Overall my thoughts about this book are that it’s a tool that may work really well for certain business owners and I think that you can find some real help in here. If you’re familiar with and like the cash envelope system for budgeting, you might really like this approach. It’s essentially a budgeting and cash flow management system.
The author writes from a place of understanding how business owners often naturally behave and then works to create a system that flows with that instead of fighting against the natural inclination. The premise is that business owners often look at their bank account balance regularly and view that as an indicator of how they’re doing in their business and how they should make decisions.
We can definitely agree on one point that the author makes early on in the book and that is that there is only one way to fix your financials and that is by facing your financials and I wholeheartedly agree with that. I think one of the biggest hurdles that business owners face in figuring out their business money is taking that step of facing the reality of the numbers and I’ve shared that in my posts recently so go ahead and check those out. So starting from that place I definitely agree and I’m aligned with finding an approach to help business owners take that step.
To get into the actual formula, the traditional accounting equation is sales minus expenses equals profit. The profit first formula flips that around and says that sales minus profits equals expenses. So in the original accounting equation profit is somewhat beholden to whatever is left over after expenses and in the profit first formula expenses are forced to sort of bend to what you’re going to say your profit is and so that is the key difference of this approach and this way of looking at your business financials.
To facilitate this equation the author has created an assessment that uses what I think is probably the most helpful tool in the book and that is the TAPs and CAPs. Wondering what that stands for??? CAPs are your current allocation percentages and TAPs or your target allocation percentages. So CAPs helps you understand where you are at now and TAPs helps you visualize where you want to go. The reason I think this tool is so helpful is the author actually gives a roadmap for how to work these applications in your business from a baby business (so someone who’s just starting out) all the way up to the ranges where your revenue is becoming more significant. Since there are structured ranges based on your gross revenue, this becomes a really useful, quick win you can use to assess your business and I think that’s one of the most powerful things in the book is it gives people an approachable, concrete way to begin understanding the health of their business.
Not only do you get to see and understand the current health of your business but you also get a roadmap for implementing these percentages and working towards the target allocation percentage and that is I think a really great part of the book where you’re actually getting guidance on how to gradually and sustainably work towards those percentages if you’re not quite where you want to be over the span of quarters and months. You’re not just gonna go 0 to 60 and go from where you’re at right now immediately to where you think you should be or where you want to be. It’s going to be a gradual process over time of implementing strategies for tweaking your expenses, improving your sales, and taking different approaches to bring those numbers where they need to be little by little.
Now when it comes to the part that I think a lot of people think about when they think about this book it’s that you’re supposed to have all these bank accounts. I can’t personally speak for that part because I haven’t actually implemented having all those bank accounts. It’s something I’ve toyed about experimenting with for 2021 so I can share my feedback with you. If that is something you want to see me try and report back on, I am open to doing that so let me know in the comments below! Even outside of the bank accounts; I think there’s still so many great nuggets here such as concrete numbers for budgeting, specific strategies for timing of payments, figuring out what reasonable amounts are for expenses and for paying yourself, how to get out of debt, and knowing when you can afford certain expenses. If there’s any one of those that resonates with you or that you’d like to hear more about please let me know and I can share more in depth in another post.
This question has come up a lot (as it should) so it’s time we address it here. One of the goals of your business is to make money, but how do you go about using that money for your life? Here are a few questions to help you figure that out. Today, I’m speaking to sole proprietors and single-member LLCs, but if you’re not in that category and have questions on this, let me know.
What do you need? Think through the costs associated with your most basic needs (rent, food, fuel, utilities, etc.). Be realistic about this and don’t try to make some spartan budget if you know that’s not going to work for you. We’re just gathering information here so put down your best estimates.
What do you want? Go to the next level and think about what you envision and want for your life, usually you will have goals that are beyond your current situation and that’s great! How would that new reality change the numbers above (usually they will be bigger!)? Again put together your best guess of how much it would take to fund that goal or lifestyle. These answers will help inform your revenue targets or how much your business needs to make.
What can your business realistically support? According to the Profit First method, if you’re a new business or a business bringing in less than $250K/year, you would aim to pay yourself 50% of revenue (after materials and subcontractors) to start. That leaves the rest for operating expenses, taxes, etc. How does that number match up with what you need and want? If your business doesn’t currently have the margins to pay you what you need/want, here are your go-to solutions: increase sales and/or decrease expenses. Another option is to take on a part-time job to help keep you afloat for a bit – just make sure this doesn’t take you too much away from actually being able to GROW the business. I’ll be touching more on this soon when I share my book review of Profit First.
How do you record it? When you pay yourself, it’s not a payroll expense and will not show up on your Profit and Loss. Instead, it will show up on your balance sheet as a reduction in equity and cash.