283: Implementing Profit First with Success     

Michele Williams: Hello!  My name is Michele, and you're listening to Profit is a Choice.

Welcome to the podcast! Today, we’re talking about Profit First—a powerful money management system that is proven to boost interior design business profit. If you're making money but never seem to keep it, or constantly juggling funds, you're not alone. We’ll show you how Profit First helps you separate money with purpose, avoid the “robbing Peter to pay Paul” cycle, and make smarter financial decisions. Whether you're just launching or scaling your design business, this episode is packed with strategies to help you pay yourself first and grow a more profitable interior design business. 

Every day, empowered entrepreneurs are taking ownership of their company financial health and enjoying the rewards of reduced stress and more creativity with my background as a financial software developer, owner of multiple businesses in the interior design industry, educator and speaker, I coach women in the interior design industry to increase their profits, regain ownership of their bottom line and to have fun again in their business. Welcome to Profit is a Choice.

Hello and welcome back to another episode of Profit is a Choice. One of the things that prompted me to create this podcast in the very beginning was being able to just really understand profitability and be able to share it with other people. I started my first business in the year 2000 and as I've told the story, my pricing was off, I wasn't saving all my money the way I needed to, and I ran into challenge after challenge after challenge with either not pricing it effectively, not saving for profit, or not saving to pay the taxes. I documented a lot of that in the book that I did with LuAnn Nigara. I think it was the second book in her series, A Well-Designed Business-The Power Talk Friday Experts. I'll make sure that I link that. I kind of described that entire journey and how I started wrapping my arms around pricing and profitability and what the numbers mean, and how to use those numbers to plan for my future. I've told the story in one of the other podcasts, and I'll link a couple down below, if you're looking at the show notes from different Profit First episodes that I've done so that you'll be able to see them. But one of the things that was so interesting to me is I had to learn my lessons a step at a time. I didn't just have the opportunity to have a Profit First book back in 2000.

Profit First, I think, came out in 2014 or 2015 so it was years past the lessons that I was learning. And in those lessons, what was so interesting was every year or two, I would learn the next thing, and then I would learn the next thing, I would kind of run into the next wall. The beautiful thing about Profit First as a money management methodology or system, if you will, is that it kind of alerts you to hear all the problems that could show up and how to start putting some things in place early on to fix it.

Let's start by talking about what Profit First is. Some people have the mistaken idea that it's about taking all of the profit out of the business first. That's not really what it's saying. What it's really trying to do is put you in the mindset that we want the business to live within the means of what the business can afford to live in, so that we're not spending money that the business truly doesn't have. The way that we do that is by budgeting and setting up some thresholds for different areas of the company so that we have the money to be used for the items that we plan to use it for. Just like a budget is a decision that we make in advance on how we're going to spend the money, Profit First fits into that by saying, here's the money that I need to have in profitability in the company. Here's the money that I need to pay the owner, here's the money that I need to pay the taxes so that all that money is separated out to be able to do the job that it is intended to do.

Profit First also helps us look at and most of our businesses gross profit as being the revenue that we actually have to run the company on. Because it's so easy, especially if you have a business that does a high amount of services or a high amount of product sales, it's easy to look at that top line revenue number and think that we have all this money to go spend in the running of our business, when, honestly, a lot of money is going to come out in cost of goods, if you're product based, and then the money that we have to run the company is substantially less than the revenue that we had coming in. When that happens, if we don't have a good handle on all of that, it is very easy to overspend or to spend at a time that we don't have it.

Profit First helps us look at the percentages in our business that are spent on things like owner's benefit, taxes, profit, operational expenses, and then other things like inventory replenishment, or, let's say, bonuses. You can break it out into so many different ways, so that the money gets put into these buckets or bank accounts, and then it gets protected so that it is used only for what you meant to use it for. If we were to take a Profit First attitude, we would even hopefully create a cost of goods account where we're putting the money in to be able to separate it out from the operating money in our company, to allow us to pay for the products or the services that are cost of goods, for the sales that we've made, so that we're not robbing Peter to pay Paul, meaning we're not using the money that should be used to buy a sofa and a credenza for a client to pay payroll, because that's robbing client money to make an operating expense coverage, and that's not what we want to do.

Profit First again, is being able to separate out your money into bank accounts where it can then be looked at in smaller chunks with a purpose in mind, so that we're not overspending on the wrong things. A question I get a lot of times. Well, when should I start this? I have a whole podcast that I'll link about starting Profit First when you don't even have profit. Why? Because it's about the way that we think about money. We can go ahead and establish percentages that over time we are addressing and we're moving the money around in a way that makes sense for it to cover the things we need for it to cover. I would also have it a profit account, move the money in there and use it to go pay off debt, because that's going to trigger me that when that debt's paid off, everything in that profit account can now come to me. You can start working within the system immediately.

Some of the very first accounts that I would have people set up are a profit account and a tax account. Why? Because, first of all, if you have any amount of profit, you're going to have to pay taxes on it, and I don't want to start getting up upside down with the IRS and penalties and fees. The more that I can separate out to cover the tax burden, that is a big stress reliever for me. So that's one of the first accounts I would have you set up.

The second account is a profit account. Now if you are running a business that is profitable in that account, we can then make a decision on how we handle that profit. If you are profitable but you have a high load of debt, we can then use that money to start paying off debt, but at least it's going into a profit account so that we can see it, know it, feel it, and touch it, before we have to pay it out.

Once we've got those two accounts set up, we can start looking at the other accounts that we may want to set up. We can also start setting up a system of monitoring so that next quarter, what do we want it to be. Let's say that our operating expenses are really high. They're higher than we need them to be. Let's say that, based on the chart, they are running at 75%. The chart says 50% but ours are running at 75%. Well, the only way to get that down is either to reduce the expenses or to increase the real revenue or the gross profit so that it is a smaller percentage of that number. And the answer may be a bit of both. Maybe you're in a sales slump and the numbers aren't coming in, the revenue is not coming in, therefore the expenses are a higher percentage. That's one thing we have to solve. The second thing though is, what if you are selling you are killing it, and the expenses just keep going up. That tells us that we're probably spending more, spending more, instead of perhaps slowing down and taking time to look at processes, or looking at where we can save money, or how we can do things differently.

Profit First is a kind of tool that allows us to take a step back and say, is this money being allocated properly? Am I spending the money where I need to spend it? And is it really showing up in the areas where I need it to show up most? Sometimes, all of those expenses are going out the door, and then the owner is not getting paid. If we can start looking at it, we can also put a plan in place that every month, or every quarter, we're adjusting, adjusting, tiny adjustments, allowing us to get to a place more of homeostasis, where things are working properly. Where we can satisfy all the bills and all the demands of the company, while also satisfying the need to pay us as the owner and to cover the taxes and to have profit, which is the sustainability part that allows us to grow into the future, either by hiring more people, doing more travel, doing more things in the company that maybe we're not able to do now, or also it puts us in a position that if we want to start a new section of our company, or we want to buy a building, or we want to renovate or have a new space, or whatever it is that you want to do, the profit is what gives us the ability to do that without having to go back into our personal funds to pull the money to be able to do it. The more that we can plan for profit and be very clear on where the money is coming in and going out, the more that we have the power to actually use those numbers to move us forward.

What really needs to be in place for us to start this? Well, the first thing I would say that we need to do is we need to understand our own internal processes and how cash flows in and out of our company. If we don't understand when money comes in, when it is ours, when we are recognizing revenue, cash accounting, accrual accounting, all the different things that fit into our process, if we don't understand in our own company, the flow of money, then we can easily implement, if you will, air quotes, Profit First and it not work for us. Everybody who has told me that Profit First didn't work, it wasn't a Profit First problem. It was a Profit First implementation problem. And so maybe you've tried different things, and you throw your hands up and say, it doesn't work for me. It's not the saving of the money in the bank accounts that’s the problem. It's probably the timing, the amount, the percentages. There is an implementation issue. The very first thing is to truly understand how money flows in and out of your business, and that means the amount, the timing, and the revenue recognition.

After that, it's about establishing the first two or three accounts that you want to set up so that you can go to the bank and get those set up or do them online. Then it's about doing the analysis of the numbers so that you can see what your company is currently doing. What are the current percentages? Here is one of the big pitfalls that I see is that companies set up based on the percentages that the book tells them it should be instead of the percentages that they're currently running at, with the plan to slowly get them to what they need to be. We call it caps and taps. Caps are current allocation percentages taps or target allocation percentages. So, the more that we can go in and look at what our current allocation is and then set the target and slowly move ourselves to it, the more we're going to have success. But if we just use the percentages in the book if and then, let's say that they're not in alignment with currently what you're doing, and you try to allocate based on that, you're going to be in trouble. And that would be an instance where people say Profit First doesn't work when it's really the implementation.

So having the knowing and understanding cash flow and process, going to the bank and setting up a couple of accounts, and then sitting back and actually doing the analysis, that's going to be your first three steps. After you've done that, the next big thing is building a strategy. Anytime we go into this, it can't just be a direct I don't see it just as a direct implementation from the book, and it's all going to work. I mean, that is pie in the sky that is in a perfect world, and you can get to that, but that might not be where you start. The strategy says, how do I need to use the money? What am I saving the money for? Is this going to be a drip account? Is this going to be a savings account? What am I doing here? Then, how does money flow into these accounts? How does money flow out? So, it's sitting down and literally building out a financial, money management strategy, and then implementing. The biggest challenge that I've mentioned before is implementation without strategy that's going to bite you every single time. If I could just encourage you to sit down and work through, how does money come in? How do I want to save it? Where are we going? What do we want to do? And then start putting this into the process. What I love, and the way that I work with my companies that I coach is to start by looking at an overall company strategy. What is the company trying to do and achieve. Then we build financial strategies to support it, and money management or profit first strategies to support that. All of these things have to work together. If not, that's where there is a disconnect, and we're going to start falling apart, or things aren't working. Everything really goes back to what is the company doing and where is the company going. And then how do we align financials, how do we align marketing? How do we align our team? How do we align all of these pieces and parts to be supportive of the overall company strategy and profit. First is one of those tools that you can put into your toolbox to help you do that. I would highly recommend that you grab the book. You can grab it on Amazon or wherever you buy your books.

Another great thing is to listen to it on Audible. Now, Mike is hysterical, and he is such a fun guy, and you would probably really enjoy his personality as you listen to it. It makes it very relatable. I also am offering a course that I've had for years called Master Your Profit, and we're getting ready to offer it starting on May 8, in a live coaching format, meaning I'm going to coach you. You're going to go in and do the work, and then I'm going to live coach you again. We have four live coaching sessions tied in to you, actually understanding the fundamentals, going through your own numbers, doing your own analysis, and having feedback from a coach and a community environment, and then in a live coaching call, multiples of them to help you truly implement a strategy that works for your company. I would love to invite you to join us in that program, starting on May 8 and going through, I think, June 19. You can find that information by going to scarletthreadconsulting.com and looking under the Work With Me tab, you should see Master Your Profit in there, and we would love to support you and help you in building and implementing this tool in a way that is supportive and that works for you and for your company. Remember, every day we have the opportunity to choose to be profitable, because profit doesn't happen by accident.

Profit is a Choice is proud to be part of the design network.org where you can discover more design media reaching creative listeners. Thanks for listening and stay creative and business minded.