Thread by @NeelBParekh

WTF is 'Profit First' and why do you need it?

I "found" $70K in spare cash in my biz just by implementing Profit First's budgeting system.

Here is EXACTLY how you can implement Profit First in your biz. Step-by-step.

⚠️ WARNING: Long Thread

✅ First off....WTF is Profit First?

In short - PF is a super simple budgeting system to organize the cash in your biz.

I think about it as the way to answer "how much $ do I have to expand?"

The system is based on the book titled Profit First by @MikeMichalowicz (sup Mike).

It changes the OG formula of "Sales - Expenses = Profits" ➡️ "Sales - Profits = Expenses"

So you basically take out your profit FIRST, and then run your company with whatever cash is left.

Pretty simple concept, right?

✅ WHY I IMPLEMENTED PROFIT FIRST -

I wanted to do a bunch of things: pump up marketing, give bonuses, redesign my website, open up new locations.

I created a fancy excel budget before...and never opened it again. It was too bulky.

I had no budget or financial forecast system

I don’t mean that we had 0 cash...I mean that I didn’t have a system to say “OK so we have a budget of X this quarter so I can afford X new initiatives”.

I didn’t just want to spend wildly and end up with 0 cash, so I did the opposite....I only spent cash when needed.

Questions I had:

✔️How much more can I spend in marketing?
✔️How much should I be making as an owner?
✔️Am I spending too much or too little in OpEx?
✔️How much can to spend on future investments?

I didn't know how to answer these questions. PF luckily helped solve this.

✅ THE PROFIT FIRST PROCESS -

The PF process is relatively simple:

1) Calculate your Target Allocation Percentages (more on this below)
2) Set up buckets of business bank accounts (OpEx, Tax, etc)
3) Do the % allocations consistently.

That's it.

Here is how to set it up ⬇️

1️⃣ FIND YOUR 'TARGET ALLOCATION %'

From your incoming $$, you need to split it into the below buckets.

- Profit
- Taxes
- Owners Comp
- Operating Expense

But how do you know what % to put into the above?

I put the calculator for this in a Sheet 😀: bit.ly/3dfOPPW

It’s important to remember that Target Allocation Percentages show your ideal situation for allocation, and it’s not likely for any business to get to this ideal allocation very quickly.

Work towards your TAPs goals overtime in a step function. Its OK if its take a while.

2️⃣ FIND 'REAL REVENUE'

TAPs are decided based on the size company you have.

BUT...your top-line revenue isn't "really" showing the full story.

We gotta first find the number that makes things apples-to-apples, and THEN run our target allocation percentages (TAPS) ⬇️

For example, a real estate brokerage may have $5M in annual revenue and $3M in subcontractors costs per year. This means the company has $2M in 'Real Revenue'

This business needs to operate like a $2M company, not a $5M company, and calculate TAPS accordingly.

This is why you need to calculate your “Real Revenue” first and foremost.

Once you have that number, then you know how much real money you have to distribute to the buckets (profits, taxes, etc)

Here is how you can calculate it, based on your biz type: exigobusiness.com/post/real-reve…

💪 Sweet! You have your 'Real Revenue' and TAPS calculated

Now just some basic things to set up at your bank, and we're almost done....

3️⃣ SET UP 5 MAIN ACCOUNTS IN BANK #1 -

Go to your bank and set up 5 bank accounts:

(1) Real Revenue
(2) Profit
(3) Taxes
(4) Owners Compensation
(5) Operating Expense

This is the main business bank where money flows into/out of from your business operations.

4️⃣ SET UP 2 "HOLD" ACCOUNTS IN BANK #2 -

(1) Profit HOLD
(2) Tax HOLD

Money is transferred to this 2nd bank at the end of the month. Out of sight, out of mind.

You cannot touch this money for your daily business. It's accessed only at the end of the year.

By doing this allocation to bank #2, you now know that you are already fully saved up for profit and taxes before ANYTHING else.

That's a huge weight off your chest, and now any money remaining is just for business use.

Makes running a biz a lot simpler.

💪 At this point, you're all set up now and done the hard part

Now on to the easy fun stuff 💰

5️⃣ RUN YOUR % ALLOCATIONS -

Every 2 weeks, do this:

✔️Calculate Real Revenue
✔️Move money from your "Real Revenue" account to each of your account buckets based off your TAPs.
✔️ Move money to your Profit and Tax "HOLD" accounts at Bank #2

That's it.

Example: My TAPS are:

Profit: 10%
Taxes: 10%
Owners Comp: 30%
OpEx: 50%

I run this every other Wednesday into the above buckets. Keeps things tidy and organized.

At the end, I know EXACTLY how much money I have to spend in each category. I just stay within those limits.

✅ WHAT IF YOU DON'T HAVE ENOUGH $$ IN OPEX? -

Here's the key - you can only use what you have in your OpEx account. You are not allowed to “borrow” money from other accounts.

If you don’t have enough in your OpEx account to pay for expenses, cut your expenses.

✅ MY FINDINGS -

Based off calculating my TAPs, turns out that I was underfunding OpEx, which was bottlenecking my growth.

I also had to slightly decrease Owners Compensation.

Instead of making the % shifts at once (which would be a big change), I did it over a few months.

For MaidThis, there were a few things that didn’t fit neatly into the Profit First paradigm (e.g. contractor cash flow and Owners’ Comp/Profits timing).

Figuring out Real Revenue was a bit funky for me bc we mainly use contractors.

Once that was solved, it became very easy.

✅ FINDING MY EXCESS CASH -

After 5 months of doing this, turns out I have a decent amount in excess cash in my OpEx account.

On average, I could have been spending $5-6K more per month on the business and still been in line with my TAPs (aka I was underfunding the company)

A side benefit of setting this up: I changed up my bank to create my 5 main accounts and got a new credit card. I had to re-link all of my recurring expenses to my new CC, so I evaluated all of my recurring costs and identified a few unnecessary services, which I cut.

Based on the excess OpEx fund, I’m making more investments into the company to get us to the next level. The changes I’ve already made based on the “newfound” OpEx cash:

✔️Stepped up the internal hiring
✔️ Re-designed our website
✔️ Allocated more money to marketing channels

I actually get excited for every other Wednesday when I make the PF allocations....it helps me feel organized and know what I have to spend to help the company grow.

I’m sure I could create a fancy Excel spreadsheet to properly allocate % of my OpEx budget to marketing, overhead, etc....but the reality is that even if I created that, I probably wouldn’t keep it updated or use it.

Therefore I’m loving the simplicity of the PF system.

I just log into my bank account, look at my OpEx account and can say “Ok sweet so I have X more I’m able to spend”. That’s it. I know that the number is accurate and I’ve already taken care of myself for Profit, Taxes, Owners Comp, etc.

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If you or someone you know is looking to start a work-from-anywhere local business, shoot me a DM or check out:

maidthisfranchise.com

Side hustlers welcome :)

Franchisees have access to all our systems (like Profit First) and way more 😎