It's the dark secret of many small business entrepreneurs – most are a couple of bad months away from total bankruptcy. I learned this lesson the hard way after generating hundreds of millions and having nothing to show for it. While I changed that over the last few years, I am still a work in progress. And many small business owners I know are still living check-to-check.

The book Profit First changes all that once and for all. Ask yourself. "What would it be like if I could immediately start taking profit from ny business – this month, and every month from now on? What if I could be permanently profitable?"

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Spiritual Foundations

Keeping your accounting straight and your business profitable is not just a good idea – it's biblical.

"Be diligent to know the state of your flocks,
And attend to your herds;
For riches are not forever,
Nor does a crown endure to all generations." – Proverbs 27:23-24

Tip of the Week

Try this with me: one book, one month, deep.

Profit First, by Mike Michalowicz.

Feature Presentation: "Profit First, Broke Never"

TESTIMONIALS FOR PROFIT FIRST

Darnyelle Jervey: "It feels good to be building a business that serves me. Profit First is helping me to live out my mission in my own business." Bottom Line: $296,763.20 in profit, 258 percent revenue growth, and more than a million dollars in sales.

Carrie Cunnington: "My business finances are organized and clean. I'm profitable (yeah!), disciplined, in control and motivated." Bottom Line: Debt free and posting quarterly profits.

Christian Maxin: "I now need just 60 minutes a week to manage my financial planning." Bottom line: Christian can see the financial health of his business at a glance: $250,000 in new profit and business growth of 20 percent.

Paul Finney: "Once you have cash, opportunities start to appear like never before." Bottom Line: 500 percent growth in weekly sales; costs cut by 20 percent.

Helen and Rob Faulkner: "After 18 years of being in business, we finally feel we're a success." Bottom Line: Helen and Rob turned around their business and posted a first-ever profit distribution within four weeks of starting Profit First.

Notes and Quotes from Profit First:

Money problems occur when one of two things happen:

Sales slow down. The problem here is obvious when you operate check-to-check and sales slow down: you won't have enough to cover expenses.
Sales speed up. This problem is not obvious, but it is insidious. As your income climbs, expenses quickly follow. Exchanging the newly leased car for a rust-bucket, laying off employees because we're overstaffed, saying "No" to our partners—all of this is very hard to do because of the agreements and promises we made. We don't want to admit we've been wrong in how we've been growing our business. So rather than reduce our costs in any meaningful way, we scramble to cover ridiculously high expenses. We steal from Peter to pay Paul, hoping for another big payout.

Most business owners try to grow their way out of their problems, hinging salvation on the next big sale, customer, or investor, but the result is simply a bigger monster. (And the bigger your company gets, the more anxiety you deal with. A $300,000 cash-eating monster is much easier to manage than a $3,000,000 one. I know; I have survived operating both.)

"Profit must be baked into your business. Every day, every transaction, every moment. Profit is not an event. Profit is a habit."

THE FOUR CORE PRINCIPLES OF PROFIT FIRST

Old "Profit Last" Formula: Sales – Expenses = Profit

New "Profit First" Formula: Sales – Profit = Expenses

Here's how you apply the four principles:

Use Small Plates—When money comes into your main INCOME account, it simply acts as a serving tray for the other accounts. You then periodically disperse all the money from the INCOME account into different accounts in predetermined percentages. Each of these accounts has a different objective: one is for profit, one for owner compensation, another for taxes, and another for operating expenses. Collectively, these are the five foundational accounts (Income, Profit, Owner's Comp, Tax, and Operating Expenses). Those five accounts are where you should get started, but advanced users will use additional accounts (outlined in Chapter 10).
Serve Sequentially—Always, always allocate money based upon the percentages to the accounts first. Never, ever, ever pay bills first. The money moves from the INCOME account to your PROFIT account, OWNER'S COMP, TAX, and OPEX (OPERATING EXPENSES). Then you pay bills only with what is available in the OPEX account. No exceptions. And if there isn't enough money left for expenses? This does not mean you need to pull from the other accounts. What it does mean is that your business is telling you that you can't afford those expenses and need to get rid of them. Eliminating unnecessary expenses will bring more health to your business than you can ever imagine.
Remove Temptation—Move your PROFIT account and other "tempting" accounts out of arm's reach. Make it really hard and painful to get to that money, thereby removing the temptation to "borrow" (i.e., steal) from yourself. Use an accountability mechanism to prevent access, except for the right reason.
Enforce a Rhythm—Do your allocations and payables twice a month (specifically, on the tenth and twenty-fifth). Don't pay only when there is money piled up in the account. Get into a rhythm of allocating your income, and paying bills twice a month so that you can see how cash accumulates and where the money really goes. This is controlled, recurring and frequent cash-flow-management, not by-the-seat-of-your-pants cash-management.

Resources Mentioned in This Episode

Profit First book
Profit First podcast
Profit First Info Graphic (Ray's Notes – Coming Soon!)

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