092: How to Start Profit First with No Profit in Your Design Business
092: How to Start Profit First with No Profit
with Michele Williams
On the podcast today, we are going to tackle excuses that I hear sometimes. "I cannot do Profit First because I don't have enough profit. I'll get to that later when I am profitable." What if I told you that not doing PF before having profit could be the problem. Listen in today to learn how to save your profit before you have any.
Ok, Let's just get this out on the table early. I am a certified Profit First coach and have been since 2015. This method of managing your money works. I also have facilitated the Financial Peace education from Dave Ramsey. I serve creatives – like you – and my focus is to help you create and maintain profit in your company so that you can have a sustainable business. Let's talk about how to create a profit first strategy even if you don't yet have a penny of profit.
Topics Mentioned:
•Working within constraints
•Profitability mindset and habits
•Building the business for the future
•Strategic debt
Listen to the Episode
Define Profit
To begin, let's define profit. Profit is the money that we set aside with intention, to make our businesses sustainable. This might be a slightly different definition from what you have learned in the past. Maybe you heard something along these lines: profit is what is left over after all the bills have been paid.
But this definition is inherently flawed. If we wait until all spending is done to recognize profit – then we are considering profit an afterthought to doing business. Yet, we all go into business with some idea of making a profit. If that is the case, why would we not plan for profit from the beginning and set it aside to protect it as the business is growing?
Have you ever heard of Parkinson's Law? This is the law that says work expands to fill the space available for completion. Money does the same. In simple terms, the more money we make the more we spend. In the discussion of time – let's say you have two weeks to get something done. In most cases, you will complete the work right before it is due. If you had two days, the same would hold true. If there are limits to our resources, we normally adapt and work within those constraints.
By not limiting our expenses and letting profit be a left-over – we are setting ourselves up for disappointment. Because expenses tend to expand if not seriously controlled to gobble up any and all profits we have. Shiny objects – anyone?
So, going forward, we will consider profit as a percentage of our Real Revenue (or gross profit) that we want to preserve for our company's sustainability.
Keep in mind, as we discuss profit in a PF model, we are not talking net profit on your Income Statement. We are looking at company profit as separate from any owner's benefit, including salary and owner's draws. This profit is company sustainability. We will distribute it at given times, but it is meant to support the company, not just the owner.
Have a Profit Mindset
It is important to focus on profitability from the start. While our company's profit may not be as high as we want it to be when we begin, we do need to start with the mindset that it is important, will be made and saved.
I love what Dave Ramsey says, "We have to love saving more than spending."
Zig Ziglar put it like this, "If you do the things you need to do when you need to do them, then someday you can do the things you want to do when you want to do them."
Our mindset controls all that we do. I am not talking Pollyanna thinking, but seriously taking our thoughts captive and asking hard questions. Are these thoughts truthful? Am I setting myself up for success or failure, depending on my thoughts? Our actions stem from our belief systems – and they are not always in alignment with what we say we want.
Making a clear decision to make and save profit in a company is a huge first step. Then following through with action is what will ultimately create the success we are working for.
What do you believe about profits? What do you think you should do with profits? How much do you think is enough? All of your answers are guiding your decision making, even if you are not consciously aware of it.
Even before you earn your first dollar, you can decide what you believe about money.
Money is not good or bad. It is amoral. What we choose to do with money is where morality comes into play. I can tell you this. I cannot give away money I don't have. I cannot invest money I don't have. I cannot leave a legacy I don't have.
Decide early on to be profitable and to do what it takes in your business to make that happen. This may mean growing quickly or slowly. It may mean hiring or firing. It just means you have to be willing to take a long hard look and be intentional in your choices. Even when you are profitable at the level you desire; you are still working on your profitability mindset. Decisions come into play with efficiencies and competitors' advantages, which can reduce our profitability even if we change nothing. This work is never done. Start early and keep reviewing your mindsets around money and profits.
Create Profit Habits From the Beginning
Habits are so much easier to create with small amounts of something than when you have a windfall. Want to start a new 401k habit? It is easier to put in 3 or 6% than 15%. But if you choose to start with 3-6%, you can gradually increase to 15% or more without the shock. Starting profit saving behaviors when you begin your business is the same thing. Set up a framework of decision making and activity that allows for your current and future success.
How do we do that? I have my clients that are either new in their business or just starting to begin by allocating 1% of their Gross Profit each allocation period to company profit. Just 1%. Small amounts add up quickly. When we can do 1%, we try to stretch to 2% and so on. Just getting into the habit of moving money into the profit bank account at 1% works that profit saving muscle in our business. The more we do it, the stronger we get. The more excited we get – and we begin looking for ways to build up more and more profit while exceeding the product and service offerings.
Even when we have debt to pay off, we use the profit account as a pass-through. This shows us clearly what could be profit if the payments were made to us instead of to debt reduction. And we are already in the habit of saving for profit when the debt goes away.
If we pay off debt without seeing it as spending our profit, then we can easily assume we never had that money and allow future expenses to eat it up. Going into a profit account then out to pay debt is clear, and a very direct correlation is made about what our money is being spent on.
Measure What Matters
You have probably heard it said that you get what you inspect, not what you expect. Make a plan to measure what matters – and profit matters. Dave Ramsey says, "You will either learn to manage money, or the lack of it will always manage you."
There are two ways I love to manage money. The first is by creating a budget for my company. A created plan in advance of how my money will be spent to attain the goals I have set forth. Then I love each month to measure to that budget to see if I am on track to meet my goals.
John Maxwell said, "A budget is simply telling your money where to go instead of wondering where it went."
Here is a good indicator that you don't know where your money went. Look at your P and L and see the net profit at the bottom. Recognize that money is not in your bank account or on your balance sheet and wonder where it is. That is an indicator that something is not being measured accurately.
Again, starting with smaller amounts of money and being clear on what it is allocated for and how it will be spent will help you stay in line – and in alignment with your values and goals – as sales increase and more money comes in to be managed.
Decide About Debt
Make a decision before you begin with regard to debt. Is this something you want to have in your company? How much is too much? What will you allow debt to be created for – and what is an immediate no? How will debt be managed?
It is easy, in our environment today, to take on more debt than we need to. We are offered loans and credit cards in the mail on a consistent basis, and these can easily be alluring if we have a dream but no current funds to make it a reality. Debt can work, but it has to be extremely strategic. Otherwise, it is a set of weights on our shoulders that keep us from moving forward. Debt can keep us from being able to react swiftly or nimbly. And remember this – it has to be paid back. It is not free money. Mike Michalowicz says this, "well-dressed poverty is still poverty." We must decide to consistently spend less than we make to stay out of debt.
Our company needs to be able to live within its means. Otherwise, debt will be our burden and will control our ability to grow with peace and ease going forward.
To be truthful, implementing a money management strategy like Profit First is more about what you believe, followed by action to show those beliefs. Any new system or strategy can be difficult. But when thought about in advance and decision making is done prior to being in the heat of the moment, your way forward will be most clear.
I have built a business and worked hours upon hours to make no money. It is a terrible feeling. I have also planned for profit from the start and been much less stressed. And I like this way better.
No matter where you are right now – with an idea for a business or 30+ years in, you can move forward. If you are making tons of profit and don't know what to do with it – call me. If you know that there can be a better way – call me. I am telling you – It is never too early or too late to do business better! Start now. Don't wait.
Decide today to manage your money, so the lack of it doesn't manage you. I am happy to assist. Because what seems simple is not always easy. Go to ScarletThreadConsulting.Com and sign up for a discovery call and let's see how we can move your business forward to be as profitable as possible. I will end this podcast like I have every other one before with a reminder that profit doesn't happen by accident.
Key Thoughts:
Create a business that is profitable and to plan for that from the very beginning, set some aside to protect it as the business is growing. - Michele (03:30)
We're not just building the businesses we have today. We're building the businesses we want to have tomorrow. - Michele (11:44)
Make a plan to measure what matters and profit matters. - Michele (14:49)
To stay out of debt, we have to love saving more than spending. - Michele (18:00)
Contact Michele
Email: Team@ScarletThreadConsulting.com
Facebook: Scarlet Thread Consulting
Instagram: @ScarletThreadATL
References and Resources:
All Roads Lead to Profit, Episode 004 with Mike Michalowicz
Profit First by Mike Michalowicz
Financial Peace by Dave Ramsey