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Automatic Profitability & Financial Stability With the Profit First Framework

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The Profit First framework is one of the most transformational things I’ve ever implemented in my business. In this training you’ll learn what the Profit First framework is, why it’s important, how it flips the conventional accounting and business finance model on its head, and how to set it up in your business.

For a lot more insights on Profit First, read this book.

Video Transcript

This may be one of the most important trainings that you do related to running a freelance business or a digital agency. It can be very fun and exciting to talk about how to get more sales, how to increase your prices, how to increase profitability, abs and tools. All of that is fun, all of that is exciting, but at the end of the day, if your business isn’t financially healthy, it’s not going to last. And if your business isn’t financially healthy, it’s going to put a tremendous amount of stress and weight on you as the owner. And so what I want to do in this training is teach you about the profit first framework. This is a framework that I implemented many years ago in my business is not just my agency, but any business that I’m involved with. We implement the profit first model because it is an actual game changer. I know a lot of people use the word game changer and they’re just overselling things. This is truly a game changer for your business. Now I did not develop the profit first framework, but I do use it like I mentioned and I can vouch for it. And I do want to pass it along to you. There is a book on the profit first framework. If you want to get it, I’ll link to it in the description. But this should give you a really great overview and I would highly, highly, highly encourage you to implement this in your business. So let’s go ahead and get to it. So running a profit first business. The first thing you have to understand is you can have very strong revenue numbers and not have a healthy business. There are a lot of businesses, a lot of agencies that have very strong revenue numbers, but they just aren’t profitable. And we have to avoid building an unhealthy business. The way we’re going to avoid building an unhealthy business is by ditching the conventional model and moving this to this profit first model, which allows you to structure the numbers correctly from day one. You also really need to know your numbers in terms of having accurate data. And if you’re using the conventional model and you are falling behind on bookkeeping and accounting, like a lot of agency owners are, you just don’t know your numbers. And if you don’t know your numbers, you can’t really run a business very well. That is another huge problem.

By running the profit first model in your business, you are going to be forced to be intuitively aware of how much is outgoing and things like an expense account and how much people are getting paid and how much profitability there is just at a base level by running the profit first framework, you are going to be more in tune with the numbers related to your business. And that is a huge plus. You are not going to fall victim to the common problems that other agencies and freelancers fall victim to because of this framework and because you’re being introduced to this framework in the inner circle. And this is one of the most powerful business accounting and financial management systems ever devised. It will overnight, again, going back to not just using terms, saying game changer and things. It literally overnight can fix a lot of the cracks in your business’s financial foundation. Let’s discuss Parkinson’s law. Parkinson’s law says that our demand for a resource increases to meet the supply of it. In business, what this means, and you probably see this in your own business to a large degree, you’ve probably seen it in a lot of other businesses because it’s a very common problem, is that if you have $1,000 in cash to run a business for whatever amount of time, you’re going to spend $1,000. If you have $10,000 to run your business, you can very easily spend $10,000. And you see this in personal finance as well. There are people who make $5,000 a month. That’s their salary. They spend $5,000 a month. If they didn’t get $5,000 a month, if they only got $3,000 a month, they would spend the $3,000. If they got $10,000, they would spend the $10,000. There isn’t a framework or a system in place to make sure that they don’t spend or to ensure, let’s say, that they spend less than they make. You can do budgeting, you can do all this other stuff, but a lot of people just don’t adhere to that. But bottom line is Parkinson’s Law in business states that if I give you $10,000 around the business, you’ll probably spend $10,000 around the business. If I give you $50,000 around the business, you’ll find a way to spend $50,000 around the business. And if I only give you $100 to get the business off the ground, you’ll do whatever you need to do to get the business off the ground for $100. So this is how Parkinson’s Law works. And what this leads us to is that the trap of falling victim to the main problem that people have, cash flow issues, living client to clients, living sale to sale. If there’s no profit, if there’s very little income to the owner, if there’s no money left over for taxes, which I see very often, we do set aside money for this and that. But we didn’t actually pay ourselves and we actually forgot to put money aside for the taxes that we owe. It’s very common, it’s a very common problem. These are all stemming from the lack of a framework. And people think that, well, I’m doing bookkeeping, I’m doing accounting, I’m following the conventional model, which we’re going to talk about in a minute. That’s not a framework for success. That’s why we have to install something different.

The traditional accounting model, as I just explained, sets this trap. The traditional model says, you take your revenue, then you have your expenses. Whatever is left over at the end of the day, and expenses, by the way, means owner pay, means salaries, it means marketing, it means a lot of things. Whatever is left over at the end of the day, that’s your profit. And if you don’t have any profit left over at the end of the day, well, you’re not profitable. But the problem is, we just talked about Parkinson’s Law, and if Parkinson’s Law holds true, it basically means that if you make $10,000 in revenue, and you spend $10,000 in revenue, there’s no profit. And that’s probably what’s going to happen. There’s only going to be profit if you prioritize profit. Because again, you fall victim to Parkinson’s Law, whatever the number is, that’s what the expenses are going to be. And then thus, there’s not much profit left over if any. So we can easily solve this simply by changing our mindset. Now, I want to be clear here that what I’m about to show you with this framework is not just a mindset shift. It is a physical accounting shift. And it’s going to completely transform how you handle money in your business, but there is a huge mindset shift behind it. Because we know that this Parkinson’s Law thing is a problem, and we can solve the problem by forcing profitability. Let me say that again, forcing profitability. It’s no longer about, well, after everything washes out, hopefully the business is profitable. No, we’re going to force profitability by how we structure the accounting. We’re going to force owner pay by how we structure the accounting. We’re going to force taxes being accounted for by how we structure the accounting. Here’s a common example, common agency, $100,000 in revenue, $85,000 in expenses, $15,000 in owner pay, $0 in profit and $0 set aside for taxes. This is exactly what we want to avoid, but this is what the conventional model kind of fosters because revenue trickles in at the top and the first place it goes is to expenses. Parkinson’s Law says, well, there’s $100,000 there, we got to spend the $100,000.

And so $85,000 of it goes to expenses and the owner spends, you know, actually a very small amount on themselves. And this is what, you know, so many agencies and freelancers go through and this is why they live client to client. This is why they live project to project. Here’s how it should be. Strong agency, $100,000 in revenue, $30,000 is set aside for expenses, $50,000. And this is not spent, by the way, okay? You’re going to see how the model works in just a second to make sure it happens like this. But this is the end result of the framework. $100,000 in revenue, $30,000 goes out expenses, $50,000 goes to you, the owner, $5,000 goes to profit and $15,000 goes to taxes. Now, depending on your revenue, depending on your business, these numbers can change. You have full control over them. The key here is that there is a framework in place that is proven to create profitable businesses. So we achieve this very easily with just being intentional about the accounting and intentional in a new way. So you can be very intentional with the traditional model and you may run a decent business, but Parkinson’s law speaks to people’s general behavior in the sense that you want to be intentional with their accounting in the traditional model, it just doesn’t work out at the end of the day. The profit first model is successful, and I’ll say it again, because it forces profitability. It forces people to be paid. It forces taxes to be set aside. It forces these things, right? If you just follow the framework. So common agency, revenue minus expenses, minus owner pay, minus taxes equals profit. Profit first agency says revenue minus profit, minus owner pay, minus taxes equals expenses. This is the mindset shift, and this is the physical banking shift that you are about to undergo with your business.

So let’s say that let’s reiterate this. You already know what the traditional model is. The profit first model is revenue minus profit. This is critical, minus owner pay, minus taxes equals expenses. Let’s take a look at kind of how this shift works and why it’s so powerful. So instead of running the business based on whatever expenses that you feel are viable based on revenue, which we know Parkinson’s law is probably going to take over, and you’re going to end up using almost all of your revenue to run your business, you intentionally extract profit first, then owner pay, then tax money from that revenue, and then you force yourself to run the business with whatever is left over. And that can feel very, very restrictive, that can feel very, very scary, but when you’ve implemented it and it’s working, you feel immense relief. And you realize just how strong and healthy of a business you actually have. Well, in the beginning, you realize how not strong and not healthy your business is. But as the months go by and you are working this model into your business, you start to see the fruit of your actual labor where everything’s just taken care of and everything runs smoothly. And the business has everything that it needs in order to be smooth and successful and cash flow wise and reserves wise and as you’ll see some bonuses as well. So the benefits here are crystal clear. You’re going to ensure in most of your agencies, people we’re talking about here, rather with traditional revenue numbers, not like insane revenue numbers. So this doesn’t, it’s not like you can only benefit from this if you’re making tons and tons and tons and gobs of gobs of money. That’s not what I’m saying. In fact, you’ll actually get a lot more benefit personally as an owner in terms of how much you’re extracting from the business, the percentage at the lower revenue amounts. So right off the bat, 50% of your agency is going to go to personal income. You’re going to ensure that your tax payments are accounted for. You’re going to ensure that your business is making at least 5% profit. And we’re going to be studying that money aside for two specific purposes and you’re going to ensure that you’re running a lean, healthy business.

Sounds good. Okay, so let’s talk about how to set it up. First, the bank accounts. This is the hardest part. You need up to five separate bank accounts, which typically means finding a bank or credit union that’s going to allow you to open linked accounts with no extra monthly fees. Or if that’s not possible, you can just eat the fees. It’s going to be about $10 per month per account if you’re in the US. Just recognize that look, if I’ve got five accounts and I have to pay a $10 fee on all of them, $50 a month to run a wildly profitable, financially healthy business. It’s a drop in the bucket. Don’t even look at this as an expense. Following the conventional model is a traditional expense. Not implementing this framework is a huge expense. It’s going to cost you dearly. If you implement this model, I guarantee you, like the $50, you would pay 10 times that eventually to have a, just the business you’re ultimately going to have by using this framework. Here’s how the accounts look like. We have a revenue account. We have an owner pay account. We have a taxes account. We have a profit account. We have an expenses account. I want you to see where that expenses account is. It’s at the bottom. The money trickles down and eventually, instead of eventually finding its way, hopefully to profit, it eventually finds its way to expenses. Where owners are already taking care of, taxes are already taking care of, and profit is already taking care of. The expenses is the final bucket that collects whatever is left over. You’re going to see why that happens. But you’re going to see that we’re also very intentional about that. Here are the instructions. Once your bank accounts are set up, all your money is going to go into your revenue account. Every place that you get money from, I get money from Stripe, I get money from PayPal, I get money from QuickBooks invoices, I get money from Cash, I get money from Chex, all of the money goes into the revenue account. That’s the top of your framework. That account just collects things. It doesn’t do anything else. It just collects things. On the 10th and 25th of every month, you’re going to distribute revenue into your other accounts based on your set percentages. On the 10th of the month, you’re going to go in, whatever revenue is there, you’re going to put 50% of it into the owner pay account. You’re going to transfer 15% into taxes. Depending on where you live, depending on how big your business is, how many write offs you have, all of that, you might need to change that number. If you change the taxes number, the other numbers have to change as well. It’s always going to add up to 100%. Then profit, we’re going to have 5%. Then expenses, we’re going to have roughly 30%.

If you want to run a super-learn business, maybe that’s 20%. You want to give a little bit more for marketing and advertising and things like that. Maybe it’s 35% or 40%. But like I said, as you adjust one percentage bucket, the others have to adjust to account for that. You have to decide where is that money going to come from. On the 10th and 25th of each month, you go into your revenue account, you transfer out the money into all of these other accounts. Finally, you have your expenses account. That’s where you put your 30%. That is the only account that you should be actually spending out of. You don’t have a check book, you don’t have a debit card or a credit card, this linked to your revenue account. You don’t spend out of the owner pay account, you can transfer out of the owner pay account. Taxes, you can transfer out of right of check or whatever for taxes. That’s fine. Profit, we’ll talk about that in a minute. But like general day to day expenses, all of that comes out of the expense account. And we need to talk about what’s going to happen, well, we’ll get to that. What happens if there isn’t enough in the expenses account. But the multiple accounts model here is like the envelope system in personal financing. You’ve followed Dave Ramsey or a lot of personal finance gurus talk about having an envelope system. You take your cash when you get paid and you distribute it into different envelopes and there’s a groceries envelope. And so whatever is in that groceries envelope, that’s what you got for groceries. And you’ve got to be really careful and make sure that that’s all you spend on groceries and then same thing for gas. And if you’re overspending, if you’re running at a money, what does that tell you? It tells you you’re probably spending too much on groceries for your income level. That’s going to be key to keeping the back of your mind. What is the profit account used for? We know what the expenses is used for. We know what owner pays used for. We know what revenue obviously is used for in taxes. What is the profit account used for? There’s two important uses for the profit account. First, it’s a last ditch emergency fund. So if one month revenues very low and you got people to pay, you got bill, personal bills to pay, you might need to tap into that profit account. It is money set aside. It’s profit that your business has made along the way and it can be used for really whatever you need to use it for. But ultimately we want it to stay there as much as possible and we wanted to continue growing as much as possible. Second use though is it is a bonicing account for yourself and your team. We’re going to talk about how to do this. So quarterly or semi-annually or annually, whatever you want to do, you withdraw 50% of the profit account. You can distribute that to yourself. You can distribute some of that to your team if you want if you have a team. But that is a bonus. And you can do that, like I said, it doesn’t matter if you do it quarterly, semi-annually or annually. It’s completely up to you. But it is a nice way to set money aside for bonuses. And this is an example. If you have 2500, you’re doing this quarterly maybe. And every quarter you’ve racked up or let’s say the first quarter you’ve implemented this system, you’ve racked up $2,500.

You could bonus $625 at the end of that quarter to yourself as the owner. And if you had two employees, you could bonus them $300 each, roughly. And remember, that’s only removing 50% of what is in the front. We’re not bonicing the entire account out. We’re bonicing 50% of the account out. Because it will still keep growing in this fashion. So if you distribute half of it, and then you, but you’re continuing every time you get paid, every time that 10th and 25th comes around, you’re distributing your money out. It’s going to grow. So you had originally $2,500, but we have $1250 after we take half of it out for that distribution. And then the total after this next quarter, it’s now up to 3750. You take 50% of that to bonus it out. And then an X quarter, it’s going to be even higher than 3750. It’s going to still keep growing, even though you’re extracting 50% every so often to bonus it. Here’s the big question. What if there isn’t enough for minimal expenses? If you’re not making enough to cover the business’s most minimal expenses, you need to change the owner percentage temporarily. Because you can’t pay yourself if the business can’t sustain itself in the leanest possible state. Again, we want to avoid taking money from the profit account or the taxes account. As soon as revenue grows, you change the percentages back to prioritize owner pay. But here is the biggest thing going back to the envelope system. When I said, hey, you have a groceries envelope with cash in it. If every month, it’s like, I’m out of money. You are spending too much money. You’re either one or two things that’s happening. One, you’re spending too much money on groceries. Right? So obviously you have to make some adjustments there or two, you don’t have enough revenue. And this is like I said, it’s forcing you to run a healthy business. So you know, okay, I need more revenue or I need to make hard decisions cut back and get my expenses under control. In a lot of businesses because of Parkinson’s law, they’re just dramatically overspending on expenses. And the way we don’t have enough money for expenses is your way overspending for what you’re bringing in in terms of revenue. The 30% number that I gave you for expenses is not just a number I pulled out of thin air. The 30% expenses number is typically what a healthy business, especially like a digital agency like ours, is able to exist on. You should be able to run a profitable agency only spending 30% on expenses. That’s just the bottom line. And so all the other percentages will work out if that’s the case. So this is forcing you to look at your numbers and say, we are spending way too much on expenses for what we’re bringing in revenue.

Now, if you’re already like nickel and diamond, there is zero room to adjust for expenses and you’re still out of money, you don’t have enough revenue. You’ve got to go get more revenue. You’ve got to stop whatever you’re doing and go find more business. But guess what? You have that alarm. You have that alert. You’re not just going like, all right, we got $10,000 this month. And we spend it. Now we got to go find all new money. No, that’s not happening anymore. That’s what’s not happening here. Right. So there are hard facts at the end of the day that you don’t have enough revenue or you’re overspending on expenses. But what’s not happening is you’re clueless and you’re just spending every dollar that comes into the business. That’s what’s not happening anymore. What about in the very, very beginning? Okay. So in the ultra early stages for those of you in that stage, you might not be able to take any income. Everything will need to go to expenses, profit and taxes. However, I’m still not a fan of allocating 0% of owner pay. It needs to be something. Even if it’s only 5% at a principle for the vision of a healthy business. And then really you need to get to that 50% owner pay as fast as possible. You are taking on all the risk. You are likely doing all the work. You cannot just be expensing out everything. Right. And then the flip side is if you’re taking way too much as an owner and you’re not feeding any money into the business for taxes and expenses and marketing and things like that. This will demonstrate that to you as well that that’s going on and that’s not healthy. That’s not how you should be running the business. So this framework will take whatever financial situation you’re in with your business and it will transform it and it will do that practically overnight. And like I said, it is, let me see if I can get back to camera here. It is one of the most important, one of the most powerful things that I’ve ever done in business. You can take all the marketing stuff, throw it out the window. You can take all the fun tools and apps, throw them out the window. At the end of the day, if somebody said what is the most transformational thing you’ve done to run a better digital agency, the profit first framework would be the exact thing that I would point to. So that’s how important it is. I hope it makes sense to you. If you have any questions about it, let me know. And like I said, I will link down below to the book. I would encourage you to read the book because it’ll give you a lot more insights. It’ll give you stories. It’ll give you, it’ll give you motivation to implement profit first. But that’s it. That’s the training for today. Hope you liked it. Hope it helps you. Cheers. you you you you you you you you you you you you you you you you you you you you you you you you you you you you you you you you you you you you you you you you you you you you you you