Mastering Cash Management: A Profit First Case Study

[TIM SEYMOUR ]: Foreign.

Welcome to Profit first beyond the Book, a podcast that takes you beyond the book with Profit first and the rest of the Profit first professional UK and Ireland. Welcome to Profit first beyond the Book.

[TIM SEYMOUR ]: And I it's a special edition today with just me and I just want to share a success story, a very common success story that we hear from our members week in, week out, working with Profit First. This is one that I particularly was involved in and it was a client of mine. So I'm going to share the story with you now. And it's a brand about how a family business got out of their overdraft and funded their VAT bill, consistently using Profit First. So the reason I want to tell you this is because the most powerful lessons from Profit first don't come from the book, they come from what happens after you try to use it in the real world. This electrical family business is a perfect example for you. They went from constantly fighting the overdraft, struggling to pay their VAT bill and never paying themselves on time to finally feeling in control of their cash. They didn't do it by earning more, they did it by changing how they managed what they already had. So let's dive in. The firm was run by a brother and sister, David and Sarah, alongside their mum and dad. When they took the plunge to work with me and to finally implement Profit first, this is a situation they were in. So a good company, doing well, great reputation, lots of work. But like many businesses, they were left asking that frustrating question, where's all the money gone? Cash flow was tight. December had been really quiet and the VAT bills kept catching them off guard. And more often than not, David and Sarah were paying themselves last and only when there was any money left to pay them. So let's take a step back to where we started with their profit first journey. It was January. The sales income in December dropped below the normal levels and unfortunately, the business wasn't financially prepared for this to happen. On top of this, they'd received a one off annual bill and their quarterly VAT was also due. So in order to resolve this, they used their overdraft facility. Sound familiar? Then at the end of the month, they used up the rest of the overdraft facility to cover the staff wages, leaving their own pay until February. So our first step was simple. We need to get clarity on the money. So in the first few sessions that I worked with them, we completed a full profit first assessment. We pulled the numbers apart to really understand what was going on. And as often happens, we discovered a big Chunk of what looked like staff wages was actually owner's pay. So once we separated that out, everything became a bit clearer for them. We then built the profit first rollout plan. We opened some new bank accounts, one with styling for the profit first pots and another with lloyds for the income and operating expenses. That structure alone gave them an instant sense of control. They could see what their money was for. They could see each pound had a purpose. But clarity is one thing. The real test comes when cash is tight. At this stage, sales were unpredictable. They had two main customers and one of them was completely dependent on the dad's skills. The dad built the business up through his skill set and without him being in that business, this particular client would not be able to continue with the business. So if dad wasn't available, the work stopped. That, that's a scary position to be in. One key person for one key client. So we started talking about how we could reduce risk. How could they find more clients like their best one? Sarah began reviewing costs and tightening up to zero budgets. And David focused on increasing sales and strengthening relationships. But then we faced a real challenge, because when cash is low, the idea of moving money into profit first pots can feel impossible. I can remember David saying to me, but Tim, we're already using the overdraft. How can we possibly make allocations right now? It just felt overwhelming to them. I remember saying, look, let's not wait for things to get better before we start. Let's start small, even if it's just a VAT pot. So that's what they did. Just 12 and a half percent into VAT. Every Wednesday at 9 o', clock, Sarah would log on to the Bomb, the banking app, add up the income from the previous seven days and transfer 12 and a half percent into the VAT pot. Simple, one very small step, but it changed everything. And from an accountability perspective, the first few times that Sarah did the allocations was when I was on a call with her after I asked her to simply email me each Wednesday morning as soon as she'd done the allocations. If I didn't hear from her, I would chase her. But actually, I didn't need to chase because Sarah was all in on profit first. And it really helped because she consistently made the allocations every Wednesday at 9 o'. Clock. That's what it's all about with Profit first is building the habit and building the rhythm with your money so that you can understand the patterns that are forming with how the money moves in waves throughout your business bank accounts. So we're making weekly allocations of 12 and a half percent of the income into the VAT pot. And a few weeks later things really began to shift. So David originally had been really resistant to opening the second current account and separating the income from the operating expenses. But after seeing the VAT pot grow from the 12 and a half percent weekly allocations and from starting to then look more closely at how the money comes in and out of the business, David realized how much more clearer everything would be with two separate accounts. This is a massive point of resistance for many people and this was a massive step change by David making this decision himself, following my guidance from a few weeks previously. So David opened up the separate bank account and he renamed it operating expenses. So now we had a bank account where the customers paid their money into which was the income account, which is to serve and trade for the business. He had a separate current account to make the payments to all of the suppliers and to make the wages payments, etc, but he also had the other parts ready to start putting money away so that that money could then go back in to better cover the bills as, as and when they were required. So they started making allocations and even though they were still in an overdraft because they realized something powerful, moving money into pots doesn't take it away from the business, it gives it purpose. By March, sales were back up just above the target level that they had set. And so they made their first proper full set of profit first allocations and including one to the profit pot. And for this particular business we have pots for VAT materials subcontractors. Then profit owners pay tax, operating expenses and also salaries. We separated salaries from the operating expenses to provide even more clarity for the business, but also because from the very first time I met David and Sarah, they made it so clear that they paid their staff on time, every time, every month without fail. Therefore, I wanted to ensure that the money was, for one of a better phrase, ring fenced into a salary pot to make sure they were comfortable and they had peace of mind, knowing that their team and their employees would all be paid at the right time. As they started continuing with the allocations, they were already building up money for the next VAT return, their VAT potential. They were paying suppliers intentionally, not reactively, and for the first time, they paid themselves on purpose. That's the moment profit first really starts working. Not when everything's perfect, but when you decide to trust the process. Over the next few sessions, they started to build some serious momentum. The VAT pot covered the full water, 3, 4/4 VAT bill. It was about £13,500. Without any panic, the money was there. They did not need to use the overdraft like they had done previously. Their owner's pay became consistently paid. They were making smarter supplier payments based on what was in their OPEX account. Of course, they paid their team on time as well through the salary account, because that was already a non negotiable. That had to be done. And finally, they had a forecast in zero that matched their Profit first plan. In the background, Sarah was cutting unnecessary software costs. David was improving pricing and focusing only on profitable jobs. And as his apprenticeships developed their skills and came to the end of their apprenticeships, where they were going to become highly skilled and qualified, he started delegating more and more to them so that he could free up his time. And there's another hidden benefit of Profit First. It's really not just all about the numbers. It gives you back your headspace. By June, when we met for the quarterly review, the difference was night and day. Every cost was covered from their profit first parts, VAT material, subcontractor salaries, operating expenses, all paid without stress. They'd even made their very first profit distribution. There was £1,000 in the profit pot and they placed half into their vault account to start building up an emergency fund. The cash and the other half they paid out to themselves. This was their reward to spend on themselves, not to reinvest in the business, but to reward themselves personally. This gives such a feeling of reward and satisfaction and even evidence you're proving to yourself the system is working and it spurs you on to keep increasing this reward each and every quarter. And then there's the moment I love the most. Because the initial problem that the business had was solved. Their next VAT bill, which was around £14,000, was completely covered by the money they set aside in the Profit first pots. No more sleepless nights, no more borrowing, no more panic. The overdraft wasn't completely gone, but their mindset was transformed. They'd halved the overdraft from the end of January to the end of June. So by the end of the year, the overdraft will be clear. They were finally in control of their cash. And for the first time, Profit first had become a habit, not a hope. So what can we take away from their journey? Number one, start where you are, even if you're an overdraft. Don't wait for perfect. The best and only time to start Profit first is now. It does not matter what situation you are in do not wait to earn more. Do not wait until you're making a profit. Do not wait till you get more money coming in. The only way for this to happen consistently is by using Profit first right now. Number two, clarity creates control. When you see clearly where your money goes, you make better decisions without even trying. Number three, this isn't just a number system, it's a behavior system. Profit first changes how you think about money and that's where the real transformation happens. And finally, number four, celebrate the small wins. Covering that for the at budding four was their light bulb moment. That's when they truly believe this works. Paying themselves a profit reward of £500. Another light bulb moment. This system works. Paying their owners pay their monthly salaries and dividends on time every month. Profit first works. So that's the story of a family business that proved Profit first doesn't just fix your books, it fixes your habits. So if you'd like to explore how Profit first can bring the same sense of control and calm into your business or into the business you work with as an accountant, bookkeeper or coach, you can hit our website, which is Profit first co. In fact, it's coming up on the screen now, profitfirstuk.co.uk you can hit that website, you can find out more about us. And if you're looking, if you're a business owner looking for help with Profit first, come on to the website and you can find a section saying find a certified Profit First Professional and we can help match you up with someone suitable to work with you. If you're new to Profit first and you're not really too sure what it's all about, definitely read the book by Mike Michalovics. And in the meantime, if you want to join our free Facebook group for accountants and bookkeepers interested in Profit first, then just head to Profit first. Type in the Profit first pathway, answer three simple questions, agree to the rules and we'll allow you in. And you'll better join us on our future challenges and calls that we'll have together. That's it for me this week. It's a short edition. This week I wanted to change things up and share a success story that is a normal success story, the type of story that we hear every week from our members at Profit First Professionals. These are the things that we're doing for our clients and our clients are telling us that implementing Profit first into their business is a game changer. Our members are saying becoming a Profit first professional has been life changing. So reach out to us and if you only do one thing from this podcast, if you're not already utilizing the Profit first strategies in your business, open up a separate savings account, call it Profit. And once a week, maybe a Friday at 9 o', clock, maybe a Monday at 10 o', clock, pick a time, pick a day that suits you, log on to your bank, add up your income from the previous week and put 1% into your profit pot. Do that consistently now for the next few weeks and watch that money grow. Prove the system works and then you can find out more about how Profit first can absolutely transform your business. Thanks for listening today. My name is Tim Seymour, Profit First Professionals UK and Ireland. Bye bye.

Thank you for joining us on our podcast today. Profit first beyond the book was brought to you by the Profit First Professionals UK and Ireland team. If you'd like to find out more about Profit first or becoming a Profit first professional, head to our website profitfirst uk.co.uk.