Cash First: How the Profit First Method Works, Starting at 1%

Spoiler, it's the pretty one, right? Accrual accounting will lie to you with a straight face and a nice font. You've got receivables sitting out 60, 90 days, so technically you earned that money. Sure, try paying your electrician with a receivable or an IOU. See how that conversation goes. Hey Mike, I can't pay you yet, but on paper we're crushing it. Mike's not impressed. You've got inventory eating cash, you've got tax obligations you haven't set aside for because you figured you'd deal with that later.

And later is April, and April comes for everyone. The P&L is a story, cash is the truth. And right now, most owners are reading fiction and wondering why the ending never works out. I think it's challenging, right? Like, everybody just wants to take on business, bring it in, bring the revenue in, make sure the numbers look great, but then understanding that you've got to have different ways of, or filtering that money to make sure the business is functional.

You mentioned it, payroll on Friday. Like how do you make sure that payroll is paid on Friday because you've got funds coming in and out of your account. Cash is, you think is doing great because revenue, you know, you're raking it in. You know, these allocations are things that we talk to an awful lot of people about. And this is based on Profit First by Mike Michalowicz, right?

Profit First is the holy grail, the Bible that we talk to people about on a regular basis. But some people hear it and they think it's a bit of a gimmick. They think it's a bit of a fad, especially accountants who are qualified and been doing this a specific way for years, but that doesn't help their clients get out of the trouble that we're describing, right? The cash flow crunch that we're describing.

Talk a little bit about Profit First. What's your honest take with Profit First? How, even though you're a qualified CFO, you know, how did that shift your mindset? Because I'm sure you had a bit of resistance to it initially to say, oh, no, we shouldn't be doing the books differently. This is the way we've always done the books. What was your aha moment with Profit First and what was your honest take with it?

My honest take? It's the opposite of a gimmick, right? This is positive cash flow management, right? And for me, it saved my financial life. And I don't say that like a guy at a seminar trying to sell you a course. I say this as a guy who was making six figures and eating ramen because I paid everyone else first and hoped there's something left over, right? I used to get the look from my wife saying, you know, where's the money, right?

You're so great with everybody else's money, but where's ours? Yeah. Right? And that's the problem, is that there was never... Shut up and eat your ramen. Shut up and eat my 19 cent ramen, right? Chicken. Chicken beef. Chicken beef, you know. Do you ever have the prawn one? Do you have prawn shrimp? You don't call it prawns in North America. Yeah, they call it shrimp. Yeah. How long have you lived in North America? Too long. Time to go back overseas and get some prawn ramen.

Yes, you can say it right that way. You know, the problem is, Jon, that there was nothing left over. Right? Parkinson's Law doesn't take weekends off, right? So, and if you're not familiar with Parkinson's Law, read Profit First. It's a fantastic book and it's a great way to do it. And you know, some people will say, well, you know, I tried it. It didn't work for me.

Right? Or most of your accountants out there don't even understand what it is. And it's not necessarily Profit First, it's Cash First. Right? So here's what Profit First actually is. It's behavioral finance applied to your business. Right? It's a mindset change. The concept is dead simple. You take your profit first, you take your cash first, then run the business on what's left. Right? That's it. That's the whole thing. Sales minus profit, or the cash that I want to have left over, equals expenses. And what that does is it starts shining a light for you, right? But most owners and most accountants do the exact opposite, right? The revenue minus expenses equals profit. But then generally speaking, there's no profit leftover or you have profit, but there's some receivables.

There's no cash, right? So it sounds reasonable until you realize it's the financial equivalent of eating everything on the buffet and hoping there's a salad left at the end, right? Never a salad. There's just a stomach ache and a credit card statement you're scared to open. Profit First flips the equation. Revenue minus profit equals expenses. Profit comes off the top. Cash comes off the top. What's left is what you get to spend. And it works because it's not a philosophy. It is a mindset, right? It's plumbing. You're not changing how you think. You're changing where the money physically goes. It's very hard to argue with a bank account that's already been allocated.

Give us more detail. Walk us through it. How does this actually work in practice? I mean, you've mentioned behavioral, but you're actually getting into the details of a different functional system for allocating cash. How does it work? So for all those folks out there, it works perfectly for businesses up to $75 million annual sales. So we're talking bigger businesses. This will work. So here's where I'm going to make bankers very confused and accountants slightly nervous.

You set up separate bank accounts. Not one account where everything gets dumped in and you try to mentally earmark it like we all do, because we all know how that goes. Oh, that 40 grand is for taxes. No, it isn't. It's already gone. You've already spent it on the marketing campaign that produced 11 leads and a lot of feelings. You set up five core accounts. Income, that's your collection point.

Every dollar lands here first. Profit, sacred, untouchable, proof the business actually works. Owner's pay, because you deserve to get paid like a human being, not an afterthought. Tax, so April stops being a horror movie. And operating expenses. This is what's left and it's what you actually run the business on. Every dollar of revenue gets allocated by a percentage into those accounts before you spend a dime on operations.

Your operating account gets what's left and yes, it feels tight at first, right? That's the whole point. The tightness is the feature, not the bug. It forces you to run leaner, make better decisions, and stop treating your revenue like a blank check at a restaurant where you're already full. I've used this in my business. Obviously, you educated me. I've got certified. I've been to the conferences with you.

I get Profit First, and I'm a true believer that it absolutely changes the business. Is it just those five accounts? For those listening, I had my hand up counting out the different accounts. There are five accounts. And, you know, the crux of the matter is you take out pay, profit, tax, and you force the business to operate on a smaller operating expense, unless you're making tons of cash, in which case you don't have to worry about it, you just have it allocated.

But it also forces you to go through a practice there of cutting things that are unnecessary, which essentially makes the organization more efficient. And it's something that organizations don't go through on a regular basis. Nobody ever sits there and says, okay, everything's stopped. Let's just check efficiency now from a cash flow perspective and force ourselves to be a little bit more lean until they get into trouble. I think Profit First allows you to do that on a regular basis.

Are there other accounts that you can set up? Are there other ways, other accounts that you should be establishing? You know, if people want to grow different areas of the business out, or is it just those five? Is it only those? No, see, Profit First is very customizable, right? It's got to be custom to your business. Right. So if I'm buying a lot of equipment, I want to have a capital expenditure account, right? If I'm doing a lot with retainage, right?

I want to have a drip account, right, so that I don't have to, you know, I can pay my bills waiting for that 10% or 5% that's left over six months after the project's done. Right. So, you know, if you're a seasonal business, have a seasonality account. Put all the money in your peak season, right? Allocate a bunch of cash so that when you're slow you can still keep the lights on, the heat on and your key employees, right?

So it's completely up to you. And now a word from our sponsor, Structural Wood Corp. Custom roof trusses out of Waddington, New York. Their whole job is making sure your building has structural support. Ours is making sure your bank account does. One of us charges more. Structuralwoodcorp.com. Do you have an account for polo shirts? I do. I do. I'm gonna get the Ford one every three months.

That's not a big budget. Well, you know, I'm a minimalist. Yeah. Except I like a lot of things. Yeah. A maximized minimalist. I don't know what that is. So what happens though when an owner says I can't afford to take profit? Right? They know they're in a cash flow crunch right now. What happens when they just don't feel like it's possible? Like, how do they start? You know, the owner who does the most pushing back is the one that needs it the most.

And I say that with love and a little bit of the tone your doctor uses when you say you don't have time to exercise. Start at 1%. One. That's almost nothing. On $100,000 a month, that's $1,000. You probably spent more than that last month on software tools nobody's logged into since the free trial. Or polo shirts. Or polo shirts. I guarantee you, there's a subscription running right now in your business that three people think someone else is using and nobody is. There's a lot of wasted expenses. We look at companies as usually about 5 or 10% waste. But here's what that 1% does. It builds the muscle. It creates the habit. And more importantly, it exposes that waste. You start moving 1% and suddenly you're looking at every expense with new eyes. You're renegotiating contracts you've been rubber stamping for years, you cancel the software nobody uses.

You have a conversation with a vendor you've been too polite to push back on. The constraint is the catalyst. It doesn't shrink your business. It makes your business smarter. And if you generally honestly cannot set aside 1%, that's not a timing problem. That's a structural problem. And 1% just diagnosed it for free. You're welcome. Well, I mean, yeah, it forces the business to look at itself. You've said that nothing else works until your money works.

What does that mean for the other levers, all the different components? We talked about some of those components in the last episode and how to get all those components jiving together. But what does it mean for those different components? Marketing, hiring, systems, et cetera, et cetera. It means every other investment in your business is a bet. And bets are fine if you can afford to lose. If you can't, they're not bets, they're prayers.

You want to hire a marketing agency? Great. Sorry, Jon, can you fund that for six months without flinching? Not funded if that one invoice comes in. Not funded if Q3 is good. Fund it. Period. Six months without touching the profit account or rating the tax charge because you'll pay it back later. You will not pay it back later. You never pay it back later. Later is a fictional land where business owners put promises they don't intend to keep.

Same with hiring. Can you cover that new salary for a year even if revenue dips? If the answer is no, you're not ready. You're not being conservative. You're being honest. And there's a massive difference between we can't afford this yet and we can't afford this ever. Fix cash first. And every other lever becomes 10 times more effective because now you're not spending scared. You're spending smart, and scared money, as they say, don't make money.

Mm-hmm. Too true. You mentioned touching the profit account. Is there any leeway here? Like you've got these different accounts that are allocated out, funds are in them. You want to do something, either some in your tax or some in your own account or some in your profit. Is there ever an instance where you can touch it? Where you can say, okay, well, I'm just gonna grab it.

I'll put it back later. Or is that just sacred? Depends on how well you've built the habit, Jon. If we're in month three and you're already touching tax money, we have a problem. If you're in month 36 and you've already developed a habit and you know your business in and out, you know what's going to be happening, sure. You can give yourself a little bit of grace on that one.

It's customized to your company, but the problem is that we have to build that habit first, right? It's like going to the gym every day or Monday, Wednesday, Friday, or whatever that's going to be. After three years, it's just habit. But when it's new, brand new, you gotta look elsewhere. You still have a structural issue. Yeah, I think one of the things that helped me, because I was dipping into it.

I was allocating and I'm like, ah, you know what, I'm just gonna grab a little bit. I'm going to move it over here. Yeah, I'll treat that as comp. How'd that work out? It depleted the account and I didn't comp myself. I just used it, but I think one thing that helped me was, as per the Profit First recommendations, I created a separate account outside of it that I can't touch.

I don't have a card, as soon as I move it, it's gone and it's sitting in that account, right? So being able to transfer it out of one banking account or banking system into something completely separate is a really good idea for those starting. Because the tendency is you've been so used to shuffling money around the whole time, you just, it's fine, I'll do it. And I need it and you self-satisfy.

But yeah, I think we're on time. Like your binky. Say it again. It's like your binky. Yeah, yeah. It's my piggy bank. There's just a hole in the bottom of it. Where'd that little stopper go? How does cash flow work with exit planning? If somebody's thinking about selling in two to five years, why does anybody need to do anything about it now? Because buyers do not care about your best month. They care about your worst month. Read that again. Your best month is a story you tell at dinner parties. Your worst month is the one in the data room that makes a buyer's attorney start circling things in red. Buyers look at three things: revenue, profit, and cash flow.

Revenue is interesting. Profit is better, but consistent, predictable cash flow is what gets you a premium multiple. That's the difference between 3x and a 6x. On $2 million of EBITDA, that's the difference between $6 million and $12 million. That's not a rounding error. That's a lake house, right? I don't know about you, but I could deal with another $6 million in my life. But if your cash is lumpy, seasonal, or dependent on one or two big clients, you could leave any Tuesday, your valuation takes a hit.

A big one. Buyers are not buying your revenue. They're buying the machine that produces the revenue. And a machine that runs out of oil every quarter is not a machine anyone pays a premium for. Cash first, the positive cash flow mentality creates that consistency. If it's this, it's not just operational hygiene, it's exit strategy. Every time you move money into that profit account, you're not just being disciplined, you're building the evidence that a buyer is going to use to justify writing you a very, very large check.

So yeah, it matters now. Absolutely. And I mean, we're involved with M&A activities, right? We look at it. We look at the numbers on a regular basis. We're evaluating deals for people. That is exactly what we look at. We look at how much money the business makes and is it consistent. And if there's any inconsistency there, you start to question it and you want to have conversations around it. So yeah, I think it's critical.

Okay. We're starting to wrap up and as per every episode, you know, if somebody is listening and they are in this situation. They've got lots of revenue coming in, but not a lot of cash kicking around. What is their very first move? Stop the car right now. I'm just kidding.

Hit the brakes. Yeah. What's your surroundings, right? Really, the best thing to do is open a separate bank account today. Not tomorrow, not Monday, not when things calm down. Things are never going to calm down. That's the lie your business tells you so you keep putting off the stuff that actually matters, right? Label the account Profit, transfer 1% of every deposit into it. Don't touch it. Don't be drawn. Don't touch it, right? That's the whole move. That's it. I know it sounds embarrassingly simple, like me messing up embarrassingly, right?

I know 1% feels like nothing. That's exactly why it works. Because if 1% breaks your system, your system was already broken. You just couldn't see it until you shine a tiny 1% flashlight on it. Yeah, I think the key thing when you shine this flashlight on a business and you're walking through all these steps of application of Profit First. You made a key point.

Like if you can't afford 1%, something's really horribly wrong, but we're not in it to make 1%. Like we're in it to make businesses that pay us well, right? And that we then turn around and sell. So this whole process gets you to again shine that spotlight on it and understand if it is a viable business as well. I think people have to understand, there's hidden costs, there's all sorts of other things.

You think you've got a 30% margin, but actually, if you've got no cash flow kicking around, you're not getting a 30% margin. It forces you to unpack it and restructure the organization so it can be better. This is Cash First. It allows all the other elements of the business to be examined, so that it does what it's supposed to do. Give us a takeaway here, Ryan. Wrap this up, like what is the key takeaway from this episode from understanding cash and managing our cash? Yeah, so I think the key takeaway is, you know, revenue is applause, cash is oxygen and right now most of you are holding your breath and clapping. Stop it, right? Open the account, move 1%, don't touch it, fix the cash first, and everything else, the marketing, the hiring, the systems, the exit, stops being a gamble and starts being a plan.

1% today, not Monday. And not when things calm down, right? Things are never going to calm down. And that's the whole point. And your electrician Mike will be so proud. Awesome. Great. Yeah. Game changing episode. I hope people are understanding this. I know when I heard it, it was an aha moment. It just makes a ton of sense. I got to do this one day. But the fact is, got to do it today and act on it today and get those things set up today and the 1% today because there was nothing like looking in an account and starting to see money in there and it growing.

That got really exciting for me and the business started to make profit. And then you start to have a complete change of mindset. Everything ladders up to profit. It does. It's all about the Benjamins, baby. That is right. So I implore everyone to read the book, Profit First by Mike Michalowicz, and seek professional help with a certified Profit First professional. Excellent. Good episode. Did I make you look good? How'd I do?

Yeah, do I do my job? Adequately, yeah, make you look okay. Well, wait for the comments. Yeah, except for being able to pronounce embarrassingly. Embarrassingly enough. Yeah, my bad. But hey, let's have some prawns. Yes, I'm gonna go have some prawns. I'm gonna have a prawn cocktail, some prawn cocktail crisps and a cup of tea, prawn crop down and spot a dick. That's a personal hygiene matter, not a cash matter.

Good stuff, Ryan. Thanks again. See you next episode. Hasta luego! Ciao ciao! That'll do it for this episode of From Burnt Out to Bought Out. If anything we talked about today hit home, do us a favor. Share this episode with another owner who needs to hear it. And if you're sitting there thinking, they're talking about me, good. That's the first step. Head to the show notes and book a free triage call with our team.

No pitch, no pressure, just a real conversation about where you are and what's possible. You can also find us on LinkedIn and at wearesynergysolutions.com. New episodes drop every week. Until next time, stop running the treadmill and start building something you can actually sell.