15 Dec Five reasons Profit First isn’t working for you
You may recognize Profit First as the system that promises to transform your biz from a cash-eating monster to a money-making machine. The book, originally published by Mike Michalowicz in 2014, has created raving fans around the world in its less than ten years of existence. Over 600,000 small businesses have implemented it. The book has been reprinted in 13 different languages. There have been 11 industry-specific derivatives written.
I swear by Profit First. I’ve built my own business around it. I’ve helped countless other businesses implement it, and I’ve been witness to their cash flow transformations. All of this in a mere five years of being a Certified Profit First Professional! It’s empowering to build a biz that is set up for permanent profitability and sustainability.
Profit First is made to be simple. It leverages our natural habits toward bank balance accounting. But even with all its acclaim and glory, I often see people struggle to implement the system.
Do you feel “stuck” and don’t quite understand why it is not working for you? Let’s take a peek into some of the things that could be holding you back.
You don’t have your books in order.
One of the core principles of Profit First is that every dollar has a place and purpose in the business. Your profitability should not be greater than the total amount of money collected in revenue.
I’ve heard many times that the Profit and Loss Statement is NOT representative of what is happening in the business. Your net income or loss may not feel like yours if you don’t understand how it all comes together. Where does your owners pay get reported? What happens to the business stuff you bought on your personal credit card? What about all re-payments on loans from a family member?
If you don’t understand how every dollar is reported in your financial reports, find a bookkeeper to help you make sense of it all. If you do have a bookkeeper, it’s also possible they have something in the wrong place. Profit First is a cash-based system and the numbers must come out exactly to the amount of revenue collected in order for the system to work.
You don’t want to follow all those darn banking rules.
I know, it’s a pain to set up a separate bank account for each purpose. Your banker might think you are crazy for requesting five bank accounts or more. However, the alternative isn’t very pretty.
Dumping everything into one mess of an account does not allow for any visibility and clarity to what you are spending. Separate bank accounts provide that clarity. Not only do you know exactly what is getting deposited into an account, but you also know which expense gets paid from what account.
These separate bank accounts create a very tangible and real connection to the money. Would you pay for somebody else’s groceries if there was no food in your own house? This system sets you up for the same level of accountability in your business and allows you to always feed yourself first.
You don’t understand margins and markup.
There are only two ways to increase profitability: cutting costs and increasing margins.
Selling MORE is not a sure-fire way to increasing profitability. If you have poor margins, selling MORE at undesirable margins will hurt you instead of help you. Many small businesses don’t understand how much they need to sell at their current margins to meet an acceptable level of comfort.
One way you might outspend your revenue is in the materials and contractors cost equation. You’re not making enough margin or gross profit before the operational expenses are added in. To remedy this, raise your prices or find suppliers who can provide cheaper supplies–or a combination of both. The other way to outspend your revenue is with too many operational expenses.
Remember, it’s possible to outspend on both materials and contractors and operational expenses. How do you avoid that? Constantly stay on top of margins and costs. Review costs once per quarter, at a minimum, to avoid overspend. Expenses have a way of sneaking up on us.
You are stuck in the SALES level of the Business Hierarchy of Needs.
Another of Mike’s books is called Fix This Next, and it explains the Business Hierarchy of Needs. SALES is the base level of that hierarchy. One must have sales before they can be profitable.
When we start a business, we try to figure out what it is going to cost us to produce our goods or services. Then we can set up an appropriate sales price. We must price our products so we can cover what we expect to spend in the ACDC area of the biz.
ACDC wasn’t just a great band in my high school and college years! It can also describe the activities we do at the SALES level of our business:
- A-Attract customers
- C-Convert customers to make a purchase
- D-Deliver on services promised
- C-Collect on services delivered
If you are unable to focus on this base level of Sales to Attract, Convert, Deliver, Collect, then you will never advance to the Profit level. Until your ACDC method is working, your profitability cannot be fully dialed in.
You think your business is “different”.
Maybe your brand new business is not yet attracting the right clients, so you’re trying out business development tactics. Maybe you have a kick-butt system for managing your expenses on a spreadsheet and you don’t want to open all those bank accounts required in Profit First. Perhaps you haven’t pinned down your ideal client avatar. Maybe you are not as efficient as you should be and as a result, you’re heavy on talent.
While these are all potential roadblocks to profitability, they are not stopping you from being permanently profitable. Your mindset is. Consider letting go of preconceived notions of what it looks like to be a “successful” business owner. This might mean getting your hands a little dirtier than you had planned. You may need to train someone who does not have the full technical ability you hoped for in exchange for a better price point. It may mean implementing fewer biz dev tactics and measuring the efforts more closely.
Your business, while unique, still follows the same metrics as every other business. If you have enough sales, then you can make the necessary changes to accelerate profit.
Don’t give up! Start small instead.
So you’re on the road to accelerating profit but have run into some bumps. Don’t despair! Even businesses that have partially implemented Profit First can see an enormous impact. Consistently setting aside just 1% or 2% in a profit account can have a profound impact on the business.
You’re bound to experience roadblocks on your path to permanent profitability. However, I beg you to keep working toward this goal! Every 1% deposit adds up. Before you know it, you will have a nice chunk of money to put toward a debt or avoid financing an expense.
These small steps will lead to the demise of your cash-eating monster. And if you need help along the way, we’re here for you. Congrats, you’re on your way to creating a money-making machine!