clients or does it help me keep clients? Now, we actually have 9 questions that help you answer— as you answer the 9 questions about the expense in a non-biased, unemotionally attached way, you'll be able to find out, is this expense actually productive for my business or not productive? 2 things always happen when we do this with clients, and the 2 things as in 2 comments are always made by our client. Either one, I thought I'd canceled that. So be on the lookout for things that you didn't realize you're still paying for, but know you don't need. And the other one was, I have no idea what that is. Chances are, if you don't know what the expense is, it is not serving your business. Therefore, let's cut it. We want to do this because as your income increases, it's very natural without a system like Profit First for our expenses to increase at the same pace, if not faster, than our income. And so we're going to come in with these analyzation questions and really cut the fat off because if it's not helping you get clients or keep clients, then really what's the purpose of it? And then the last step, we sit down with our clients and go over their first allocation day. This is all rhythm day, allocation day, kind of the same thing. Mike Michalowicz's Profit First book suggests the 10th and the 25th. Those are the days that I use personally for managing the tax firm's cash flow as well. So on the 10th, Or the 25th, you sit down and you're gonna take money from your income account, put it into the different smaller plates based on the percentages the cash flow analysis tells you, and then you're also gonna review the expenses that happened over the last time period. So if I'm sitting down on the 10th, I'm gonna look at expenses that happened from the 25th to the 9th, and I'm gonna analyze those expenses. So when you first do this, when I talked about step 6 and we're analyzing All your expenses, we're going to go back probably 6 months. Sometimes we go back a full year, but really we want to make sure that we're looking at expenses that currently exist. But then going forward, it becomes much easier, which is why we do it on our allocation day, because then I just have to look at the last 2 weeks of transactions. But I use the same process. Is this expense helping me get clients or keep clients? Did I think I canceled this payment, but it's still happening? Or maybe I don't know what it is. We're still going to go through the analysis. It helps us stay lean. That way, as our revenue increases, we stay in control of our expenses and don't fall for the normal cause and effect of increasing expenses if we don't have a system. So there you go. Those are the 7 steps that we walk our clients through over the course of 4 meetings. I hope this serves you. Profit First has been a game changer for me personally and our firm. It allows me to know all sorts of things. I've since adapted. I would say I'm an advanced user since we teach other people how to do it as well. But I mean, I have an account that I've created. It's basically an internal line of credit instead of having to go to a bank. If I need a quick infusion of cash for something, I'm pulling it from my internal line of credit. I have a few large expenses that happen every year. I figured out what the dollar amount is, and I put that money away a couple times a month so that when the big expense happens, I'm not nervous or worried about how I'm going to be able to pay for that because I've set aside the money over the course of the year. Sometimes people also have an account where they Are unsure if they're going to be able to hire somebody. Well, if you set up an account called future hires, I can pay that bank account as if I'm hiring an employee for a couple months to see if I can afford to keep the money in that account. If I can't, then I might not be ready, or maybe I need to look at hiring someone part-time and readjusting that way. But if I've been able to put money aside like I've been paying someone a salary into this account for 1 month, 2 months, 3 months, then I know with confidence that I can afford to hire the next person. And when I hire them, I have 3 months of cushion so that they can get up to speed and start providing a return. So anyway, Profit First, the sky's the limit. We are here to help if you have any questions. We also have free resources, so feel free to download the links so that you can implement this yourself if you want. And we are here to help if you need us. Uh, profit is a choice. Have the courage and wisdom to choose it. And please remember to like, subscribe, comment. 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