Profit First Summary Chapter 9: Advanced Techniques

Do this now:

Open your calendar and in six months from now set a reminder to return to this and put into place at least one of the following advanced Profit First strategies.

You can read the information now, but do not do them until you have at least two quarters running basic Profit First principles first.

Depending on your business, consider making some or all of the following account types in order to better organize your cash flow.

Income Account: All incoming payments go to this account.

The Vault: Save up a three-month reserve in an ultra-low-risk, interest bearing account. Predetermine rules for use of this money so you have a solid plan before any crisis hits.

Stocking Account: For big purchases and to fund stocking parts of your inventory. Use it to chip away at big bills before it happens. For example, if you know you have to buy a 10,000 machine in 10 months, then put away $500 on each accounting day.

Pass-Through Account: For any income you receive that will not be allocated to Profit or Owner’s pay. For example, if you make a purchase for a hotel and are reimbursed by the client. On your accounting days, any money in this account gets transferred to the Operating Expenses account since this is what you used to pay the initial bill.

Materials Account: This account is similar to the Pass-Through account but is only for materials.

Subcontractor/Commission Accounts: Same as the materials account but use it for contractors and commission-based employees.

Employee Payroll Account: Add up gross pay for employees and payroll taxes. The sum of that sits in here until payday.

Major Equipment Account: Similar to the Stocking account but specifically for expensive equipment purchases.

Drip Account: When you receive a lump sum payment for ongoing work, put it in this account and then drip feed the income to the business evenly over the term of the contract.

Petty Cash Account: Allocate a regular amount for small purchases such as gifts and client lunches.

Sales Tax Account: Any sales tax you collect goes here immediately and stays here until you give it to the government.

Once you have set-up all the different accounts your business needs, create a written set of instructions detailing the purpose of each account and the process you follow to allocate money in and out of each one.

Make it easy enough to understand so that if you gave it to any employee they would be able to carry out the instructions.

Additionally, create two tables.

The first is for the bank you use for general business operations. Have three columns. The first has account names, the second is for account numbers, and the third records the balances of each account.

The second table is the same but is for the bank you use to keep money out of reach. The one for Tax, Profit, and Vault accounts.

Do not include grand totals. It will mess with your mind.

Take the sum of the monthly required personal income for all owners and halve it (because you get paid twice a month.)

Now divide that number by the Owner’s Pay percentage.

This is the minimum you need to deposit into the income account every pay period.

Adapting Pareto’s Principle (the 80/20 rule), 20% of your clients account for 80% of your revenue.

Likewise, 80% of your profits come from 20% of your offerings (goods and/or services.)

Narrow in on your best clients (the 20%) who buy your most profitable products and serve them in the very best ways you can. They are your golden geese!

For everyone else, find ways where you can elevate them to your more profitable offerings. If you can’t, get rid of them.

Greg Crabtree says, if you are in the tech industry, then your real revenue must be two-and-a-half times the total labor cost.

For those in a “cheap labor” field, such as fast food, the Real Revenue cost must be four times your total labor cost.

Here are a few things you can do that take little time to implement.

Change the name of your Tax account to Government’s Money so you are less likely to “steal” from it.

In your online banking platform, hide all accounts apart from the Operating Expenses account. This prevents you from considering these other accounts when making spending decisions.

Set up automatic transfers from all external income accounts, such as Paypal and Stripe, into your Income Account. This prevents you from seeing the balance in these external accounts as extra money. Keep minimum amounts needed to avoid fees.

To get an acute sense of your cash flow, have your bank send you balance notifications for your Income account and Operating Expenses account four times a month—on your accounting days and several days after those accounting days once all payments are settled. Also get a daily notification for the balance of your petty cash account.

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