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Profit First Explained: How to Build a Business That Pays You First · Profit Points Podcast

• 0:00
  SPEAKER_00: Hey, glad you're here.
• 0:01
  SPEAKER_00: This is Profit Points, and I'm Megan Schwann, your accounting sidekick and certified profit first professional and fix the snips advisor.
• 0:09
  SPEAKER_00: If you're a small business owner who wants to actually understand what is happening in your business financially, not just survive it, but genuinely get it, you're in the right place.
• 0:20
  SPEAKER_00: Every episode covers one concept, uses real numbers, and ends with something you can actually do.
• 0:26
  SPEAKER_00: That's the deal.
• 0:27
  SPEAKER_00: Let's talk about today's topic.
• 0:31
  SPEAKER_00: I want to take a moment to talk about the single most impactful framework I have found for building a consistently profitable small business.
• 0:41
  SPEAKER_00: It changed how I think about business finance, it changed how I advise my clients, and it is at the core of virtually everything we do at Sidekick Accounting.
• 0:50
  SPEAKER_00: And I am talking about profit first.
• 0:53
  SPEAKER_00: If you've heard about it, great, stay with me because we're gonna go deep today.
• 0:58
  SPEAKER_00: And if you haven't, you're about to have a moment.
• 1:01
  SPEAKER_00: But first, welcome to the Profit Points Podcast.
• 1:03
  SPEAKER_00: I'm Megan Schwan, your accounting sidekick and CEO of Sidekick Accounting.
• 1:08
  SPEAKER_00: Traditional accounting gives us this formula.
• 1:11
  SPEAKER_00: We have revenue, we minus expenses, and then what's left over equals profit.
• 1:16
  SPEAKER_00: And mathematically, that's correct, but behaviorally in the real world of running a small business, it's really a disaster.
• 1:25
  SPEAKER_00: Because when you subtract expenses from revenue and call the remainder profit, you're designing a system where profit is what's left over.
• 1:35
  SPEAKER_00: And as Parkinson's law tells us, expenses or anything expands to fill what is available.
• 1:43
  SPEAKER_00: In this case, that's revenue.
• 1:45
  SPEAKER_00: In other words, if the money is there, it gets spent.
• 1:50
  SPEAKER_00: You may have noticed this before.
• 1:52
  SPEAKER_00: By the time you've paid contractors, subscriptions, payroll, marketing, and every other operational cost, whatever's left over is often not much.
• 2:02
  SPEAKER_00: And then you start the whole cycle over again next month.
• 2:06
  SPEAKER_00: Mike Mikellowitz identified this problem and wrote an entire book about the solution.
• 2:11
  SPEAKER_00: It's called Profit First.
• 2:12
  SPEAKER_00: And the emphasis is elegantly simple.
• 2:16
  SPEAKER_00: Instead of revenue minus expenses equals profit, you flip it.
• 2:20
  SPEAKER_00: We take revenue, we minus profit, and that equals your expenses.
• 2:25
  SPEAKER_00: You take your profit first before operating expenses because true profit covers owners' pay, tax savings, and strategically reinvesting into your business.
• 2:37
  SPEAKER_00: You allocate profit to a separate account at the moment that revenue comes in.
• 2:42
  SPEAKER_00: And then this is key, you let your business run on what's left.
• 2:48
  SPEAKER_00: Here's how it works in practice: you open multiple bank accounts.
• 2:52
  SPEAKER_00: The core five are an income account where all revenue is deposited, a profit account where your profit allocation goes, an owner's pay account, a tax account, and an operating expense account.
• 3:05
  SPEAKER_00: Each time money comes in, whether it's daily, weekly, or on a schedule that works for your business, we usually recommend weekly, you allocate it across these different accounts based on your target allocation percentages.
• 3:19
  SPEAKER_00: Those percentages are based on your real revenue, the past, and your current capacity.
• 3:26
  SPEAKER_00: Profit FERTs provides target allocation percentages or taps that serve as a guidepost depending on your revenue range.
• 3:34
  SPEAKER_00: Mike did extensive research on top performing companies to come up with these.
• 3:39
  SPEAKER_00: It gives owners a target and direction to aim for.
• 3:43
  SPEAKER_00: Most businesses don't actually start at the tops that are in the book.
• 3:47
  SPEAKER_00: They typically start with what we call caps, current allocation percentages.
• 3:52
  SPEAKER_00: And then those percentages shift as your business stabilizes and grows.
• 3:57
  SPEAKER_00: A business at 500,000 might have a profit target of 10% or higher as overhead becomes more efficient at scale.
• 4:08
  SPEAKER_00: The beauty of this system is that it uses human psychology and habits in your favor instead of against you.
• 4:16
  SPEAKER_00: When the money is in a separate account labeled profit and you have a rule that you don't touch it except for quarterly distributions, it stops feeling like available cash to spend and it becomes yours.
• 4:29
  SPEAKER_00: It's non-negotiable.
• 4:31
  SPEAKER_00: And your business learns to operate within the boundaries of what is in the operating expense account.
• 4:37
  SPEAKER_00: You make decisions differently when you know that account is the limit.
• 4:42
  SPEAKER_00: Let me give you a concrete example of this.
• 4:45
  SPEAKER_00: Say your business brings in$15,000 in a given month.
• 4:48
  SPEAKER_00: Using profit first allocation percentages, let's say we do 10% to profit, 50% to owner's pay, 15% to taxes, and then 25% to operating expenses.
• 5:00
  SPEAKER_00: When$15,000 comes into your income account, it gets dispersed into those accounts.
• 5:07
  SPEAKER_00: You transfer$1,500 to profit,$7,500 to owners' pay,$2,250 to taxes, and then you have$3,750 in operating expenses.
• 5:17
  SPEAKER_00: Your business runs on that$3,750 this month.
• 5:21
  SPEAKER_00: This is what you have to pay softwares, contractors, marketing, and everything else operationally.
• 5:27
  SPEAKER_00: Now your first instinct might be$3,750 is not enough.
• 5:32
  SPEAKER_00: And that instinct is worth examining because if your current operating expenses are higher than$37.50, Profit First will surface that immediately.
• 5:48
  SPEAKER_00: And it's not a comfortable question.
• 5:50
  SPEAKER_00: I'm not going to sugarcoat it, but it is the right question.
• 5:55
  SPEAKER_00: The goal over time is to bring your actual expenses in line with your target allocations, which might mean cutting things, renegotiators, or growing revenue faster than your expenses to close that gap.
• 6:11
  SPEAKER_00: And at the end of the quarter, you take 50% of what's accumulated in your profit account as a distribution to yourself, a reward for running a profitable profitable business.
• 6:23
  SPEAKER_00: The other 50% stays as a reserve.
• 6:26
  SPEAKER_00: That distribution is powerful, not just financially, but also psychologically, which is what we're leaning into.
• 6:34
  SPEAKER_00: It reinforces the behavior of creating this system and sticking with this system.
• 6:39
  SPEAKER_00: And it makes profit real.
• 6:42
  SPEAKER_00: That profit is yours.
• 6:43
  SPEAKER_00: Profit is the whole point of doing this small business thing.
• 6:47
  SPEAKER_00: I know what some of you are thinking.
• 6:51
  SPEAKER_00: My margins are too thin to allocate any profit right now.
• 6:54
  SPEAKER_00: I'm a hot mess.
• 6:55
  SPEAKER_00: And honestly, I hear you.
• 6:57
  SPEAKER_00: Profit first actually addresses this.
• 6:59
  SPEAKER_00: You don't have to start a 10% profit right out of the gate.
• 7:03
  SPEAKER_00: In fact, a lot of times I advise clients to start where they are with those caps.
• 7:08
  SPEAKER_00: And that might just mean that profit is 1%.
• 7:12
  SPEAKER_00: And it's a great starting point.
• 7:14
  SPEAKER_00: The point is to start building the habit, to start allocating something to profit from every dollar that comes in.
• 7:22
  SPEAKER_00: And when you incrementally increase that percentage by maybe one or two points every quarter until you reach your target, it creates that small consistent progress over time that adds up to transformational results, which is what we're looking for.
• 7:38
  SPEAKER_00: So the action plan today or your action step is to read or listen to the book Profit First by Mike McAllowitz.
• 7:48
  SPEAKER_00: It's available pretty much anywhere.
• 7:50
  SPEAKER_00: Or better yet, book a strategy call with me at Psychech Accounting, and I'll give you a free copy and we can walk you through how we implement Profit First for clients that are exactly like you at your exact stage.
• 8:02
  SPEAKER_00: You don't have to figure this out alone.
• 8:04
  SPEAKER_00: The system exists, the support exists.
• 8:07
  SPEAKER_00: You just have to take the first step.
• 8:10
  SPEAKER_00: I've said this before when I started doing these videos that business owners don't struggle because they're bad at business.
• 8:18
  SPEAKER_00: They struggle because no one ever taught them how to read and use their numbers.
• 8:23
  SPEAKER_00: And I believe that more than ever today, we're so overloaded with all of this information that sometimes it creates paralysis, analysis, paralysis, right?
• 8:34
  SPEAKER_00: Today I want you to, I want to add something.
• 8:37
  SPEAKER_00: Those tools exist, the tools that you need to be successful, the tools that you need to be able to run and grow and scale a successful and sustainable business.
• 8:47
  SPEAKER_00: The framework exists, the knowledge exists.
• 8:49
  SPEAKER_00: And if you've been listening, you've started to build your foundation, working on things like CEO mindset, tax strategy, profit design.
• 8:57
  SPEAKER_00: Those things are not nothing.
• 8:59
  SPEAKER_00: If you've been doing the action steps that I have in these videos, you've been taking steps.
• 9:04
  SPEAKER_00: It's everything.
• 9:05
  SPEAKER_00: Take what you learn and do something with it.
• 9:07
  SPEAKER_00: Your business and your future self will thank you.
• 9:11
  SPEAKER_00: If any of this has resonated with you, if you're interested in learning more, if you're ready to stop guessing and start building a business that's profitable by design, I would love to be part of that journey.
• 9:22
  SPEAKER_00: Sidekick Accounting specializes in exactly this work.
• 9:25
  SPEAKER_00: So book your call, go to chatwithmeg.com.
• 9:28
  SPEAKER_00: And thank you so much for listening to me on Profit Points or wherever you're watching this.
• 9:33
  SPEAKER_00: And I will see you next time.
• 9:36
  SPEAKER_00: All right.
• 9:36
  SPEAKER_00: That's your episode this time.
• 9:38
  SPEAKER_00: Don't forget your action step.
• 9:40
  SPEAKER_00: I want you to actually do it, not just add it to the list.
• 9:43
  SPEAKER_00: If this episode was helpful, share it with a fellow business owner who needs to hear it.
• 9:48
  SPEAKER_00: And if you're ready to go deeper on your specific numbers, book a strategy call with Sidekick Accounting.
• 9:53
  SPEAKER_00: Go to chatwithmeg.com, and I'll see you next time on Profit Points.