Monthly Archives: October 2021

Set Yourself Up for Success with Profit First

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’re a Profit First newbie (or just need a refresher), start here.

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 success and 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.

If you’re experienced with Profit First, it’s time for annual goal setting and refinement.

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 financial 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.

What You Need to Do NOW to Prepare for Tax Season

While income tax filings have an annual deadline, the management of your taxes is ongoing, especially as business owners. 

The key to managing your taxes is Proactive Tax Planning. This can mean many things to business owners, depending on the size and complexity of your business. But for the sake of keeping things simple and pragmatic, we’ll refer to proactive tax planning as a periodic review of your financials and projected tax liability DURING the tax year. This allows you to forecast your potential tax liability and position yourself to maximize any credits or deductions you may qualify for. This is the best way to make sure you’re paying the least amount in tax that you’re legally obligated to pay. But what does this look like in practice?

What you SHOULD have been doing (from January to September) to prepare for tax season

It is currently the beginning of the 4th quarter in 2021 (early October). If you were actively managing your taxes throughout the year (with the help of a tax pro, of course), you will have done these things:

  • Know your tax liability for the previous year—This number is the basis for what you may need to pay as quarterly estimated taxes. 
  • Pay your quarterly estimated taxes—If profitable, you should have been paying quarterly estimated taxes.
  • Review your financials on a monthly basis—You should know if you are more or less profitable as you were this time last year. This will give you a strong clue if you should increase or decrease your quarterly estimated tax payments. 
  • Review your financials on a quarterly basis with your tax pro/advisor—They will help forecast your tax liability, identify any tax savings opportunities, and help you make your estimated tax payments. 
  • A-la-carte consultations—Between quarterly consultations, you should have reached out to your tax pro before making any major decisions that will have a large tax consequence, like real estate or large asset purchases.

What you should do for the rest of the year (from October to December) to prepare for tax season

One of the biggest benefits that we have as business owners is the ability to control how much our businesses are taxed. How? By controlling how profitable we are. But we can only exercise that power by having up-to-date financials (a profit and loss statement and balance sheet). 

You can’t know what your tax liability will be until you close out your books after December 31. This is why they call it ESTIMATED taxes. However, by having accurate financial statements, we can make very accurate projections of what you may owe. And by knowing how profitable you are as we near the end of the year, you have the ability to increase or decrease business spending, which ultimately gives you great control over what you’ll be taxed on. 

There’s one popular, yet horrible strategy that I want to warn you against. There are accountants and “advisors” who will encourage business owners to sped off all of their profit in order to save on taxes. This is equivalent to spending $10 to save $3. It’s not illegal, but it’s just a bad strategy if you’re looking to build wealth. Instead, you want to focus on increasing PROFIT while budgeting for and minimizing your tax liability.

So, here are the things you’ll want to do for the remainder of the year:
  • Have all of your financial statements cleaned up and updated ASAP if you haven’t done this already. You cannot plan for taxes effectively without accurate financial statements.
  • Compare January through September 2021 to January through September 2020. Are you more or less profitable than the year before? This will give you a large clue if you should anticipate a larger or small tax bill.
  • Consult a tax pro. Have them do tax projections and forecasts based on your year-to-date Profit and Loss Statement, and based on what you think your net profit will be at the end of the year. Have them identify any potential tax savings opportunities.
  • Pay your quarterly estimated taxes if you haven’t done so yet. It’s important to pay 2021’s taxes with 2021’s dollars.  
  • Plan to meet with your tax pro before the year ends and keep a really close eye on your net profit as you approach December 31. 
  • Catch up on your quarterly estimated taxes if you haven’t done so yet or start planning for it. You should have very accurate estimates if you consulted a good tax pro. If not, use last year’s tax liability as your basis. 

Profit First has a wonderful system to help keep sufficient tax reserves. It’s simple, painless, and can help make sure you have enough for taxes and helps you prepare for tax season, no matter how little or how much you make. Sign up now for an assessment and let’s get you started!

Having A Plan For That “Extra” Money in Your Profit First Accounts

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. 

Money Without a Plan

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.)

Got extra money in the OPEX account?

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. 

Got extra money in the Tax account?

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. 

Got extra money in Owner’s Pay?

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.

Got extra money in the Profit account?

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.

Now that you have some ideas about what to do with that “extra” money, we’re feeling relieved.

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.