Get Your Taxes in Order & Don’t Ask for an Extension

The 2021 calendar year is officially over, which means that tax season is upon us. (Happy New Year, right?) It’s time to start getting organized so you don’t have to ask for an extension on your taxes.

If you’ve been following along recently, you’ll know that there’s a lot you can do to prepare. We’ve told you how to reduce your taxes without reducing your net profits, we’ve shared how to work ahead so you can minimize your tax season stress, and we’ve given you tips to prepare for taxes well in advance.

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Setting Your 2022 Financial Goals

Have you set big, lofty financial goals for 2022? And if so, how did you come up with those numbers?

Setting financial goals is incredibly helpful so you have something to strive for, but setting the right goals is vital. If they’re not realistic, you’re bound to feel frustrated mid-year, throw up your hands and give up.

Let’s avoid that by setting your goals with intention and research. Answer each of these questions and write down any numbers and calculations so you have them handy.

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Start Your Year on the Right Financial Footing

Every new year, do you go through the motions of creating a “new year, new you,” trying to overhaul your business and your life to make this year your “best year yet”?

Look no further than your social media feed and you’ll quickly find that you are far from alone. Everyone is encouraging us to be better than before by changing our diets, our exercise regimens, our reading habits, our relationship statuses, our home organization systems, our money management, you name it.

And so many of us buy into it. I’ve been guilty of this too!

Then when we can’t hold onto these new (unattainable) habits, we feel like failures.

What if we try a new way of making progress toward our best year yet? Instead of trying to change it all, try finding little things you can do to make consistent progress in your business. And let’s forget the major overhaul.

This applies to any resolutions and changes you want to make in your personal life, but let’s talk about how to do this in your business.

Do CPR on Your Business

We’re not trying to breathe life into your business, we’re doing what’s Consistent, Predictable, and Repeatable. CPR.

What are the little things you can do to make consistent growth in your business? It’s not about overhauling your finances so you can set yourself up to be profitable next year; it’s about consistently allocating to your Profit account—starting with just 1% a month, if that’s where you have to start.

Make it a habit: Twice a month, transfer 1% of your revenue to Profit. Once you’ve established this habit, increase that allocation to 2% or 3%—whatever works for where you are right now.

Not sure how much to allocate? Grab our free Profit First Overview and learn what your percentages should be based on your current revenue.

As you become more consistent in your allocations, they start to become predictable. You know that on the 10th and 25th of each month, you’ll have a financial date with yourself to make those allocations. And you’ll hopefully start to incorporate other pieces of the financial pie in those dates, like reviewing your balance sheet and profit and loss statements, checking in on your expenses to see if there’s anything you can let go of, and planning for future purchases.

Consistency and predictability will help you to create more systems so that everything you do is repeatable, without recreating the wheel each time.

Some ideas for systems around your financials include:

• Create an allocation calculator that allows you to plug in your numbers so you don’t have to do the calculations yourself each time. (Our clients have access to a robust tool that does this—and a lot more—for them.)
• Create a task in your project management system (or use a Google Doc), listing out what you’ll do on your finance dates. Then there’s no question about what you need to do and your finances are always up-to-date.
• Even if your finance dates are only once or twice a month, make it a point to enter transactions more often so you’re not overwhelmed during your finance dates. Or, hire someone like us to do this for you!

You Can’t Do it All

One of the biggest challenges to setting new goals and intentions in the new year is that we want to do it all. We want to learn new things, launch new offers, set new revenue goals. But there’s only so much time in the day, especially if you have some personal goals and commitments you want to keep.

Joining mastermind groups and coaching programs and buying courses is fine, but know what you want to prioritize learning. Then do that and only that until you’ve mastered the concepts. Only then should you focus on doing something else that’s new.

If you want to lose weight, you know you need to focus on nutrition, fitness, and mindset. But if you’ve been off the wagon for a while, you really can only focus on one thing at a time. Determine what’s most important to start with and do only that for a month, then add in the next most important part of the process and so on.

Just like if you’re trying to overhaul your health, trying to do everything at once is a recipe for overwhelm. If you’re trying to “fix” all the things in your business at once, you’ll stress yourself out and not make progress on anything.

This really is an exciting time of year and it’s ripe with possibilities. What one thing will you choose to start with to become Consistent with, so it becomes Predictable, and then Repeatable? Where will you start your success in 2022?

How to Talk to Your Clients About Raising Your Prices

Raising Prices Doesn’t Guarantee Increased Profitability

If you’re trying to increase your business profits (and who isn’t?), you might think the sure-fire way to do that is simply to raise your prices. If your customers pay more, you’ll make more. Right? Not necessarily.

Well, if you’re using the Profit First method, raising prices will indeed equate to increased Profit. Because you take in revenue, you immediately pay yourself a profit. So if you take in more revenue (by raising your prices), you’ll pay yourself more profit. But increased revenue does not necessarily mean increased profitability.

Profitability vs. More Profits

And what is profitability exactly? It’s a measure of your profit relative to your expenses. It’s an assessment that helps you determine if your business can sustain itself and grow. Ultimately you want to be able to project the profitability of your business well into the future.

Here’s why raising your prices does not automatically equate to increased profitability. 

You do have to raise your prices from time to time no matter what because of inflation. The cost of doing business is always gradually increasing because the costs of goods and services in our economy are generally rising over time. 

So if you raise prices just enough to keep up with the cost of doing business, you might not increase your profitability at all. So how do you increase profitability? 

There are endless tactics and factors of influence. (Here are just a few ideas specifically for gym owners.) 

But at the most basic level when we’re talking about profitability, raising prices alone won’t cut it. You have to raise your prices and you also have to monitor your expenses.

How to Plan a Pricing Increase

Price increase strategy incorporates many factors. Ideally, you have a system in place for reviewing your client pricing structure on a regular basis. This involves running reports and examining numbers that are very specific to your business and its service offerings. Read about one fitness studio owner’s successful formula for profitable pricing here.

But let’s say you’re leaving your pricing structure in place for now because it’s working well. How much should you raise your prices, even if just to stay even with current expenses? 

I’m always a proponent for increasing your prices regularly by small amounts rather than implementing larger increases less often. It’s easier for clients to stomach.

At minimum, we suggest increasing your prices by 1 to 2% annually to account for an inevitable increase in the cost of something or other. But a 3 to 5% increase is very standard. 

Your landlord might raise the rent, or the cost of your CRM software monthly subscription might go up—or both. You might be able to predict how much your vendors will raise their prices this year by reviewing the history of previous years. 

And then consider whether you need to upgrade to a higher tier of an existing expense, or purchase something new altogether this year. You’ll need to factor that into your spending plan, and possibly your pricing increase, if you haven’t saved ahead to pay for it.

You should examine your full roster of expenses at least quarterly, and definitely whenever you’re thinking about implementing a pricing increase. We talked about analyzing your recurring business expenses and how to reduce them in this earlier post. Trim whatever you can. This is a step toward increased profitability.

Along with that, you should look at any other areas where you may have inefficiencies in your business. Are you running a tight ship with your team members for maximum productivity? Trim here too, if necessary. Labor inefficiency is an enemy of profitability.

Raise Prices to Achieve Broader Goals

Now you’re aware that you need to increase prices incrementally on a regular basis just to keep up with rising costs. Of course, it’d be great if you also could strategically raise prices to help you achieve your broader business goals. 

For example, do you have a goal to pay yourself more every month? You can use a pricing increase to take an incremental step toward that. Work backwards with the numbers. Do you know what your revenue needs to be in order to increase your Owner’s Pay by as much as you want to? Figure out how much you need to increase incoming revenue per client in order to make that incremental step.

Final Thoughts

Overall, determine an increase that you are comfortable selling to your clients. Are you confident that a $10 increase in their monthly membership fee is worth it for them? 

Part of raising rates and your journey toward increased profitability might also involve changing your business model to add more value to their membership. If your goal is to have a higher market share (more clients), then you’ll naturally need to scale your business over time to accommodate them.

Having a higher market share also makes you a more competitive business, and this alone can improve profitability. 

And stay tuned for next week’s post, where we’ll offer some best practices for how to tell your clients that prices are going up!

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?

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.

Set Yourself Up for Success in 2022 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 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 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.