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Show Notes

If you’ve ever heard the term Profit First (or if you’re yet to discover it) then this is the podcast episode for you!

In this episode I cover:

  • What is Profit First?
  • The number one principle of Profit First and how it flips how you think about your business instantly
  • Why this methodology was such a game changer in my business and how I see it transform my client’s businesses
  • How this system helps you manage your cashflow AND understand more clearly how your business is performing

And of course, so much more!

In this episode I mention the Benchmarks or Profit Accelerator Kit which you can download for free here: Benchmarks

If you want to talk about partnering together to assess and improve the profitability of your business, schedule a call here: Schedule your call

Connect with Laura
Website: www.laurajohagan.com
Instagram: www.instagram.com/laurajohagan

Episode Transcript

Hey, Hey. Hey, welcome back to another episode of Prosper and Profit. I’m excited to have you back here tuning in again and I’m curious to hear your thoughts about the topic that we’re speaking to today. And, you know, like I’ve said right up at the top of this podcast, when I launched it, that this is all about empowering you and having you gain confidence, having you gain knowledge, having you being resourced with either being able to start the process of looking at your numbers yourself or knowing where to get the right help. 

So for now what I wanted to do is to dive into this topic of Profit First. Profit first was a bit of a game changer for me in terms of my business and obviously I have now gone off and got certified in the profit first methodology and I work with my clients on implementing that. And it also forms up the foundation of additional profitability, performance improvement work that I do with my clients. So it’s really important to actually understand, what is this profit first methodology that we’re talking about? What is profit first? You know, sometimes the conversation goes in such a way where it’s almost like assumed knowledge and you think you’re supposed to know what profit first is.  And in my experience, a lot of my clients, people in my world haven’t yet come across it, which is exciting because I get to introduce you to it and I get to break down some of the barriers to accessing it and also showcase why it’s such a game changer. So let’s just dive on in and talk about what is Profit First, right? 

You might’ve heard people mention it. You might’ve heard the term around in Facebook groups, in business circles, all the things. So profit first is actually a book. It was written by Mike Mickalowicz, it’s a book he wrote. In the book he shares his entrepreneurial journey and hitting a rock bottom moment where even after making a significant amount of money, he basically hit rock bottom because he’d burnt through all the money and was basically bankrupt. He didn’t know how the family was going to pay the next month’s mortgage instalment and he talks through that and shares that story. As he’s talking through the story, he’s sharing this system that he came up with to help work with some of the human behaviours that we all inevitably have, human brains are wired in a certain way, and I’ll talk more about that in coming episodes, there’s just so many topics really to touch on with this. Basically what happened was he started to see that he just had these behaviours and he wanted to find some way to work naturally with them rather than to try and always fight against them. And you can probably relate to that in different areas of your life where, sometimes you feel like you’re fighting against the natural inclination. So he came up with this system called Profit First and he talks about that in the book.

The book teaches the methodology, it teaches the concepts, it shows you how to do it. The most simple explanation to give to you is that it’s a cash management tool that helps us work with our natural behaviours and that prioritises profit. Right. That’s why it’s called Profit First. We take profit first andd because it’s a cash management tool we use a process that makes it a really visual and not a lot of decisions to be made. 

Mike talks about taking things out of sight out of mind. So in the book, he shares a lot of information around that. Like I said, I will touch on different topics and concepts and things in the future, because there’s just so much gold in there, but basically when we’re looking at what is profit first, okay; we’ve established it’s a book. And then we’ve established that the book teaches a cash management system and what that does is it creates a mindset shift where we prioritise profit because what we see is.

So profit first flips the traditional way of thinking about profit and flips that all around and says let’s prioritise profit and take profit first and then run the business on what is left. Right? So we I guess flip it on its head and instead of bringing in money in our business, paying all of our expenses and seeing what’s left over, we begin to reverse engineer. Take profit first and run the business on what’s left over. Right. And it’s really interesting because a lot of the time when you talk to people, they’re like, oh, I can’t run the business off less than this. Like we must have this. We must have that. When the constraint is there, it’s amazing how people can run their businesses off much less. And this is what this system teachers and over the coming episodes over, you know, we’ve got plenty of time ahead of us. I’m going to take you through more and more of the concepts, but I’m just wanting to start really high level and introduce you to the idea because it is foundational in terms of the work I do with my clients. 

It is a system that I personally found game changing when I implemented in my business. And this is someone who is an accountant by background. This was so game changing for me, suddenly I had my tax set aside, suddenly I didn’t have to worry about my taxes at the end of the year, suddenly I actually had a cash profit instead of wondering why there was never any money left over all of the things. 

So how do we actually do this? So we’ve talked about it’s a book we’ve talked about it’s a cash management system. We’ve talked about how flips profitability and the idea of profit in business. So it’s about prioritising and putting it first. What does it actually look like to do this? Or how does a business owner actually do this? It’s a system that uses multiple bank accounts. So we have a separate bank account for each of the core topics that profit first or maybe core components is a better word, each of the core components of a business that profit first splits out. From the profit first methodology, we have, I’m going to run through the five core components of pretty much everything that makes up a business; we’ve got income, we’ve got profit. we’ve got owners pay or sometimes it’s referred to as owner’s compensation, I find I tend to use the two words interchangeably. So I might say owner’s comp sometimes or I might say owner’s pay sometimes, we’ve got tax and we’ve got operational expenditure. In Australia, we also have GST and I often suggest for clients collecting GST and have a lot of GST and have to make those quarterly GST payments to open a sixth bank account for GST. 

So basically we open a bank account for each of these core components. Then what we do is we set up this process where we sit down and do regular allocations from our income accounts. So all of the money in our business comes into income. If you brought in $25,000 this month in your salon, coaching business, chiropractic business, whatever it is that all comes into your income account, even if it comes through Stripe, even if it comes through, PayPal, we funnel everything into the income account and then we sit down and we move the money out of the income account and enter those four or potentially five if there’s a GST account too. We move the money on a regular basis into those other accounts. I know when I first moved out of home, I used the envelope system, which is going back a little bit now because we don’t really use cash very much anymore, but you know, I’d set aside an envelope for rent, I’d set aside an envelope for groceries, that kind of thing. This kind of works to the same principle.

So we have these accounts that we’re sending our money to on a regular basis. And part of the beautiful thing is we actually put tax and profit in a separate bank account to our main business operational banking, so the idea is they’re kind of out of sight out of mind until we need them on usually a quarterly basis. So the next question people are going to ask is, well, how much do I set aside in each of those accounts? So part of the profit first process is working that out for your business and I’m going to point you to a resource I have on my website. I refer to it as either the profit accelerator kit or benchmarks. I’ll link it in the show notes. That is a resource that helps you figure out what are your current percentages and it also starts talking you about where should you be targeting to go. So basically you figure out your current percentages and they become the amount that you allocate into each of these bank accounts on a regular basis and then you run your business or your business expenses through the OPEX account. You pay yourself out of the owner’s comp account. You have tax and potentially GST and profit sitting off in a separate account where you can’t see them every time you log in and that ensures that you are banking profit on every single invoice that comes into your business. So you can see it’s actually a really simple system.

I also always refer to it as a savvy cash management system, because it’s a savvy business owner that’s actually taken the time to decide that they’re going to manage cashflow. It’s a savvy business owner that’s set a time each week or each fortnight to sit down and do their allocations and pay themselves and prioritise profit. It’s a savvy system because it’s a savvy business owner who’s starting to say, I’m going to figure out this money thing and I’m going to understand how money moves through my business and I’m going to set up a system that works for me or a process, I often refer to it as a system or process and again, I use those two words interchangeably.

As I mentioned before, as you go through this process, you figure out your current percentage allocations. So you’ve got this of the hundred percent of income that comes into the income account. What percentage am I splitting across these other accounts? And what’s really great is as you go through that process, profit first has also come up with benchmarks around where a business should be based on its size. If you download that resource, you’ll see, it’s got target percentages too. So you start to see the gap between where you are now and where ideally you want to take your business to over a period of time. It’s not an overnight thing. It’s usually a transition depending on where you are now of 3, 6, 12, 18 months, even depending on where your business is, starting from. 

So you can see that it starts to get you thinking about profitability in a different way. Not only are you managing the cash but you’re starting to think about how do I drive my business from where it is now to this spot that’s potentially the benchmark of a business of my size. Then you can start thinking about improvements to be making to your business to improve profitability. Now I do a deep dive for my clients on that. I actually do it for them. I do it in a really deep way using Xero, using their tax returns, using all of the inputs and assess their business, where they are, where they, where they could potentially get to and I compile a whole series of recommendations that we can then work on together to improve their profitability. And what that process does when I take my clients through it is when I’m presenting where they are and potentially where we could get to, I am empowering them and educating them on what’s currently happening in their business. So suddenly they feel like A) they know how to manage the money in the business and B) hey understand more about what’s happening in the business, what the performance is, why potentially they’re getting stuck paying themselves or why tax time is stressful. All of those things. And then we’ve got this roadmap of all of these different pieces that I refer to them as performance improvement projects that we get to work on together to move the dial towards where they want to get to.

A really common one I see with a lot of my health and beauty business owners is they’re working too much and they want to pull their hours back. With my online coaching businesses and consultants that you know are running online businesses it’s often more about pricing, time leakages and not including certain things in their pricing and also freeing up bottlenecks from themselves when they can no longer deliver more. They’ve reached a plateau, but also just shifting the focus on profitability. I find for every business owner that comes to me, it just hasn’t been a number one priority while they’ve been establishing their business and getting it to a certain point. Now they find themselves get to this point where business has grown, they’re attracting clients and bring clients in isn’t their primary concern anymore but they’re finding that A) they’re not paying themselves as much as they want to and B) they’re actually working a lot and more than they want to, and they don’t understand why the business isn’t as profitable as they want it to be.

So that’s, how I integrate profit first into the work I do with my clients. But like I said, this is a process that you could start yourself and some people really can do this whole process themselves. I know I was very comfortable and confident doing the whole profit first process myself in my business from the book when I discovered it and I loved it so much and it changed so much for me that I decided to sign up and become a profit first professional and I learnt how to take it deeper, how to take it further and I learned all of these intricacies in different things in different circumstances and how to really do that assessment and that analysis in a lot more detail. I hope this has given you an idea of what Profit First is and potentially sparked an interest for you. You could run and get those benchmarks off my website and get started with this, do that assessment benchmark yourself. Identify where are you now? Where could you potentially get to and that might be the exact resource you need to really start improving the financial health and performance of your business.

For some business owners it’s really complex. I’ll be honest, you know, not the process of Profit First is complex, but their business is complex and numbers just isn’t their natural thing. That’s usually the people who come to me and want to work one-on-one. Doing it in a way that’s accurate and that considers all the complexities of their business with different service lines, different offerings, staff, rent, a lot of health and beauty businesses have services as well as retail products. There’s just complexity in the business. So if you’re running one of those businesses, you are running a complex business and these are multi six figure businesses with a lot of complexity, a lot of those business owners don’t want to do it alone. They don’t want to embark on that process. They’re already busy delivering their services to the clients, managing their team, you know, trying to have time for their life outside of it and that’s where I come in. I can do that assessment for you, but in a much deeper way than what you’ll see in that instant assessment and then we work together on all of the performance improvement projects. 

I was just reviewing a client. We’re doing a second assessment for her as the business has changed and grown since we did our initial assessment and what I saw from when we did the assessment and when we started all the business performance improvement projects all of those tweaks meant the income per month was actually nearly double. It wasn’t fully double, but it had grown by about. 10 to $15,000 on average a month and profit had grown at a similar level too, because we did things that improved the top line, like pricing and capacity in the space increasing that, making sure things were fully booked. All of that work. And then we’ve done some work inside the expense side of things and improving the way money is being spent in the business. So the same has flowed through to the profit and it’s just amazing to see, that’s kind of five months later, how transformational this work can be in what’s really quite a short amount of time. So that might be something you want to think about, you know, like, hey, this is the work I want to do. I want the knowledge transfer. I want to up-skill in this area but I don’t have the time and I want someone to guide me through the process and do the deeper dive and really get in the nuance of my business who can then make recommendations so that I can pay myself more, increase profitability, potentially pull some time back. 

I do a session right up the top where we unpack what your goals are and then I use that as part of that assessment too, to figure out what are the improvements that we can make in your business that actually bring your personal goals to life. So, I worked with a client recently they were a couple and they basically wanted to hire someone to replace them for the work that they were doing in the business and have much less of a day-to-day role and just some oversight and management and just making sure the business stays profitable. And that’s the work we’ve we did. I did a whole series of models for them about what it looked like when they’re working in the business, What it looked like to put the staff member in the business, what it looked like at different salary levels, all the things. And it was incredible. It was just such a powerful process. So I can do a lot of that detailed work that my clients just don’t know how to get the data for even within their business and don’t have the time for and just don’t have a natural inclination towards doing. Then what I did is I talk them through the whole thing, what I’ve done, how I built it up so they could really understand it, but they didn’t have to do that grunt work themselves.

So I hope this has given you an idea, at least a little taste today of what is Profit First, why it’s so important because understanding your numbers, getting in control of the cashflow and then flipping the idea of making profit a priority and then viewing your business through that lens is ultimately what gives you, you know, we talked about prosper being thriving, flourishing in life, right? It’s ultimately what creates that for you. That’s how we free up time. That’s how we pay yourself more. That’s how you get an additional reward of profit above the salary that you pay yourself. So it’s how you get to take home more from your business without working more. For a lot of my clients, it’s actually about taking the same or more home from their business and beginning the pathway to working less. So Profit First and the methodology I take my clients through really unlocks that. So go check out the book, go check out that resource on my website. 

If you know you want to do this detailed work together feel free to book a discovery call. I’ll put that link in the show notes too. This is something new for me, I’ll put the link in the show notes for a discovery call and we can just jump on a call. There is never any pressure. I’m all about making sure there’s value, helping you see your business more clearly. It’s really a conversation and if I’m not the right person to help you, I’ll identify that and point you in the direction of the person who is. So, you can do that as well.

What I would love to ask from you, if you’ve enjoyed this episode, if you’re enjoying where we’re going, I know we’re really early in. We’re just starting to get a feel for where we are going to go in this podcast and all of the things that you know, potentially we’re going to talk about but I would love for you to a hit the subscribe button so that you’ve got each podcast each week in your ears fresh. And that’s you saying yes to empowering yourself financially and committing to this journey. So I’d love for you to subscribe and while you’re there and this podcast is really new, I would love if you could leave a review. If you think this podcast is worthy of five stars, I would love that. And if you’ve had a takeaway, if there’s something you’re enjoying and you could type up a little review, that would be amazing. I would appreciate it so much. And I think for today, that’s it. 

Go and have an amazing day prosper and profit. And I’ll be back in areas soon. Bye.