It seems like it was just yesterday that we couldn’t wait to put 2020 behind us. And then it was hard to know what to expect from 2021.
But things are generally looking up for the fitness and wellness industry. As consumers come out of isolation, they’re having a newfound appreciation for the in-person activities and services we provide. And they’re adjusting to a new normal and forming new habits. Now more than ever, physical and mental health is a life priority for so many people.
So while business owners had to do a fair amount of winging it these past 18 months, next year looks to be more predictable—and hopefully, more profitable. Have you started to plan for financial success in 2022 yet? Profit First is key to this (but you knew we were going to say that).
If you’re already using Profit First, this final quarter of the year is the time to set annual goals and quarterly target allocations for 2022. Trust us, goal setting leads to growth and profit gains. Skip ahead to read our advice on how to do this—it’s a combination of big picture thinking and number crunching, and we’re always here to help.
If you haven’t implemented Profit First yet, now’s the perfect time to set up your system so that it’s in place and ready to go at the start of the new year. This is exciting! You’re about to pump some new life into your financial health.
Begin by downloading our Profit First Overview. This includes super simple steps—and a formula using your current business numbers—to get started right away with this cash management system.
The gist of Profit First is in its name. With this system, you will take out a profit from your revenue as it comes in, first. You’ll also set aside portions of your revenue for an owner’s salary, and for taxes (which, let us remind you, become unavoidably due). You will use what’s left—and only what’s left—for your operating expenses.
With Profit First, you move money into separate bank accounts earmarked for Profit, Owner’s Pay, Taxes, and Operating Expenses (OPEX) so that you cannot be tempted to “borrow” from them. You do this on a regular schedule, usually twice a month.
How much of your incoming revenue should you allocate to each bank account? Profit First works with allocation percentages—so when your revenue goes up or down, all of your accounts will adjust in proportion, as they should. See page 8 of the overview to calculate your suggested target allocation percentages for each account (and what that translates to in real dollars) based on your actual business numbers. The target allocations are just that—targets to aim for, to get your business running optimally.
This is an excellent place to start, but this is also the place where some business owners get stuck—say, when they’re comparing target allocation percentages with their current figures. Maybe you’re currently spending 50% of your revenue on expenses, but your Profit First instant assessment suggests you allocate just 30% to OPEX. As it is now, you never have enough to pay the tax bill when it’s due, let alone give yourself a profit—so you know you need a better system. But it’s a gradual process to make this shift. You may not be able to make such a drastic cut to your expense budget overnight.
That’s okay. As Profit First creator Mike Michalowicz says, “The key to successful Profit First implementation lies in stringing together a series of many small steps in a repeating pattern.” This is where a Profit First professional can really help. We’ll do the calculations and show you how you can move from your current allocations to your target allocations, incrementally. Small steps.
And that’s why we suggest setting up Profit First now in preparation to start using it in 2022. Because it does take a few months to get into the habits that make the system successful. So give yourself a quarter to get going. And you’ll refine and adjust the target percentages quarterly moving forward, to get you closer to the ideal setup for your unique business.
Every year I set a new financial goal for my business. You should too. For example, it could be to increase my revenue by 50% in 2022. Once I’ve set a big picture goal like that, then I’ll apply it to my Profit First system already in place. I’ll calculate how much additional revenue I need to be taking in every quarter to reach my goal. And as my revenue shifts, I might need to reassess my target allocation percentages, per Profit First. What do I want my target allocation percentages to be for every quarter in 2022, to achieve the business growth I’m looking for by year’s end?
Then it’s a matter of knowing the data that’s unique to my business, so I can figure out how I’m going to actually get there. What’s my average revenue per client? How many new clients will I need to add at that rate to achieve my goal?
But it’s not just the incoming revenue. I also must consider what I might need to spend from OPEX in order to acquire those new clients. How much marketing do I need to do to get new business leads, and what will that cost? Will this process divert labor from my team that I need to account for?
If you intend to plan for business growth and not just wish for it, you should get familiar with the ins and outs of your business at this level. Make 2022 the year you can answer all of these questions.
As you can probably see, planning for success requires a bit of reverse engineering. You set a goal, you do the calculations, you identify the steps, and you take action. It’s often a process of trial and error. Profit First is great because you can build your goals into the system of target allocations and continually customize it for your business. It’s a constant refinement.
So what’s your goal for next year? With some thought and planning (and Profit First), 2022 can be your most successful year yet.
When a client tells me they’re finding “extra” money in their Profit First accounts, I get excited for them, but also a little concerned.
Excited because more money in their accounts usually means their revenue has increased. Business is probably going well.
Concerned because—well, remember when we explained Parkinson’s Law? The demand for something expands to match its supply. It’s a phenomenon of human behavior that proves itself time and time again. As it applies to money, here’s what happens: The more money you have, the more money you will spend.
So, for example, when you have “extra” money in your OPEX account after you pay the bills, your natural tendency is to think that’s money that can—or even should—be spent. You may drum up reasons for ongoing expense spending without thinking through if it’s feasible in the long term.
You’ll spend it, and then you’ll form habits of spending.
When you accumulate more funds than you’d anticipated having thus far in your Profit First accounts, please don’t think of that money as disposable cash. It’s really just Money Without a Plan, which is a bad thing. You should always have a plan for what to do when your revenue shifts.
The beauty of Profit First is that you can build and tweak your plans through your allocation percentages. You already know you should review them on a quarterly basis, which is fine for the most part, but sometimes revenue has grown so much that you need to make an intermediate adjustment. Here’s what to do whenever your business has more money in its accounts than you planned for. (It might be time to make some new plans.)
The most dangerous place to have extra money is in OPEX. There are many options and ways to spend money on things that fall under operating expenses—it can be tempting.
But remember that Profit First is based on circumventing Parkinson’s Law. Your OPEX allocation should be set up to just cover your current operating expenses so there’s no extra money hanging out in there.
You can give yourself a little buffer though. What’s the minimum OPEX balance for your comfort level? It might be $100 or $500 or $1000, or one month of expenses. Consider that figure your “zero.” At the end of the month when all the bills are paid, if you have substantially more than your zero in OPEX, then you need a plan for that “extra” money.
What would best serve your business? It might be time to adjust your Profit First allocations to reduce the percentage going into OPEX and to drive them closer to your target percentages for the Owner’s Pay or Tax accounts.
Or, maybe it’s time to create an advanced account or two within your system. Reallocate some OPEX funds into its own separate bucket for an Annual Expense account, or a Marketing account… It all depends on your business needs.
Extra money in OPEX almost always means that overall revenue has increased. But it can also mean you’ve cut your operating expenses. Usually that’s part of a plan too, so your allocations should be adjusted accordingly.
Let this money accumulate until you’ve paid the taxes for the current period. Repeat: don’t do anything with this money until you’ve paid your taxes!
Once that’s done, you can transfer the extra funds to your Profit account and withdraw them as a profit distribution when the time comes. Or you could add the funds to an advanced account you’re working to build up.
If you’re finding extra money in the Tax account even though your revenue hasn’t substantially increased (or nothing else has dramatically changed), this could indicate that you may have been a little off in calculating your Profit First targets the last go around. The percentage allocated for taxes should result in the right amount of reserves you’ll actually need, because it’s based on your total revenue.
If it’s not making sense to you, seek the guidance of your Profit First coach or tax professional before adjusting your target allocations.
Good. This is one time when you need a little “extra” in there, or else freaking out may ensue. The pandemic has taught us that it’s so important to still be able to pay yourself when revenue dries up in turbulent times.
As with OPEX, you can decide on a comfort buffer. For some owners, it’s one month’s pay. But we recommend saving a cushion of three months. It really depends on your personal financial needs. Talk to your Profit First coach for guidance on the buffer and how long to keep it in your account—it’ll be different for every owner based on your overall financial health.
If you’ve accumulated more than three months in Owner’s Pay, think about increasing your monthly pay disbursement, or adjust your allocations to put more money in Profit and use it to work toward building a rainy day fund or retirement plan. Realize that anything in Profit is still owner’s pay, but sometimes it’s how you label the funds that can determine how wisely you spend them.
No one has ever complained that having extra money in their Profit account was a problem—go figure. But let’s say you’ve taken your regular profit distributions, you’ve paid off all your debt, you’re jetlagged from enough vacations… and you’ve still got extra profit that you don’t know what to do with. This is the moment to put your profits to work for you, by venturing into investments and retirement planning, if you haven’t already.
However, this is assuming you’ve already got three to six months of revenue sitting in a VAULT account. This is the ultimate disaster preparedness plan for your business, and if you’ve got more Profit than you know what to do with, then you’re surely in good enough shape to be amassing a VAULT.
Don’t hesitate to ask us for help in designing a plan at any stage of your business journey. This is exactly what we do.
As a bookkeeper, I’m always taking the pulse of a business to help assess and improve its financial health—ultimately, so that the humans behind it can have all they want out of life. I talk about money a lot because it’s—no pun intended—the currency I deal in. But it never fails to surprise me how uncomfortable most people are to discuss money, be it their desire for it, their lack of it, or their fear of losing it. Why are we so afraid to talk about it honestly and openly?
Money itself isn’t good or bad. Money is just a thing we use to transfer energy back and forth between people. It’s a medium of exchange to get what we need to live—and then, hopefully, to experience our best lives.
It drives me crazy that money is such a taboo subject, but I get it. I see people ashamed that they’re not providing enough for their family, or that they’re in too much debt, or that they can’t afford what other people can afford. There’s also the hesitation to be proud of financial successes. You’re seen as bragging if you’re doing well.
The truth is, we usually don’t know the whole story behind everyone else’s finances, and we get everything out of whack when we set up comparisons. It’s not apples to apples, because the other guy may be dealing with oranges.
If you can talk about it, you can change it
One of the things I love about Profit First is that in encouraging us to pay ourselves first for our hard work, it essentially encourages us to believe that we deserve that money. It puts money at the forefront of the conversation of why we’re in business in the first place. Sure, you have a great service, product, or skill that you want to offer to the world, but let’s face it, you’re also here to make a profit.
Here’s my two cents on how to talk about money with the people closest to the backend of your business, with the goal of eliminating secrets, banishing anxiety, and making smart decisions that will help you to sustain and grow your business.
Talking about money with your bookkeeper
Your personal financial health and your business financial health are intertwined. Be honest with us about both. We can’t help you with your money if we don’t know what’s going on with your money. Are you in a jam with your finances at home? Are you not making a living wage? Maybe we can make a suggestion on the business end of things that will help to lead you out the hole you might be digging.
Bookkeepers are experts at reviewing your financial data, so we don’t give money advice without having facts to back it up. In other words, we got receipts. Even if your bookkeeper isn’t privy to your personal bank statements, it’ll likely all get fleshed out for her when she reviews your business statements and
And we all have our dirty little money secrets. The things we like to splurge on that no one else thinks worth a dime. Or the occasions we got ripped off and felt we should have known better. As bookkeepers, we’ve seen it all—maybe we’ve even been there ourselves—so nothing is too taboo to share. Tell us so we can help.
What’s appropriate to share with your employees and contractors? This one may surprise you.
I’m a fan of having an open-book policy with your staff and sharing how things are going with your business. I share my P&L figures with my team on a regular basis—they know my allocation percentages. Employees are your boots on the ground. The more they know, the more likely they are to be invested in increasing revenue for your business. Their success is tied to your success, especially when you’re doling out bonuses based on your profits at the end of the year. Isn’t it great when your employees point out how you can eliminate an expense because they’re no longer needing the service you’ve been paying for?
Most business owners don’t want their team to know how much they’re making. But what I’ve seen is that most of the time, your team thinks you’re making more money than you actually are. Sharing your business finances with them can dispel the myth that you’re swimming in cash, and that it would be easy for them to leave and become your competitor—one of the biggest fears that business owners have.
I’ve started to gently encourage my team members to open up a bit about their personal finances, if I have their permission to do so. I can see that it affects their work when they’re struggling at home—we all have money anxiety at some point. If you have staff meetings, you’re probably already providing some kind of business education to them on a regular basis, so consider adding financial literacy webinars and other tools and learning to the mix.
Talking about money with your business partner
Profit First is beautiful for business partnerships because it puts percentages in place from the starting block that both (or all) partners agree to ahead of time. Sure, there will be issues from time to time, but they’re much easier to mitigate when you’re working from an established framework.
It’s also important to know your money personality. Is one of you a spender and the other a hoarder? For example, you could have differing views on what constitutes a necessary operating expense, but at least with Profit First in place, you share a basic understanding of how money will be handled in the business.
Talking about money with your life partner
It’s common for business owners to discuss major decisions about their business (such as big-ticket purchases) with their life partner, even if that partner doesn’t have a legal interest in the business. They’re vested in its success because they’re vested in you.
We advocate for some regular conversation about your business with your life partner. I know a couple that talks about it every Sunday morning, but if that’s too much taboo for you (!), I recommend doing it at least quarterly. Make them privy to the details of your Profit First strategy. I often see conflict where the partner doesn’t understand the difference between your revenue and your profits. You can show them your Profit First allocations to help them understand that you have a plan in place for when and how often money will be flowing out of the business and into your pockets—and how you’re avoiding the need to invest future household income into the business, because you’re saving in advance for things like taxes.
It gets easier
Take it from a bookkeeper—the more you talk about money, the easier it gets. Don’t let a lack of practice hold you back from making progress. Practice!
The Profit First system is simple enough that most people can see the immediate rewards of paying yourself first. But no two businesses are alike, and each will have its own complexity. We love that it’s so easy to customize the system to meet the needs of your unique business, by opening additional, “advanced” accounts.
Every business following Profit First sets up the five foundational bank accounts—the buckets, if you will—to distribute income. Then you make your fixed allocation percentages twice a month without deviation. But you’re the owner and you know your business best. After a while, you might notice that something in your system needs tweaking.
Maybe you didn’t foresee having to pay a large invoice that ended up draining your OPEX bucket. Now you’re aware that it’ll be an annual expense for your business—same time, next year—and you want to plan ahead. For example, CrossFit gyms have an annual affiliate fee of $3000, and sometimes owners forget about that until it’s right on top of them.
Take some pressure off yourself. If it will help you to create a new bucket, or account, to meet a specific expense, we encourage it. In fact, there’s a saying that gets kicked around amongst Profit First professionals…
When in doubt, create an account.
By the way, we’re calling these “advanced accounts,” because this is technically an advanced Profit First technique. (That’s right, young Jedi, you’re advancing.) But really, it’s quite simple. These are just extra accounts (or separate accounts, new accounts, sub accounts—whatever you want to call them) beyond the foundational five. Name your accounts in whatever way makes sense to you.
There are lots of reasons why you might want to open up an advanced account and flow some cash into it on a scheduled basis.
A payroll account is an advanced account that we think every business owner should have (unless you’re a solo operation). This ensures that you protect employee and contractor wages so you don’t accidentally run out of money to pay them.
Or, let’s say you know you’ll need to make a big purchase down the road, such as new exercise equipment for your gym. You could open an equipment account and start accumulating those funds now (rather than potentially facing the sudden expense when a machine breaks down).
Or maybe you want to invest in continuing education courses for your staff. If it’s important enough to be a goal, create an account for professional development and start saving for it.
Maybe you want to embark on a marketing push for your business, which will involve hiring multiple vendors. Having a separate marketing account might encourage you to determine a budget in advance and stay true to it, without comingling those expenses with all the other things in OPEX.
Creating more accounts ensures that money is there when you need it to be. It’s really all about preparation and peace of mind.
How to put money in advanced accounts
So you’ve determined you need to create some extra accounts. How are you going to make this work within your Profit First system? Where will the money come from?
Like the examples we’ve been talking about here, most of the advanced accounts that our clients set up are to isolate and cover specific business expenses. In the absence of a new account, you’d be paying these bills out of OPEX. So you’re almost always looking at reallocating money from OPEX when you create an advanced account.
Your allocation target is quite simply how much money you want to invest into the thing you’re creating the account for, and in how much time you want to achieve it. That affiliate fee is $3000 per year? Divide it by 12, and figure out the percentage of your income that equates to. (You want to accumulate $10,000 in an equipment account in 8 months time? Divide $10,000 by 8 and figure out the percentage of your income that equates to.)
You’ll then subtract that percentage from your current OPEX allocation percentage. Your OPEX funds aren’t really being reduced per se, they’re just being redistributed into new accounts so you can very clearly target money toward specific expenses.
Advanced accounts can come and go
You don’t have to use them all the time.
For example, when I’m thinking about growing our team, I start transferring money into my new hire account. I won’t actually bring them on board until I’ve got at least one month of their salary in there (and provided I was able to comfortably accumulate that pay within one month’s time. Check out our important guidance on this in How to Profit First Your Way to Team Growth.) Once I’ve actually hired them, I’ll transfer the funds to the payroll account, and let the new hire account remain dormant for a while—until I’m thinking about hiring again.Occasionally there are times when the creation of an extra account won’t be for an expense, or when it might make more sense to assign dollar amount allocations rather than percentages. Let us help you navigate these trickier cases.
Bringing on new employees is an exciting part of business growth. But if you haven’t done it before, or even if you have, it may be daunting to think about taking on the added responsibility. Can you afford the expense of a new hire? How do you navigate the administrative aspect of paying them? Maybe you’re only paying yourself thus far, and that’s simple enough—you just transfer fixed percentage allocations into your Profit and Owners accounts twice a month. That all changes when you have a team.
As you know, the Profit First system involves setting up five separate bank accounts for the distribution of funds. But there are smart reasons to create additional accounts, or subaccounts, to earmark and protect funds that need to be reserved for a certain purpose. Paying employees might be one of those reasons.
That is why we often suggest that if you have any employees besides you as the owner, you should create a separate payroll account, as a subaccount of OPEX.
Why do you need a separate payroll account? Why can’t you just take from OPEX to pay your employees? Two big reasons.
A separate account makes sure the money you’ve allocated for employee wages can’t accidentally get intertwined with all your other expenses, and then accidentally spent. For example, if your rent and your payroll are both paid out of OPEX and one of these expenses would happen to place you in overdraft this month, the bank will decide what to pay. The bank might choose your rent over your payroll. They’re both important, but which is easier to rectify?
Having separate accounts ensures that your team members get paid no matter what. Bouncing a payroll check is really the absolute worst for employee morale.
Having the payroll account split from OPEX also ensures that you meet your obligation to set aside the taxes you owe to the federal government on behalf of your employees as soon as you pay their wages. These funds can’t get accidentally spent either. This is another big one. You don’t want to get in trouble with the IRS for failure to pay your payroll taxes.
And don’t let us scare you too much. Read our blog post on some common payroll mistakes and how to avoid them.
Theoretically, a new hire should help to generate revenue in some way, or free up the owner to do so, but in reality things can take a while to get off the ground—or things might not go according to plan. You need to onboard the new employee, which takes time. Time where they may be costing you time and money.
And according to Profit First principles, hiring an employee is a business expense that you must be able to meet without increasing your current total OPEX allocation. This means, for example, that if your current OPEX target allocation percentage is 50%, and your payroll subaccount target is determined to be 25%, then your OPEX becomes 25%.
So how do you determine what percentage to allocate toward the payroll subaccount?
If you’ve already got employees on the books, take a look at last year’s figures to see what you paid for employees in total. Determine what percent of your revenue that figure was, and use it as a basis for your payroll target allocation percentage.
If you’re considering your first hire, you will want to have one month’s worth of employee salary as a buffer in your payroll account before you bring them on board. Determine what that figure is, and then try to transfer 2-3% from OPEX into the payroll account each month until you’ve reached that figure.
The length of this process will enlighten you as to whether hiring someone now is feasible. Did it take just a month or two to accumulate that one-month salary buffer? Then you can probably afford to add that employee. On the other hand, did you struggle to make available 2% from OPEX each month to transfer to the payroll account? If that’s the case, you need to rethink your decision.
Your business might depend on independent contractors, rather than employees. In terms of cash flow management, we recommend that you compensate them from your payroll banking account if they are providing your clients substantially the same service that is provided by your business as a whole (for example, personal trainers who are contractors at a fitness studio). If, however, the independent contractor is providing a service FOR your business, such as janitorial or marketing services, you should include this expense as part of OPEX.Here’s more on leveraging team members in your wellness business.
So you’ve implemented Profit First in your business and are on your way to establishing smarter expense spending habits, financial security, and peace of mind. You’ve determined the target allocation percentages for your five bank accounts—and you’re maintaining the discipline to distribute your revenue into those accounts consistently according to those percentages. What’s next? Should you sit back and relax?
Not exactly! The Profit First method is designed to help you not only become immediately profitable, but to set you up for continued success in the long term. The goal is to have distributions that are not only achievable and adequately meeting the needs of your business and personal priorities today, but that are also optimal for business growth, efficiency, and sustained profitability going forward. Making sure that you’re dividing your revenue into the optimal percentages, in turn, enables your business to be fully optimized and, ideally, one step closer to an optimized quality of life.
You see, your target allocations can and should evolve over time depending on your revenue and your needs. The Profit First assessment graph serves as the fundamental guidance for how to allocate funds based on revenue range, and it’s largely appropriate for most businesses, but your specific business and your priorities will dictate if, when, and how your percentages will fluctuate.
You should review your target percentages every quarter. Quarterly reassessment allows you a few months to see if your current allocation percentages are working fully in your favor, and if not, where you can make improvements.
(Actually, a quarterly review makes sense in every area of your business, but it’s particularly important for your finances, and we have some ideas here on where to start.)
There are a couple of ways you can do this.
You could start the assessment process from scratch and determine target percentages based on your revenue range using the Profit First assessment graph. But what if you haven’t yet made the leap into the next revenue range? It may look as if no changes are necessary to your strategy, but you probably know better. You’ve come so far already, and you likely have a clearer picture of your desired and attainable goals.
When your revenue changes, it’s definitely a good time to reevaluate your target percentages, but you might need a professional to help you make sense of the numbers and set new quarterly goals. We can help with this.
For starters, you can look at your OPEX account for guidance. Are you accumulating more money in your OPEX account than you’re actually needing to spend? If so, you know you can safely reduce the distribution.
Let’s say you’ve got a $5000 surplus sitting in OPEX that’s built up over the last quarter. You can figure out what percentage led to the accumulation of that surplus, and you can safely reduce the OPEX distribution, in increments of 2% to 3% per month.
This would be the time to consider how you could better make use of those funds by reallocating them to another account or by creating a special account for another use that also falls under OPEX, like a payroll account.
Let’s say your OPEX is at the target allocation of 50% and you want to take some continuing education classes which will improve the services you provide in your business. You know you’ve got some wiggle room in OPEX (that $5000 cash surplus as proof) so you decide to create a separate account for, say, Personal Development and mark its target allocation percentage at 5%. You then reduce your OPEX target to 45%. Soon enough you’ll have the funds for that class, while still being able to cover your other business expenses.
Or you could create a separate account for large annual expenses or emergency maintenance. It really all depends on what you need.
Having too much revenue to distribute is a nice problem to have, but what if your revenue is down? Should you cut your own pay to compensate? We don’t ever recommend reducing your Owner’s Pay percentage when revenue is down, though it may seem like an easy solution. Check out this blog post for guidance on determining your Owner’s Pay percentage according to Profit First principles (hint: you’d only ever reduce it when revenue is UP).
Any time you have a big change in revenue—certainly if your business moves into another revenue range on the Profit First assessment chart—it’s wise to talk to your tax professional. That’s because beyond any changes you make to your cash management system, there may be changes to your tax liabilities. A good accountant will recommend ways to reduce your tax burden, such as investments or deductions, that are specific to your overall finances and priorities.
And come September (aka the financial third quarter), you should ask your accountant to estimate your tax rate for the current year. You’ll have eight months worth of real revenue data, so there’s no need to make a guess based on last year’s figures. However, if you’re following Profit First principles, you should have enough funds in your Tax Account based on the performance of your business to pay your taxes. But your accountant can and should work with you to reduce that tax liability as much as possible. (If not, get a new accountant!)
You’re tired of not having a handle on your money. As an entrepreneur, you know all too well the consequences of poor money management—on you and your business. So you took a leap and set up Profit First, which is a step in the right direction. But you’re still overspending. You still have your hands in the proverbial cookie jar, and it’s time to stop.
But how do you remove the temptation of spending your revenue, in particular your growing profit and tax account? They look so tempting and full of money, but their whole purpose is to accumulate money. So let them do their job. Set up smaller plates, and limit your spending to your operating expense account.
Are you not completely sold yet? Then, let’s take a look at some other ways to remove the temptation of spending your sweet, sweet revenue early and (possibly) on the wrong things.
Okay, but I want to take a class.
That’s great! You’re a person who cares about personal and professional development. You’re constantly investing in yourself because you love to learn and know that the more you learn, the stronger your business will become.
You don’t have to sacrifice that important part of yourself because you use Profit First, but you need to plan for it. If you know you want to incorporate personal development into your business, set up an additional account for it.
Once you have all of your other accounts on target, start your personal development account. You don’t have to save much, but as you continue to put a small percentage away, you’ll be ready when you’re ready to pull the trigger on that course you’ve been eyeing—and you didn’t have to compromise your other accounts to participate. Score!
Okay, but it just looks like SO much money is just sitting there.
Well stocked profit and tax accounts can look pretty tempting. They are the glistening oasis when you’ve been walking the financial desert for weeks on end. Andrew Jackson and Benjamin Franklin are waving at you as they sip frozen cocktails by the pool, and there you are, begging for water, dragging yourself through the hot sand. But I have four words for you: Snap. Out. Of. It.
Those accounts aren’t just sitting there trying to tempt you. They serve a purpose. A very important purpose that you know you need. If the temptation is too great to ignore, try moving your profit account and your tax account into different banks. Restrict your access and temptation. Trick yourself into honoring your desire and need for financial security if that’s what it takes.
Okay, but I’m not sure I can do it alone.
If you’re having a hard time holding yourself accountable, that’s okay. But did you know it takes more than two months to create a new habit? And not to mention the new behavior patterns needed to overcome decades of money mindset habits.
But old habits or impulsive spending don’t mean that your Profit First journey is a total loss. Find an accountability partner. If you are struggling to create accountability within yourself, find a friend or biz bestie who you can call with you are a step away from clearing your account and heading to the sale on the gym equipment.
Make sure your accountability partner understands your financial goals. In addition, this person should be supportive of the place you’re in emotionally and the challenges you’re facing.
Creating new behavior patterns is challenging, even on a good day, so be compassionate with yourself. If you are struggling to keep your financial promises to yourself, think of new ways to make it really inconvenient for you to access your accounts. Maybe you don’t sign up for online banking or have an obnoxious password you hate typing in.
The important part is to keep your commitments to yourself and realize you committed to spending out of certain accounts when you set up Profit First, so you need to keep it that way. Future you will thank you for it.
Debt feels suffocating. Your financial walls are closing in on you, and you’re ready to get rid of your personal or business debt once and for all. But how exactly? We can and will help you with this. But before we get into our recommendations for conquering debt, we need to lay some ground rules.
What does Profit First say?
First things first, you cannot pay off debt unless you are profitable. So how do you get profitable? By setting up Profit First, of course. Before you create your plan to pay off debt, you need to make sure all your Profit First pieces are in order. This way, your business will continue to run smoothly while you achieve your financial goals.
What pieces do you need? Take our Profit First Assessment and get a list of what accounts to set up!
Getting started with your debt
Step one to taking control of your finances is to control spending. By running and analyzing an expense report, you will fully acquaint yourself with every financial transaction in your business. You’ll gain a deeper understanding of where the money in your business is going and how you can control your spending.
The next step to paying off debt with Profit First is to understand the intention behind your accounts and allow yourself some grace. This is true whether your debt is in your business or personal finances.
The minimum payment of your credit cards, loan payments, or whatever type of debt you find yourself in comes from your operating expenses. Your bill is covered at its minimum each month. Any additional payments to the principal come from quarterly profit distribution.
Here comes the “grace” part. Just because you are laser-focused on paying off your debt, don’t forget to take some of your quarterly profit and have a little fun. You work hard. By allowing yourself some wiggle room to have fun once in a while, you’ll stave off burnout, so you’ll stay strong for the long haul.
Now that you have the Profit First debt-busting basics down let’s look at a couple more “must-dos” when managing your money.
Why would I save to a savings account if I’m trying to pay off debt?
Let’s get real for a second. Debt comes from spending too much before you have it. So make sure you don’t make a similar mistake by aggressively paying your debt down before you have other financial safeguards in place, i.e., an emergency savings account.
For many clients, the tendency is to put all of their profit toward debt as quickly as possible. We like where your head’s at, but what’s the point of paying off your debt if you are one big emergency away from creating more?
What happens when you’ve paid off all your debt (without emergency savings in place) and your HVAC breaks? You’re right back where you started, except this time, you’re more frustrated and in debt than you were previously.
Creating an emergency savings plan does prolong your journey to becoming debt-free, but it’s the only way to ensure you stay that way once you get there. Unfortunately, emergencies do happen—and usually when you least expect them.
What can you do in the meantime?
Your small plates are in place, you’re paying minimum payments from operating expenses, and you’re building your emergency savings account. Here are four debt management basics you can implement while you’re saving. (These aren’t Profit First principles, just good old-fashioned best practices.)
Managing debt is a beast. But the struggle toward financial freedom is underway. You’ve set up Profit First and created emergency savings. Now all that’s left to do is stop blaming yourself for being in your current financial position.
No matter how much you might hate your debt, realize that it gave you experiences that have brought you to where you are today. Your debt afforded you opportunities, but now that you are making a profit, you don’t need it anymore. So leverage the income you have, say thank you to debt, and show it the door.
The best way to identify your Next Vital Need (what to fix next) is to take the assessment. And if the assessment tells you that you need to fix your sales, read on!
Unpredictable sales are frustrating, especially when that rollercoaster cycle leads to unpredictable profits. After all, operations expenses are usually relatively stable. So when you’re not bringing in enough revenue to cover expenses (after your profit and owner’s pay allocations, of course), you blame sales.
That’s a fair assumption. But there’s more to establishing predictable sales than simply making sales month over month.
If you feel like you’re experiencing a challenge with your sales or you’re finding that you just don’t seem to have much left in your OPEX account each month, it’s time to “fix” that sales challenge.
But again, it’s not about making more sales. It’s about making the right sales from the right people so that you can live the lifestyle you want.
Being able to support yourself and your family is important, right? We’re all for paying yourself a living wage, but do you know what that looks like for you? It looks different for everyone depending on where you live and what lifestyle you want to maintain. Figure out how much you need to live comfortably while also eliminating debt and putting some cash away for savings. Then reverse engineer the numbers to determine what you’ll need in sales to make that happen. Consistently.
Of course, more sales isn’t necessarily the answer if you’re not selling enough to take home what you want. There are a lot of factors to consider here, including reducing expenses. And when you’re looking at your numbers on a regular basis, you can easily calculate exactly how much you need to make in sales in order to fund your owner’s pay account appropriately.
You’ve likely heard of the ideal client and the importance of knowing who that is. Once you know who that person is, are you doing the things you need to do, in the right places, to get them interested in your services?
It’s not enough to advertise or create content for your audience. You need to show up in the places where your ideal clients show up so you can provide value and grab their attention. That means being an active participant, like guesting on podcasts your people listen to or commenting on social media content, responding to your subscribers’ emails, etc. And not just half-hazardly either, but with intention and in the places where you know your “right people” are hanging out. You don’t need just anyone to join your gym or visit your studio; you need the right people to do that.
Once you attract the right people, you need to convert them into customers–and repeat customers if that’s your business model. It’s not about making the sale at any expense; it’s about selling with integrity to the right customers.
It’s not your responsibility to be the hero of your customers’ challenges; it’s your job to make them the hero and guide them along the way. This allows you to focus on the potential customer, not on making the sale–thereby eliminating the pressure on you or your salesperson to make the sale. After all, you may not be the best solution for everyone. And wouldn’t you rather convert the people for whom you are the best solution?
No one likes to feel let down, and sometimes clients aren’t happy–but they won’t tell you that. There are a lot of reasons why you may not deliver on the promises you gave during the sales process, not the least of which being overextending yourself (which we often do in an effort to make more sales).
Depending on your business model, the goal should be to delight your customers so they’ll continue buying from you. If they’re not happy they will likely take their business elsewhere. But the reality is that it’s much easier to retain a customer you already have than it is to find a new customer.
A sale isn’t really final until both sides have delivered on their promises, and sometimes a sale remains incomplete indefinitely. This includes the client paying in full for the delivered product or service. You’re a business, not a charity, and clients need to fulfill their obligations to you.
If your business is a retainer model, you’ll notice that some clients will pay later and later as time goes on if they’re not on an auto-pay system. And if you don’t have a delinquent collection system in place, you’ll want to get something set up.
Looking at your own business from a different perspective can be difficult. If you’re struggling to determine where your sales breakdown is, let’s talk! We have experience helping clients like you get on the right sales path so they can live the lifestyle they want. Contact us today!
Three months can fly by—especially in your business. It’s that time again for your Quarterly Financial Routine. You do have a quarterly financial routine, right? If you do, awesome! If you don’t, you’re in luck. We’ve compiled our top three tasks that should be a part of every business’s quarterly review.
In addition to the quarterly tasks, we strongly recommend using your quarterly quiet time to review the progress of your yearly goals. Revisiting the goals you set back in January every three months allows you to stay on track, reflect on your priorities, and hold yourself accountable.
Now let’s take a look at the top three quarterly tasks we recommend in your business.
You know your business is making a profit, but do you have a clear understanding of your KPIs? Key performance indicators are built into the Profit First model. By creating a spreadsheet for profit distribution every quarter, you can more quickly and accurately track the performance of your key accounts and begin to compare any fluctuation quarter over quarter.
If your business is growing, take a close look at your distributions from each account, then consider any notes you have made in previous quarters and adjust your distributions accordingly. If you’re finding that your operations expenses have increased, determine why and whether you need to increase your allocations there. Ideally, you have a good handle on your expenses and can ultimately increase your owner’s pay and profits instead.
Spending time with your KPIs will help you develop a broader understanding of your business operations, which leads to a positive impact on your owner’s pay percentage.
The goal of Profit First is to make sure you are paying yourself what you need. A quarterly analysis is a crucial step towards ensuring you allocate the proper owner’s pay percentage based on any account fluctuation.
Take time at the beginning and end of each quarter to analyze and record any changes to the buffer in your owner’s pay account. The cushion in your account should be increasing over the quarter, meaning you’re allocating more to that account than you ultimately need. If you have a steady increase, it’s time to raise the amount you actually pay yourself.
However, if your revenue is down, you might be eating into your buffer. It’s natural to think the easiest solution is to adjust your owner’s pay allocation down—don’t do it! If you notice the drop mid-quarter, stay the course, trust the buffer, and look at your financial standing as a whole at the end of the quarter.
Whether you’re practicing Profit First or not, running a quarterly expense analysis report by vendor will tell you everything you need to know about who you’re paying, how much, and when.
This report offers a comprehensive reminder of every vendor you’ve paid throughout the quarter. This is the time to evaluate if you are still getting value from their services. Is there another vendor who does the same thing that you can go with instead? Or do you have the potential to eliminate an expense?
Doing this analysis can also bring to light duplicate charges, increased subscription prices, or subscriptions that you no longer use. Identifying these will help you to save money in the long-term.
Bonus tip: If you are thinking about decreasing your owner’s pay (like we talked about in Task #2), don’t do it! Decreasing expenses is the key to keeping your allocation intact.
By creating a regular quarterly analysis of your business, you empower yourself to make educated decisions based on experience and expertise. Without trust in the system, you might end up making impulsive financial decisions that end up hurting you or your business in the long term.
You don’t have to wait for a special day to analyze your financial health. Schedule a quarterly date with your spreadsheets and make the most out of your relationship. Getting up close and personal with your finances will help you feel more confident, prepared, and empowered to develop your business needs’ money mindset!