It was right after all the Christmas cheer of 2018. I was enjoying a movie with my wife when I got the call that would change my life. It was my mom. She had called to ask us to come over in the next few days and talk about her longarm quilting business. I was not prepared for what happened when we arrived at her house.
We walked in, and she dropped a bombshell. She said, “I can’t do this anymore. I don’t have any money and owe tens of thousands of dollars in taxes. I want out. What do I do?” And that is when the floodgates broke. Tears flowed. Tears of stress, of frustration, of fear, of anger.
To make a long story short, we talked through what happened and explored all the options available to her. We decided that the best course of action was not to close the business but to have me get more involved in the business. But it wasn’t all butterflies and rainbows, not even close.
The Beginning
For a full year, we did what all the experts said to do. We kept the books updated, reviewed reports, and reconciled accounts. But we still had not made any real progress in getting out of our hole.
After that first year, my mom asked why we would owe taxes if we didn’t have any money. That’s when it clicked–we needed a cash management system.
In my search for a good cash management system, a good friend told me about a book called Profit Firstby Mike Michalowizc. I read it and knew this was the system we needed. Within days of finishing the book, we opened the additional accounts, redirected our customer payments to be deposited into the income account, and got the bills coming out of the appropriate accounts.
The Results
Within 18 months, making less than $200,000 annually, we had paid off over $50,000 of debt and saved $10,000. The business was debt-free for the first time since it began. It wasn’t easy. But we were desperate and sick and tired of having our money tell us where it was going each month instead of us telling it where it was going.
We stayed true to the four principles of Profit First.
The Four Principles
Dieting is the easiest way to explain these four principles. So, the first principle is to use smaller plates. Research shows that when we use smaller plates, we generally eat less because there is less plate area on which to pile food. When you have a smaller plate, it will start a chain reaction. You will eat smaller portions, which means fewer calories, which leads to losing weight.
The second principle is to serve sequentially. Eating your vegetables first will give you better nutrients and satisfy your hunger. Then, when the less healthy food comes, you will eat less because you're already full.
The third principle is to remove temptation. Remove junk food from your house. People always go with what is easier and tastier.
The fourth and last principle is to enforce a rhythm. Waiting until you're hungry is bad because you are more likely to binge and eat too much. If you eat at regular intervals and before you're hungry, you will likely consume fewer calories.
So, how does this apply to your business?
When most businesses start, they go to the bank and get a checking account and sometimes a savings account, which they don’t usually do anything with. In other words, you get one big plate that has all of your money piled on it.
#1 - Small Plates
But when you use smaller plates or multiple accounts and start to spread that money across the accounts, you have less in your operating account and will naturally spend less or at least start to question your purchases more often.
#2 - Serve Sequentially
Just like you should serve and eat your vegetables first in life, in business, using the Profit First system, you serve or set aside your profits to help ensure you have a healthy store.
#3 - Remove Temptation
You remove your savings for profits and taxes, so you are not tempted to spend that money. You want to be like a squirrel and start hiding your money from yourself for your future self.
#4 - Enforce a Rhythm
We are creatures of habit. We do not like change. So, use that instinct to your advantage, and in a regular cadence, you allocate the money you receive from sales into the various accounts.
These four principles make the foundation of the Profit First cash management system.
Trust the System
We followed these principles and were able to turn things around in our shop. It was not complicated, but it also was not easy. It took patience, discipline, and some sacrifice. But it has totally been worth it. We continue to follow these principles to guide our financial decisions today.
It has been proven to work, but it is different, and change is hard. Commit now, trust the process, and prove it to yourself.
Start with One Account
Open just one new bank account and name it your PROFIT account, which is your emergency fund. Make it a checking account. I recommend opening a free account that has no minimum balance requirement. Relay Financial is the official banking platform of Profit First. My affiliate link is in the description below. I personally use them and love them.
Transfer 1%
Once that account is open, transfer one percent of the current money in your bank account to the new PROFIT account. Don’t touch it. Let it sit.
Every week for three months, transfer one percent of the money you collect into your PROFIT account.
The Recap
The four cash flow principles are to use smaller plates or more than one bank account; serve your profits first, then your operations; remove any temptation to borrow from your future because that is just stealing; and enforce a rhythm in your business–sporadic spending and binging are not healthy for you or your business.
Tell me in the comments below or email me at jacob@curtisaccountingsolutions.comwhen you open your PROFIT account and have transferred one percent into the account.
If you need help with this and piecing together financial freedom, please schedule a call with me by clicking the link below.
www.curtisaccountingsolutions.com
Here is my Relay affiliate link:
