UPWORD Consulting - Week 8

Profit First Part 1


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Hello my entrepreneurial friends welcome to the profit first segment in your course with the group here and I'm so excited. Let's get this profit engine started. So I am not the author of profit first Mike mccalla Wits is my business partner and the author of profit first. I typically travel the country with him he does his keynote and then I do the workshops after his keynote. So today we are going to dive into what we cover in a profit first workshop. I am also the host of profit First Nation, the official podcast for profit first, where we dive into advanced profit first strategies. So profit first is a book written by Mike mccalla wits. I call him the most prolific author on entrepreneurship. He has sold over a million copies across his seven titles, but his most popular one is profit. First, I highly recommend even though we're going through the How to have profit first, and I'll be showing you how to implement it in your business. I do recommend that you read the book, you can get the book at the library, you can download an ebook, you can even get it on Audible. And if you sign up for Audible for the first 30 days, it's free. And that's when you could download the book and listen to it on Audible. It has a great index section as well. So you can catch up on things or dive into deeper topics as you evolve in your implementation of profit first, profit. First of all, what the heck is it it is a do it yourself cash management system. And the great thing about profit first is you don't have to be a bookkeeper or accountant. All you have to do is know the difference between spending and saving. And then you're good with money. So I think you guys all can accomplish that. This is not bookkeeping. This is not accounting, you still need an accountant and or bookkeeper to keep your books compliant and reconcile your accounts at the end of the month for profit first, as a cash management system will help you manage the cash flow in your business. By understanding all you have to do the difference between spending and saving.

So, but she didn't write the book, what makes me qualified? Well, I'll answer that in the next segment. Yes, but I didn't write profit first. So what qualifies me to be here teaching profit first to you? Well, I have been an entrepreneur since the ripe old age of 25, which is, sadly decades in being in the entrepreneurship world. And when I started my business at the ripe old age of 25, it was an advertising and marketing agency in Nashville, we did over a million dollars in our first year, we had national clients now I'm dating myself Service Merchandise, and Sam's Club to name a few. And we were published in national publications, you know, I was, it was is pretty flattering. But the sad thing is, is that when it came to the finances of my business, I was like an ostrich with my head in the sand. I thought well, if I hire a bookkeeper, full time on staff, and I'm working with the largest CPA firm in town, then I'm set if there's a problem, they'll let me know. I was just focused on working in the business and working on the business and thought, Okay, well, I don't have to worry about the finances because I have a bookkeeper and accountant. And that's their job. But sadly, I was way wrong about that. But being an entrepreneur with their head buried in the sand, when it comes to the financials of the business that they own is common. In fact, according to US Bank, Small Business Report 83% of small businesses operate check to check meaning when money comes in, it's out the door in a flash and there is no reserve, you're operating out of one check account checking account and I was a typical entrepreneur, just like I'm sure you're an 83% entrepreneur, eight out of 10 entrepreneurs anytime you're in a room, eight out of 10 are likely operating their businesses check the check out of one checking account. So the good news is, is that I went from hiding from my financials to owning my financials. And again, you don't have to be a bookkeeper or an accountant to own your financials. You just have to understand and own the spending and saving decisions in your business. And that's all it takes to owning your financials. This is not an accounting course. This is not a bookkeeping course. This is a course on cash management. cash management is the real time what's going on in your business when you need to make those type of decisions. The funny thing about finance is that it is really kind of a mindset game. And so the challenge is logic over emotion. And we'll talk about that in the next segment.

Let's talk about the funny thing about money. The funny thing about money is that you need to make sure that you're taking logic over emotion. What do I mean by that? Well, our natural tendency when we deal with money is that it's 10% logic, and 90% emotion. Most people have stories in their head, things that they tell themselves fake things that they're believing about money. And what you need to do to be successful with money is to focus on the logic, focus on the logic and throw the other crap out the window. If you're, if you're a fifth grade teacher said that, hey, you know, you're not so good in math, maybe you should take some sort of creative approach and get into graphic design or something like that, that you don't let that stop you from being good at business and being great with the cash in your business. Focus on the logic, we're going to show you how to implement profit first as a cash management system. And you will actually shock this fifth grade teacher who said that you weren't good at math, because you are good at math, you're, you're good enough at fifth grade math, I don't need you to do calculus, I don't need you to do accounting, I need you to just do fifth grade math or plug numbers into a spreadsheet and let the spreadsheet do the math for you. Please, please, please just throw out the stories in your head and focus on the logic. And that will carry you to be more successful with money than the average person.

But there's also another problem we have to tackle. And that's Jabba the Hutt. So the real problem with your business is you've got a job of the heart problem. What do I mean by a job of the head problem? Well, it starts with the generally accepted accounting principle that sales minus expenses equals profit. This is how your income statement or otherwise referred to as your profit and loss is set up, sales minus expenses equals profit. The problem with this equation is that your business consumes the cash in the form of expenses, and profit ends up being the little to nothing leftover. And so it's like you're letting Jabba the Hutt have access to your cash, and he treats it like an all you can eat buffet, just consuming cash for expenses and expenses, and more expenses, which is why you end up having little to nothing leftover in terms of profit and cash in the bank to correlate to that profit in your business. The solution is profit first. And we will dive into that in the next segment.

So the moment that you've been waiting for what the heck is profit first, and how does it work? Well, here is the solution to Jabba the Hutt. we flip the equation in profit first, and it's sales minus profit equals expenses, we prioritize profit, what we prioritize is what happens so by prioritizing profit, we will be on the path to permanent profitability. And then our business will tell us what we have leftover to spend in expenses. So we focus on the profit. And that is how profit first is works from a theoretical but let me show you in the next segment exactly how it works.

Okay, so now let's show you exactly how it works. What happens is when a client pays you that money is going to go into your income account at the bank, then you are going to start allocating on your designated allocation day. First to profit so your allocation day is the day when you do the allocations to your core accounts in profit First, the book recommends the 10th and the 25th some people do their allocations monthly, we don't recommend a frequency any more than weekly. All right, so you're going to allocate a percentage to profit, then you're going to allocate a percentage from income to owners pay, you're going to allocate a percentage from income to tax. And you're going to allocate a percentage from income to operating expenses. After you've done these allocations. So you're going to have five core accounts at your primary bank, you probably only have one account, you maybe have two accounts. But these five accounts are what you need to start profit first, step number one of implementing profit first is getting your button to the bank and opening these primary accounts. So a lot of people use their existing checking account as their income account, because you already have it tied to the systems where money comes in. And you would, you would create an operating expense account. And that's what you would pay your operating expenses from. These should all be checking accounts you don't want, you don't need any savings accounts, you should all be checking accounts. So after you complete your allocations to these accounts at your primary bank, then what you're going to do is you're going to allocate and sweep from profit, that balance to your profit hold account at an inconvenient bank, and you're going to do the same with tax, your tax balance at your primary bank is going to be swept to your tax hold account at your inconvenient bank. So you will open up two additional accounts. These two accounts can be savings accounts at an inconvenient bank. What do we mean by an inconvenient pig, we mean, an inconvenient bank, a bank that's hard to get to a bank that's out of sight out of mind, we want this money here out of sight out of mind. So it doesn't tempt you to pull from that you will only access these accounts at the end of each quarter when you do your quarterly profit distribution. Or when it's time to pay your quarterly estimated taxes, then you will access the money in that account to do such. And next, we will be talking about how this is kind of like an empty tube of toothpaste.

So let's talk about the significance of an empty tube of toothpaste. And looking at the how you spend money in your business like an empty tube of toothpaste. The actual concept is based off of Parkinson's Law. So the empty tube of the toothpaste goes like this, when you have a seemingly empty tube of toothpaste. Do you go without brushing your teeth? No you don't, you get real crafty. Now we all know that there is like one or two more servings, or two more days of brushing your teeth in this part of the toothpaste. So while we've already squeezed up from the bottom, we know there's a little bit left. And so we get under there. And we really, really, really just push push push until we can get enough of a dollop out to brush our teeth. But what do we do with a full tube of toothpaste? Are we economical with how much toothpaste we put on a toothbrush with a full tube of toothpaste? Heck no, when we have a full tube of toothpaste we just glob it on. But when we have an empty tube of toothpaste, we make it work we get enough out of it to brush our teeth successfully. And so Parkinson's Law is like an empty tube of toothpaste. And I want you to apply running your business like you're running it on an empty tube of toothpaste. So Parkinson's Law is a function over time available versus effort. And so when you have a little time, you tend to put a lot of effort into it to make it happen. When you have a lot of time you spend a lot of time when you have a lot of money, you spend a lot of money when we put profit First, we actually do more with less. This is that concept of saving versus spending. We've been spending spending spending on operating expenses instead of saving saving saving towards profit owners pay in tax. And so this is how we're going to change the business. If you can brush your teeth with a seemingly empty tube of toothpaste, you can run your business on less than what you've been running it on by applying Parkinson's Law. So this is how we get sales minus profit equals expenses by minimizing the expenses and prioritizing the profit. In our next segment, we'll talk about how you do Thanksgiving

So how do you do Thanksgiving? When it's time to serve that Turkey on a platter? Do you just put it in the middle of the table and say, alright people have at it? Well, you are probably doing that with your business. When you just have one checking account, you are just saying, alright, Jabba the Hutt, we have one checking account, all of our money comes in this one checking account, and all of our money goes out of this checking account here have added and that's why Java The head is just eating it. But what why why do your business different than how you do Thanksgiving, with profit first, when the client pays you that money goes into your income account, think of your income account as a big platter of cash, like a platter of Turkey. And then what do you do at Thanksgiving, you don't put that big platter on the table and say have at it, you portion out servings on two plates. So you think of your accounts as servings of cash. So you'll have a serving and a plate to profit a serving to owners pay a serving to tax and a serving to operating expenses. And profit owners pay and tax are three servings to you, the owner. And the what's left and operating expenses is what you run your business off of. You're going to allocate the percentage to each account based off of target allocation percentages. And these target allocation percentages are based off of the real revenue of your business. So that is total sales minus cost of goods minus contractors expenses, then you get your net income or your real revenue number. And then based off that real revenue number you are going to allocate based off of these percentages. These percentages were calculated based off of a study Mike mccalla watts, the author of profit first did looking at 1000 businesses in varying industries and of varying sizes to determine what these target allocation percentages are. Next, we are going to talk about how there are only two ways to increase your profitability See you in the next segment.

So welcome back, there are only two ways to increase your profitability. And I'll tell you, it's not selling more. The only two ways to increase profitability are number one, to increase margin. And number two, decrease expenses. The decreasing expenses is really important and that's where this Parkinson's Law comes in that empty tuba toothpaste we are going to do the same or even more with less expense. All right. And next we'll do a bit of a status check to see where you guys are in terms of grasping all of this amazing new knowledge about profit first.

Alright, it's time for a status check on all of the wonderfulness that you've been learning about profit first. So I hope that you are deciding now that you can stop hiding from your financials, you don't need to be a bookkeeper or accountant, you don't have had to have taken an accounting class. to own the financials of the company that you own. You just have to know the difference between spending and saving. That's it, and you are good with money. Next, we're going to talk about what happens on an actual allocation day. So stay tuned for that segment.

All right, welcome back. And it's allocation de allocation day is going to be the day that you do your allocations. The book recommends doing your allocations on the 10th and 25th. So that'd be twice a month. Some people do them as infrequently as monthly or quarterly, especially if it's a side hustle business. We don't recommend doing it more than weekly. In our businesses. We do it bi weekly to correspond with our pay roll. So we do it on the Wednesday prior to a Friday payday. So we're doing it every other week, which means we do 26 allocations per year. If you do On the 10th and 25th, you're doing two allocations per month 24 allocations per year. So, on allocation day, let's say you have an income balance of $5,625. In your income account, this is the cash that's been accumulating in that income account. since your last allocation day, what you're going to do is you're going to pull up your handy dandy allocation day calculator. This is the basic edition, we'll go through advanced editions of this calculator, in further segments down the line, but what you're going to do is your going to just follow the instructions. Number one, enter the date, let's say it's may 21 2021, enter that date. Step number two, you're going to enter your income balance. And it's 5006 25. And boom, it does the allocation percentages, and the dollar amounts for you automatically. Step number three, we're just going to verify those allocation percentages. Now, we talked about the target allocation percentages, but you are not going to start with the target allocation percentages, we'll get there in a next segment. But you're going to have a current allocation percentage that you're going to change each quarter. And you're going to work towards that target allocation percentage. So you're just going to verify that the percentages in the percentage column are correct for the current quarter. Now, what you don't want to do is you don't want to be jacking those percentages, let's say that you had a really high income day, for your allocation to high income balance, you are not going to say all right, well, I got a lot of income here, I think I should reward myself and change that profit percentage to 10%. No, that will throw off your cash flow by being a percentage based system. Actually profit first helps you normalize your cash flow throughout your business. So when you have highs and lows, it's keeping it steady from a cash perspective. Alright, the next segment is going to be how to create your rollout plan.

And welcome to How to create your rollout plan. Now you have your target allocation percentages, your target is where you want to get to. Now, again, if you're an eight, if you're an 83% entrepreneur operating with one check account, then you have probably been allocating or saving nothing towards profit, you've been saving nothing towards little to nothing towards owners pay and not saving anything towards tax. It's been like 90% 95%, or 98%, of what you've been making has been going to operating expenses. So we have our target allocation percentages. And this is where we want to get to, but you don't get there overnight. What happens is, is you're going to create a rollout plan, and this is how it's going to go. You're going to start with an instant assessment. And what you're going to do here is you're going to pull your cash basis, profit versus a cash management system. So you are going to pull a cash basis report your income statement for the year prior. So for the whole year prior 2024 and 2021. recording this, you're going to pull your cash basis income statement, and you are going to look at it and say okay, well, what was my percent of profit? What percent was owners pay on that income statement? What percent was tax? And what percent was operating expenses against your net revenue. So the sales after cost of goods and contractors have been deducted. So let's say that your current allocation percentage is zero to profit, maybe 30% to owners pay 0% attacks, and 70% to operating expenses. Well, we want to get to 5% profit, we want to get to 50% owner's pay, we want to get to 15% tax, and then we want 30% towards operating expenses. Now if you're here, you are not going to get here overnight. In fact, I think I often say that my hosting a profit First Nation. My following Mike around the country doing workshops after his keynote is my penance for not doing profit first, right when I first implemented profit first in our businesses, when I read profit first I'm like, this is amazing. This is gonna be so great for my husband and I because we had different opinions about how to manage and use the cash In our business, but we both agreed that this was a logical system to use. And we agreed to follow that system. When I read profit First, the book clearly states, hey, don't do the target allocation percentages out of the gate. Make sure you know what your current allocation percentages and then adjust those allocation percentages quarter over quarter, just minute, Li one, two or 3% until you hit your target allocation percentages. Well, I'm a Type A and when I read the book, I'm like, well, Mike mccalla wits. He doesn't know Danielle Maulvi. We can do this, we can hit our target allocations out of the gate. So what did we do when we implemented profit? First, we went at our target allocation percentages out of the gate, and it worked. Oh, my gosh, was amazing. Then our second allocation day came, and the income balance was not as high as the prior income balance on our first allocation day. And so trying to hit our target allocation percentages on our second allocation day was a huge failure. Mike mccalla Wits was right, Danielle molvi is wrong. And that's why I am here in front of you telling you please don't do what I did. I tried it. Just follow the logic, follow the book, don't let the emotion get away, I kind of had the emotion of like, I'm an A player, I can do this. No, I did not follow the logic. So follow the logic. And now we're going to work steadily quarter over quarter adjusting our allocation percentages. So if this is where you're starting, we're going to start really roll it out nice and slow. Let's allocate our first quarter, let's allocate 1% to profit. Let's keep our owners pay the same if that's what you've been paying yourself, let's let's test this. Let's Let's dip our toes in the water. And let's allocate 1% to tax, get that account to start building. And then operating expenses, it's going to come down 2% to 68%. If you've been running your business on 70%, in operating expenses, you can run your business on 68%. This quarter, we'll start to prove profit first to you, then the next quarter, we're going to keep profit at 1%. We're actually going to start increasing owner's pay because we want to hit a target of 50%. And tax is going to be 3%. And then operating expenses comes down 5%. And then again, we're doing another adjustment in the following quarter of our allocation percentages. Now here we're increasing owners pay by reducing operating expenses. Alright, so you know, 50% owners pay might seem a little rich to you. But likely, the problem is is that some of your owners pay has been in your business that you've been treating as personal perk expenses. All right, so we need to eliminate using our checking account in our business, as in our operating expense account in our business. As a personal piggy bank. Nope, you need to pay yourself in owners pay in true owners pay and not be using your operating expenses for personal perk expenses. Then we're going to do another adjustment. And then another adjustment, Intel we then hit our target allocation percentages, it takes six to eight quarters to move from your current allocation percentages to your target allocation percentages. You are making incremental changes quarter over quarter. So you are going to actually create this rollout plan and it doesn't take long and we have the resource available for you to do this. Next we're going to do a quick review to make sure we are ready to move forward.

All right, before we move any further, let's do a quick review. So remember, there's only two ways to increase profitability number one, increase margin and number two, decrease expenses. And when we're decreasing expenses, we're remembering that Parkinson's Law we are going to put more effort and get more effort out of little cash. If you are looking at wanting to really dive into decreasing your expenses, then I recommend checking out a series we did on the topic in profit First Nation our podcast starting at episode six So Episode 678, and nine, encompass the expense challenge. And we walk through different ideas about how to reduce expenses. This is really, really important step to do. And we have an expense challenge worksheet for you to add up. Most businesses that any profit for professional works with, when they do the decrease expense challenge, easily find a 10% reduction in expenses. Some people have even found that 30 35% or more opportunity to decrease expenses. And when you decrease expenses, you're increasing profitability. So do not skip this step. It's really important and it's not as hard as you think we've got you on this with our series. So I'm hope that you are feeling even more confident now. And we are not going to be an ostrich with our head in the sand when it comes to the financials, and the cash in our business that we own. And that you are going to start owning the financials of the business that you own, your bookkeeper and accountant, they cannot make those save and spend decisions. Only you the owner can make those decisions, whether you're going to save or spend the money. And remember, don't let emotion get the best of you. Most people look at money as 90% emotion. And what we need to do is focus focus, focus focus on the logic. And I want to share with you a post that someone who has implemented profit first in their business put on LinkedIn and actually I interviewed Brian on episode 61 of the podcast. So check out that episode. But I think this is the most eloquently stated and just spot on, and I want to just share it with you. profit was always an ugly word. I attended networking events with the mantra purpose over profit, and I was applauded for it by other attendees. But we were all wrong. The dirtiness of the word profit was my own insecurity around lack of understanding in the business world. I was conditioned through the news and others outside the entrepreneurship bubble, that if I had a profit, I was greedy and taking advantage of people. The mindset was horrible to someone like me, moving from a hobbyist to a freelancer to a business owner, and artists essentially without a business background. I'm sure it played an underlying role in how I priced my services, how I valued my time, and the way I viewed my role as someone in service to others. Profit isn't a dirty word. It's a misunderstood word. And until I tackled my own misconceptions about it head on, I was going to continue living a freelancer life. Despite what Illinois viewed as a legal entity, I owe Brandon Meili and Amanda Neely more than they may ever know, by introducing me to the profit first model. years ago, I've been able to see a much more realistic view of financial health. Rather than my ignorant purpose over profit mindset, I actually have more purpose in my life, knowing all the good I can do by combining purpose with profit. So profit is not a dirty word. It's a misunderstood word. You need profit in your business, to sustain your business to get through a pandemic to get through the ups and downs and the craziness. Profit first is having cash in the bank to correlate to your profitability. And that cash in the bank is your emergency reserve. It's your cushion. It's how you grow and scale your business. So I hope you want to trust the process. But let's dive into that a little deeper in the next segment.

Okay, you have made it this far. The next thing you have to do is just trust the process. Go with the logic, knock that crap out of your head, not those stories out that aren't logical, and it's just things that you're making up in your head or things that you're wanting to believe so that you can keep your head buried in the sand. Let's trust the process. So this actually, is what Mike states in the book, trust the process. This works, but it's unfamiliar. So you will resist commit to it for now. And relinquish your resistance and comfort in doing what you did in the past. First, trust the process, then prove it to yourself. So now it is time to implement. And we will dive into that in the next segment.

Oh my gosh, aren't you so excited? Can you not wait to implement profit first, here we go. This is the checklist for implementing profit First, it is divided into three phases. In phase one, that's the start phase, that's where you are, there's four steps in the start phase, then you move on to the execute phase where we have another four phases. And then the iterative refinement. This is where you continue to work on adjusting your allocation percentages and really refining maybe your target allocation percentages end up being slightly different than what the book outlines. And this iterative refinement is an important step. But you don't have to worry about phase two and phase three. For right now I just want you to see the big picture, what I want you to focus on is the start phase. So step number one is get your butt to the bank, you need to open up your primary accounts, you need to open up an income account, and profit account, an owner's pay account, a tax account, and an operating expense account. Five accounts as your primary bank, if you go to profit first nation.com and click on step number one, we have a list of profit first friendly banks, we even have an email template that you can copy and paste. Now a lot of people get hung up on this phase. And again, they let some crazy nonsense, pop into their head and start believing this nonsense, that they're going to be judged when they go into the bank and say to their banker that they want to open up five bank accounts. Well, let me tell you, let's focus on the logic. Because what's gonna happen is when you go into the bank to open up your five accounts, your banker is going to be so excited, because most banks provide commissions and spiffs to their bankers for opening new accounts to existing bank holders. So when you go in and want to open up five accounts, then your banker is going to be excited because you've made their week you have helped them meet their quota. So make someone's day, make your banker state, get your butt to the bank and open up your five accounts. Then step number two is you're just going to start allocating 1% profit with each deposit, we are just going to do this slow, we haven't gotten to that rollout phase, we haven't gotten to that instant assessment, we are just going to start allocating 1% of profit, because you can run your business on 99% of what you've been running on, and allocating 1% to profit. Step number three is hauling your ass to an inconvenient bank. This needs to be a totally separate bank, where you sweep your profit and your tax balances at the end of your allocation day to your tax hold and profit hold account at your inconvenient bank. You put it there and you forget about it, you put it there, the next allocation and you forget about it, you only go to that account at the end of each quarter to do your distributions or your draws from so that you can pay your quarterly tax estimate or pay down business debt if you have business debt from your profit account, or take that profit distribution and celebrate because you have put blood sweat and tears into your business. And then step number four is once you have your accounts opened at all of your banks, then you are going to determine your allocation rhythm and schedule your first formal allocation day. So are you going to follow the book and do the 10th and 25th to allocation days per month? Do you have payroll? And are you going to if you pay bi weekly? Are you going to do your allocation on the Tuesday or Wednesday prior to the Friday pay date? So the money is in those accounts to pull. Are you going to do it monthly? Are you going to do it weekly. Again, we don't recommend doing it more frequently than weekly. So this is so easy. I just want you to know that this can be done in 38 minutes or less from when we turn this camera off and when you are on your own. Oftentimes when I do workshops, I challenged people who ever sends me proof of opening up their bank accounts first gets a private one on 130 minutes. session with me. And the record for that has been 38 minutes when I concluded a workshop, and someone sent me proof that they had opened up their five accounts with that screenshot. So you can do this. Let's make it happen. You got to do step number one, get your butt to the bank. And just for added support, check out our podcast profit First Nation. We've got lots of different awesome playlists and more resources and information for you. But I will be coming back with some more segments on advanced profit first strategies, but I'd also recommend tuning in to Episode 51 Do you hear Jess and Marty's profit first journey and hear about how just read the book five years ago but didn't do anything with it? And she I think she was happy with that decision five years later, check out that episode and see