17. How a Profit First Mindset Can Transform Your Business

One common mistake I see with business owners who want to make more profit is that they are putting profit last. Profit is what happens to them after all their expenses are paid.

But sustainable project requires a Profit First mindset. In this week's podcast, I'm talking about how a Profit First mindset can transform your business. 

A profit last mindset is a sure way to unending hustle, burnout and poor or inconsistent profitss. Instead, adopt a Profit First mindset and get off the hustle and burnout bus and start making more money.

Tune in and learn:

• What Profit First is and what isn't
• The 4 core principles behind Profit First
• How to start implementing Profit First today.

Mentioned in this episode:

• Get your free guide to 10 Ways to Improve Your Cash Flow
• Get your free guide to 3 Reasons You Aren't Making More Profit  (and How to Fix It)
• Continue the conversation and book a free call

For the full show notes, including the transcript, go to www.carlamoats.com/podcast/episode17




This episode was produced by The Podcast Teacher.

DISCLAIMER: The information in this podcast is for informational purposes only and does not constitute an accountant-client relationship. While we use reasonable efforts to furnish accurate and up-to-date information, we assume no liability or responsibility for any errors, omissions or regulatory updates.

Transcript

Hello, and welcome back to the Purposeful Profit Podcast. I'm your host, Carla Moats. This week, we are talking about adopting a “profit-first” mindset in your business. Unfortunately, too many entrepreneurs have a profit-last mindset. But if you are ready to quit bleeding money in your business by going from a profit-last mindset to a profit-first mindset, today's episode is for you. 

So, Profit First is a strategic financial management system. It was popularized by Mike Mokolowitz in his book Profit First, and just an interesting note here, is Mike is a fellow Virginia Tech Hokie. We were both there, our time overlapped briefly, so we might have even sat in on classes together and did not even know it. 

Today, I'm gonna talk to you about what the Profit First mindset is and what it isn't. I'm gonna talk to you about the 4 core principles of the Profit First approach. And then we will talk a little bit about getting started with Profit First, if you're ready to try and implement that and go from a profit-last mindset to a profit-first mindset, I will help you get started on that today. Alright. So let's go ahead and dive in. 

What a profit-first mindset isn't. So profit first does not mean we are prioritizing profit over all else. It doesn't mean Profit First has to be the end all, be all. It doesn't mean that maximizing every single profit dollar has to be your goal. It's also not about cutting expenses and crippling your business. It's not about stripping your business bare. It's also not about massive change. We'll talk a little bit later about the 1% improvement, but it's not about making massive changes in your business. It's also not about change for the sake of change. We're not implementing this just to say we did it or just to make change for the sake of change. Change we're gonna make is gonna be very intentional; it's gonna have a purpose behind it. 

It's not another name for hustle culture. In fact, it will help end the perpetual hustler burnout that so many of us entrepreneurs find ourselves on as we're on that, you know, hamster wheel trying to constantly chase another revenue dollar, another sales dollar. It also doesn't mean your goals are set in stone. One of the things about Profit First is it's very flexible. You always own the decisions about what your profit's gonna be, you're gonna set goals based on where your business is at, the maturity of your business, your industry and markets, and your own personal business as well as personal goals. 

Another thing I wanna put out there is it's not an excuse or a way to avoid understanding your conventional financial statements or the numbers in your business. Yes. Profit First gives you a methodology to pretty much guarantee if you follow it properly, you'll make a profit. But I do not believe that it is a complete Panacea or quick solution to not knowing your numbers, not being able to understand your financial statements. I still think that's an important part of being a business owner. And it's also not about “implement and be done.” Doesn't mean that I implement profit first and now I can just kind of rid my hands of anything financially related. It doesn't mean I implement it and then I never look at it again. 

So if those are all the things that Profit First isn't, let's talk about what Profit First really is. The profit-first mindset is about focusing on profit over revenue and expenses. It's literally putting profit first rather than last, just the way conventional and GAAP accounting does. So the conventional GAAP accounting statement is revenue minus expenses equals profit. And we're flipping that equation with profit first, and we're saying it's revenue minus profit equals expenses. We're gonna define profit upfront, and what's left is what our expense bucket's gonna be. 

The Profit First mindset is also budgeting with intention. We're gonna create spending plans. We're gonna rein in out of control spending. We're gonna quit spending money blindly. We're going to quit spending money totally based on our gut. We're going to decide ahead of time how we're gonna allocate our financial resources. One of the most important decisions you make as a small business owner, is we all have financial resources, (I mean, unless we're, like, Bill Gates or somebody), we don't have an infinite amount of financial resources. And the decisions we make about how we allocate those financial resources is one of the most important decisions we make as business owners. 

Profit First is also gonna allow you to scale profitably and build a sustainably profitable business. If done correctly and properly, basically, Profit First guarantees that you can make a profit. Doesn't necessarily mean it's easy, but it will guarantee it. So if you follow the program, you're guaranteed to scale profitably, And you're guaranteed to build a sustainably profitable business. 

The profit-first mindset also focuses you on operational efficiency and continual improvement rather than hustle. I talked earlier about the hamster wheel where we're constantly chasing our new revenue. As we just get on this wheel, it goes round and round and round in circles, and we can never really get there. Same thing with sales. We're living for sale to sale. It's going to put an end to that. And when you focus on operational efficiency and continual improvement, you're also gonna find that that breeds creativity into your business.

Another thing it's gonna do is you're gonna pay yourself more by ensuring you pay yourself first. As a business owner, your cut of your business is really made of 2 things. One is your owner's pay, which is what you're paying yourself for your work in the business. And there's also profit. You're taking a profit distribution. So any type of CEO out there I wasn't a CEO, but when I worked in corporate, I had a healthy bonus distribution every year. It was based on whether I had met my personal objectives, but it was also typically a formula that was tied to the business's overall profitability. And as a business owner, that's basically what your profit distribution is. You're basically taking a distribution out of your profits to reward you for meeting those profit targets. 

Profit first mindset also reduces risk in your business, allows you to build up reserves. The money that you're not distributing to yourself in terms of profit, you can reinvest in your business. You can use it to set up an emergency reserve. But overall, basically, Profit First is reducing your risk because, again, you're becoming more intentional. You know where your money's going. You're making more intentional decisions. 

I said earlier, we would talk about the power of the 1% improvement. Another thing that Profit First does is it really harnesses the power of the 1% improvement. It's not about massive change. So if your profit today is…let's just say today your profit's 5% and you want it to be 15%, we're not gonna go from 5% to 15% in 1 quarter, 1 month, maybe even in 1 year. Okay? We're gonna make small changes. But if you improve by just 1% every day for a year. At the end of that year, you will have improved by almost 38 times your baseline. 38 times. So, really, the power of the 1% improvement is really about the power of small incremental change. And that's what we're gonna do with Profit First. I said earlier, we're not gonna your business bare. We're not gonna break the back of your business, particularly if you're not a brand-new business. You've already built a business that's basically, you know, using expenses at a certain rate. We're not gonna go in and just strip it all away tomorrow. We're gonna make small incremental changes. We're gonna go maybe from 5% to 6%, And maybe from 6 then to 7. And we're gonna do this over the space of a year, 2 years, maybe even 3 years.

One of the most important things Profit First does is it fosters behavioral change that permeates all areas of your business. You start thinking more strategically, start thinking more intentionally with your money. There's a book out there that if you haven't read it, I highly recommend it, it's called Atomic Habits by James Clear. One of the things he talks about is how change in your identity It's really where real change comes from. And that's what Profit First allows you to do. It allows you to start identifying as somebody who puts profit first, who makes profit intentional. And when you do that and when you change your identity, that's where real substantial behavioral change comes from.

I'm also of the belief that a Profit First mindset goes beyond implementing Profit First. This is why I said it's not just, you know, implement it and clear my hands of it. Profit first mindset is really a way of looking at managing your business so that you're putting profit at the forefront more so than revenue and expenses. That doesn't mean revenue is not important. I've gone on the record in a few other episodes and said I'm not a revenue hater. I don't want people to think I'm a revenue hater. It's just that revenue gets a lot of love, And I'm out there to equalize it a little bit. If you go out into the business coaching space, into the small business space, there is no shortage of people out there showing revenue some love. There are not nearly as many people out there trying to show profit some love, and that's what I'm trying to do here is really to show your profit a little bit more love. 

This isn't just about implementing Profit First and saying, oh, well, I've implemented it and, you know, go on my merry way. Okay? It's really about building that identity that I'm somebody who puts profit as a priority in my business. But part of the profit-first mindset comes from Implementing Profit First. Now you don't have to implement it Profit First. If you haven't got it, by the way, again, the book is Profit First. It's a very, very popular book out there. You can grab it on Amazon. Again, it's written by Mike Michalowicz, and it is kind of the bible of the system. And you can, obviously you know, you can implement it. I use it in my business, but I do use a slightly modified version of it. I'll talk a little bit about that as we go on. You do not have to implement Profit First to adopt your Profit First mindset. There are other ways to do it. In my case, I started with just developing an intentional profit goal. Implementing Profit First came later. But implementing Profit First is a quick way to really start building and start moving from that Profit Last mindset to the Profit First mindset. 

So Profit First really has 4 core principles. The first principle is you're gonna divvy up the pie. This is being recorded in September 2023. So, you know, we're coming into the fall season, pumpkin spice latte and everything's out there. So think about pumpkin pie. It's probably one of my favorite kinds Fall foods. The pie comes out of the oven, and do you divvy up the pie first into 8 equal slices, or do you take a slice? You know, when you're hungry, you go cut up a slice. Well, the science behind this says that when I divvy up the pie upfront, I'm likely to eat less pie overall versus going and just cutting a slice. It's the whole thing, you know, my eyes are bigger than my stomach. So we're gonna take that pie and we're gonna split it up into pieces to start with. So if you think of that pie as all the income that comes into your business, your revenue. You're gonna split that pie between owner's comp, taxes, profit, and OpEx. So ahead of time, we're gonna slice them up and they won't all be the same.

So first we're gonna figure out, you know, how much profit we wanna have, how much taxes we wanna have? How much owner's comp? The very last slice in the pie is gonna be the operating expense pie. And then you're gonna serve things sequentially. Once you've sliced up that pie, you're going to make Profit First. You're gonna take your profit first. You're literally if I get $1,000 in, and let's just say your profit, Your allocation is 30%. Okay. I get a $1,000 in. I'm gonna take $300 off that pie to start with, and it's gonna go on a separate account. You're always gonna allocate money to the appropriate accounts before you spend the money. Okay? So the profit last mentality says that $1,000 comes in and I can have a bill that comes in for $500, and I just pay it. That's not the way it works anymore. That $1,000 piece of revenue is getting split into all these different pies. And let's just say I end up with $300 of it is my OpEx pie. Okay? I'm paying my operating expenses out of that OpEx pie. So, again, I'm paying all my expenses out of that smaller piece of the pie. 

The third principle is you're gonna remove temptation. You're gonna set your profit and tax money aside in an account where you're not attempted to dip into it. I'll be honest. I have a few different thoughts on this one. I have a lot of training in mindset management and basically how to manage urges. I came from a weight loss coaching background where we learned to manage urges. And to me, the urge to dip into my profit or my tax money is nothing more than - it's just like an urge to eat an Oreo or whatever. And I have tools to learn how to manage that, So it's not really an issue for me. But for some people, what Profit First officially advises is that you put your profit and your tax money in an account that's not at your regular bank. Where you don't have a debit card, you don't have checks where you basically create obstacles to go in and borrow from yourself and take money out of the account.

When I'm working with somebody, we'll talk about this a lot, knowing your own mindset, knowing your own tendencies. For some of you, it might be good to put it in a completely separate account, or put in a high-interest account. For other people, in my case, my, tax and profit account, they sit at the same bank as all my other accounts. I put them in a separate account, and I never have any issue of wanting to pull the money out. But if you are in a business that's having maybe a lot of cash flow issues right now, maybe it is good to set it aside, but it's also really important if you're constantly wanting to dip into this money or find yourself dipping into this money, then the other thing to do is we have to go back and ask ourselves, did we make too much change too fast? Because, again, we don't wanna break the business. If you're putting money in your profit and tax and you're immediately needing, or feeling a need to go pull that money back in, then you've probably set too aggressive targets for your percentages, and the percentages probably need to be revisited. 

Then, the 4th principle is we're gonna enforce a rhythm. So what Profit First advocates officially is that you're gonna do your allocations twice a month on the 10th and the 25th. Again, this is one I don't really strictly adhere to. I think a lot of this has to do with how much volume do you have, how complicated is your business? If you are a typical coach who is handling 5 or 20 clients doing a 1 on 1 business, I don't think you necessarily need to do it twice a month. If you are a coach though, that's in a high volume business, that's maybe selling courses, you're doing a launch, that's getting 100 people, maybe you have a membership, Been doing it more often probably makes more sense. 

Me personally, I'm doing my allocations once a month. So I find that serves my purpose. I'm typically not getting money in every single day. I have a small group of CFO clients, small group of coaching clients. My CFO clients pay me once a month on the same day every month. My coaching income's a little more sporadic. I find it doing once a month is adequate. But, again, really depends on a number of factors that as you're implementing Profit First, if this is something I'm working with you on, these are things we'll definitely discuss is exactly how many obstacles do we need to put so that you're not tempted to take your profit and tax money? Are we making sure that your allocation percentages are reasonable for where you're at in your business right now? And really, how often? What kind of volume do you have? What makes sense in terms of when you're doing your allocations? 

So again, those are your 4 basic principles of profit first. Divvy up the pie, Then serve yourself sequentially. Take that profit first. Expenses is the last bucket. Remove all your temptations so that you're not cheating on yourself or borrowing from yourself. And then enforce a rhythm. Make sure that you're doing your allocations on a frequency that makes sense in your business. So what if you're ready to adopt a profit-first mindset? I think implementing the profit first system is a very good way to accelerate your movement to go from profit last to profit first. 

First, go grab the book, grab it on Amazon. If you have questions about where to find the book or anything, you can drop me a line or I'll put some in the show notes, maybe a link over to Amazon. But the first step you have to do, and he talks about this in the book, is you have to assess the current health of your business. So I'm happy to help you do that. If you wanna schedule a call at www.carlamoats.com/workwithme,  I will help you fill out Your Profit First instant assessment form in the book, you will find an example form. I will help you fill that out. We'll look at where you're at now and where you want to go. 

The one thing is if you are doing this on your own and you're using the book, take the percentages that are in the book with a grain of salt. I think the book, when it was originally written, was really more focused on product-based or manufacturing-type businesses. Actually, some of the profit margins are quite low, particularly if you're in a service-based business. He has a chart for how high your revenue is, how long you've been around, I think, and what your profit margin should be. And I find a lot of those profit margins are actually quite low. 

So that's one of the things that if you schedule a session with me, we'll look more specifically at your business. Service businesses tend to be higher profit margin. And again, I think a lot of his book, While he doesn't explicitly say it based on other examples I see in the book, I think it's more targeted to product businesses. Service-based businesses, just take some of those profit margins with a grain of salt. 

So if you're scheduling your meeting with me, again, www.carlamoats.com/workwithme, we'll put together that profit first instant assessment, and then we'll use that to put together your purposeful profit strategy. I will basically help you come up with what your target allocations are. Your target allocations are where you want to be in the future. Where I said earlier, let's just say you're at 5% now and you wanna get to 15. 5 is where you're currently at. 15 is your long-term target. We're not going from 5 to 15 tomorrow. So part of what we'll do in this call is we will try and figure out together what is a realistic short-term goal for you. 

And so, again, if you are ready to quit bleeding money in your business, put more money in your pocket, go from profit last to profit first, Then please go www.carlamoats.com/workwithme. We will put profit at the forefront of your decisions you make, and you will start planning strategically rather than spending blindly, you will get to know that every month, you'll have a predetermined profit, and you'll be able to start paying yourself a bonus just like the big time CEOs get. 

Alright. Thanks for joining me this week, and I will see you next week.