¶ Implementing the Profit-First System
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This is Daniel , the founder of Bookkeeping for Painters .
And this is Richard , the tax director for Bookkeeping for Painters . How's it going ? It's going pretty good . How about yourself , Daniel ?
Doing well , doing well . So this week it was pretty fun . I had a mastermind with the revenue group 0 to 500K . We do masterminds pretty much every week with the different revenue groups So different painting business owners and different revenue groups And one of the things that came up this week was using the profit-first system .
So I figured it would be a good opportunity to kind of discuss this on the podcast .
Cool , yeah , no , i've heard a lot of our clients talk about profit first . They seem to get a lot of mileage out of using that system .
Yes . So just so , if you haven't heard of profit-first , it's a book by Mike McCallowits written a few years ago , and the whole idea behind this is prioritizing yourself first for whatever you're making in your business . So paying yourself first ends the name profit-first . So one of the issues it goes through in the book .
Basically a lot of business owners , when they want to understand where they are in their business kind of a bad habit they have is just looking in their bank balance to see what their bank balance is at . Obviously , probably the right thing to do would be to look at your financial statements and get a better understanding .
But not everyone has that accounting acumen to fully understand their financial statements . So Mike McCallowits wrote this book about basically a method you could use to use that habit of looking at your bank balance to your advantage and play to that . So the whole idea is paying yourself first .
So whenever you get paid from one of your customers , you take that money and you put it into different buckets And the buckets are basically bank accounts . So you have a bucket for your profit , a bucket to pay your personal taxes , a bucket to pay your business expenses , your operating expenses . You can have more buckets than that .
But just to keep it simple , you have a bucket for your profit , a bucket to pay your taxes and a bucket to pay the operating expenses of the business , and so , whenever money comes in , you split out the money into those different buckets , based off of a percentage that you've predetermined for what your profit should be , what your taxes are approximately going to
be and then what you will need to pay for your business expenses .
When it comes to allocating the money for these different buckets . I mean , is he talking about having different bank accounts for each one of these buckets , or is this more of an on paper only thing ?
No , it's literally going to Wells Fargo or Capital One , whatever , and say starting a separate checking account for this called profit checking , operating expense checking , tax , savings accounts , and you can maybe have a revenue checking account where you do all your deposits into the revenue account .
So a method that I usually tell folks I wanna do this is that have like a revenue checking account where you make all your mobile deposits when you collect checks from customers , deposit everything into revenue checking account and then each week push it to your different your other bank accounts based off your predetermined percentages .
So maybe you shoot for 15% profit . So you put 15% of the revenue you collected from customers over the past week , put 15% in profit and then maybe you estimate 10% for taxes . You're saving 10% for taxes . You put 10% of the money you collected into the tax account and then maybe the rest is supposed to be for operating expenses .
Put the rest in there and then the idea yeah .
So I mean it sounds like there's a reason for the priorities . So profit first is kind of self-explanatory , right . So the first thing you do is you pay yourself and then so let's say , that's 30% profit you're gonna pay yourself .
Then you've got your tax account , which is say , i would recommend , it's gonna depend on your entity but like if you're a sole proprietor , you file your taxes on a schedule C . You wanna think about that self-employment tax .
So I would recommend a little bit higher in taxes , probably like around 20% , if not 25% , if you have to worry about that self-employment tax . So that gives us up to 55% , and then is it just like the remaining 45 goes into operations .
Yes , that would be , and you can have more buckets that you set up or the system . But if you just wanna keep it simple and beginning and just kinda understand the system , you basically have a profit for a bucket for profit , a bucket for taxes , a bucket for everything else to run your business on .
So , like I know , when money starts to get a little tight , we get a little squeeze for cash , our first temptation is to cut our profits , to take money that we normally keep for profits and spend it on other things . Is that allowed in this system , or is this more of a like ?
we can have a hard division , right , like the profit goes on , the profit first , and then , if we've got to make decisions about cash flow , well then we might need to tighten up operations or reduce our expenses , but we're not gonna reduce our profit . Is that kind of the thinking ?
Yes , yeah , once you've moved it into profit , you're not supposed to borrow from it . It's kind of the idea . So you'll need to go in before you start doing it is understand . what are your costs ? what are your true costs going to be for your operating expenses ? What is a really dialed in tax percentage for your ?
you said 25% , but it really depends on your situation . Do you have an S corp ? Are you paying yourself a salary ? Those sort of questions . you can dial in that tax percentage if you have a good understanding of the tax or you're working with a tax finer .
And then you also have your profit , which is based off of how much profit you should be making is based off of what entity you are . If you're sole proprietor , your profits should be higher because you're not running a salary . And it also depends on what services are you doing in your business .
We had a whole podcast on what you should be paying yourself based off of the services you provide to your company , like , are you the salesperson , are you the production manager , are you both ? Are you doing admin , all that stuff .
So those different questions and you can kind of refer to previous podcasts or work with a tax finer finance person who understands those costs or get a better understanding yourself to really dial in those percentages when you start this program , this profit first program , because if you start it and you just kind of guess , like I guess I want this much , you're
probably not gonna succeed , at least the first time , without kind of really understanding what your numbers are and where you should allocate .
¶ Implementing a Profit Allocation System
Yeah , that makes sense To have the plan . Put it in writing if possible , and then your odds of sticking to it are going to go up . That seems like the whole idea is we have these boundaries , we're putting our money away for profit and we're not touching it because it is so tempting to .
I mean , especially as business owners , we tend to sacrifice ourselves And we're the last person that we think of . We're thinking of our customers , we're thinking of our employees , we're thinking of everybody else and you come last .
And that's a dangerous way of thinking , because if you're not taking care of yourself , if you're not paying your own bills , then there won't be anybody to run the company And so you need to take care of it's not selfish . You have to take care of yourself so you can take care of others .
Yeah , that's a great point . The business has to survive . The business doesn't survive , then your employees will be out of a job , your subcontractors won't have as much work as they did before . So you have to take care of in most cases we're saying yourself , your business , but a lot of .
If you're running a smaller painting business , you're in charge of the business . You're putting your life's work into it , so you got to look after yourself first . Make sure you're taking care of the business , taken care of , so that you can continue to help provide for your employees and their families .
Right , it kind of reminds me because I just took a flight . They say if the oxygen masks come down , put your own mask on first , then help others , because you can't help somebody if you pass out . Yeah , so make sure your bills are getting paid first , and then you'll be in a position to help a lot of other people .
As was mentioned , you can't help anybody if you're out of business or if you're broke .
So I like that You have your account , you're making sure it's your , funding it and you're allocating your profit or your revenue between yourself , the government , because the government gets their taxes We don't want to get in bad graces with the IRS And then also the operations which would include our employees .
All right . So some of the benefits I think of the system are what we kind of touched on already , like paying yourself first , getting into that mindset , making sure you're taking care of yourself first .
Then also the other benefit I would say is a lot of business owners do tend to rely on how much cash they have in their bank account as a tool to make decisions where they should be looking more at their numbers , you know , in their financial statements .
But it is kind of true that a lot of especially businesses just starting out or newer , they're using their bank balance as a guiding tool to understand what they should do next in their business .
So that is kind of a benefit where they can just look at the how much money is in the different buckets to get an understanding of how they're doing or what they should do next . I think the downsides of this system are , you know one , you'll have to have several different bank accounts .
Your financial institution might charge you depending on who you're banking with . There are some banks that do not charge you or additional bank accounts , but some of them do charge you like a maintenance fee or something like that .
So that's just something to pay attention to If you are interested in doing the profit per system , check with your financial institution to see if they're gonna charge you to open up . You know , if they're gonna charge you $25 to open up four different bank accounts , you're gonna be paying $100 a month for this , so it's probably not worth it .
So that's something to kind of look into . And I think some there are several out there that don't charge you for additional bank accounts . I know Capital One is one of them And I would go ahead .
No , i was gonna say I know there's quite a few . Especially if you're willing to do like online banking , you're willing to take electronic statements . Sometimes , if you're willing to forego like access to a teller , you can usually find free checking out there . Us Bank has some nice free checking accounts . You mentioned Capital One .
We don't really recommend any one bank over the other , but there should be good options out there if you wanna try and save some money .
Yeah , good point . The other downside I would say to the system is just being overly reliant on the system and not really truly understanding your numbers , cause the system does require you to understand your numbers , kind of to start out with to really set the system up . So it's not a replacement for understanding your numbers .
I guess it works in concordance with understanding your numbers . So you still need to get that down so you can really get the maximum benefit out of the system .
Yeah , absolutely . I think that's a good point , because cash is extremely important , obviously , but cash does not always reflect profit . If you are heavily reinvesting into your company , you're buying tools and equipment and new vehicles , your cash is gonna be on the low side , but your profits could be high .
So yeah , i would say , checking your bank balances is not gonna be a replacement for having a properly prepared profit and loss statement .
It does not replace the need to have some kind of an accounting system , but it can certainly serve as a nice heuristic to kind of see at a glance or maybe even get like that emotional feedback , like if I look at my bank account and I see a high number in there , i feel good for the rest of the day .
So Yeah , make a good point there , and I would also say , if you another . The other example would be if maybe it's the spring and you're taking a lot of deposits for work to be completed in the summer , your bank balance might be super high , which might be oh , it gets you excited .
But the thing is , if you're not tied in with your financials , you would might not realize that those that's basically a bunch of liability that you're holding in your bank account because you haven't produced any of the work yet .
So it might give you a false sense of comfort to see those really high bank balances , but you haven't actually earned any of that money yet because you haven't . It's not the summer , you're just taking deposits and you haven't actually produced the work yet . So , again , not a replacement for understanding your financials , but it can be a very good tool .
Absolutely .
So I think the last thing really is just how do you implement this system , And we kind of talked through it . But just to sum it up , I think is basically first understand what your profit percentage is going to be . We did a podcast on what you should be profiting in your business , So that definitely lists in that podcast .
If you're not sure how much you should be profiting , based off of what services you're providing , And then so you get that percentage down , Then you need to understand how much should I be putting aside for taxes ? This is very specific to your individual situation , So I would get with a tax finer on this one .
You can ballpark it for sure and it'd be maybe okay , but to really nail it down you might want to get with a tax finer . And then the operating expenses is basically everything left over . So nail down those percentages .
Then get those different bank accounts set up with your financial institution hopefully a financial institution that's not going to charge you for every single checking account you're going to open .
And then , once you have those established , then on a weekly basis you're making your deposits throughout the week And then at the end of the week you go into your revenue checking account and then you allocate that money over to your profit checking , your tax checking and your operating expense checking , based off the percentages you already developed , and then work
from there And that's really the down and dirty on how to implement that .
Sounds like a good system , sounds like something that most everyone can implement , and I like that . It's intuitive . It helps respond to that part of our brain that sees the number and it makes a lot of intuitive sense , because sometimes accounting is not intuitive And this is kind of a nice way to respond to that part of our brains that like things simple .
Absolutely All right . Well , i think that about wraps it up for our podcast episode . I'd like to hear your thoughts . If you have any questions , comments maybe you're using Profit First and it's really worked for you , or maybe it hasn't . Let us know what you think .
Or if you have questions on how to implement it , definitely let us know by going to Grow Your Painting Business . Look that up in Facebook Grow Your Painting Business group and join the conversation . Let us know your thoughts and we'll see you next week .