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Profit First: Parkinson’s Law

Profit First!

I must give kudos and credit to my coach, Tina Forsyth, for introducing me to the book, Profit First.  I found it easy to connect with author Mike Michalowicz’s message: simplify the accounting process, add in some mindset shifts, with the end result bringing the financial focus back to profit and how your business supports you first.  This is not some new magic formula. There are no special tools required.  Profit First just takes a slight spin on what you and I already knew.  It was brilliant.  So brilliant, it dramatically enforced the coaching I was implementing, and it was business changing.

I have to admit, during my introduction to Profit First, I was also introduced to Parkinson’s Law.  I had either not heard about it before, or if it was introduced in passing during the 14+ years of being a business owner, it just didn’t stick.  Since it is an integral part of the Profit First system, I did some research.

Parkinsons LawI found that the quote “work expands to fill the time available for its completion” is a common productivity proverb based on Parkinson’s Law. So if you give a task eight hours, it’s going to take you that full eight hours to complete that one task (uh oh, that doesn’t work for entrepreneurs).

A little historical interlude takes us back to 1955 when Cyril Northcote Parkinson, a famous British historian and author, used that quote in an article that became the focus of his book, Parkinson’s Law: The Pursuit of Progress.  The back-story: Cyril gained this nugget of truth while working for the British Civil Service (not the James Bond Secret Service side of the British Government, but that would have been way cool).  So if this statement works with time, it must work with other things like money, right?

In the book Profit First, Mike Michalowicz, shared the generalized version of Cyril’s statement as, “The demand upon a resource tends to expand to match the supply of the resource.”  Have you experienced that with the finances in your business?  If you’ve been reading my past posts, you know that I have.  Money came in (awesome) and almost immediately it was gone (enter expletive here).  In fact, sometimes, the resources expand to be more than what the supply provides which results in debt.  In businesses there tends to be one bucket, or one main checking account.  Normally, the ADI Team has witnessed many of our clients immediately take what comes in and pay whatever bills are in front of them first.  That may or may not include paying themselves or saving any for Uncle Sam.  Spending unintentionally is also why there is panic and stress around tax time.  Over the course of the year business owners simply become disconnected from where their money went.

**ADI Pro Tip: Here’s a clue: if the money comes in so you can take it out to live on, there will be tax owed.  It’s just how that works.

Back to Parkinson’s Law, which ends up being all about how the demand (spending) of our resource (money) expands to match the supply (bank balance).  That is why when you are unintentional with your business finances, the money *magically* goes out as fast as it comes in; your expenses (demand) expand to fill and use all of your resources.  How do you change this?  The first part of the Profit First system is to create smaller plates, which by default will limit your demand to what is available.  This one small change seems simple, but it comes with a string attached.  By making this change you also agree to change your mindset.  If we take the funds that have been received (over a period of time) and allocate it to the smaller plates, then you have a set amount of resources to pull from.  When Parkinson’s Law kicks in, your expenses would expand to fill only that one small plate.

So let’s dive into a real case study. As in past posts, we’re going to look at how I implemented this first phase in three easy steps.

First step – open bank accounts

I was not expecting to encounter a mindset issue in the very first step.  UGH!  Who knew I had a hang-up around having multiple accounts?  In the 90’s it was costly to have multiple accounts and the tools we used back then made it cumbersome to track.  Now is actually a good time to open accounts because banks are offering free business accounts with limited activity and variety of savings accounts.   You’ll need to open the following accounts to get started.  Do not argue.  Yes, you will need these accounts if your intention is to change the relationship with finances and your business.

  1. Income (Checking)
  2. Operating (Checking)
  3. Taxes (Savings)
  4. Owner’s Pay (Checking)
  5. Profit (Savings)

**ADI Pro Tip: If your bank insists charging you account fees, ask to speak to a manager or take your business elsewhere.

Second step – adjust how money flows from your accounts

I kept my initial business account as my Revenue (Income) account since it was already tied to all of my client payment options and I had limited direct vendor payment withdrawals.  You may flip that depending on how many items you will “change”.  The mission, if you choose to accept it: you will work from different accounts depending on what the activity is. One account will receive and hold all incoming revenue. One account will be your Operating account where all expenses will go out of.  Any direct vendor payments, your checkbook, and debit card will generate from this account.  It will take a little bit of work to make these changes (it may take a couple of months to get all of the little things worked out).  You don’t have to immediately be perfect! Overall, while it may be a pain in the tush, this process won’t take a great deal of time, all of this will be worth it.

Third step – take a breath and get use to a new flow

As mentioned, it may take 30-60 days to work in the adjustments for this new system. For example, I forgot to order check stock on my new operating account. I also thought I was being smart, and originally didn’t want a debit card (yes, yes, I realized that needed to change).  So your task is to get comfortable with this new flow just using these two accounts.  That way when you move into figuring out your Target Allocation Percentages (TAPs) and then paying bills only twice a month, you’ll be ready for a new challenge.  That’s when Parkinson’s Law will really kick in, but I’ll touch on that next time.
Parkinsons Law 2

This change is not for the faint of heart, but it will work for any business owner that knows and desires a better relationship with their finances.  So if you are willing to accept this mission, Business Owner 007, we are here to support you.  While this blog post won’t disintegrate in 60 seconds, it will put you on the path of a business changing mission.  Good luck secret agent.  Share with us your mission successes below.

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