Profit First (Part II): This should be easier than losing weight!
So, having learned from Part 1 last week, you now know that our math has been wrong all along. It’s not Sales – Expenses = Profit.
No, no, no, dear friends, it’s Sales – PROFIT = Expenses
Mind Blowing!
When we become intentional about our profit, and carve it out first, we’re prioritizing the health and stability of our business. Similar to our own personal health. Okay, if you’re like me, you know that the constant battle with that warm chocolate cookie ensures that you never lose those last 15 lbs. But our organization health is similar to our own, so says Mike Michalowitz, the author of Profit First, and there are some fundamental principles we must all follow for a healthy company to nurture.
1. Use small plates: The more we see, the more we consume, so see less of it. By taking out the PROFIT FIRST, we won’t see the money in the bank, so we’ll adjust our spending to accommodate. This is not an all-you-can-eat buffet anymore; it’s us deciding to intentionally spend within our means. Let’s all start our business DIET today. By the end of our exercise, we will have four accounts:
a. Profit
b. Owners Comp
c. Taxes
d. Operating Expenses
2. Serve Sequentially: Always separate the money coming into the account based on the decided distribution model into your four accounts. Profit is always First – like the weight loss goal – remember the end game always and make it your starting point.
3. Remove temptation: Hide the cookie you say, “please don’t”, but oh, we must. By putting the PROFIT money in a different bank, maybe in an online bank like Capital One, you won’t see the money every day. Plus, it’ll take three business days to get back into your bank account if you do need it. That would be enough time for you to stop your instant temptation to touch the Profit account and only access it in dire times.
4. Workout regimen: Like going to the gym every day, well four days a week (that we can do), we’ll monitor our cash position and set a rhythm for automatic withdrawals. Let’s say the 3rd and 18th of every month we deduct 1% of everything we earned and have an automatic withdrawal setup. You currently have $100K in MRR, let’s put away $5K each month. That’s 5%, not a huge impact to the operating expenses, but at the end of the year you’ll have $60K in your bank. Start small and let’s work our way up to 10% (that’s our ideal weightJ).
So I know you’re thinking, “Kam, I’m barely able to get to the gym once a month and have been struggling with the last 10 lbs. for 20 years now.” I understand, but with these simple tools we’ll be able to make our business healthy and, as we all know, “Cash is King”. We’ll work harder for it.
Homework: Yes, I said homework. This week open up a PROFIT account in a different bank and transfer 1% of your monthly revenue into it as an automated transaction.
Let’s start small. WE CAN DO THIS!
