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 business, a 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 it anymore. I don’t have any money and I owe tens of thousands of dollars in taxes. I want out. What do I do?” And that is when the flood gates broke. Tears flowed. Tears of stress, of frustration, of fear, and 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.
For a full year, we did what all the experts say to do. We kept the book updated, reviewed reports, reconciled accounts, but we still had not made any real progress of getting out of the hole we were in.
After that first year, my mom asked why we would owe if we don’t have any money and that’s when it clicked–we needed a cash management system. Within a few weeks I discovered Profit First and we began the implementation. We went to the bank and opened our accounts, we got all the customer payments to be deposited into the income account and got the bills coming out of the right accounts.
Within 18 months, making less than $200,000, 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. But 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 is was going.
We stayed true to the four principles of Profit First.
Dieting is the easiest way to explain these four principles. So, the first principle is 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. If you eat your vegetables first, you’ll get better nutrients that will satisfy your hunger. Then when the less healthy food comes, you will eat less because you're already full.
Principle #3 is Remove Temptation. Remove junk food from your house. People are always swayed to what's easier and tastier.
And the fourth and last principle is Enforce a Rhythm. Waiting till you're hungry to eat is bad because you will binge. If you eat more regularly and before you're hungry, then you will consume fewer calories.
Applying the 4 Principles
So how does this apply to your business. Most businesses when they start go to the bank and get a checking account and sometimes a savings account (which we don’t usually do anything with). We get one big plate that has all of our money piled on it. But when we use smaller plates or multiple accounts and start to spread that money across the accounts, we have less in our operating account and will naturally spend less (or at least start to question our purchases more often).
By prioritizing our bills, or serving sequentially the most important and impactful expenses first, we will have less money available to spend on the non-essential items.
We remove our savings for taxes and profits, so that we are not tempted to spend that money. We want to be like squirrels and start hiding our money from ourselves.
And finally, we are creatures of habit. We do not like change. So, we use that instinct to our advantage and in a regular cadence we squirrel away the money we received into their appropriate accounts.
These four principles make the foundation of the Profit First cash management system and is how were able to do things around the shop. It was not complicated, but it also was not easy. It took patience and discipline. But it has totally been worth it. We continue to use these principles to guide our financial decisions today.
Jumping into this profit first system is hard, but here are your first steps.
Trust the process. It has been proven to work, but it is different and change is hard. But commit now, trust the process and prove it to yourself.
Open just one new bank account for your Profit (your emergency fund). Make it a checking account. I recommend opening a free account that has no minimum balance requirement, like Relay Financial. I personally use them and love them. PS - they are also the official bank of Profit First.
Lastly, transfer 1% of the current money in your bank account to the new PROFIT account. Don’t touch it. Let it sit.
The four secret principles to avoid losing your cash are to use smaller plates (more than one bank account), serve your expenses sequentially (including your emergency fund), remove any temptation to borrow from your future, because that is really just stealing; and enforce a rhythm in your business. Sporadic spending and binging is not healthy for you and it is not healthy for your business.