Today, I will show you the steps to take in your Profit First journey after you have used the instant assessment to calculate your current allocation percentages and know your target allocation percentages. If you haven’t done that, please see my other blogs and resources on how to get that done.
Now that you have decided to use the Profit First system in your quilt shop, you need to tell your bookkeeper. Why? Because you need their support. If your bookkeeper is not on board, your implementation and use of Profit First will probably not be successful. You need to get your bookkeeper on board. Ask them to read the book cover-to-cover so that they can learn and understand the system and help support you.
If they are unwilling to support you with Profit First 100 percent, you need to find a new bookkeeper, like me. My team and I are Certified Profit First Professionals.
The second step you need to take is to set up your checking accounts. You need at least six checking accounts at your primary bank and two other accounts at a separate bank. The six accounts should be nicknamed or labeled INCOME, INVENTORY, PROFIT, OWNERS COMP, TAX, and OPERATING (or Opex). Except for the INCOME account, I recommend including your current and target allocation percentages in the account’s nickname. For example, for your PROFIT account, if you had a current allocation of 1 percent and a target of 5 percent, then you would nickname it “PROFIT 1%, TAP 5%.” This will help you know what percentage to use when allocating or transferring.
If you have a current allocation percentage of zero in one or more accounts, like most of the quilt shops I work with, then use 1 percent as your current allocation percentage.
Remember, your current allocation percentages cannot add up to more than 100 percent. I recommend labeling your OPERATING account last using the remaining current allocation percentage in its nickname.
A quick tip, use your existing checking account as your OPERATING account.
The two other accounts you will nickname PROFIT HOLD and TAX HOLD. Because these accounts hold your money, and the money they hold is only withdrawn quarterly.
You know your current allocation percentages or CAPs, you know your target allocation percentages or TAPs, and you have your accounts created and nicknamed. Now we are making progress!
We need to start slow. We cannot start instantly allocating based on your target percentages, even if your business could do more than your current allocation percentages. We start small to help you get into the habit. Set your current allocations percentages low enough that it will not be detrimental to the business and where there is no excuse not to try it–at least 1 percent in each account. Because if your quilt shop can’t afford to set aside just a few percentage points of your revenue, it’s probably not a business worth pursuing.
Now that your accounts are set up, it’s time to make your initial allocation. When you look at your primary bank and your six accounts, the only account with any money in it is your OPERATING account (except for any minimum balances that may apply). Subtract any outstanding checks and payments you have from that account and transfer the balance to the INCOME account.
Now we are going to do our first allocation. Divide up the money in the INCOME account into all the other accounts (INVENTORY, PROFIT, OWNER’S COMP, TAX, and OPEX) based on the CAPs you set. This is your first-ever “allocation” and will be the only thing you ever do with the INCOME account besides receiving future deposits from sales.
I’ll walk you through an example. Let’s say you have the following current allocation percentages: 50% for INVENTORY, 1% for PROFIT, OWNERS COMP, and TAX accounts each, and the remaining 47% for OPERATING. Now let’s say you have $5,000 in your old primary bank account, which is now your OPERATING account, and you have determined that you have $3,000 in checks and payments waiting to clear. That means you have $2,000 currently available. So, you transfer the $2,000 to the INCOME account. Then you transfer all the money from the INCOME account to the respective accounts based on those percentages. That would be $1000 to INVENTORY, $20 each for the PROFIT, OWNERS COMP, and TAX accounts, and the remaining $940 to the OPERATING account.
As you see the numbers allocated, you will see that while the percentages aren’t pretty, it is obvious that a huge portion of your money is going to expenses. It feels good to know you now have a system and clarity, but the immediate picture is ugly. And that is kind of what we want because, over time, you will be motivated to improve the allocation percentages. You will be motivated to reduce expenses, and perhaps even more important, you will find ways to increase your profitability (through innovations, thinking up new, better, and more efficient operations). This system will make it undeniably clear what money you have and what purpose it is being used for. And with this clarity, you can make much better decisions to improve the health of your quilt shop.
Now that you’ve seen an example, do you have any deposits to make today? If so, tally up the deposits, deposit them into your INCOME account, and immediately distribute the money to all the other accounts. Do this for every deposit going forward. But don’t worry, we will get you into a rhythm shortly to make this process manageable.
Congrats! I am not saying that lightly. You’ve just taken a big step. This is likely the first time in your entire business life that you have deliberately accounted for your profit first. Before anything else, you made sure you addressed your profit, your personal income, and your tax responsibilities. That’s a big deal. And it is a big step to a very, very healthy quilt shop.
Now that you have established your accounts and made your first allocation, we need to get the money from somewhere to fund those accounts. And there are only two ways that can happen: sales or expenses.
Let’s start with sales. We need to update your credit card processor, like Rain Payments, WorldPay, Shopify, or whatever software you use, to deposit your customer payments into the INCOME account. And whatever cash and checks you collect are also being deposited into your INCOME account.
Now, let’s review your expenses. This is especially important if you are currently spending more than 100 percent of your sales. Sales growth can and does happen, but it takes time and won’t happen overnight.
From all the quilt shops and businesses I have met, it is pretty easy for most of them to cut 5 to 10 percent of expenses overnight, such as frivolous costs like unused recurring membership fees, office space, that expensive car that is “justified” because it is an expense, and perhaps even extra staff who aren’t helping your cause much. Cutting unnecessary expenses might bring you some emotional and psychological pain, but it’s much easier than trying to make new sales out of nothing.
You need to run your business based on what you can afford to do today, not what you hope to be able to afford someday. This means that you sometimes have to wait to hire someone or make a high-ticket purchase. When big expenses show up, you sit down and ask yourself, ‘Do we really need this?’ If you determine it would hurt your profits today (which is to say the longevity of your quilt shop), don’t buy it.
I have shared and will share more on cutting expenses in other blogs. But cutting expenses is easier and quicker than conjuring new sales out of nothing. You will learn to use only what you need and not be wasteful. You will pay fairly for what you use but will use less. And you are going to love it.
The next step is to get into a rhythm. I recommend that the day you process payroll, you do your allocations first, process payroll, pay any bills, review any pending inventory orders, cancel old orders, and place new orders. The key here is to do all of this on one day. Do not spread it over multiple days. The day you allocate money to your accounts is the day that you pay your employees and bills and make new orders. Doing all this on the same day frees up your mind between allocation days to focus on other important tasks.
And finally, once a quarter, pay your profit distribution and estimated taxes and adjust your current allocation percentages.
Using Profit First saved our quilt shop. If you stick to Profit First, it can help you too. Click the link in the description below to download the free step-by-step process of starting Profit First.
On May 17th, I will be hosting a virtual webinar on Profit First. I would love to see you there, so please click the link below to register.