2019’s biggest distinction for me was how to make my business profitable overnight. I learned how from a book called Profit First by Mike Mik-cal-O-witz, and I want to share the basics with you today.
The other day, I was watching a video interview between an online mentor of mine, Aaron Marino and Mr. Wonderful, Kevin O’Leary, of SharkTank. About half-way through the video, Aaron’s business partner asked Kevin when they should take some money out of their seven-figure business.
I was shocked, but I realized a year ago I probably wouldn’t have been. You see the shift in paradigm I learned from Profit First make that question, as crazy as asking, “When should I increase my weights when working out?”
If you used the Profit First paradigm you would be taking money out about 2 weeks in. You would build profit in from the beginning.
I know that sounds crazy but lets talk about the craziness that is the way most people do it.
Most business work like this. I decide what I need to spend money on in my business. Then I make some sales. Take that income and spend it on everything I need for my business. This includes payroll for my employees. Then if there is anything left over, I might pay myself a salary. Then if there is anything after that, I can take a profit.
With this methodology how often do you think the business owner gets paid? Especially in the early days.
Not only that, but the only way it seems to work is if by some kind of accident you make a lot of sales quickly, because it seems there is always something to spend money on in business.
Profit First stands this on its head. It actually takes into account human behavior as well.
How Profit first work is you start by taking some percent, normally a very small one at first, maybe 1%, of all revenue and you put it in a separate hard to get to bank account called Profit.
Boom overnight you are profitable.
One of the cornerstone methods of Profit First is the bank accounts. When you explain how to do it, people think you are crazy.
Crazy like a fox.
If you wanted to start Profit first tomorrow, you’d go to a bank and you’d set up 5 bank accounts.
Probably not your current bank because of all the fees. You see some of these accounts need to be able to have zero balances, and banks don’t like zero balances. Which is a whole other issue.
You’d have these accounts:
- Income
- Profit
- Tax
- Owner’s Comp
- OPEX
Every bit of sales you make drops into the Income account. I should point out this is real revenue. It is sales minus cost of goods. So if you buy a product wholesale and sell it for a retail price, this is the difference. Cost of goods is not all of the costs to run your business, but just the per product cost of goods.
All the other accounts have a percentage associated with them. This percentage is based on your real revenue. Profit first also takes into account that you may need to work up to your targets, read the book to see how that should work.
Now that you have all your income in one account, periodically – generally two times a month – you distribute money from the Income account, to the other accounts.
First, you take your profit percentage and transfer it to the profit account. We’ll talk about how and when you take money from that account in a minute.
Then you take your tax percentage and put it in the tax account.
Likewise, transfer some percentage to the Owners Comp account. This is the money the company pays you for the work you do. This too varies over time and the amount of work you are doing. In general, it should be what you would pay someone who does what you do for the company.
All the rest is removed from Income account and put in OPEX account, which stands for Operating Expenses. You run you company out of this account. It is where you pay your bills, and if there isn’t enough money in this account, then you can’t spend it.
But Ron you might say, that isn’t really profit because you may have more bills than you have in your OPEX account. And I’d say you may have more bills than you have in your income account too, but that is the problem. You must lower your expenses. Why not just lower your expenses to the amount you have in OPEX and make sure you get paid first.
Now there are a lot of extenuating circumstances about implementing the system. They are all in the book, which takes a very practical approach. Mike understands what it is like to run a real company. He understands you can’t completely move to this system overnight. But you can make progress, and you can start making a profit tomorrow.
Get the book. Take action. I promise you it will revolutionize your business.
My biggest takeaway was the distinction that we spend what we have in our business bank account, so why not make sure that account only has money in it after you’ve gotten paid.
Now about the profit account. Every quarter you take half of what is in the profit account and you distribute it to the personal bank accounts of the company owners.
You don’t put it back in the business.
You freaking spend it.
Guilt-free.
Let me tell you, that feels awesome.
Question of the Day: Does your business pay you?
