Profit First: FYI – There’s No Magic Pill to Fix Your Financials

By June 11, 2015 May 9th, 2017 Bookkeeping 101, Cash Flow, Profit First, Taxes
Profit First!

There was a time where I chased after the latest greatest magical solution that would save my business. Just that one thing that would be that thing that would solve all my problems. And one day I realized: “that one thing” is just pipe dream. So this week during some conversations with prospective clients, specifically about how Profit First could save their business and increase their cash flow, deja vu kicked in for me. I do admit, implementing Profit First into my business to change the bad habits I had created has had amazing results on my cash flow; however, it’s not as easy as swallowing a magic “save my business” pill. It may seem easier to continue the quest for the latest greatest “solve all the world problems with this one program”, but trust me, while chasing that shiny bauble is inspiring, without implementation and taking a hard look in the mirror at your habits, change will not occur. So let’s take a look at some of the problems that business owners often seek out a magic pill for, and see if we can pinpoint a few “ah-ha” moments that might assist your own business.

Owner’s Compensation

There are really only two categories to choose from:

Your business is not providing you any financial support;
OR
Your business is not providing enough financial support – you need more!

In my case, it was not being able to contribute any funds to our household for a seriously ridiculously long time. Business owners I talk to may be the only person contributing to their household, so adding $500-1000 more a month is a big deal in their world. Implementing the Profit First system will definitely, and intentionally, set aside funds to pay the owner. To increase funds, though, we require a harder and longer look at the business spending and pricing.

The ADI Team recommends implementing the bank accounts to create smaller plates. This one step is a big first step in changing spending habits and create intentional spending patterns.

Spending Habits

Do any of these sound familiar? Here are a few issues I have worked with clients on:

  • Maxed out business credit cards;
  • Spending funds as fast as the money shows up in your account;
  • Every time you turn around an influx of cash is required – aka personally funding your business, over and over and over again;
  • Funding the business with personal credit just to pull the funds back out to live on – this is you if your draw as the owner exceeds the profit in the business.

My bad habit was not being aware and intentional about my spending which resulted in maxed out business and personal credit. These action items are also not “magic pills”. However, they ARE the sure signs you’re not paying attention to the outflows of a business, and by bringing them back into focus, you can start back on the path to financial health.

Not using an accounting tool to accurately and timely pull your recordkeeping together, resulting, sometimes, in being 6-12 months behind in your recording. Without current accurate data you have no way to keep score so you blindly lash out at the cash issue and hope you hit something.magic 2

No budget: If you don’t know what funds the business requires to run day-to-day operations, how do you know how much revenue needs to be generated? A budget will at least give you a starting point for planning.

No intentional cash flow spending plan. All the focus on paying bills, as soon as they are received. With no planning ahead, creates fund shortages, which normally means the owners don’t get paid or you ignore that one large bill looming over there in the corner. Worst case is choosing not to pay those payroll taxes – you plan on getting to them as soon as cash flow changes, unfortunately, if the habit isn’t addressed the business owners I have worked with never change the habit.

The Profit First system hits these issues straight on. To start the smaller plates, you need to create intentional allocation of your funds. Next, reviewing your outflow and your target allocation percentages (TAPs) is a good starting point for creating a budget. Changing “how” you spend money (Profit First recommends paying on the 10th and 25th) brings an intentionality into the spending based on your TAPs and budget. Profit First wraps all three of these necessary actions and packages in a somewhat golden pill, making it easier to “take”. Follow the system = get the results.

Unknown Tax Liability

Well hey, if you really to shut your business down permanently, then just continue to ignore Uncle Sam and tax liabilities your business is creating. This is one way: ignore your medication and leave your business so “sick” (or lacking in funds) that it cannot survive the tax man’s visit.

If you have funds to draw out and live on, that signals a profitable business that will owe tax. Now hear me on this one – because if you haven’t been tracking your funds and hitting aimlessly at your cash flow issue, do you really understand how much you have drawn from the business to pay yourself? Have you been paying your rent? Eating? Driving your car? What does it cost per month to do that? Times 12 months = the profit your business might show to the IRS. Most clients I have worked with end the year with $20-$60k bottom line profit as a Schedule C, sole proprietor/single member, LLC. They are in disbelief that they could have that large tax bill (think minimum $3-9k). In the end, we look back at the funds they withdrew to live on $2000-$5000 a month: that had to come from somewhere, and I know they weren’t selling any of these illegal “golden pills” from the back door of their business. Know your numbers. Be empowered by them and plan ahead.

Payroll Liabilities Always First! This doesn’t happen to every business, but it has happened enough times that it is worth listing here. When cash gets tight one of the first things I get asked is, “Do I have to pay that payroll tax on time? Can’t I get it next week?” Five or ten years ago, you probably could of. Today no, you cannot. Most tax liabilities must be paid by EFT, and some payroll solutions won’t let you do that if you don’t pay on time. Plus this is a very ugly slope to go down, not to mention expensive! A past client had thousands of dollars in penalty and interest paid at the end of the tax year due to paying his tax liabilities after the due date. We are talking $3-6k in penalties that, literally, could have gone in his pocket with better cash flow planning.

Profit First does address this tax issue and it is one of the first intentional buckets money is allocated to twice a month, right after owner pay and a profit reserve. With unintentional spending habits though, the business will be living outside of its means, and a tax savings will feel like a very heavy anchor around the business owner’s neck. Not having enough funds to cover taxes lies deeper than having the cash to pay it. It all starts with being intentional, planning ahead, and having timely accurate access to your numbers.

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The core of this post is to state that yes, there is no magic “save my business” solution. There are however, easy steps to implement that can re-focus your business purpose, change habits that may have been unintentionally created, and get your business back to health. Profit First is a great system that will be business changing, only if you are willing to address the bad habits in your cash flow tracking, planning, and managing. It is far easier to live in a fantasy world where there IS a golden pill that will eventually fix everything, rather than taking a hard look at where you are at today. Numbers are empowering, you just may need a little help to get there.

If you’re reading this article, and those “ahhhh, haaaaa” moments rose up (as in: ummm, why does it sound like Connie is talking directly to ME…) then maybe it’s time to set up a Consultation Call to evaluate your business health  – and start your path towards Profit First.


Want more?

Join the Profit 101 Sessions, and gain access to Connie’s webinar series.

One Comment

  • Thelma Walker says:

    Very good article explaining the importance of a business focusing on profit and proper cash flow management through good spending habits
    regardless whether it relates to business or personal. It is true there is no magic in keeping a business from failing because there are other things outside
    of what the numbers can tell that affect a business such as the economy and so forth. However, if a business follow the steps you explained the chances of ‘growing broke’ are very slim in my opinion. Thanks for alerting businesses to this good advice.
    Thelma Walker, Systematic Business Services, Experienced Bookkeeper Pro, Certified QuickBooks ProAdvisor

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