Welcome back to Your Win-Win Teacher Business. Today’s episode is part of our Business Book Club series, and the book we’ll be discussing is called Profit First.
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Read the transcript:
[00:00:01] Janice Cook:
Welcome back to Your Win-Win Teacher Business. Today’s episode is part of our Business Book Club series, and the book we’ll be discussing is called Profit First. It is disclaimer time. Remember that I am not a CPA, a tax professional, or a lawyer, and this is just a podcast episode about a business book that I love.
[00:00:50] This episode will discuss payroll and taxes and depending on if you are a sole proprietor, LLC, S Corp, et cetera this bookkeeping system may or may not be a match for your situation. Your accountant will know about Profit First and be able to answer questions about if it’s the right system to apply to your situation.
[00:01:13] It’s a very well known system and I think it’s worth being knowledgeable about it, but only you can decide in the end if it’s a match for your unique situation. Why am I sharing this book? The profit first accounting system has made running a business feel more peaceful for me. I feel clear on what my business can afford and what it cannot afford, yet. I feel confident about the amount my business will be paying me each and every month, and that security helps me show up as the best version of myself when I come to work each day.
[00:01:52] I’ve come to notice over the years that not everyone feels so peaceful when it comes to making decisions about their business. If we’re not careful, it can be easy to allow our self-worth to be dictated by the ebbs and flows of our dashboard.
[00:02:10] I’m all about celebrating a big income windfall, and I’d be lying if I didn’t feel some sense of fear from time to time in the leaner seasons of business. But overall, the profit first system cares for my business year after year and ensures that I feel safe as a business owner who lives with the reality of inconsistent monthly revenue.
[00:02:36] Is this book enjoyable to read? No, but I think the audio version makes it a little easier to digest. And if I’ve gotten through this book multiple times, I know you can do it too. At the end of the day, we’ve skipped the four years of a full business marketing degree and done very well for ourselves as accidental entrepreneurs.
[00:03:00] But there are going to be times where we need to take a course and learn a skill or read a book and fill a gap in an area that we don’t know enough about. So for me, I’m willing from time to time to push through a book that’s a less enjoyable read because I know the benefit is worth it.
[00:03:19] I’ve yet to meet a business owner who didn’t leave this book with some good food for thought that made their business stronger in the end and it’s such a fun book to chat with other teacher business owners about. So let’s talk about the premise of the title. Profit First. I will be forever grateful for the strong start I got as a small business owner.
[00:03:43] As a TPT seller, I took a strong foundational course within my first three months, and it saved me a lot of backtracking. I had confidence as I took each action because I had support, community, and expert guidance. Shout out to Shelly Rees and the amazing TPT focused success community. On the financial side of my business, I met with A CFO who was suggested from another circle of business owners that I trusted, and he helped me set up my business finances properly from the start. He had me read this book, guided me through the EIN and the DBA steps, and got me out of the gates with a strong foundation.
[00:04:26] This book might challenge the way you’ve been handling your business finances, but the author is so humble and walks you through the pros and cons of different paths. He shares about some paths that he took that didn’t go well, and he shares the benefits of going through the Profit First path. He shares that
[00:04:48] 8 out of 10 businesses fail for lack of profitability. And if you’re a Shark Tank viewer like I am, you’ve gotten used to people projecting in how many years from now their business will finally be profitable. Such an interesting mindset. Businesses are amazing because they help others, but at the end of the day, they’re also jobs that need to be serving the owner. And without profit
[00:05:19] we lose the win-win of business, and instead we end up with what the author calls a cash eating monster. The author shares that making money and keeping money are different skills, and I think that’s a gut punch for some of us to read and truly let sink in as we reflect on our business as it exists right now.
[00:05:43] So this book contains a bookkeeping system that pays you first. It does set aside money for taxes as well as money to reinvest into the business for growth, but it makes sure you as the owner are cared for first. And I hope that’s something we can all get on board with. He reminds us that revenue is vanity, but profit is sanity.
[00:06:12] You can’t run your business if you don’t feel safe and stable. You can’t keep going if you aren’t feeling rewarded and it doesn’t feel worth it. We aren’t hoping for a future day when the business is profitable enough for us to get paid. Instead, we’re structuring our business to pay the owner right from the start.
[00:06:36] The author says that as soon as you have an idea for a business, it’s time to start the profit first accounts, but don’t fret if you started in a different way. It truly is a system you can pivot to mid-year and still feel the benefits right away. Let’s dive into the nuts and bolts of the system.
[00:06:57] The Profit First accounting system involves having multiple bank accounts that all have different jobs. All of the money that comes into the business goes into an account called Income Plate. On your Profit First Accounting Day you will follow a list of set percentages and divide that money across the other plates or accounts.
[00:07:19] And just as we use small plates for portion control and to guide behavior, we can do the same here inside our business finances. Let’s talk about the jobs of those other plates. They are reward, reward, protect, and serve. So the first plate is called profit.
[00:07:41] Profit is different by the way, from the profit and loss statement that you might print out from QuickBooks or get from a bookkeeper. This is a completely different concept.
[00:07:51] So if this system is a change from what you’re doing now and you’ve likely been putting 0% towards profit, the system suggests starting with something as small as 1% because we’re in the business of building a habit. So when you pay yourself, you take 1% of the income that you made during that recent time period, and you transfer 1% from the income plate to the profit plate.
[00:08:18] We’ll talk more about what you’re going to do with that money in a bit. Over time, I’ve been able to increase that 1% to 10%. The second plate is called owner compensation. This is how you pay yourself. Personally, I started at 50% for this and I’ve been able to increase it over time to 65%, but please don’t get bogged down by the specific percentages.
[00:08:43] I’m sharing my own because I guarantee someone will ask me. Chapter five guides you through these percentages, and it also scares a lot of people away. You will tweak and adjust the percentages over time based on your needs. The profit first accounting system is more important than the specific numerical percentages that you choose.
[00:09:05] So when I pay myself, I take 65% out of the income that was made during the recent time period, and I transfer it to owner compensation, and that’s the way I pay myself. The third plate is called taxes, and you likely have an idea of what percentage you set aside for this already. Many start around 30%, I personally started at 20% and then moved it down to 15% over time.
[00:09:33] The reason is my spouse has a W2 job, so every year that we’ve owed taxes, we increased his W4 withholding to bring us closer to zero. That’s what worked well for me, but every household is still different.
[00:09:48] When it’s time to do your Profit First accounting, you’ll take your taxes percentage out of the income plate and you’ll transfer it to the taxes account. The final plate is called operating expenses. Having this money set aside in an account of its very own is the best part. This practice helps you see your expenses and available money to spend on the business with much greater clarity.
[00:10:16] The book talks about different types of businesses and reminds us that online businesses can run pretty lean. We don’t have overhead expenses like physical office space, materials, shipping, et cetera. I have found 15% to be a good number for my business over the years. It’s challenging to stay within that number, but I’m always able to make it work
[00:10:40] so I would say it’s challenging in a positive way. So when it’s time to do Profit first accounting, I’m taking 15% from that income plate and moving it into my operating expenses account. This is the rhythm we do when we sit down to do our profit first accounting. And just as we have an eating schedule, profit first suggests that you go through this bookkeeping rhythm twice a month.
[00:11:07] They suggest the 10th and the 25th of each month. In my practice, I find the 25th falls at a terrible time in both November and December, and I prefer to do my profit first accounting on the first and the 15th. So let’s go back to the jobs of these accounts. Reward, reward, protect, and serve. When it’s payday,
[00:11:33] first, we reward ourself. After all, we are the most important person in the business. We send money to our profit account, then we pay ourself as the owner of the business. Reward, reward. Next, we protect the business by setting aside the money that we’ll need for taxes. I think we can all agree that this practice is an important part of having a healthy business.
[00:12:00] Finally, we serve the business through the operating expenses account. Businesses do have expenses, and we do want to be able to make certain investments to help them grow and thrive, but the mindset shift likely is the filling of this account last. Let’s take a closer look inside each account and answer some questions that have probably started to bubble up.
[00:12:27] Profit. What are we even doing with this 1%? The profit account has two functions. If we think about your favorite business, there’s probably a quarterly bonus structure, and the profit account allows you to incorporate a quarterly bonus into your own business.
[00:12:47] What a good boss you are to yourself. So you’ve been pulling out a small percentage on each bookkeeping day and putting it in the profit account, and at the end of the quarter you get to see how business has been for the quarter, and you get to pull out 50% of what’s in that account as a quarterly bonus.
[00:13:08] That’s pretty exciting. It’s exciting to come up with a celebration list of ideas of how you’ll spend that money, but it’s also a good checkpoint for you to see how the business has been doing, and you get to buy yourself a small treat and reward yourself and stop and smell the roses. And that’s really motivating and it helps you get the strength to keep going for another quarter.
[00:13:30] And as you dream bigger and wanna reach for bigger ticket celebration items on the list, you’re really motivated to have a great upcoming quarter. The next function of the profit account is that it can serve as an emergency slush fund for your business. Now, this isn’t for extra expenses that you can’t fund in operating expenses.
[00:13:52] This is for bigger things like an unexpected tax shortfall, so something that is a true emergency in the business. It’s gives us a little bit of money that’s stashed away again for security to keep the business healthy just in case something bad and unpredictable happens. So we’re not pulling from profit to reinvest in the business.
[00:14:15] We have an account for that. It’s called operating expenses. Once you’ve built up more than three months of business runway, in that profit account, the book talks about considering funding a different account, they call it a vault account, where maybe you’re saving up for a larger, big capital expense, but I would call that like advanced profit. First at the beginning, just knowing that the reason you’re putting aside money in the profit account is for your quarterly bonus rhythm, and so that you finally have an emergency slush fund in your business.
[00:14:50] That’s really the takeaway today. As you earn more, the percentage will become more. It’s very motivating. And don’t stress over what percentage, to start this at, 1% is a no-brainer. You must have 1% of wiggle room in your expenses. Chances are you can skim 1% off the top on your next bookkeeping day and not even notice that it’s gone.
[00:15:17] But the impact is huge. The profit account helps you feel like the business is truly serving you each and every day, and that matters. That changes your ability to show up with a positive attitude when you sit down to run your business each day. Next is the owner compensation account. If your business has a single owner, this probably feels easy.
[00:15:43] If your business has more than one owner, the book will dive deeper into that scenario for you. You’ll hear the author refer to this as a pass through account. Money really isn’t going to stay in the owner compensation account very long because you’re likely going to scoot it right out and transfer it to your personal or family checking account to go live your life. For a few years, I didn’t even really use this account,
[00:16:07] I just sent the money directly to my family checking from income plate. But over the years, I’ve adapted my system and started to use that account as a payroll reserve account. I won’t go into detail about that here since this episode is designed to be focused on the system discussed in this specific book,
[00:16:27] but head back to episode 14 if you’re curious about my payroll reserve account and how it helps me weather the inconsistent income that comes with this type of business. So in both of these accounts, the owner is getting rewarded before anything else happens in the business. Since everything is based on the percentage, if the owner wants to have more placed on either of their two plates, the way it happens is by having the business earn more income in the next pay period.
[00:17:00] That’s motivating in an immediate way and really helps you get creative and honest about what actions turn into revenue. Next is the taxes account. You’ve likely already got a place where you are setting aside money for taxes and you’ve likely got some clues about what percentage you need to be setting aside from previous tax returns.
[00:17:23] So let’s turn to the operating expenses plate. This is likely where some feelings will start to bubble up. You may find that you’ve been spending too much in the business because you didn’t have a clear picture of what the jobs were for every dollar in the single business bank account. You may find that you’ve been spending too much in the business because you didn’t have a clear picture of what the jobs were for each dollar in your single
[00:17:55] business bank account. The book has a lot of tough love on this topic, and it provides a lot of action steps to turn the ship around. It isn’t an accident that we distribute to operating expenses last. If there isn’t enough money to pay bills, we don’t pull from other accounts, it means it’s time to get rid of expenses.
[00:18:20] When you have less money to work with, it forces you to get a little more creative, and that’s not a bad thing. The author suggests that every business can probably cut 10%,
[00:18:34] and I think that’s a really interesting idea to take out on your next walk and think about, yeah, there probably is 10% in here, and embrace the challenge of looking for it. So the author talks us through an exercise where we really look line by line at what we’re spending on in our business and label things with P, R, and U.
[00:18:59] You can get highlighters that are different colors, you can get colored pencils that are different colors, but this might be a time where printing things out actually does feel like it helps you get more clarity on the situation. So P, does this expense directly lead to delivering a profit? If so, you mark it with a P. R.
[00:19:23] Can this expense possibly be replaced with a lower cost option? And U. Is this an unnecessary expense that can be cut? And so by asking those three questions as you look at every single expense your business has, you can gain a lot of clarity on what to do next. First, you cut everything marked with letter U, the unnecessary expenses.
[00:19:56] Then you look at the R expenses, expenses that can be replaced with a lower cost option, and you start making that magic happen. Finally, you evaluate P, the expenses directly leading to delivering a profit. Another technique they mentioned is to practice delaying and ask yourself, can you go just one more day?
[00:20:23] And often we do this with groceries. If we’re used to going grocery shopping once a week, but we’re getting ready for a trip or we have like a half a week coming up and we just see, could I delay one more day? If I always get groceries on Saturday, could we make it till Sunday? Could we make it till Monday?
[00:20:42] Could we make it till Tuesday? If you usually shop for groceries once a week, but you can stretch to have them last a week and a half, if you do that twice during the month, you’ve saved an entire grocery trip out of your budget. This often happens with big tech purchases too in a business. If you know you’re going to need a new laptop soon, practice delaying it.
[00:21:09] Can you go just one more day? Can you make it work? Sometimes creative solutions bubble up as we practice delaying that purchase, and it helps us get a little scrappier and keep our costs a little bit lower. So give yourself permission to try to live without those U expenses and see what happens.
[00:21:31] It’s easy enough to add most types of expenses back in if we find that we truly can’t live without them. And then welcome to the world of gaining more benefit for your business from resources that cost less money. It’s a tough process to walk through, but the benefits are compounding. Once you have your operating expenses more dialed into an amount that isn’t straining and stressing your business quite so much and you’re seeing more money in your pocket, I think that’s a process worth walking through.
[00:22:05] A few additional thoughts to share. I wanna repeat that this book is not about getting bogged down in trying to determine the perfect percentages. Chapter five has a way of making your brain spin if you let it. But the takeaway is that even if it’s just 1% profit at the start, you practice pulling the profit first.
[00:22:27] You reevaluate every quarter and bravely bump it to 2% by challenging yourself to run a leaner business and keeping the operating expenses low. Let’s say you start at 30% for taxes, 50% for owner’s compensation, 19% for operating expenses, and 1% for profit. You are off to a great start. You’re now getting a consistent paycheck and you have a clear budget for your expenses.
[00:22:57] That’s a win in my book. At the end of the quarter, you might see if you can come down to 17% for operating expenses and shift up to 51% for owner’s compensation and maybe 2% for profit. At taxes time, if you have a refund, you might shift the overage into the profit account and then pull that number down to 25% for the year and see where you land.
[00:23:25] You’ll settle into the operating expenses percentage that truly feels needed through this process. You’ll gain clarity on what you actually need to save for taxes, and you’ll have built a healthy habit of setting aside profit first and always taking a consistent paycheck.
[00:23:44] The goal is to hit taxes right on the target, to spend as little as possible still running a healthy business, and to keep as much as possible for yourself through profit and owner compensation. If you have business debt, the book will provide you a path to dig out of that too.
[00:24:05] And if you feel unsure at any time, if you can afford to hire help, the book provides a game plan to help with that math as well. And you know that I’ve got plenty of tips about the process of finding clarity and getting organized before you hire help in my free guide. You can always find that at cookfamilyresources.com/hiring-guide.
[00:24:28] So maybe you’ll read this book and maybe you won’t, but either way, thank you for letting me share this small story from my bookshelf and from my heart. You’ll likely hear about Profit First Accounting, and hopefully this podcast episode provided some input about how that system is similar and different to your current bookkeeping approach.
[00:24:51] Remember, you don’t have to run your business alone. Read books and talk about them with business besties. Share about this book on Instagram and tag me at teacherjaniceva. Slide into my dms anytime to talk about the ups and downs of running a business. Leave a review on Apple Podcasts and share a takeaway from the book with others to help them on their teacher business journey. shelf that you’re hoping I’ll cover here on the podcast, I’d love to hear about it.
Here is a playlist of other episodes about my favorite Teacher Business Books:
