I remember how mentally, physically, and emotionally exhausting it was to put in all of this effort into my business without really having the reward of knowing how much money I was actually making.
I thought I was supposed to pay myself as little as possible because, truthfully, I thought it was all about revenue.
I was wrong.
That’s why I was thrilled when I had the opportunity to have Mike Michalowicz join me on the IHML Show. He just has so much wisdom to offer entrepreneurs like you.
(You can hear all about his journey from entrepreneur to author, including the bankruptcy– and piggy bank– that planted the seed for change in his life by listening to the episode here.)
Mike isn’t someone who just lets life happen to him, even when faced with adversity. After facing the hardships of a hard fall into bankruptcy, Mike decided to learn from his experiences and let them lead him toward his true calling of being an author.
His books have allowed him to fully step into his mission of helping entrepreneurs avoid entrepreneurial poverty and, instead, run successful businesses.
Maybe you’ve read one.
He’s the man behind books like The Toiletpaper Entrepreneur, The Pumpkin Plan, Profit First, and Clockwork.
Mike believes there is a fundamental flaw in how most entrepreneurs view profits, getting too easily caught up in the grind mentality. So, when I had him on the show, we spent a lot of time talking about his Profit First method, a behavioral approach to cash management.
It’s exhausting waiting until the end of the year to find out if you *maybe* reached your profit goals, right? With the Profit First method, you don’t have to.
So, I want to outline the first steps you can take to begin implementing Profit First in your business ASAP.
It begins with a change in the formula.
The Profit First method literally puts profit first:
Sales – Expenses = Profits
Sales – Profits = Expenses
This means that every time the business receives a profit, a predetermined percentage (whatever it is) is allocated to the profit account. The remaining funds are used to run to business.
Step 1. Set up your 5️⃣ foundational accounts.
These five accounts will help you build strong habits around properly distributing profit and revenue from sales so you can manage your expenses and feel the satisfaction of receiving profits for your hard work.
- Income. (This is all of the money that comes in)
- Profit. (This rewards shareholders, like business owners and investors)
- Owner’s Pay. (This is your salary)
- Tax. (This helps save for one of the most significant expenses of the biz)
- Operating Expenses. (Use this for all other operating expenses)
Step 2. Determine the percentages you will allocate to each account.
Determining the percentage of the income you will allocate to each of the five accounts will give you immediate clarity when you log onto your bank account. You’ll know exactly how much money is available and for what purpose.
Maybe you want a 10% profit and 30% salary. If so, those become those percentages and auto allocation amounts. Regardless of what they are, determining those percentages will help you realize that $10,000 of revenue does not mean you have $10,000 to spend.
Step 3. Follow the 10/25 rule for allocation.
Maybe you check your bank account daily to watch as your income builds. Great. At a minimum, you want to be sure to log into your account twice a month (the 10th and the 25th) to allocate the income into the four other accounts based on the predetermined percentages. This will help you manage your expenses, such as your bills, by ensuring money is there when they need to be paid.
BONUS! And for those of you who are worried about debt (btw, you can choose not to worry about it but that’s another conversation for a money mindset episode), you can make it a priority to pay it off with your profits (like 95-99% of it).
Do you have to adhere to this strictly? Not necessarily. Maybe you make your allocations every week, or whatever works best for you. The whole point is to establish good habits and a rhythm for allocation. This is going to help you understand your average income and profits.
In other words, you’ll gain more confidence and control over your finances.
Here’s to taking back the power and bringing in those profits! 🤑
P.S. Don’t miss my episode with one of Mike’s incredible business partners, Adrienne Dorison, where we discuss all the things regarding how to run your business like clockwork, so you can confidently step away (vacation, anyone?) without worrying about all the things. Listen to the episode here.