thread Re: Profit First: Core Principles and Action Steps in Square Readers Book Club

Profit First: Core Principles and Action Steps

PessoAlumni — Tue, 16 Jan 2024 14:39:27 GMT

As we’re getting deeper into reading Profit First by Mike Michalowicz, let’s get deeper into the material. Last week we talked about the basics: why profit is important, and some of the reasons why businesses fall into the Survival Trap and stay unprofitable.

Now, let’s dive into the core principles and first action steps of this strategy of ensuring that your business becomes truly profitable.

But first, a major caveat and expectation setting: you can’t just implement the steps of Profit First and expect to magically be profitable. The steps will help show you what you need to do in order to be profitable. You will probably need to cut expenses. You may need to increase sales. You will need to work smarter. The steps of Profit First can help show you how to do that, and enable you to systematically put aside your profit. But you will need to do work outside of these steps.

Profit First One-Sheet

What is Profit First:

The author says, “I’m simply asking you to remove the profit first, and operate on less.”

But that’s easier said than done. Taking profit first is not just a mindset change, but rather also a physical systems change. The plan is to put systems in place to make you get used to having less to spend on your business, securing more profit.

Here are the 4 Core Principles of Profit First

Use Small Plates

Our needs grow to fit our means. All expenses feel necessary, especially when you’re used to having enough money to pay for them. But when you don’t have that money, you tend to get more creative and can get by with less.
“When less money is available to run your business, you will find ways to get the same or better results with less. By taking your profit first, you will be forced to think smarter and innovate more.”

Serve Sequentially

According to the idea of “Primacy,” what we see or do first sets our expectations. If you pay your expenses first, expenses will be the most important thing. When we think profit first, profit becomes most important. This is done by first setting aside money directly from our income into accounts for profit and each type of expense.
“Always, always allocate money based upon the percentages to the accounts first. Never, ever, ever pay bills first… And if there isn’t enough money left for expenses? This does not mean you need to pull from the other accounts. What it does mean is that your business is telling you that you can’t afford those expenses and need to get rid of them.”

Remove Temptation

If we see money somewhere, we’re very likely to dip into it and fall back into the Survival Trap. Solve that temptation by taking and hiding that money. Make it inconvenient to look at it, and even more difficult to use it.
“Move your PROFIT account and other ‘tempting’ accounts out of arm’s reach. Make it really hard and painful to get to that money, thereby removing the temptation to “borrow” (i.e., steal) from yourself. Use an accountability mechanism to prevent access, except for the right reason.”

Enforce a Rhythm

If the money in your bank accounts are inconsistent, you’ll be inconsistent with your spending. If you’re inconsistent with your spending, it’ll be a lot harder to secure profit. Take control by making transfers and payments twice a month, or automatically.
“Don’t pay only when there is money piled up in the account. Get into a rhythm of allocating your income, and paying bills twice a month so that you can see how cash accumulates and where the money really goes. This is controlled recurring and frequent cash flow management, not by-the-seat-of-your-pants cash management.”

How to Enact Profit First:

From those Profit First principles, the author lays out the first steps of implementing them in your business. You can also check out the Profit first One-Sheet for a simple instruction guide.

Step 1

If you just want to get a taste of the Profit First process, this is the first step the author recommends you follow in order to make sure you can put aside profit first.

Open up a separate Profit account.

Use the same bank you currently use for your business and open a second Checking Account that you’ll use to store away your profit.
Use the account nickname feature to call this account PROFIT.

Transfer 1% of your current bank balance into it.
Each time you get a deposit or income from sales, transfer 1% of it to this account.

You can set up automatic transfers, or just calculate and transfer it manually.

Don’t touch this money.

Michalowicz says, “You have “seeded” the account. Don’t touch it. Never transfer it. Just let it sit for now.”

The author writes, “Your goal for now is to get started immediately and decisively… But something magical will happen. You will start proving the system to yourself… You will have a flavor of how powerful it is to reserve your profit in advance… The goal is for you to realize that this unfamiliar process of taking your profit first isn’t so scary after all. Then once you are digging the Profit First vibe, you are set for greater success. Because you will be staged perfectly to do the rest of the system, and your heart will be in it.”

Step 2

When you’re ready to move onto doing more, and following the basic process of Profit First here are the next steps:

Follow the process in the Step 1 section above.
Have a total of 5 Checking Accounts

The goal is to have a total of 5 Checking Accounts to use as buckets. The five accounts are:

INCOME
PROFIT
OWNER’S COMP (COMPENSATION)
TAX
OPEX (OPERATING EXPENSES)

If you already opened a PROFIT account in step 1, then use that. Rename your existing checking account to OPEX. Open 3 new checking accounts named INCOME, OWNER’S COMP, and TAX.
Set up these accounts according to how you’ll use them. Your deposits will go directly into your INCOME account, your personal payroll will come out of OWNER’S COMP, pay your taxes from the TAX account, and all other expenses would come out of OPEX.
Your income from sales goes into your INCOME account, and you would then transfer all of this money out into each of the other accounts, according to set percentages that you’ll determine based on your current spending and goals you’ll set.
“Always, always allocate money based upon the percentages to the accounts first. Never, ever, ever pay bills first… Then you pay bills only with what is available in the OPEX account. No exceptions. And if there isn’t enough money left for expenses? This does not mean you need to pull from the other accounts. What it does mean is that your business is telling you that you can’t afford those expenses and need to get rid of them. Eliminating unnecessary expenses will bring more health to your business than you can ever imagine.”

Step 3

And here’s the next step of the Profit First plan:

Follow the process in the Step 1 and Step 2 sections above.
To meet the “out of sight, out of mind” part of the Profit First plan, open two Savings Accounts at a separate bank:

TAX - HOLD
PROFIT - HOLD

Any time you transfer money into the TAX and PROFIT checking accounts, then immediately transfer everything from those over to each of these secondary HOLD accounts.
Set up your allocations and payables to be twice a month, to limit the amount of time you spend working on this system. The author recommends the 10th and 25th of each month. This is when you would transfer money, then pay your bills, then pay yourself according to your established salary.
Each Financial Quarter, pay your Taxes and then take your Profit.

On the first day of each quarter take 50% of what is in the Profit Hold account and distribute it to equity holders/owners. This isn’t owner compensation, this is profit sharing. The other 50% stays in the account as your emergency fund. If you have more than a three month emergency fund, you can use the excess to spend on capital gains and improvements on the business.
Adjust your allocation percentages to get closer to your target goals.

You can also check out the Profit first One-Sheet for a simple instruction guide.

Next week, we’ll run the Instant Assessment to see what financial shape your business is in now, and to determine what percentages you’ll divide up your income to transfer into each account.

We’d love to hear your answer in the comments:

What are your initial thoughts on reading the principles of Profit First?
Are you going to enact any of these action steps?
Have you tried this already? What have you felt and seen so far?

Feel free to share any other thoughts you have about this book. We can’t wait to hear your thoughts in the comments below!

View and Subscribe to all threads about this book.

Happy reading,

Pesso

Re: Profit First: Core Principles and Action Steps

Lovewell — Wed, 17 Jan 2024 20:12:22 GMT

@PessoAlumni When we first read profit first it was like a huge lightbulb going on for us! We immediately became less stressed and felt the weight of the “what ifs” lift from our shoulders because now with steps it seemed possible to be in control of our finances. We immediately put them into practice and it has changed the game for us. We no longer are stressed about purchasing and payroll and what that is going to look like. We are aware of it and are smart with scheduling and ordering and if we have a higher payroll than normal for some reason we note it and see what happened, but we aren’t stressed about it. Reading profit first has put us in a position to be successful. And we are so excited more people are reading it and hope it changes their financial situation in their business for the better as well!

Re: Tell us about your Book Club experience

Smellthis1919 — Wed, 17 Jan 2024 20:52:23 GMT

Hi Aylon

Just started chapter 3 of profit first...wowiewow so far i am devouring all the information Mike has written ...very eye opening for me ...great advise for me going forward ...i am going to put my trust in his method and see if it helps me it sure can't hurt 👍😌

Re: Tell us about your Book Club experience

Lovewell — Thu, 18 Jan 2024 00:13:27 GMT

@Smellthis1919 we noticed huge changes for us! Excited for you!

Re: Profit First: Core Principles and Action Steps

Smellthis1919 — Thu, 18 Jan 2024 01:02:58 GMT

Thank you so glad you told me 👍😊👍

Re: Profit First: Core Principles and Action Steps

bonny — Thu, 18 Jan 2024 13:19:48 GMT

Last year I was beginning to question my "why". I couldn't work any harder than I already was. From sun up to sun down, I was on the hamster wheel of creating more products to make more money to make more products and at the end of the year, for what? This book has been a welcome new perspective. And I can already say that following the advice has made a difference.

Re: Profit First: Core Principles and Action Steps

KayMandi23EXP — Thu, 18 Jan 2024 13:57:50 GMT

That's interesting. I'm in the same situation. I work as hard as I can counting every hour of the day trying to make sure I stuff as much as I can so I can succeed.

Re: Tell us about your Book Club experience

Tamyra_Paunchy — Thu, 18 Jan 2024 14:09:26 GMT

This is so encouraging to hear. Happy for you and your team. Thanks for sharing!

Re: Profit First: Core Principles and Action Steps

Tamyra_Paunchy — Thu, 18 Jan 2024 14:11:53 GMT

OMG. Same!! I was getting up at 2am, going into the kitchen to make product from 3am-7am, logging on to a remote job from 7am-4/5pm, then logging out, making product again from 6-10pm, getting home at 11am, crashing, then getting up to repeat that the next day. All while making ZERO profit. 😞 I was barely breaking even on some orders, losing $ but telling myself it was good publicity on others. It's been a struggle. Like you, I'm really glad to read about a different, perhaps 'better' way. Because what I was doing was not sustainable at all. Looking forward to implementing some of the changes and seeing a difference myself!

Re: Tell us about your Book Club experience

PessoAlumni — Thu, 18 Jan 2024 22:18:20 GMT

Thanks for sharing, @Smellthis1919 ! I'm so glad that you've been getting a lot out of it so far! Can't wait to hear what you implement and how it works for you. Keep us updated!

Re: Profit First: Core Principles and Action Steps

PessoAlumni — Thu, 18 Jan 2024 22:21:29 GMT

That's so amazing to hear, @Lovewell -- thanks for sharing!

Wow. That's incredible that you felt such a drastic change in your stress levels and mindset so quickly, just by reading it. It really takes a huge load off just to know that there's a thing that has worked for others and can work for you too.

I absolutely love how you've been planning ahead and taking changes in stride, rather than stressing out about it.

So great that you're working to control your expenses through scheduling your employees and ordering product in a smarter and more controlled way. Cutting expenses is a huge part of the puzzle!

How have the bank accounts side of things been working for you?

Re: Profit First: Core Principles and Action Steps

PessoAlumni — Thu, 18 Jan 2024 22:23:10 GMT

Oh wow, this is all so intense, @bonny @KayMandi23EXP & @Tamyra_Paunchy !

I absolutely understand this feeling and apparent need to work non stop and still not getting ahead despite all the work. It is so frustrating and can really beat you down and make you feel so defeated.

I'm so glad that the book has been helping so far!

What have you implemented at this point and how has it helped?

Re: Profit First: Core Principles and Action Steps

Lovewell — Thu, 18 Jan 2024 23:10:59 GMT

@PessoAlumni At first the bank accounts were tricky but we have now gotten into the habit of moving what we need to daily so it’s quick and not much of a hassle.

we have accounts at a couple bank and I think a total of 9 sub accounts within our main accounts

Re: Profit First: Core Principles and Action Steps

TheRealChipA — Fri, 19 Jan 2024 20:41:25 GMT

Hey, fellow readers! I’m going to post this thought here, then ask @PessoAlumni to do me a favor. But, first…..

As I’ve been working through Profit First, I’ve realized that Square has given us a pretty darn good tool to help us put the principles in action. That tool is Square Savings with its associate Savings Folders. I had already decided to rework my 2024 financial planning to follow the Profit First guidelines. I’m going to do an experiment for all of 2024 that incorporates Square Savings to do what it does best — create account(s) that automatically get funds added to them with each sale so that I don’t really miss them.

I’ve create various folders in my Savings dashboard with percentages defined to automatically sequester funds from each card sale I make in 2024. I already ignore what is in savings, having done that all of 2023 to put aside funds for my closed off-season, so I know I’ll be disciplined. Each day, I’ll ONLY transfer what is left in my Square Balance (after savings have been taken out for each folder) and then use that money for my regular expenses. Since Square Savings are out-of-sight-out-of-mind in my day to day routine, I just won’t miss what is accumulating there!

We’ll see if this experiment works, or not. But if anyone is interested in following along throughout the year as I put it in action — and to hear the good, bad and ugly — then I’m hoping that @PessoAlumni will create a separate thread (better yet another board where I can post multiple topics for the sake of clarity!) and post its link here. That way those that want to follow along and chime in with comments and suggestions can do so. And, if it’s in a separate thread, then we don’t have to clog up this one with stuff and other people don’t want or need to see. Win, win!

I already have a few issues I’ve had to tackle as I set this up for myself. So I’ll share those along with my solutions as soon as I can.

Re: Profit First: Core Principles and Action Steps

Lovewell — Sat, 20 Jan 2024 05:20:17 GMT

@TheRealChipA I love this for you! I’m quite excited for your automated savings! We have that set up in square savings as well and then we have a couple different banks we use with multiple folders in our accounts for other categories that get deposits and withdrawals more frequently. For example we have a folder for merchandise. As we sell merchandise we move that money into our merchandise account and then after a few months when we have a new order to pick up of fresh merch we have that money in that account so we aren’t taking money out of our operating expenses. We do this for a couple different categories as well! And it’s been a huge huge help.

Re: Profit First: Core Principles and Action Steps

Doran — Sat, 20 Jan 2024 06:59:40 GMT

I've used Square Savings this same way for the last two years and it's been amazing. After finishing the book I reorganized the folders to align with his categories. I had two different tax folders before-- sales tax, and quarterlys along with some long-term goals and a yearly bonus folder for myself. I swear this strategy is the only thing that kept me open last year with all the storm damage. Whatever remains and all the cash I get I put into a separate checking account to pay all my bills.

After finishing the book I upped my bonus percentage and reorganized a little. I'm excited to see how it goes. This book was a great one to start the year with.

Re: Profit First: Core Principles and Action Steps

TheRealChipA — Sat, 20 Jan 2024 13:04:56 GMT

@Doran @Lovewell I’m very happy to know that someone has already tried this out and that it is a sound concept. Like I said, I’ve used Square Savings for two years to help me set aside funds for the off season expenses when we are closed. But until I read this book I hadn’t figured out a good use for Savings Folders. This seems like a perfect alternative to setting up 5 (or more) separate accounts in various banks, especially since I have the discipline to just ignore my savings balance unless a) it’s time to use what I’ve put away or b) something catastrophic happens and that’s my only option.

It has been a little tricky converting savings percentages, though I think I fixed that. Profit First is based upon percentages of “real revenue” and Square Savings is based upon percentages of card-only processing volume (which doesn’t include cash sales, nor does it include sales tax and tips which ARE in card processing volume). Anyway, I hit upon a formula that gives me approximately how much my folders need based upon card processing volume. It was interesting because I realized that I can fund all of my savings folders with card processing funds and then use the rest plus funds from cash sales to “pay the bills.” That realization makes the ability to have “out of sight out of mind” savings be even less painful, I think.

Re: Profit First: Core Principles and Action Steps

PessoAlumni — Mon, 22 Jan 2024 17:06:30 GMT

This is all so wonderful, @TheRealChipA -- thank you so much for sharing it!

And thanks for jumping in too, @Doran & @Lovewell -

You can absolutely start a separate thread in the Book Club Group if you'd like a single place to track and give updates about your process! I'm sure some folks would love to see what you come up with and how you tweak it along the way. Or you're more than welcome to keep it going here -- whichever works for you.

That's such a good callout that Square Savings can set up automatic savings allocation percentages into savings folders. Such a cool way to use that feature. And even better callout to keep in mind that it's only credit card sales, and that it includes tax and tips. Great things to keep in mind for others setting this up!

Can't wait to see your progress-

Re: Profit First: Core Principles and Action Steps

PessoAlumni — Mon, 22 Jan 2024 17:07:44 GMT

Thanks for sharing, @Lovewell -- I'm so glad you've been doing this too, and getting into the Advanced Profit First techniques of adding your own accounts to fit your needs.

I'd love to hear more about how you've been running the system and what impact it has had on your business.

Re: Profit First: Core Principles and Action Steps

PessoAlumni — Mon, 22 Jan 2024 17:09:20 GMT

Thanks for sharing, @Doran -- so cool that you were using the Square Savings folders before, and that you're tailoring it to match the Profit First system too.

That's amazing that it has helped you so much and kept you in business with those allocations to get through hard times.

Very excited to hear how the tweaking of percentages goes!

Are you also working on cutting expenses? Has it happened naturally or are you making a conscious plan?