You’re busy and your revenues look good, but you don’t have as much leftover at the end of the year as you would like. 

This is a cash flow problem and there’s no other industry quite like the construction space where having a firm handle on your cash flow is as essential.

If this rings true for you, the Profit First approach to cash flow management and building a consistently profitable business might be right for you. The best thing about it? It’s easy because it works with human psychology rather than against your natural instincts and preferences. 

We know that implementing a whole new system of cash management can feel daunting. That’s why we’ve come up with 3 simple steps you can take this summer to begin exploring the Profit First system to see if it’s right for you.

Step 1

➡️ Open a separate bank account and name it ‘Tax Account’. 

A lot of business owners determine their cash flow by checking their bank balance. A bank balance is not an accurate picture of your business’ cash flow situation.  

Rather than force you to generate cash flow statements (and learn how to read them), the Profit First system has you allocate your cash into different bank accounts. This is a simple way to ensure you don’t overspend and put your business in a cash flow crunch.  

The Profit First system recommends several bank accounts, but this summer we challenge you to open just one account: the tax account.  

Most of the large banks in Canada offer the option of opening a second savings account at no extra charge. Some even allow you to create a nickname for that account.  

Action Step: Once you’ve opened your account and named it, set aside one day per month where you transfer 1% of your monthly revenues into that account. 

 

✅ Step 1 done!

 

Note: if your bank doesn’t offer a free second account, you can explore banks that do, or skip this step and move on to step 2. Don’t give up yet!

Step 2

➡️ Read the first 2 chapters of the Profit First book

Knowledge is power and learning more about the Profit First system is a great first step. 

Action Step: Download the first 2 chapters here for free and read them by the end of the summer. 

✅ Step 2 done!

Step 3

➡️ Get your Profit Blueprint

The Profit Blueprint is a free assessment we offer to identify where your business stands financially and creates a plan to help you get started on your Profit First journey. 

Action Step: Read more about how it works and sign up for your Profit Blueprint this summer. 

✅ Step 3 done!

Often, the hardest part is getting started. We hope this simple list of summer action steps will encourage you to take a little time out of your busy summer to work ON your business, not just in it. 

Have questions? Contact us to book a no-obligation call to discuss your business and cash flow challenges. 

The post Get Started With Profit First: 3 Simple (and Free) Steps You Can Take Now  first appeared on The Rayne Firm.

In it, I defined Profit first as: 

…a simple, yet very effective approach to finances that works with human psychology to create profitable, sustainable businesses. 

Today, let’s dive deeper into what we mean by “human psychology” in the context of your finances.

Parkinson’s Law

This is the psychological principle that underlies Profit First. To understand it, let’s talk toothpaste. 

Mike Michaelowicz, the author of Profit First, uses an analogy to explain Parkinson’s Law. It goes something like this:

When you first buy a tube of toothpaste, you squeeze out great globs from the full tube, often losing half of it down the drain. This doesn’t worry you too much, because there’s lots more where that came from. 

But as you get nearer to the end of your tube, your habits change. You pinch and squeeze every last bit, getting a full tooth-brushing in with only a fraction of the toothpaste. 

As a mom with as many as 7 kids in the house at any given time, I can tell you I’m really good at rolling up that tube to squeeze out every last drop.

It’s a great analogy because everyone can relate to it. It illustrates the principle behind Parkinson’s Law:

“Work expands to fill the time available to completion” [source]

If my kid has a week to finish his homework, it takes him a week (or more likely, the last day of that week).

You know how it goes. There are a ton of examples from daily life. 

Now let’s show how it connects to your business finances.

The Profit First Formula

The age old accounting formula looks like this:

Sales – Expenses = Profit

We take what we earn, pay our expenses, and the leftover is our profit. Seems pretty straightforward, right?

Well, easy to understand maybe, but for some reason those profits never seem to materialize for many business owners. Recognizing this, Michalowicz reversed the formula to look like this:

Sales – Profit = Expenses

Why?

Mathematically, the result is the same. 

But psychologically, they have very different results. 

To understand this, let’s go back to toothpaste.

Simple Financial Habits for Profit

How do you know how much profit you have?

Most business owners look at their bank accounts. If there is a lot in there, they make decisions differently (like the full tube of toothpaste). 

If it’s looking lean, they may rethink capital purchases, dividend payouts, or going on that 2 week conference/vacation. 

The problem with the bank account as a cash flow indicator is that it isn’t accurate. Some of that money may be earmarked for expenses that haven’t been paid yet, or plans that you have in the works, or, I don’t know, payroll?

Cash Flow Statements

The most accurate picture of your cash flow position comes from your cash flow statement. But when do you take the time to generate and review that report? 

Most of us… not so much.

And even if you do, deep-seeded psychology might not register that all that money in your account isn’t yours to spend (or that all that toothpaste down the drain costs you money.)

This is where the Profit First system comes into play.

By reversing the accounting formula, profit is removed from the revenue first and the leftovers are used to cover expenses.

This equates to removing some of the toothpaste from the tube to use later. That sounds a little tedious. Thankfully, it’s easier with money.

The #1 Profit First Habit

To accomplish this (and trick your lizard brain), Michaelowicz recommends opening a separate bank account for your profits. 

Once revenues come in, you immediately allocate a percentage to the profit account and transfer it over. The leftover money is available to pay expenses and operate your business. The idea being, a smaller tube of toothpaste will make you think twice before spending anything. 

And it works. 

The Profit First system extends to setting aside tax dollars, your owner’s pay, operating expenses, and revenue. 

If you’re interested in learning more, get the first 2 Profit First chapters on me. 

You won’t regret it. 

Jenn

P.S. Looking to work with a bookkeeper who can help you keep more of your profits? (And who doesn’t mind reconciling the extra accounts!) Book your complimentary Profit First Blueprint here.

Although this blog offers business advice, this content is for general informational purposes only—it is not intended to replace the guidance of a licensed legal or financial professional. Information created by third parties that we may link out to or feature on our site is not endorsed by us and remains the responsibility of such third parties. Bookminders Services Inc. assumes no responsibility for errors or omissions in the content.

The post The Psychology of Profit First first appeared on The Rayne Firm.