Monthly Archives: November 2021

Your Black Friday Deal Probably Needs a Drip Account

Did your business promote a Black Friday deal this year? If so, now’s the time to set up a Drip account within your Profit First system—before you spend the revenue that you made.

What’s a Drip account?

It’s an account you create to help you manage the cash flow when you receive a lump sum payment instead of installments for a service or offering that you’ll be providing to your clients over a long period of time.

Maybe you’re selling a discounted annual gym membership to customers who pay upfront for the year in full. They’ll be using your facilities and your resources over the course of 12 months and your expenses to service them will be accruing over that same period of time. So it doesn’t make sense to treat their full payment as money in your pocket now.

Instead, stretch their payment out over 12 months even though you’ve received it all at once. The sensible thing to do is to place the revenue in a Drip account, then take a proportional amount of the money and “drip it out” each month. So you’re matching revenue with expenses on the same timeline.

If you don’t allocate this money correctly, then it’s just money without a plan, and you’re in danger of spending it. We see this a lot: businesses in year-round “Black Friday mode,” trying to sell annual memberships, or offering other long-term, one-time payment deals, because they’re always needing a large influx of funds—to pay for services they sold months ago but don’t have the resources to cover now.

As one of the biggest spending days of the year, Black Friday is a classic time to offer special membership or subscription deals. But your business should use a Drip account for any similar payment structure regardless of the time of year. Retainer fees, sales of packages and bundles, pre-payments—these all might warrant the use of a Drip account. 

Here’s an example of how to use your Drip account for annual membership fees paid in full up front.

  • Put each lump sum payment into the Drip account.
  • Automatically transfer 1/12 of the amount to your Income account every month as if you just received the revenue (in two payments on the 10th and 25th as per the suggested Profit First schedule would be great).
  • Proceed as you normally would to allocate the funds by percentages—into OPEX, Owner’s Pay, Profit, Tax, Payroll, and any other advanced accounts you’ve created within your Profit First system (the Drip account is considered an advanced account as well!).

Of course, if the membership deal is six months instead of 12, or if it’s an unlimited package deal for three months, then you’d prorate the funds accordingly. You might need to create multiple Drip accounts if you have multiple levels of deals on offer. You can also book a call with a professional to help you determine how much to drip each month.

Trust the Drip account system. 

Don’t be tempted to move more than 1/12 of the Drip account funds into Income every month. Can you see how you will end up overinflating your Profit First accounts? OPEX will definitely be too high, and you will mistakenly think that you can spend more on expenses—which could topple your whole Profit First system.

With Owner’s Pay, this inflation can be especially dangerous. If you’re an owner who withdraws the full amount from your Owner’s Pay each pay period, you’ll be paying yourself prematurely for services not yet rendered. (And you know we advocate for building a buffer in Owner’s Pay. Determine a living wage for yourself and withdraw that every month, leaving the extra for when tough times hit. True, Owner’s Pay will grow as your revenue increases, but you should be making calculated decisions to increase your Owner’s Pay allocation percentage using accurate earned income figures from previous periods.)

Similarly, you might think the Drip account should only be for setting aside some OPEX monies, and you can do what you want with the rest. Which would be…? Putting it in Owner’s Pay? Or Profit? You can see how you run into the same problem.

Black Friday shouldn’t put you in the red.

When you do offer long-term, prepaid deals, you need to price them appropriately to cover your expenses that will accrue over time. You’ll probably need to pay yourself or a team member to work with the client, so factor in payroll expenses. Don’t forget rent, utilities, insurance, and anything else that falls under OPEX.

You may think of offering deep discounts for existing services to get people to sign up. But consider how you can add value to your product offering instead of discounting the price. Throw in a free month of a nutrition app with the purchase of a gym membership, or add a free massage for buying a bundle of ten at full price. We’ve encouraged you to get creative to incentivize your clients in an earlier post.

We caution you against relying too heavily on “paid in fulls” to sustain income. Monthly recurring revenue models are much easier to manage in terms of cash flow. As you head into the new year, what are some ways your business can create excitement around a monthly subscription rather than waiting for the next Black Friday to roll around?

3 Ways to Minimize Tax Season Stress

Tax season is around the corner. Getting everything together and filed can be really stressful, especially for business owners; but it doesn’t have to be. You simply need to know what you need and have it ready by the start of the filing season.

Primarily, you’ll need to:

  1. Know your numbers
  2. Know your mileage
  3. Know your home office expenses

Know Your Numbers

Your “numbers” are your annual net profit, to be exact. Hopefully, you are able to produce a Profit and Loss statement for the year because you’ve kept really good track of your books or had a bookkeeper working with you.

The Profit and Loss statement (P&L) will tell you (or your tax preparer) how much the business made in revenue, how much was spent in business expense, and the difference (profit or loss); all of which is needed to prepare the business portion of your tax return. An accurately-completed balance sheet is also helpful, but the P&L is critical.

Know Your Mileage 

If you use your vehicle 100% for business, tracking vehicle expenses are easy. But if you use it for both business and personal reasons, you’ll want to track the number of miles you drove for business and separate that from the personal miles. Your tax preparer will need this number to give you credit for the business use of your vehicle (56 cents/mile for 2021). If you didn’t keep good track of your business miles, use your calendar to track old appointments and meetings, and get the total for those miles driven throughout the year. You’ll also want to report the parking and toll fees you incurred during the year. 

Know Your Home Office Expenses

You may get a deduction for the business use of your home, but you’ll need to be able to provide some information to take advantage of it. Typically, these items should not show up on your P&L, but you can still use them to reduce your taxes. In order to claim the home office deduction, you’ll need:

  • The total square footage of your entire home
  • Square footage of your home office space
  • Annual total for mortgage interest/property tax or rent
  • Annual totals for all utilities
  • Totals for certain repairs and improvements

Typically, you’ll be able to get a deduction for these expenses based on how much space your home office takes up (i.e. you’ll be able to deduct 8% of the total annualized expenses if your home office takes up 8% of your home).

To learn more about the home office deduction, you can get more information on the IRS website or ask your tax preparer.

Having all of these numbers ready in advance will save you a lot of stress, time, and potentially some money. So start early! And while you’re at it, start setting up some systems for next year so you’re gathering this information year-round. If you need support with this, be sure to contact us!

Money and Mindset for the Holidays

I know this is no surprise to you, but the holidays come around every year. Just like your birthday and your anniversary. You have plenty of time to plan ahead for saving up to buy gifts and for taking time off. But every year, it seems like it sneaks up on you. Right?

It doesn’t have to be that way and the last two months of the year do not have to be the most stressful of the year. All it takes is a little bit of planning for Parkinson’s Law.

First, let’s take care of this year’s holiday season; it’s right around the corner. How can you be ready for those last few weeks of the year–both financially and with tasks and projects?

And since we all know that what’s going on in your personal life bleeds over to business and vice versa, we’re going to talk about both.

Start Where You Are

Most people put the holidays and vacations on credit cards. Let’s break that cycle. If you haven’t been saving for holiday purchases, start now. (Better late than never!) You may not have a lot to set aside, but something is better than nothing. And you can find creative ways to gift your friends and family with what you have–instead of what you can put on plastic.

At the same time, we usually spend more money on groceries and eating out in November and December so it might be smart to watch your spending in other areas to make up for that.

Also remember that you don’t have to buy gifts for everyone, and you don’t have to spend money to show appreciation. Sometimes just some quality time together is gift enough. Some families draw names so they don’t have to buy gifts for everyone. Others get gifts just for the kids, since the adults can just buy themselves what they want. Here are some other ways to make the most of the money you have.

In your business, find unique ways to show your appreciation without impacting the bottom line. That might look like some paid leave for employees during your slower months. (If you have a subscription-based business plan, your revenue will stay the same so there’s no hit to your bottom line.)

And as for the work you need to get done before taking off for the holidays, remember Parkinson’s Law. And fight it! 

First, make a list of priorities and know what you can delegate to others or let go of completely. Then set a schedule for yourself to get the work done. Actually plug it into your calendar so you don’t overbook yourself and you actually have time to get the tasks done.

You may also want to find an accountability partner who can hold you to your schedule. That could be a biz bestie or a team member who is tasked with checking up on you. (It works!)

Plan for Next Year

Once we’re past this holiday season, January 1 is not too soon to plan for the next one. In fact, we recommend this! You can Profit First your personal finances so you have money set aside when it comes time to shop, set a holiday budget, and do some creative things to cut your expenses so you can increase your holiday budget.

In your business, create a business that allows you and your team to take time away so everyone can enjoy the holidays. This looks different for different businesses, but some ideas include:

  • Build out a subscription model. Clients pay a monthly fee for your services, whether they use them or not. You won’t see a dip in your revenue when things slow down over the holiday months. And fewer clients to see means you won’t have to work as much!
  • Create tools clients can use at home. If you’re in the fitness industry, this could look like at-home workouts. If you’re a wellness practitioner, this might be mindset work and meditations. Think about how you can serve your clients without being face-to-face with them? That way you’re still providing value even if you’re technically not working.
  • Do a Profit First assessment on your allocations. If you want to have a certain amount set aside to make up for a slower season, you might want to adjust your allocations so the money is there when you need it. And we recommend having three to six months of expenses set aside…just in case.
  • Don’t feel like you need to buy for your team. It’s so hard to buy for people we only know professionally. Sometimes the best gift for your team is a year-end bonus using your profit distributions. After all, December 31 is profit distribution day anyway!

In the end, it’s important to have your mind and your pocketbook prepared for what’s coming up. We can’t prepare for everything, but we can prepare for the things that come every year–taxes and the holidays.

Use your Profit First accounts to your advantage and never feel like you’re scraping together funds for “emergencies” (because you forgot to save for the holidays).

Choosing The Right Business Coach

Working with a coach is a great idea when you’re looking to improve some area of your skillset. Sure, you can google the subject, read a book, or watch a dozen YouTube videos, but nothing can replace real-time human instruction and guidance from an experienced professional who has walked the walk. 

If you’re looking for a coach to help you improve your business or your finances, you will find no shortage of people out there to choose from. The same goes for life coaching or mindset coaching. Technology has made it possible for us to connect with anyone, anytime, anywhere in service-based relationships—but with coaching, I think you really need to have a personality connection more than anything.

Trust and Straight Talk

Your coach needs to be someone that quickly earns your trust because they’re going to hold a lot of information about you and your business. You should feel comfortable revealing all your money baggage to this person. Sometimes when we’re tiptoeing through a financial minefield, we don’t tell anyone (we’re embarrassed, fearful, or insecure). Ask yourself if this potential coach is someone you could tell the whole truth to, and if you’d heed their advice in navigating a safe way out. 

After all, you’re hiring a coach because you’re looking to improve something about your business or financial situation. (If you weren’t, you’d be knowledgeable and confident enough in your abilities to handle it yourself. And I’ll tell you, as a coach…even coaches need coaches!) So you need someone who won’t just fill your sky with sunshine and rainbows because that won’t improve anything. She should be straight with you about where change needs to happen.

I do this with my clients, and I’m humbled by what they share with us in return. Sometimes, I suspect I know more about my clients’ money situations than their own spouses do. That’s a measure of not only how difficult it is to talk about money with the people in our lives, but how important trust is to the client-coach relationship.

We’ve mentioned here before that your coach, as with all members of your business money team, should have a teacher’s mindset. That’s because most business owners aren’t looking for someone to do all the work for them—rather, they want to learn how to do it better themselves. Does that sound like you?

Experience and Expertise

Of course, your coach should have excellent experience and qualifications. (If you want to implement Profit First, look for a certified professional.) In an ideal world, I think money coaches should have to share their own financial data with potential clients to prove they know their stuff. I’ll continue to dream. But while we wait for that to happen, it’s reasonable to ask for details of their experience, including numbers. If you’re vetting a coach who says she ran a business for five years, I’d ask her things like: How big was the business? How profitable? Was it similar to my business? What challenges did you face?

Because ideally, you want a coach who’s been where you are—and is several steps ahead of you. She’s experienced the typical obstacles to successful business ownership (or good financial health), so she knows how to get past the next four or five hurdles that now lay in front of YOU. She’s in a knowledgeable position to help you strategize crossing the finish line.

Speaking of knowledge, I know a lot about some things (like money—I know A LOT about money.) But I don’t know a lot about everything. Rare is the expert in multiple areas. (Be wary of the heart surgeon who says he can also operate on your brain.) I happen to work with a few coaches and consultants to up my game in business and in life, and I don’t confuse my mindset coach with my marketing specialist. 

That said, I am a thorough business coach myself. Even though we don’t bill ourselves as experts in these areas, we will address your marketing, your systems, and your team—because those things all show up in your money, which I’m looking at like a hawk. By reviewing your income statements and Profit First accounts, I can very often tell you what aspect of your business needs addressing, even (and especially) if you haven’t realized it yourself. It all shows up in your money.

Values and Lifestyle

Relatability is important for some people when choosing a coach. I have an entrepreneur client in her mid-40s who feels that Millennials won’t make great coaches for her because they haven’t had the same life experiences she’s had and won’t understand where she’s headed.

Perhaps what my client is really getting at is the importance of having a shared value system with anyone you’re working closely with. If this is important to you, have a look at how they’re showing up on social media. 

The coach who’s on her laptop on a beach in Bali? One business owner might say, “That’s the life I want exactly! I need to hire that coach immediately.” While another might think, “Hmm, does this coach embrace a career helping struggling business owners like me, or I am just a means to an exit plan?” Consider whether you’d be aligned with this person on, say, ideas about what to do with your profits.

I like to feel out whether someone is the “hustle and grind” type because I don’t put in 16-hour days. Any coach I work with should value life and work harmony as much as I do.

But maybe you love the hustle. There’s no right answer. It depends on what you’re looking for and where you want to go in your business. Don’t hesitate to have an extended conversion and ask real and hypothetical questions related to your business, your spending and saving habits, and your lifestyle. The right coach should emerge as simpatico with you.

Creating Money Systems Beyond Profit First

More systems in your business = less stress and more efficiency.

You’ve already got a solid system for cash flow management if you’re using Profit First. And setting target allocation percentages for each of your accounts is part of a system to help you achieve your broader financial goals. What other systems should you create and maintain to keep your money working for you?

Schedule it.

For starters, systems operate on schedules to be successful. Have you heard of #MoneyMonday or #FinanceFriday? This is a trend you should get on board with. It’s about blocking time every week to manage your money—or even to educate yourself on topics related to wealth and financial health.

We can’t recommend enough that you schedule a regular money date with yourself every week. If dealing with your finances causes stress and confusion, postponing it will only add to that stress and confusion. Build a habit of working with your money on a regular basis to make it automatic and easier.

Schedule enough time to complete your basic bookkeeping, plus add time for the extras as needed. I block off one hour every Friday, except for the days I do payroll—then I block off three hours. 

Create a Bookkeeping System.

Bookkeeping is an essential business activity that tracks and records how and where you take in and spend money. It’s more than just the organization of your financial data—although this is crucial for tax purposes. This data also guides you in making smart decisions to maintain, grow, and course-correct your business. 

Here’s one way you can think of it. Your Profit First OPEX account sets a limit on what you can spend, while your solid bookkeeping system can illuminate what you’re spending too much on.

If you’re doing your own bookkeeping, we’ve already suggested you use software rather than trying to create and manage multiple Excel spreadsheets. It’ll make your life much easier.

On a weekly basis, bookkeeping should include entering business transactions and capturing receipts. It’s much more manageable to snap pics and properly categorize the four or five expense receipts you have from this week rather than waiting to document a pile of 300 receipts in January. How can you even remember what it is that you bought at Costco for $134.97 last February? (We covered some basic dos and don’ts for maintaining receipts in a previous article.) 

On a monthly basis, you need to reconcile your accounts. We like to do this on the first Monday or Friday of the month, for the month prior. (Don’t forget to schedule extra time in this weekly money date to do the monthly stuff.)

You should also review your profit and loss statement—your overall summary of revenue and expenses—every month at the very least, whether or not you use Profit First. With the monthly P&L statement, think about what you were expecting to happen with your money versus what actually happened. Did you have a spending plan or a budget and did you stick to it? Where do you need to make adjustments for next month?

Run any key reports that are relevant to what you’re trying to accomplish or evolve in your business at any given time. For example, if you’ve recently embarked on a marketing push, you’d probably want to run a monthly report on the effectiveness of your marketing spend (are you gaining new clients at a rate to justify the expense?).

Your financial coach can be super helpful in identifying which reports to create and how to interpret them, depending on your business goals. 

Create a system to review your client pricing strategy.

Business owners should regularly assess this key factor of incoming revenue.

Pricing strategy in fitness and wellness businesses is often based on purchasing an hour of time or bundles of hours (packages). When clients want to increase their participation, that often translates to buying more bundles or buying a different package altogether. You should have a system to evaluate what products and packages are contributing to client retention and growth. Reports, report.

Review your pricing strategy annually at the very least. But, if you decide not to adjust your pricing this year, then consider revisiting the idea every quarter of the coming year, until you’re ready to make an adjustment. (Two years is a long time to wait between pricing adjustments.)

If your business uses a different pricing structure, you should analyze your time/money ratio per client every month. The first couple of months you’re working with a new client is expected to be more time-intensive, but there are always those who continue to be high maintenance beyond this getting-to-know-you period. You can track your team’s hours with that client and evaluate the trend after three months or so. Then have an internal conversation about whether you need to make a pricing adjustment to reflect your effort.

Don’t forget your quarterly Profit First reassessments.

You need to examine your Profit First system every quarter at least, so be sure to schedule this on your calendar as well. Everything is interrelated.

By the way, all of the above is pretty much what you should be doing with your personal finances too. Take a #FinanceFriday to look at how your investments are performing. Your weekly money date is a great time to research things related to retirement strategy and diversifying your portfolio. The stuff you probably would never get around to if you didn’t schedule it.