- Donna Lim
Putting Profit First Into Action
Note from Donna…. The activity of “doing” Profit First can be a scary thing. Most people can get the 5 basic bank accounts set up. Some can even get the 2 holding accounts at a separate bank. If it was only these few steps that made up this lifestyle, I’d say everyone would be able to do it on their own. The bank accounts are the easy part. It’s a bit harder to do the allocations and stick with it. The hardest part of the process is where I’ve seen my client waiver – lowering expenses. Even I’ve had a bit of difficulty seeing how I can do that. In the end, it really comes to this one thing – are we willing to put aside some of our short-term desires to obtain our most desirable long-term goal?
Most small business owners use the “bank balance” method to manage cash flow. They log online, see what the balance is today and make decisions based on that balance. The problem with that method is the checks that were written but have not cleared and the bills that are yet to come in have not been considered. The second problem with this method is Parkinson’s Law. We will consume what we have.
Profit First addresses Parkinson’s Law by using what you are already doing – bank balance method. The basic method starts with 5 accounts at one bank and 2 more at a different less utilized bank. At your primary bank open up 5 accounts – Income, Profit, Owner’s comp, Tax and Operating. At the secondary bank open up 2 more accounts – Profit and Tax.
The idea is to have all your income go into the Income account and then move money into the different accounts based on your assessment guide lines. I’ll talk more about the assessment in the next newsletter, for now, know that the assessment will determine your percentages for each account. Once you have the money moved around, you will easily be able to see what you have to spend. You are not allowed to transfer funds from your other accounts into Operating; rather you are to learn how to run your business on what’s in the Operating account. YES, that will mean you need to lower your expenses. This really isn’t new information however, you have been ignoring the problem by “stealing” the funds to run the business from your other “accounts”. Therefore, you are having issues paying taxes, paying yourself and having a profit.
The law of Parkinson’s will be at work. If you use the system of Profit First, then you will need to run the business on less money. Without looking at your P&L I can suggest areas for you to look into for making decisions to lower expenses. First up – you guessed it, Meals. I can hear your groaning now – you feel it is a must to wine and dine your clients and potential clients. I hear you. However, you don’t have to go to the most expensive places. Your business is not a place to live out your wants and desires for food. I suggest rating the client. If the client is in the top 10% of your business, take them to a nice meal. However, the 90% left – take them to coffee at a local coffee shop – not a national chain where they jack the prices up. In this way you will lower your meal expenses and support a local business.
Next up is dues and subscriptions. Look at what you are spending in this area. What can you become very innovative with? For instance, I use the free version of ASANA for task management for my team. It doesn’t have all the bells and whistles as JetPack, but it gets the job done. I would love to have JetPack someday, but not at the expense of my own pay, profit and ability to pay taxes. You can and will live without some of those bells and whistles.
Charity is another area to look at. I fully believe that we should give back to our community. Please understand that I am not saying that we should not be charitable. I’m saying we should consider our own needs (not wants). We need to pay ourselves. We need money for taxes AND we need to pay our operating expenses. I’m going to suggest for a season of time that we put a hold on this area until we are in a better position to give.
Finally, I’m going to suggest that you look at your payroll. No one … and I mean no one likes to think of the reality that we might have to lay someone off. However, if our operating costs are too high, we may in fact need to do this. This is usually the highest expense in our business. Let’s look at ways we might be able to reduce this area.
If you really want to find peace of mind with your business finances, you will need to make changes. Changes are hard work. There is a saying – if you always do what you’ve always done you will always get the same results. The time to change is now. Do it now.