Have you heard of it? I’m betting you have. It’s the newest, super exciting book that is blowing the minds of so many private practice owners. It’s called Profit First, and the method (and book) are by Mike Michalowicz. I’ve been fortunate enough to be able to interview Mike on my podcast (see here) about how to do a Profit First assessment and how to use PF as a group practice owner. Today, I’ve followed up with him on a few burning questions readers have had since the podcast interview. Read it now!
What’s the biggest obstacle business owners face in starting to implement Profit First, and what’s the antidote?”
Well, the biggest obstacle people face is they don’t believe Profit First is going to work for them. It’s too simple. It doesn’t follow the traditional accounting principles and I think that’s the problem is that we expect a system like traditional accounting where profit comes last to simply work, and logically, it makes sense. But the thing is traditional kind doesn’t work with our natural behaviours. Now, I’m not “poo pooing” accounting, I’m just saying we need a system that sit on top of it, that works with our natural behaviours.
So, in believing it won’t work, we prove ourselves to be right because we don’t even try it out, we say, “see, it didn’t work” except you need to try it and you need prove it yourself. I can speak to you and quite frankly, I have and people still don’t do it. But once you prove yourself, and you’re living it, then you’ll build on it. The key or the end-all is to start very small so, if you want to get started with Profit First, if you want to see if it really works for you, don’t set up all the five foundation accounts that I talk about. Instead, start with one account, the profit account. Make a savings account in your existing bank and then allocate 1% of your income to that account, the profit account. And the argument here is if you bring $1,000 of income this week or this day we’re taking ten bucks because if you can run your business off of $1,000, you’re in your business of $990. That’s hard to argue, and we start allocating money to a profit and as you do this more and more time will go by or see more and more profit accumulating and more and more you buy into the system and try maybe 2% or 3% (or 4 or 7 or 10) and grow your profit account and then start the other accounts. So, don’t make me prove it to you, I’ve found I can’t anyway. Prove it to yourself. Actually, get started very easily by lowering the bar and [open] one account. Don’t raise the bar here and do everything- set that one account and prove it to yourself.
“Don’t set up all the five foundation accounts that I talk about. Instead, start with one account, the profit account.”
What’s the average timeframe from starting the implementation of Profit First until the kinks are smoothed out?
You know, for most businesses, I think we’ve got to go all through an annual cycle, a full year. Because some businesses have seasonality, [and with] other businesses, we get started, we find the numbers aren’t working exactly how we want them to, and we shift things around. I’d go through at least one quarter, that’s 90 days so you can have a profit distribution, see what that feels like. [Hint:] It feels really good. But we go through that cycle and then we do our quarterly percentage adjustments. I found [that] once a business takes the Profit First for a full year, they stick with it for life and the impact is extraordinary. So, plan for that first year and if you get through the first year fully into Profit First, I suspect your future is going to be very bright from a profit perspective.
There’s some confusion in our community with regards to the contractors’ category. Many group practice owners have therapists as either contractors or employees, many of whom receive pay of 60% of the income. Would you suggest that group practice owners categorize their therapist payroll into the contractors’ category or operating expense?
When it comes to sub-contractors, first we have the very clear who they are. These are people who have the ability to work for other practices too. They’re in their own independent businesses. If they exclusively work for you, meaning, they’re part timers, then there are an operating expense, part of your payroll, but if these are subcontractors, literally people you hire on a “per use” basis effectively, what you’re doing is you’re collecting money from the client, you’re giving it to another business, that therapist who was used to deliver your services and you’re taking in administrative fee the 40%, in that case, they were likely a material and subcontractors cost. But here’s the deal, they’ve got to represent least 25% of the total revenues. For example, say you do $100,000 in annual revenue, and one contractor that you bill out for [makes] $10,000. Well, that subcontractor [makes] less than 25% of total revenue, ($10,000 of $100,000 is 10%-which is less than 25% threshold), then it’s an operating expense.
If your subcontractors represent more than 25%, if you have $100,000 practice and you bill out say, $30,000 or $40,000 of work that goes to the therapist, that’s when you put the subcontractors in the materials and subs. I don’t want this more complex than it has to be, what we’re trying to do is adjust your business for the real revenue it generates from the real services it provides. Are you a true therapy organization or you’re actually sub-contracting and hiring therapist to do the work and you’re actually just a manager of therapists, (which is a great business by the way); it’s a different type of business. So, just trying to clear around that. If you are confused to any degree, just make everyone operating expense, I can’t underline that enough. Everyone is an operating expense: run your business where top line is your real revenue and never as an operating expense. You’ll still find your right percentages doing the business that way, there’s no question about it. If you misappropriate or miscategorize people into the materials and subs account, and get a little confusing and it could hurt your business if you mess it up so, if in doubt, just make everyone operating expenses and you’ll be 100% fine. You’ll find the percentage that works for you.
“If you are confused to any degree, just make everyone operating expense, I can’t underline that enough.”
What’s your suggestion for businesses who have been paying in the rears for payroll and operating expenses based off of last month’s income, and are now switching to taking percentages for current operating expenses?
Technically, it’s July OPEX so if you have payroll from last month and income came this month, it doesn’t matter if you pay in the rears, what matters is that you’re in a cash basis. So, when money’s in, and money’s due you have enough money to pay your bills, that’s all matters. It doesn’t matter if these bills are from a month or two ago we did payroll, just that when income came in, we had enough money to pay. If you don’t, that means we need to increase income. If last month’s bills were $10,000 and the revenue comes in today and you only put in $3,000 in operator expenses, you still have a problem. Last month incurred more bills than you can cover so, the cash flow coming in always has to cover what you have. Ideally, the prior month, maybe you have $7,000 going to operating expenses but you only spend $3,000 leaving $4,000. You had another $6,000 this month now you have $10,000 in there. So, it all evens out at the end.
For those of us who’ve been implementing Profit First for some time and are ready to take the next level, what are some of the creative, interesting types of accounts you’ve seen?
I suggest in this case, just refer to the book itself, there’s a lot of accounts there. The thing is, your needs will identify the accounts you need. I wouldn’t suggest to just setting something up. Look for a thing called the Vault. The Vault is a specialized savings account that as your business gets financial stability, we want to reserve and hide money away for a rainy day. That’s called the Vault and that’s the one I would look at [first].
I found that having payroll combined with operating expenses makes it hard to see how much you actually spend on non-payroll expenses so, I’ve separated the payroll and operating expenses checking accounts. Do you suggest having a payroll Profit First account or just take payroll from OPEX?
Yeah, you can separate payroll account. As there’s more demand put on your businesses in different expenses, if those expenses accumulate to 5% or 10% more than your total expenses, if that makes sense, I do break it out. For example, if I have a manufacturer and I need to buy a line of inventory, and the inventory represents 5% or 10% or 20% of what I spend, I’m starting up a specialized account for it. If you have a payroll that’s a bit of a substantial part of your business, definitely break out from operating expenses so you can see what your payroll is compared to your other general operating expenses. We have a rule here; if in doubt, add another account. I think a typical Profit First business has the five foundation accounts and will add three or four more accounts. Our own business here, we have 13 accounts.
“We have a rule here; if in doubt, add another account.”
Do you suggest that if a business wants to save for purchasing a building or expanding that they should open another account to say for that?
Yes. If you have a future expense that you can see incurring, maybe you’re going to hire an employee, maybe buy that building. Open the account and start spending money on the expense now just like you’re paying the mortgage before you get the mortgage because then, your business will prove that it can run as it is today and pay for that building. Better example I think is with an employee. Say I want to make that hire for a new employee, my question is can I afford them or not? What I do is set up an account and I start paying them inside that account. The salary I anticipate for this person I start putting away, and I can see if my business can adjust and run off that. Once it can, then I hire that employee because I have proven my business can afford this person but the beautiful thing is when I hire them, the money is saved up. So, you can do the same thing for a mortgage.
Well, there you go! I hope this clears up any other questions you have about Profit First! If you haven’t started (or read) Profit First, now’s the time!
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