Welcome back to our second meeting, well… blog post.
At this point you should have gone through your books and cleaned them up as best as you can for now. And then you should have started to make some changes in your process to try and align it with the Profit First system as much as possible. You hopefully have a better understanding of the overall Profit First system after doing everything from the first meeting.
Today’s main objective is to calculate your Current Allocation Percentage (CAP) for each account and then decide on your Target Allocation Percentage (TAP) for those same accounts.
Before we get into the analysis, let’s solidify the accounts you are going to use.
Small Plates Review
The first account you absolutely need to have is an INCOME account. This is where all your revenue gets funneled into. It may seem ridiculous to have an account you are only going to empty into other accounts, but trust me, it makes a huge difference. Remember, never pay for anything out of the income account. It’s strictly for allocations to the other accounts.
The other essential accounts for any business are OWNER’S PAY, TAX, PROFIT, and OPEX (Operating Expenses).
For microgyms we have seven essential accounts – Owner’s Pay, Profit, Tax, Team Member, Equipment, OPEX (operating expenses), and Income account.
As you can see most of these will apply to any type of business. You could also relabel equipment to a Reinvestment account. Or you could just drop it. TEAM MEMBER is another account to seriously consider. For a lot of businesses, it’s the largest expense, so it makes sense to make sure you always have money to cover it.
Is there an expense you are aware of that you only spend money on once a year or something, but it’s a significant expense? You could set up an account for that, so you are regularly saving for it and don’t have to worry about taking a chunk out of your OPEX account when the time comes to purchase it.
Download – Cash flow analysis template.
The spreadsheet is the nuts and bolts of doing allocations. All of the percentages and amounts for each account will be calculated and tracked there. The second tab in the spreadsheet has the target allocation percentages you are working toward based on how much revenue your business brings in.
Cash Flow Analysis Walkthrough
Watch this video. It’s a walkthrough of the cash flow analysis template. The video goes over an analysis specifically for microgyms. The process is still the same and it will help you understand the spreadsheet better.
As you go through the financials, you might change or adjust one of the optional accounts. By the end of the day you should have all your accounts set.
Please note that we are not worrying about pruning expenses, yet. That will be covered in the next meeting. Remember, you are just seeing where you are currently at and then you’ll make adjustments afterward to get closer to the goal. You’re finding the starting point.
With that being said, it’s a good idea to think through your system. How you account for things and how you track purchases. Do you use an app to pay certain employees or contractors? Does it just take the total from your account and not itemize for you what each dollar is for? (If that’s the case, you might consider using a different app.) This process is an opportunity to simplify your operating system and make sure it all gels well with your bookkeeping and cash flow management.
Go into Quickbooks or whatever you use for your bookkeeping and look at the previous quarter or recent 3 months. You’ll also need to go through your bank transactions and credit card statements. Everything you use to spend money from your business. You need to find your real revenue first, then use that real revenue number to find the percentages. Put the transaction dollar amounts into each of the bank accounts you are going to use. Then total those up and divide each account total by your total revenue for that time period to get your current percentages.
Real revenue is a simpler calculation and less subjective. It’s total revenue minus materials and subcontractors. You don’t subtract any labor of full or part time employees or other costs. If someone is compensated per project, they are considered subcontractors. If you are a retailer and pay sales tax, that would be subtracted from total income to find real revenue.
Finalize Rhythm Days
Rhythm days are also known as allocation days. They are the best stress reliever when it comes to your finances. You will do your allocations, pay bills and do bookkeeping on these days. That’s literally the only time you need to worry about that stuff. We recommend doing your allocations twice a month. It sets the best rhythm for staying on top of everything, yet not feeling like you are doing to much. Once a week will work, too. Doing it more than once a week or less than twice a month doesn’t work well. Another option is to align one or both days with your payroll days.
It’s all coming together, and you should begin to see your path to more profits lined out. The last two meetings will further clarify your path.
All of this can be overwhelming and sometimes a little technical. We are glad to help with implementation if that’s all you need or we can totally take the stress away from you by doing it all – implementation, monthly bookkeeping, and all your monthly allocations.
Follow us on…