Microgym owners, you are in for a treat because you have an advantage over other business owners: You understand fitness, health and losing weight better than anyone.
It just so happens that in “Profit First,” Mike Michalowicz uses the analogy of healthy eating to explain the Profit First core principles. This is like getting a head start to first place on the podium!
You know what good nutrition means for the body. Nutrition is to your body as accounting and finances are to your business. If you are constantly putting crap in your body, exercise alone can only take your fitness so far.
If you don’t have an accounting and cash-flow management system, lots of sales will only take your business so far.
I once worked for a company that did almost $30 million in revenue the same year it declared bankruptcy. (Get that crazy story in this blog post.)
They ignored the nutrition component of their business because they didn’t respect accounting or good cash-flow management.
Profit First is like your nutritious daily dosage of fruits and veggies for your gym.
I love taking dieting principles and applying them to accounting.
The four core principles of Profit First are based on four effective nutrition principles.
- Small Plates.
- Eat Veggies First.
- Remove Temptation.
- Eat Smaller Meals More Frequently (The 10/25 Rhythm).
Studies show that if people want to lose weight, an easy trick to help is to simply use a smaller plate.
Because we are trained to eat everything on our plate we’ll eat less with the smaller plate. We consume fewer calories because there isn’t room for the second scoop of delicious, fluffy, creamy garlic mashed potatoes… And we’ll still feel satisfied!
Most business’ have one bank account.
I want you to think of that one bank account as a large plate. With one large plate, you are begging for trouble. With only one bank account, your expenses will expand to meet the cash available to spend.
All that cash sitting on one plate? We can’t help but spend it!
This leaves you wondering how to pay yourself, how to pay your taxes and how to make payroll.
The Profit First cash-flow management system requires you to create other smaller bank accounts. Each account has a specific purpose. You’ll create multiple bank accounts for quarterly PROFIT distributions, OWNER’S PAY, TAXES, future EQUIPMENT, INCOME, and some other possibilities.
Smaller plates. Amazingly simple!
Eat Veggies First
I’ve been fighting this data internally and emotionally for a while. Supposedly, if you eat your vegetables first, you’ll have less room for less healthy or completely unhealthy food choices.
With this cash-flow management system, the order you allocate your money is important.
First, put the cash in the PROFIT account. You take the profit first.
Then, transfer cash to an account reserved for OWNER’S PAY, because an owner working in the business is the most important team member. Always make sure the most important team member is paid.
Then, put money in the TAX account. The IRS sucks. No doubt. But we do pay taxes sometimes. If you owe legitimate taxes, the smallest legal amount possible, you don’t want to get behind on that bill. You don’t want to willingly invite bullies in your back yard. So we set money aside for that.
Use the remaining funds for operating expenses and some of the other “small plate accounts.”
The PROFIT, OWNER’S PAY and TAX accounts are your veggies. Allocate to those first every time!
Are you seeing how Profit First can alleviate a lot of your money stresses?
If I were an alcoholic, it would be pretty silly for me to hang out at a bar. This core principle is about not putting yourself in a place to be tempted in the first place.
From a cash-flow management standpoint, your PROFIT account and your TAX account are going to build up a healthy cash balance.
So in order to avoid the temptation of stealing from yourself, Profit First suggests moving these two accounts to a separate banking institution and setting it up so that those accounts are super inconvenient to access.
Eat Smaller Meals More Frequently (The 10/25 Rhythm)
Let’s think about the bear vs. the horse on this one.
A bear hibernates and then eats large meals less frequently. The horse grazes. Compare the two animals. While the bear is powerful, it’s large and round. The horse, on the other hand, is shredded!
Eating smaller meals more frequently helps people lose weight and stay trim.
For businesses, we might occasionally come across the scenario where the gym owner doesn’t touch the accounting all year. Come tax time, the owner finally sits down to look at the entire previous year.
I would consider that to be one large meal.
Most people make terrible eating decisions when they are starving.
With cash flow, you can’t do anything about the things you discover doing your accounting only once per year.
Looks like you had an unnecessary subscription all year. Looks as though your staff costs were too high. You didn’t realize how much was actually spent on advertising.
What if you sat down twice a month on, let’s say, the 10th and the 25th? We also call this principle the “10/25 rhythm.” When you dig into your cash flow about every 15 days, you won’t let unnecessary expenses slide.
This is the way to keep your business lean and trim.
Profit First and Your Financial Health
These dieting principles create sound cash-flow behavior.
In reality, these four core principles are actually giving us a system and framework in which we will build our profit focus.
These simple core principles are the foundation of the most successful business cash-flow management system you are ever going to come across.
Profit First trains you to take your profit first instead of letting expenses just happen and make all the money disappear.
You know as well as I do that getting and staying fit is all about our choices.
In my book, Profit First for Microgyms, you’ll learn how to ensure profit becomes a deliberate decision—your decision—rather than something you hope will happen one day.
If you’d rather talk to a Profit First expert in person Schedule Your Free Planning Session to begin your path of a healthy business.
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