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Show Notes

This week’s episode is another foundational episode of the philosophy of Profit First.

Profit First is a gamechanging money management process for business owners that ensures profit is banked on every invoice that comes into a business and is one of the pillars in the approach I take to my clients to have them taking home more of the money that comes into their business.

In this episode we discuss the 4 principles of Profit First and relate them back to something I know you can relate to, making it easy to understand how you can change the way you manage money so that you work with your natural behaviours and habits.

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Episode Transcript

Hey, welcome back to “Prosper and Profit.” I’m thrilled that you’ve chosen to press play, pop this in your ears, and spend some time together today, empowering yourself and learning more about money management. All these things so that you can pay yourself more, increase profits, and stress less when it comes to managing the finances in your business, and spend more time out doing what you love to do.

So, what I wanted to chat with today is, again, another foundational episode that we’re going to come back to and lay these foundations around Profit First. So today, we’re going to talk about the four core principles of Profit First, and I want to explain these to you and why these are so crucial to setting yourself up for success and being able to manage your money. Managing your money in your business well is how you pay yourself six figures, how you take quarterly cash profits out of your businesses, how you stress less, how you’re no longer worried about making your tax payment, all of these things, making payroll. Because when you have this savvy cash flow process in place in your business, life just gets easier, and then we get to do the work on the things that move the needle to you, taking home more of what you bring into your business.

So, this is really foundational. So, Profit First, we’ve had a few episodes already on what is Profit First. I’ll link them in the show notes because they are great foundations in terms of explaining what it is and some of the things about Profit First. And today, we’re going to talk about these four core principles. And I think they’re such a great mindset shift for you in how you think about your business.

So, just to remind, Profit First was a book written by Mike Michalowicz. He sets out these four principles. I am a certified Profit First professional. So, in the first month working together with my clients, we have Profit First fully established because it provides the foundation for us to increase their performance, manage the money in the business, and make more profits, take home more from what they’re doing. This work sets that up and makes that so much easier so that you’re no longer guessing on “I could do this, I could do that, maybe I should do this,” and working with actual visa, things that I know will actually change the game in my business.

So, Mike Michalowicz talks about, he came up with these concepts and relates them to like dieting/health. And I think it’s such a great way to think about it because this is how we came up with the concept. He was watching infomercials. He says late at night, and a trainer was kind of talking through like why most people won’t stick to diets and kind of the principles of it. And he came to recognize that it was the same in business. So, we’re going to use this example and relate it to health and eating and living a healthy lifestyle and then parallel that to your business. Okay.

So, the first principle of Profit First is use small plates, right? It sounds quirky. The idea is, apparently the plates, like the dining plates that we eat off now are about 30% bigger than they were in the 1970s or something like that. Look, forgive me, I haven’t referenced that stat, but they’ve basically said our size of dining plates that we eat off has expanded significantly over time. And what that means is we’re all eating more because we can’t help but fill up the plate. Right? We all know it’s true, even if we think, “Oh, I won’t need as much.” We tend to fill the whole plate or you can understand that’s the tendency that we have, especially when you think about something like going to a buffet and there’s this all you can eat spread, and there’s all these different salads and all these different vegetables and these delicious looking meats and things like that, we can’t help but be like, “Oh, I’ll try that meat and that meat and that meat as well.” And that side looks awesome. And the mashed potato, and I might have a baked potato too. And suddenly, we’ve got this huge plate of food and our plate is full. Right? That’s the principle, is we will fill the plate, the size of the plate we’re using. And so, in health and fitness, one of the things they suggest is obviously eating smaller meals, and a way to do that is eating using smaller plates.

So, you know, there’s the plates that we now use as side plates, probably better reflective of the size meals that someone who’s wanting to lose weight is probably needing to be eating. Now, I’m not a health and fitness person. I mean, I love going to the gym, I love tracking my macros, but I’m definitely not recommending or telling you how to go and achieve those kinds of goals, but we can relate to that. Right? We can relate to the idea of one of the easiest ways for me to eat less is instead of having that giant plate, imagine you were at a buffet just taking a side plate and filling that, right? Because you were still going to tend to fill up. So, this relates to our business because Profit First, how we use small plates is. The way that you are running your business now is likely with one bank account, potentially two. And I’ve got an episode about the five bank accounts to get started with Profit First, but effectively, think about all of the money that comes into your business and all of the money goes out of your business, probably goes through one account. That’s kind of like the buffet, right? It’s all sitting there in one big account. It’s hard to have an idea of how much we’re actually spending, what our position is, to set aside money for taxes, set aside money for profits, all of the things.

The idea is to use smaller plates, is using multiple bank accounts. So, those five bank accounts that we spoke about in that previous episode, to allocate money onto the much smaller plates. Okay. So, just like that stops us from overeating. Serving your money out into smaller plates via bank accounts stops us from overspending or spending money that we shouldn’t be spending today that we need for something else tomorrow. For example, tax, for example, GST, for example, payroll, for example, our own owners pay all of those things. When we haven’t set those out into smaller plates and we see all of the money in one account as like a spending buffet, we know the tendency is to overspend. We look at our bank account, we see there’s plenty of money there, we think spending an extra thousand over there or $500 here or investing in this thing won’t make a difference until suddenly that thousand dollars actually means we can’t pay ourselves in two weeks or, you know, create some kind of stress in the future. So, that’s that first concept. And I just want to speak this out in really simple terms that you can understand. So, that’s our first concept of using small plates in Profit First, we use small plates as a cash management process to stop overspending. It’s one of the first things it does. I just like using smaller plates from the dieting world stops us from overeating.

The second principle of Profit First is to serve sequentially. Let’s relate this to the dieting analogy we’re using. Serving sequentially. The idea is usually, we fill up a plate with the tastiest things first, which are usually the things that aren’t as good for us. For example, a really cheesy kind of potato and bacon. I don’t even eat bacon, but you know, you’ve got that idea. We fill the plate with all of this yummy stuff. The yummy stuff is usually yummy because it’s high in calories. We’ve got cheese, cream, all of those types of things. So, the idea with serving sequentially in the dieting and health world is they’re going to tell you, before you eat the really yummy part of your meal, not to say that this isn’t yummy, but eat your veggies and your salads first. So, go and eat your salad, eat your veggies, then come to the yummy potato bake or whatever it is. Look, I’m not going to tell you what you should or shouldn’t be eating. That’s definitely not my angle here. But we all know, it’s kind of like, we eat our main before we eat dessert because if we filled up on dessert, we’re filling up on super high-calorie food that’s not particularly good for us and it’s not actually going to leave us full for long. If I ate a bowl of ice cream instead of a proper meal, not only am I going to feel hungry in a little while, I’m probably going to feel sick and I’ve overeaten, right? Versus if I’ve actually had my meal and then I have the dessert later, I’m going to eat less dessert. This is the same in your business. We want to fill up on the good stuff first, which is profits. We want to make sure that your business is profitable. So, we are changing the order in which we do things and putting profit first, making profit a priority. Because traditionally, profit is what’s left over after the running of our business. That was the definition I spoke to all the way back in our trailer. We spoke about that profit is what’s left over at the end and we all know it’s not, there’s never anything left over. So, the idea of serving it sequentially is we’re carving off profit first. We’re making that a priority and then we’re running our business off the rest. And we can use those small plates to serve sequentially. We put profit aside first before we set aside the money for running our business.

The third principle is remove temptation. I can totally relate to this in terms of when we know there’s yummy food in the cupboard, we know what’s in the pantry. So, one of the things that they say from a health and dieting perspective is go and remove those things from the cupboard, remove the chips, remove the Doritos, remove the chocolate, remove the biscuits. Don’t fight temptation. Like don’t have something there that you’re going to be tempted to have later. This is true. This is why I personally don’t keep a lot of junk food in the house. I’ll go out and buy it if we’re going to an occasion, if we’re going to a barbecue, if we’re going to an event on the weekend, but like, we just don’t have a cupboard full of it because trust me, if the cupboard was full of Lindt chocolate all the time, I would eat it all the time. So, the same is true in Profit First. We want to remove temptation. Now, the biggest temptations for business owners when it comes to Profit First is using their profit account and using their tax account to fund a shortfall in their cash flow in the day-to-day operations of their business. So, this invoice comes in and it’s due, and we don’t have enough money in our account. And so, what we can be tempted to do is “borrow,” and I’m putting that in inverted commas, “borrow” from our tax account or borrow from our profit account and tell ourselves we’ll pay it back later. But more often than not, we never pay it back and then we just set this really bad habit where we go and take the money. We’ve kind of broken the system when we’ve done that. We’re no longer actually setting profit aside. We’re kind of kidding ourselves and pretending we are, but then we’re using it to run the business. Now, there are different ways to handle that, and that’s something I work with my clients on, and we can briefly touch on it. But like, if an invoice is due and you don’t have the full amount, you can ring the person and negotiate. “Hey, I can make $200 of this payment today, and make the other $200 in two weeks’ time,” or “I can pay 50% now, would I be able to get another two weeks to pay another 50%?” You know, there are so many things that are negotiable, and this is actually the habit we have to have in our business.

Now, everyone cringes when they hear that and like, “Oh, I don’t want to do that,” but actually, we have to train ourselves to run our business in a way that is actually within its means. And that’s a way of doing it, like asking for a payment plan, asking for an extension, negotiating different terms. Maybe asking instead of it being one invoice, can you break it out into a payment plan for me? Can you send this to me over four invoices during the time we’re doing this work together, or if it’s your accounting fees at the end of the year? “Hey, I know my fees are usually around this. Do you mind if you start invoicing me two months beforehand and by the time we’ve done the work, I may have paid half of it already?” You know, there are all these different things we can do because we need to start running our business off what is actually available and making decisions. And when we do that, in turn, we start looking at our expenses. That process buys us time while we figure out ways to actually fix profitability and spending problems. Again, I don’t want to go into that today, but that’s just an example. If you’re listening to this and you’re like, “Yeah, but like, what do I actually do?” So, we want to remove temptation.

So, what does removing temptation look like? Well, actually, if all your day-to-day banking for your OPEX, your owner’s comp, and your income is in one bank, the way we remove temptation is actually by putting profit and tax, setting those accounts up in a separate bank. The idea is like, you just don’t have that temptation there. When you log into your bank accounts, you don’t see the amount in there. It’s a real hassle to use that money because you don’t have internet banking set up. And it causes you to actually figure out, well, how do I solve this in a different way? So just like to remove temptation with our dieting example, we throw all the junk food out, or we give it away to charity or whatever we do. The same is true with a Profit First methodology. We remove temptation. Our highest temptation accounts are always going to be profit and tax because they are building up funds for not the ongoing operations of our business. So we just put them out in a separate bank where we can’t see them. Out of sight, out of mind, and we don’t use them to run the day-to-day operations of our business. And then it gets us to fix the real problem, which is my business isn’t profitable, overspending. So how can I either increase efficiencies, reduce expenses, bring in more sales, right? Increase revenue. And there are ways to increase revenue that are profitable. And I always caution people to focus on making more sales and increasing revenue, making sure it’s profitable, but I’m definitely not against increasing revenue. I just want you to make sure that it’s being done intentionally and it’s solving like, “Hey, my staff have excess capacity. They’re only working at 60% and I want them to get up to that 80% benchmark.” As an example.

So, that’s the third temptation. I always veer off into different things, solving different problems because everything’s got so much that sits behind it. But that’s a concept, number three, around removing temptation. Right. Fourth concept of Profit First that we’re going to look at today is enforcing a rhythm. Okay. What does that mean? So, we’re going back again to our dieting health analogy. Enforcing your rhythm. I’ve definitely seen this when I’ve been training at the gym and sticking to a macros eating plan. You just, I just ate the five meals at the set point in time. And I just never really got hungry. So you just kind of don’t overeat and that’s kind of what this enforcing a rhythm is all about. The idea is if you wait until you are hungry to eat, most people will say, your health professionals will say you’ll overeat and it’s better to actually eat multiple small meals throughout the day and stop yourself from overeating because once you get hungry, I know I’m like this. If I get hungry, I’ll just eat anything that I can see in the fridge, peanut butter and this and that. Right. And like, it’s happened, you know, when I’ve come home and for some reason I ended up missing lunch because I was out somewhere and I’ve gotten home and you’re just starving. And you just shove some toast in there. I put peanut butter on there. Like it’s not versus what I would normally eat, which is a much more healthy and balanced meal. And I’m probably less full and I’ve probably eaten more calories. And that’s the same, that’s this principle here is when we wait until we’re hungry. It’s hard for us to make good decisions and we’ll tend to overeat. And especially because we’ll eat junk food to kind of solve the immediate problem.And then half an hour later, we’re probably still hungry. And so we’ll, you know, eat more.

Now, how this relates to a business is we want to enforce a rhythm in our business. We don’t want to let bills that we need to pay build up. We don’t want to let our income account overly build up. We don’t want to kind of be like, I haven’t paid myself for three months. Right. We set a rhythm for a business so that we’re always kind of on top of things, but we’re not overdoing it as well. Right. We don’t want to be eating a meal every hour of the day. Right. Because even then we’re kind of overdoing it. So we find this rhythm. And we establish that, and it starts to help us see the patterns of our business. It starts to help us recognize when things are not working and when things are working really well. And it just makes life easier.

So what does that translate to in profit first? Well, we set a regular time to manage our finances rather than reacting. So for example, reacting looks like, oh, this invoice came in today. I’ll pay it today or, all of this money came through my Stripe account today and into my income account. I’ll do my allocations and move it out into its small plates today. And what can happen is you can be reacting to things every day in your business. And again, that’s not how we want to be doing things. We actually want to only be thinking about our finances in our business intentionally at certain points of time and then spending the rest of the time of the week doing other things, right? Because paying bills and all of this stuff isn’t like the bread and butter of our business. Right. We want to free up time to be thinking about growing our business, delivering our services, all of the things. So in profit first, we set a rhythm to sit down and do our whole financial management. And it literally is about a 15-minute process.

That’s why I talk about managing your finances in 15 minutes a week. We set a regular time, and it doesn’t have to be every week. A lot of my clients who have money coming in a lot, like daily through Stripe payments, and they’re seeing clients every day, especially in those like traditional bricks and mortar businesses where there’s kind of lots of things happening every day. Those clients do it weekly. I personally do it weekly as well because I like to pay myself my salary each week. And I do that as part of my rhythm. But some people, you know, I worked with clients who had a much bigger business, a seven-figure business. The payments came through much more lumpy. So there weren’t payments coming through every single day. It was like a couple of big payments a month would come through. So they set their rhythm as monthly. That made sense, you know, in profit first, they recommend twice a month, which is kind of fortnightly, but not exactly. So I work with my clients to determine what that rhythm is for them, but basically enforcing a rhythm means we look at managing our finances in a set ahead period of time. So I do mine on Thursday mornings. I do my allocations. I see if there’s any invoices I need to pay, and I pay myself. And then it’s done. And then I don’t have to think about managing my finances in my business till a week later. Versus what happens when we’re reacting is we’re getting stressed. A big invoice comes through. Oh, money’s come through. Oh, I better do my allocations. And like we’re spending so much more time responding and reacting instead of being intentional.

So that’s what enforcing a rhythm is all about is setting a time, setting a process, doing it at that set point in time, and not responding to things at other points in time. So again, our accounts don’t get unwieldy. We don’t build up huge amounts in there because we haven’t done our allocations for eight weeks and suddenly again, we’ve just got this huge amount in there and, you know, we’ve got the temptation and things like that. We just keep it going at a nice, steady pace. We’re being intentional in our business. We’re being a CEO. We’re being a CFO. We’re managing the finances. We’re staying on top of them. And what’s great about it too is it helps you pick up trends because you start to get a really great feel for, oh, a lot of my invoices come in at this time of the month. That’s really normal. I know I feel stressed because all of these invoices came in at once, but that’s just how they are. And then if I don’t like that, I might be able to ring a couple of my suppliers and be like, hey, I normally pay on the 27th of the month, but I would actually prefer to be paying around the 10th or the 15th. Can you adjust my next invoice? So again, see how you can then start to be really proactive and change if that is causing a cashflow crunch. Because a lot of your invoices come through at once. Now, over time, it won’t cause a crunch anymore.

Once you’ve got profit first set up because you’ll have the right amount set aside, but that might be something you want to do to kind of smooth that out. So the rhythm really helps you pick up trends, trends with expenses, and maybe changing up how they’re happening. Again, it just helps you realize like, hey, I haven’t paid the invoice for that thing. Maybe they forgot to send it to me. You know, anything like that? Same with invoices that are being paid to you. Hey, so-and-so hasn’t paid their invoice or, you know, usually X amount of dollars comes in each week, and this week, the average amount hasn’t come in. I wonder what’s happened and then you can follow that up. Oh, look, the system’s broken. It didn’t send out these three invoices or, oh, that’s strange. So-and-so hasn’t paid their invoice, and normally they always pay on time. Let me just send them an email and check in that everything’s okay. Things like that where you can get really proactive and pick up trends before they’re a problem because even unpaid invoices and things like that, they become a problem when they sit and fester for months ignored versus, hey, I noticed your invoice hasn’t been paid. I’m not worried. I just know you normally pay on time. I just wanted to make sure you got it. We can put these processes in place in our business. So that’s the kind of things that enforcing that rhythm can set up for you. And you can see how you start to get in this beautiful flow where managing your finances literally does take 15 minutes a week.

That’s something I sell in terms of one of the huge benefits of the work I do with my clients is you will be managing your finances in 15 minutes a week. You’ll know exactly what’s happening in your business. You’ll be on top of it. You’ll feel confident, you’ll know exactly what to do, and you’ll be free to go and do all the other things you want to be doing in your business besides managing finances. So just to recap, we covered the four principles there of profit first, we talked about using small plates and shrinking the size of what’s in front of us down. And the way we do that in profit first is by those bank accounts. And like I said, there’s an episode on the five bank accounts you need to work with profit first. So you can go back to that episode if you haven’t heard it. The second thing was to serve sequentially. So we actually set aside profit first, which is a complete flip on the traditional way that profits are managed, which is we run our business and hope that there’s something leftover.

We actually proactively set that aside first. We remove temptation. We force ourselves to operate within our means by setting aside profit and setting aside tax in a different bank, a completely different bank. Yes, they’re in different bank accounts, but a separate bank where we can’t see that every time we log into our day-to-day banking. And then we enforce a rhythm. So we have a set time that we manage our finances, and we can be proactive with it. And then we’re freed up to be doing the things that we need to be doing, and we’re not reacting and responding to. Invoices that drop into our inbox or, you know, stressing about things. We, we know how we’re going to do that. And we don’t then. Overspend or overreact or get really emotional and reacting to things we know when we’re going to sit down and do that. And so we can get ourselves into that zone where we know when we sit down and do our finances, but also we start to be able to read the trends of our business.

So wanted to keep that as short and sharp as possible to cover these four principles, I would love to know. What do you think of these? Are these things that you could see would be helpful in managing the cash flows in your business? These are things that I’ve seen benefit clients. I’ve worked with clients. In the six-figure turnover to mid-six-figure turnovers, even up to seven figures. And we’ve set this system up while we’ve looked at increasing the amount that they can pay themselves, increasing efficiencies in their business and increasing profitability. All of that comes actually from having a savvy system in place to manage the finances. Because that allows you to be freed up, to do so much more. And all of this sets you up to be thinking about your business in a completely different way.

As always, I would love to hear what you think. And if you are loving this podcast, please consider leaving a five-star review. If you think it is worthy, that really helps this get out into the world, shared with more people. And, um, yeah, it gets more business owners getting more financial reward from their business, which is what we are here for. , if you know that you want to set this system up in your business and you want to be guided through the process and you want to find out how you can pay yourself more, how you can get more profits out of your business, how you can get more efficiencies and get more time back in your life, then never hesitate. Just reach out. Or in the show notes, there is a link to book, a discovery call. Book that in, and we’ll have a chat about what this could look like in your business. So as always, I’ll love you and leave you there to chat soon. Bye.