Maximize Agency Profitability with Profit First Strategies

This is the 7 Figure Agency Podcast. Discover the strategies and techniques to grow a highly successful and profitable digital marketing agency with your host, Joshua Nelson. What's up, digital marketing agency owners? On today, I want to talk about how to implement profit first for your digital marketing agency. So if you're running an agency, you're trying to figure out how do I not just grow my revenue but actually increase my profitability So, if I keep more of it, you're gonna wanna watch this video. So, if you've been in the digital marketing game for any period of time, and you've been in the business world for any period of time, you've probably read this book or listened to this book, Profit First by Mike Michalowicz. Amazing transformational book, one of the books I read early in Plumbing and HVAC SEO. Really wrapped my mind around and implemented almost immediately. Had a huge impact on our ability to grow, to scale. But more importantly, to maximize our profitability. And so, what I want to do on this video is not just explain Profit First because you should go read the book and you should go, you know, study this information from Mike Michalowicz. I just want to walk you through how we implemented in this in our agency and how we've helped other digital marketing agencies simplify the process and, and actually get it implemented in their business so they can get the outcome, which is more profitability. And if there's one thing I know to be true, and I believe this with all my heart, it's that profit is not an option, right? You're running this digital marketing agency, you're putting your heart and your soul into serving your clients, into building your team, into growing your agency so that you can, you can scale. But the reality is we run these businesses to create profit, right? That profit is the money that we need to live our desired lifestyle, to take the travels, to enjoy our lives. And there's no sense running a business and just focusing on the revenue, right? Revenue is vanity, profit is sanity. And I've seen agencies go to 7 figures and multiple 7 figures and even 8 figures and have virtually no profit in their business because they're so focused on growing the top line and whatever that money needs to be spent on, building the team, investing in marketing, doing, you know, trade shows and all these other things, all important, but you can't just continually be reinvesting in growth. At some point you have to consciously decide profit's not an option. I've got to bake my profit into this business and grow with that constraint of that I'm doing this and I'm gonna keep a healthy profit for myself. And with that healthy profit, obviously you can grow the team and you can do more things within the business. So as the book explains it, most businesses operate on a single account system. So revenue comes into the business and it builds up in the checking account, and expenses are probably run through a credit card like an Amex card or a Chase Freedom card, and then all of the expenses come out of the account, right? The amount to pay the owner, amount to pay the team, the amount to pay the subcontracted fees. And when you operate in this way, you don't really know what's, like, how much profit is there. You're using traditional accounting to say, at the end of the month, let me run this through QuickBooks, let me have my bookkeeper tell me how much money did we generate minus how many expenses did we incur, and what's left over is my profit, right? And when you operate in that way, there's usually no profit, right? Uh, there's a thing called Parkinson's Law which says a thing will expand to the size of the container. And so if you've got all of your income coming to the account, let's say it's $100,000 a month, eventually your expenses will expand to $100,000 per month because you feel like, hey, that money's there It needs to be invested in the business. It needs to be taken out in distributions. And you're not consistently managing a healthy profit within the business. And so what Mike Michalowicz teaches and, and what we found to work really well is that you really need to set up separate buckets and separate accounts for your business. And so you'd have an income account where all of the deposits from your clients go in and then Immediately at the beginning of the week, at the end of the week, those funds get taken out, right? And what we're doing is we're saying we're gonna immediately take our profit, we're gonna take our owner compensation, we're gonna move money for tax, and then what's left over is gonna be our operating expenses, which I'm gonna talk about the percentages and how much money you put in each of these buckets. But when we do it this way, the income account is just a holding tank, right? It's where the money goes and it immediately gets distributed to these accounts. We're able to choose our profit and owner compensation in advance. And this is mission critical because instead of saying, how much did we make minus what was all our expenses, what's our profit? We say, how much money came in, what's our profit and owner compensation, and what's left over is our expenses, right? There's a great book called The Richest Man in Babylon, and the simple concept from that book was this individual got money and immediately took some of it and took it into a profit account. And that's exactly what Mike Michalowicz is teaching in this book. And so that's what we're doing, right? We're gonna go to Chase or we're gonna go to Bank of America, we're gonna go to wherever you happen to do your banking, and you're gonna say, hey, I need to open a couple additional accounts, right? I need a profit account, an overpaid account, a tax account, an operating expenses account. Usually if there's enough revenue in the business, these accounts are all free. But it gives you the ability to manage the containers. Just as a, as a kind of a starting point, what we find works well, and again, this is going to shift, and these kind of videos are hard because it's going to shift from where you're at the beginning of your business, where almost everything's coming to you in terms of profit and owner pay, to when you get to 7 figures, multiple 7 figures, 8 figures, the percentages will move over time. But regardless of where you're at, if you don't have consistent profitability, you should be looking to take at least 30% in profit and owner compensation, right? And you and the owner— as the owner has to get paid first, right? There's no way you can take care of the team, there's no way you can take care of the clients if you aren't being taken care of yourself. And so I'm going to show you a simple mechanism to track this or put a bookkeeper in place to track this for you, but The money comes in, at least 15% to profit, 15% to owner pay, 15% to tax. Don't forget about tax, right? As owners, we get all this revenue coming in and we spend it or we reinvest it, and then at the end of the year, Uncle Sam or the CPA says, hey, wait a minute, where's the tax money? You didn't distribute this money into tax throughout the course of the year. You owe, ah, $250 grand, right? I hope that's not you, but if you've ever gotten yourself in that situation, You don't want to be there again, right? And so you have to be intentional and say, hey, I recognize at least 15% has to be set aside for my taxes. And it may be more, consult with your, your CPA in your particular situation, which then leaves you with about 55% for operating expenses. The money that you use for your own marketing, the money you use for paying your team, the money you use for, um, the delivery of the goods and the delivery of the services that you have for your clients. And what I want you to understand is that Parkinson's Law says an object will expand to the container that it's in. You've just reduced your container from 100% to just 55%, right? And that constraint makes it so that you have to be more efficient, so that you recognize, well, I can't hire that third person, I can't go invest in that software tool, I can only spend 55% because that's all that's in my operating expenses account. It's a simple concept, but it will have a massive impact in how much profit you actually keep within your digital marketing agency and how much you're able to pay yourself as you grow and as you scale. And so I'm gonna walk you through a very simple process to implement this. Step 1 is you're gonna open up your accounts, right? And there's a, there's a case maybe for having an additional account for payroll, right? Some people do this. They've got profit, owner pay, taxes, operating expenses, And payroll, up to you whether you wanna have that fifth account and have payroll kind of sitting in its own bucket. But here's where most people get stuck. As I've talked with hundreds of agencies that I say, "Hey, have you ever read Profit First?" And they say, "Yeah, I read Profit First, amazing book, I love the idea." I say, "Okay, are you doing it in your business?" And they say, "No." And I'm like, "Well, what gives, right? You know you wanna pay yourself first, right? You know that profitability is essential. It's a relatively simple concept. What's unclear for you?" They're like, "I just, I don't know what my next step would be. I don't know how to actually implement it." And so after you've opened up those accounts, and you should do that first step, the second thing is you just want to figure out what your allocations are. And I've got a simple spreadsheet that I'll share with you if you type in "Profit First" here in the comments. I'll get you a link to this spreadsheet. But what you would do is say, "Okay, how much do I want to allocate to profit? How much do I want to allocate to owner pay? How much do I want to allocate to tax? And how much do I want to allocate to to operating expenses, right? You can decide, maybe in your case, I want 50% to profit, right? And then maybe you've only got 25% for operating expenses, right? You decide what those allocations are. After that, you're gonna set up a routine within the business. You're gonna kind of map the process for distributing the funds. And so when you wrap your head around how simple this is, you're like, I can't believe I didn't do this sooner. What you're gonna do is you're just gonna set up so that every Monday and Wednesday, every Wednesday, Monday, Wednesday, and Friday, assuming you've got consistent deposits deposits happening within your account, you or a bookkeeper, and I recommend a bookkeeper do this, you or a bookkeeper are gonna log into the bank account, right? And remember, all your deposits are gonna be set to go into your income account. And so Monday morning or Monday afternoon, you or the bookkeeper are gonna log in and you're gonna look at that account and say, how much money is there right now? Let's just say we've had $25,000 in deposits over the last couple of days. We always wanna leave $5,000 in the income account. That's just, a best practice to have funds in that account. And then you say, okay, well then how much do I need to move to each of these accounts? What's beautiful is with a simple spreadsheet that I'm going to share with you, you put the balance and then it tells you, all right, 15%, you're going to do $2,500 to this account, $2,500 to the owner account, $3,750 to the tax account, and then you're going to move $16,250 to the operating expenses account. So what this is doing is making it so that the money comes into the account, it's getting distributed, so you have the money in the accounts that you need as it happens. And simple routine, depending upon how often you incur expenses, how often you're getting deposits, you can do this once a week, you could do this every 2 weeks. I personally, I like to have it happen because we've got money coming in pretty consistently, so 3 times per week our bookkeeper goes in, grabs those funds, makes those transfers. Those funds move into the appropriate accounts. Number 4, step 4 in this process is you want to remove yourself from the flow, right? And I think that's why a lot of you guys get stuck here. You're like, okay, I know I need to set up these accounts, and maybe that's the step that you take. You set up these different accounts, but then the continual process of distributing the funds becomes a bottleneck. Find a CPA or find a bookkeeper or find a VA. Quite frankly, I hired a virtual assistant in the Philippines that at the top of the pay scale understands finances, QuickBooks certified, understands how all this stuff works, and I handed him this process. And so I don't have to be involved, right? So what I really want to encourage you to do is remove yourself from this. You can make it an hourly person, or you can make it a full-time dedicated, you know, bookkeeper within your organization. But once you remove it, it just automatically happens. And your profit is guaranteed, right? And as the company grows, the profit will continue to grow, 'cause those percentages are locked in advance. And then number 5, enjoy your profit, right? And this is important. Don't just stockpile cash within your organization. Don't just stockpile cash within your profit account. You wanna distribute that profit back to your personal income. You wanna take, at least a portion of the profit and do something good for yourself. Take care of yourself. You know, buy a luxury, go do something nice. I think so many of us work so hard and we're so focused on growing the revenue, but we don't ever experience the joy of what we can do with that money, right? And some of us, it's taking a trip. Some of us, it's buying a luxury. Some of us, it's doing something nice for our spouse or for our kids or for our family. Some of us, it's having that additional money to invest in some charitable or ministry-related activity. But be sure that you distribute it. One of the key things Mike Michalowicz talks about in the book is this tendency to put the money into a profit account, let it build up in that profit account, and then have some type of issue where you're like, "Oh, I need that money," right? And you take it and you put it back into the company account to cover an expense or to do a big marketing initiative. When it goes to the profit account, it needs to stay in the profit account. What he recommends is every quarter, which is every, every 3 months, you take 50% of the money that's in your profit account and you distribute it to yourself and you spend at least some portion of that for your own financial gains. So I hope this has been helpful. I hope this has like kind of walked you through and kind of connected some of the dots of the benefits of Profit First and how to actually implement it and get the outcomes. First things first, I highly recommend you go read the book Profit First by Mike Michalowicz. If you'd like to get your hands on this spreadsheet, just type in Profit First in the comments. I'll grab the link and send it off to you. Hope you enjoyed this, and let me know in the comments, have you done Profit First? Are you implementing this? Are you getting great results with it? Do you have some questions on how this works or kind of how you should set this up? If so, put those in the comments. Be sure to hit the like button if you got value from today's video. Be sure to subscribe for future videos like this around how to land clients, deliver world-class results, retain your clients at the highest level possible, and ultimately scale your agency so you can make more money, have more freedom, and have a bigger impact. Thanks so much for watching.