"Profit First": Obtaining Debt Freedom
Mike states there is a “tweak” to the Profit First system when extinguishing the battle of debt. The Profit account is disbursed as 99% to debt and 1% to you as profit. You might say, then why even put money in the Profit Account? Answer is simple – because we want you to build the habit of pulling money into a separate account and only using the operating account on the operations of the business. Remember someday all the profit account will be disbursed as profit.
The profit first system has been easy up until now. Moving money into different accounts is easy… it’s still all your money…its still there for you to spend on it’s intended purpose. NOW we get to the hard stuff. This is where the emotions of money hits you square in the face. It is time to face the music. If you are reading this OR the book as a struggling business owner, there’s no way around this step. You must cut expenses.
If you’ve been following my newsletter on this book, you will know that I don’t always agree with Mike; however, in this I do…. When a business is in trouble, we must do something about it before the business has no choice but to close. There are 3 steps in this process.
Start a debt freeze. This isn’t a freeze in spending. You must continue to pay your employees, bill, rent and the likes to keep the business open. This step just means that you will not purchase that new software, hardware, hire that new employee. Simply put – put all new purchases on hold. You need time to find out what you have going on and where you can cut.
Use 99% of the profit account to pay down debt.
Start the debt snowball – pay the lowest debt off first. This will help you gain strength and momentum.
Let’s talk a bit more in depth about the debt freeze. Put a list together of all your expenses… use a 12-month calendar for this project as some expenses just come around annually. Now it’s time to determine the importance of each expense. Does it generate Profit? Can it be replaced with a lower costing alternative? And (BE HONEST) is it unnecessary?
Labor is undoubtedly your largest cost. Yes, you need your team, but you probably don’t need everyone. If you’ve done any sort of coaching or reading about how to run a business, you’ve heard that you as the business owner needs to work “ON” your business rather than “IN” your business. Mike Michalowicz even has a book on that. However, a common mistake made among business owners is the all or nothing approach. A healthy business has a business owner that’s working towards the “ON” but knows it’s a gradual thing to get themselves out of the “IN”. Don’t be afraid to put yourself back into the workings of your business. It may mean the difference between keeping the business open or closing it. This is not a forever change. It’s a change for a season. This time … you will move towards the working “ON” your business with a system in place to keep you there.
Now – look at each team member. Can you combine job tasks? Is there someone that isn’t pulling their weight? Based on your TAG % you already know how much you must cut in expenses… so you also need to look at if you are paying someone too much. I’m not saying they are not worth it. I’m saying you may not be able to afford them.
Yes, this is painful. By far the most painful part of cutting cost. However, its best to look at it like this – if I don’t cut costs now, then ALL of them are out of work. It is suggested that you don’t lay people off without a witness. So, therefore, get your HR consultant and attorney involved. This is one area that you want to spend money in. Doing this wrong can have costly effects.
Now that you have the emotionally hard part done, it’s time to focus on the other expenses. I will give some examples from my own business to show you it can be done – not everything you have is necessary.
Telecommunications – I was spending money on a cell phone, a land line, efax, internet, communications system for the team and a webcam software to talk with clients. I looked for a phone system that would combine several of these items together and saved over $200 a month.
Dues and Subscriptions – This is one of those areas that often have recurring transactions. It’s set up and forgotten about. I had played with a software app that would help me ensure all my business information was the same across all platforms. It helped me get my business address, phone number, hours and all those things that people search for about my business. It was, however, a recurring charge and I hadn’t thought about it for over a year. I just didn’t have the time to “turn it off”. Well, I finally just took the time to do it and saved $300 a year.
You get the idea. Start with the easy stuff first… then go on to the stuff that’s emotional. You know the stuff I’m talking about. The stuff that makes you feel like you’ve arrived. For me, that’s a membership at a business club. It's where I network, I meet local clients, and where I meet colleagues. It’s a plush place, but it really is unnecessary – I really can go back to meeting people at Peet’s or Starbucks.
Ok – you get the idea… be real with yourself. This is where your commitment to getting out of the fiscal heart ache gets real. You have what it takes to make these hard decisions. I believe in you.