Is your agency profit where it should be? (Hint: net profit should be at least 30%) Are you constantly struggling with cash flow? Do you always pay yourself last, or not at all? Solve all these problems and actually enjoy running your business again when you apply the principle of Profit First.
In this episode, we’ll cover:
- What agencies are doing wrong with their cash flow.
- Why we should put agency profit first.
- 3 basic steps of putting agency profit first.
We’ve got a repeat guest today, Mike Michalowicz who is an entrepreneur and the author of six business growth books. I had him on the show previously talking about his book Clockwork: Design Your Business to Run Itself. Then recently, we used his Profit First theory as a workshop in our Agency Mastermind and I knew I had to get him on the show again.
Mike got his start as an entrepreneur who was very successful very early in his career. His early success led him to other investment opportunities which left him feeling unstoppable and invincible. He had multiple homes and expensive vehicles… but, in hindsight, his own ego and arrogance got in the way.
He says he never had a real pulse on his business finances and little care to know any details his accountant shared with him. So, in 2008 he had no idea his businesses were failing until his accountant called to tell him it was time to declare bankruptcy. Within a month he and his family if five lost their cars and homes. After a couple years of feeling sad, sorry, and insignificant Mike decided to become an author writing about his experienced with a new goal to eradicate entrepreneurial poverty.
What Agencies Are Doing Wrong With Their Cashflow
Typically, agencies (and for that matter, all businesses) are doing a bank balance accounting method. Your accountant tells you to look at income statements, P&L statements, balance sheets, etc. which can get mind-numbingly boring. And all you care about is the bottom line, right?
That’s because we’re trained to think: Sales (minus) Expenses = Profit
And that “bottom line” is your profit. So that’s where your attention is focused because that’s what matters most.
But Mike challenges us by asking, why is the thing we care most about falling to the bottom of the list. Think about it. Don’t we always put the most important items at the top of our list? It’s backward and wrong that profit is just considered “what’s leftover” after everything else.
Why We Should Put Agency Profit First
Mike’s formula for putting profit first is important because it means you are making money. It’s human nature that the goals we put first are the ones we get done. That’s why so many people work out in the morning. What comes first is what gets done.
Look, as a society, we are always asking other business owners “How big is your business?” and that’s because we care most about revenue. But, you can have a huge business and not be profitable at all. What we should be asking is, “How healthy is your business?”
So many agencies are living check to check. They’re most concerned with top-line revenue instead of profitability. But when you get into a situation where you can’t pay vendors or worse, can’t pay your employees does topline revenue even matter? No.
Putting profit first flips the formula: Sales (minus) Profit = Expenses
3 Basic Steps of Putting Agency Profit First
I know what you’re thinking and it’s a little more than just pulling profit out first.
1. Stop making excuses and give it a shot.
We know it’s difficult to get on board with trying something new. We’re all are used to handling our business accounting the way we’ve always done it. And so Mike says there are 3 general excuses people give for why they can’t implement Profit First.
- “My business isn’t profitable so this will never work.” ~ Yes, it’s not profitable because you’re using the old method. You can do this and you can be profitable if you get rid of your own head trash.
- “My bank will charge me fees for opening 5 different accounts.” ~ Look, your bank is your vendor and they should want to help you do what you need to do to be profitable. Explain what you’re doing and why. If they are adamant about charging fees, then change banks. Yes, it’s a real pain to do that and it will take 1/2-day of your time making the switch. But in the end, it’s your profitability worth it?
- “My accountant won’t go for it.” ~ A lot of accountants are set in their ways, but you’re the client. Explain why you want to do things this way. If they can’t get on board, ask them what percentage of their clients are profitable using the old-school accounting method 🙂 If you really can’t get your accountant onboard, check out Mike’s resource of Profit First trained accountants.
2. Open multiple bank accounts and segment your money.
Most business owners are habitual bank balance checkers. Admit it, you’re checking at least daily, maybe even hourly. So in Mike’s book, he spells out his process which includes opening 5 different accounts all dedicated to different things (profit, taxes, etc.) That way, as you check the balance of your accounts you know that bucket of money is earmarked for a specific use and not looking at one lump sum.
3. Start slow and ease yourself into the discipline of profit first.
It’s hard to undo the way we’ve always looked at business accounting. So, don’t expect that you’ll be able to pull out 30% profit right off the bat. At first, the goal is to break old habits so start by pulling 1-2% profit from every check that comes in. It’s like someone who decides to run a marathon, they train by starting slow and building up to the marathon.
For example, if you receive a $1,000 payment and you put 1% of that into a separate account for profit, that’s just $10. If you can pay your expenses and run your business on $1,000 surely you can run it on $990 and you won’t even miss that $10. Start slow and build that “profit muscle.”
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