SPEAKING NOTES – - Amazon S3First+-+Presentation+Notes.pdf · – SPEAKING NOTES ... 3 These...

HOW TO TRANSFORM ANY BUSINESS FROM A CASH-EATING MONSTER TO

A MONEY-MAKING MACHINE

– SPEAKING NOTES –

PROFIT FIRST – HOW TO TRANSFORM ANY BUSINESS FROM A CASH-EATING MONSTER TO A MONEY-MAKING MACHINE

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THE FRANKENSTEIN FORMULA

• OnedayIhadtherealizationthatIamDr.Frankenstein.Itoocantakeandideaandbringitto

life,andthenquicklycometorealizeIhavecreatedamonster.Acasheatingmonster.

• Theonlywaytosurviveistosellmoreandmore.Growthseemstobetheonlysolution.

But as the business gets bigger, so does the stress. The bigger the business, the more cash

it consumes.

• Itseems,toreallybeprofitable,weneedthatonebigclient,oronebigsale,oroneinvestorto

swoop in and save us.

• Mostentrepreneur’scompaniessurvivechecktocheck.Profitseemstobesoelusive,because

every time sales increase, expenses increase at the same rate.

• Theproblemisnottheentrepreneur,it’stheprofitformulaweallhavebeentoldtouse:

Sales – Expenses = Profit

SALES – EXPENSES = PROFIT WHY GAAP DOESN’T WORK

• ThecoreformulatoGAAP(GenerallyAcceptedAccountingPrinciples)isSales–Expense=

Profit.Itlogicallymakessense,butitignoresthatfactthehumansarebehaviorallyorientednot

logically oriented.

• FewentrepreneursarediligentlymanagingtheirfinancialsusingGAAP.Itrequiresthatthe

entrepreneurunderstandandmanagetheirbusinessbyregularlyanalyzingtheirIncome

Statement,CashFlowStatementandBalanceSheet.Itrequiresthatthosereportsareanalyzed

regularly,minimallyonceamonth,ideallymorefrequently.Butentrepreneursdon’tdoit,as

“logical” as it is, but we do have another habit... we look at our bank balances constantly.

• Mostentrepreneursmanagethefinancialaspectoftheirbusinessusing“bankbalance

accounting.” We look at our bank balance and make a determination of how healthy our

business is based on the balance. A big bank balance and we feel confident. A low balance and

we go into panic mode to sell like mad and collect money any way we can.

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DON’T CHANGE YOUR HABIT (YOU CAN’T) CHANGE THE STRUCTURE AROUND YOU

• Changingourownhabitsishard(somewouldargueimpossible).Justaskasmoker.Logicallyit

is one of the most life threatening routines we can have. Yet the habit continues. Often the only

waytochangeahabitisbecauseofacatastrophicevent(forthesmokeritcouldbeaheart

attackorstroke).Otherwisethehabitcontinues.

• Buthabitscanalsobechanneledanddirected,makingthatformally“badhabit”your

biggest ally.

• Insteadofstoppingyourhabitof“bankbalanceaccounting”(checkingyourbankaccount

regularlyandmakingfinancialdecisionsbaseduponwhatwesee)theprocessofProfitFirst

leverages it and makes it your biggest ally.

THE CORE 4 LESSONS FROM THE HEALTHY DIET INDUSTRY

• USE SMALL PLATES – The normal habit of people is to serve food that fills up their plate and

then to eat everything on the plate. So instead of trying to change the “fill up the plate and eat

it all” habit, simply reduce the size of your plates and continue your habit. A smaller plate will

automatically leverage our established habit, and reduce our calorie intake. We lose weight.

• EAT VEGETABLES FIRST – Most people eat the meat and potatoes first. The vegetables are

put aside to “eat last.” But the person eats all the meat and potatoes first and then, feeling full,

doesn’teatthevegetables.Yet,ifwesimplyateaservingofvegetablesfirst,wewouldgetall

thevitaminsandnutrientswhilealsofillingupourstomachssothatwedon’tgorgeonthemeat

and potatoes.

• REMOVE TEMPTATION–Youwon’teatdesertifitsnotavailabletoeat.Butthatdesert

tray waved in front of you makes it so easy to have it “just this one time.” To avoid eating junk

food, the best strategy is to not have access to it in the first place. As they say, out of sight out

of mind.




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• ESTABLISH AN EATING RHYTHM – Most people eat either too infrequently or too frequently.

Thefolkswhoeattooinfrequentlyoftenplantoeatthreemealsaday(breakfast,lunchand

dinner),andwilloccasionallyskiponeofthemealswhentheyareinarush.Theresultisthat

they feel intense hunger and then overeat during the next meal. Other people are the constant

snackers.Foodisalwaysinarmsreachandtheysnackanytimethefoodispresent.Ineither

case, to person consumes to many calories and puts on more and more weight.

THE CORE 4 BUSINESS DIET LESSONS OF PROFIT FIRST

1. USE SMALL PLATES

• Mostbusinessownershaveonlyfewaccounts(bigplates)fortheirbusiness.Theyhavea

operating account where deposits come in and payments go out. They may have an employee

payroll account and a savings account. But regardless of what accounts they do have, typically

the majority of money flows in and out of a single, big plate, operating account.

• Sinceentrepreneursdobankbalanceaccounting(welookathowmuchmoneyisavailablein

theaccountandtakeactionsbasedonwhatwesee),weneedtoallocatemoneyintodifferent

accounts(smallplates)whichspecifyhowthemoneycanbeused.

• Thisisgrandma’soldenvelopesystem.Grandmawouldget$100anddividethatmoneyupinto

differentenvelopesfordifferentpurposes.The$100wouldcomein,andimmediatelygetdivided

up:1.$10forvacation2.$35forgroceries3.$15forclothing4.$25forhomeexpenses5.$10

to“giveback”6.and$5for“funmoney”

• Grandmawouldalwayshaveenoughmoneyforeveryaspectoflife...shewouldjustgotothe

rightenvelope.Andifthemoneywasn’tthere,itdidn’tmeantherewasn’tenoughmoney,it

meantitwasn’ttimetospendityet.

• Inourbusinessweneedtohavesmallplatestoo.Minimallyweshouldhave4smallplatesand

1servingtray.Thesmallpatesare1.ProfitAccount2.Owner’sPayAccount3.TaxAccount4.

OperatingExpensesAccount.AndtheservingtrayistheIncomeAccount.

• AllinboundmoneygoestotheIncomeAccount.Thisaccountisonlyforaccumulatingdeposits.

ThenthemoneythathasaccumulatedintheIncomeAccountisperiodicallyallocatedtothe

“small plate accounts” based upon predetermined percentages. A percentage of all the money

intheIncomeAccountgoestotheProfitAccount,thenapercentagetoOwner’sPay,etc.




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• TARGET ALLOCATION PERCENTAGES (TAPS) – Based upon your businesses Real Revenue

(thisisyourcompany’stotalincomeminusmaterialcostsandoutsidelabor–similarto,but

notthesameasGrossProfit),yourcompanyshouldtargetallocatingacertainpercentageof

theIncomeAccounttothedifferentsmallplateaccounts.Gotohttp://MikeMichalowicz.com/

Resources to download a chart with the TAPs percentages.

• TAPsisatargetallocationpercentageandnotthestartingpointpercentagesforyourbusiness.

The TAPs are for very healthy companies, and just jumping to those percentages can be far to

fastofanadjustmentforyourcompany.Insteadstartatasmallerpercentage(perhapsstart

allocatingonly5%or1%ofyourIncomeAccount)toProfitandotheraccounts,andevery

quarter increase that percentage.

2. EAT VEGETABLES FIRST

• Asyoustartallocatingmoneytodifferentaccounts,manybusinesseswillfindthattheamount

ofmoneyavailableforOperatingExpensesis60%,50%,40%orevenlessofthetotalIncome

Depositsthatisavailable.

• Theentrepreneur,inthiscircumstance,willfeelextremepressuretoreducecostsandexpenses

(thisiswhatyouwanttodo),butfeelthatitmaybebestto“borrow”fromtheProfit,Taxor

Owner’sPayaccount...inotherwords,toskipeatingthevegetables.

• Whenthereisn’tenoughmoneyinyourOperatingExpensesAccounttocoveryourbills,

youmayNOT“borrow”fromyourotheraccounts.Instead,thisisyourbusinesstellingyou

(bettersaid,screamingatyou)thatyoucannotaffordyourexpenses.Youmustbecomemore

innovative. You must cut costs and find ways to get the sames things done at less cost. And you

must extract all the value out of your expenses.

3. REMOVE TEMPTATION

• Thequick(andtasty)fixtonothavingenoughmoneytopayexpensesittotakethemoneyfrom

ourtaxaccount,profitaccountorowner’spayaccount.Ifthemoneyintheseaccountsremains

at the same bank as where you have your Operating Expenses, it is too tempting and easy to

transfer the money.

• SetupaProfitAccount,TaxAccount(andeventheOwner’sPayaccountifyoufindyourself

“borrowing”fromtheaccounttopayexpenses)atasecondbank.Thenwhenyoudoyour

percentageallocationsfromtheIncomeAccount,andmovethemoneyintothese“smallplate”

accounts, next transfer all the funds from the Profit Account and Tax Account to accumulate at

the second bank.



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• Takestepstomakesurethatyoudon’thaveeasy/convenientaccesstothesecondbank...you

just want to accumulate the Profit and Tax money here and then disburse it on a quarterly basis

(explainedintheEatingFrequencysection).

• Destroyyourcreditcards,whichisanothermassivesourceoftemptationandreplacethemwith

debit cards.

4. ESTABLISH AN EATING FREQUENCY

• Mostbusinessownersmanagetheirmoneytofrequently(theypaybillsandthemselves

sporadically,whenevertheyfeeltheyhaveenoughmoney)ortooinfrequently(theywaituntil

theyareinapanicandneedmoney,oravendorhasstartedcollections).Insteadyouneedto

getintoa10/25Rhythm

• The10/25Rhythmhasusdisbursingmoneytwotimesamonth,onthe10th(orthenearest

businessday)andthe25th(orthenearestbusinessday).

• The10/15RhythmallowsmoneytoaccumulateintheIncomeAccountoverafewweeks

time.Youstillmakedepositseveryday(orasfrequentlyasmoneycomesin),butitsimply

accumulatesintotheIncomeAccount.Byallowingmoneytoaccumulate,ourhabitofBank

Balance Accounting will give us a keen awareness of the natural cash flow of our business. We

seemoneyaccumulatefortwoweeks,itthenget’sallocatedcompletely.Thenitaccumulates

over the next two weeks and then allocated completely. This pattern continues into perpetuity,

and we get a keen understanding of our cash flow.

• Onthe10thallthemoneyintheIncomeAccountgetsallocatedtothedifferentsmallplates

accounts,baseduponthepercentagesyouhavepredetermined(ultimatelymovingcloserand

closertotheTAPs).

• Thenonthe10th,themoneyallocatedtotheProfitandTaxaccounts,getsimmediately

transferred to the “temptation removed” accounts at the second bank. On this day, all the bills

that are due are paid from Operating Expense. As shared before, if there is not enough money

intheOperatingExpensesaccount,thisitthebusinessstatingitcan’taffordtheexpensesand

they need to be cut.




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• Thesameoccursonthe25th–AllocateallfundsfromtheIncomeAccount,removetemptation

and pay expenses from the Operating Expenses account.

• Onaquarterlybasis,fromtheTaxAccount(atthedirectionofyouraccountant–notethatyou

maywanttoconsideraProfitFirstProfessional,anaccountant,bookkeeperorotherfinancial

expertthatiscertifiedinProfitFirst)youwillpayyourquarterlytaxestimates.

• Onaquarterlybasis,yourcompanywilltakeaprofitdistribution.50%ofthemoneythathas

accumulated in the Profit Account will be taken as a profit distribution to the owners.

• TheprofitdistributionyoutakeisforYOURpurposes.Celebratewiththemoney,useitforyou...

don’tuseitto“plowback”intothebusiness,sincethatdefeatstheentirepurposeofProfitFirst.

ACCOUNTABILITY GROUPS

DESTROYING DEBT

THE PROFIT FIRST FORMULA

• Sales–Profit=Expenses,mathmaticallyitisthesameastheGAAPformula.Butfortheway

humansbehavethisisfarsuperior.InthiscaseExpensesisthe“leftover”notProfit.

• Ifyouremembernothingelse,rememberthis:Profitfirst,always.




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APPENDIX

INCOME V. COST

• Inmostentrepreneurialbusinessesastheincome(sales)increase,spendingclimbsatanear

identicalrate.Thebusiness’ssurvivalischeck-to-check.

• Ifsalesdropdramatically(e.g.loseamajorclient),costsdropmuchslowerandtheresultis

significant loses

TIME

$

Income Cost

SURVIVAL TRAP

POINT B(Vision)

POINT A(Crisis)

Cover this month’spayroll with an

unfit client

Offer new product to make

immediate revenue

Hire an expertto instantly expand

service offering

Focus all effortson sales to

get fast money

Do the workyourself becauseno one else can

do it as well as you(plus you save money)

Take on unfit project tocover this month’s payroll

Run a last minute promotionto generate quick cash




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INSTANT ASSESSMENT

• Immediatelyassesswhereyourbusinessstandstoday,andwhatyouneedtochangetobecome

aProfitFirstbusiness.

Top Line Revenue

ACTUAL PF%

100%

PF$ THE BLEED THE FIX

Material & Subs

Real Revenue

Profit

Owner’s Pay

Tax

Operating Expenses

TARGET ALLOCATION PERCENTAGES (TAPS)

• Usethetargetpercentagesbelowtodetermineyourallocationtargets.

• SetTAPsasyourgoal,butadjustyouractualallocationspercentagesinsmallincrementsto

avoid changing too much, too fast.

Real Revenue Range

A B

100%

$0 – $250K $250K – $500K $500K – $1M $1M – $5M $5M – $10M $10M – $50M

100% 100%100% 100% 100%

5% 10% 10%15% 15% 20%

50% 35% 10%20% 5% 0%

15% 15% 15%15% 15% 15%

30% 40% 65%50% 65% 65%

C D E F

Real Revenue

Profit

Owner’s Pay

Tax

Operating Expenses




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SAMPLE BANK ACCOUNTS

• AsampleofaProfitFirstbankaccountconfiguration.

• Percentagesorfixeddollaramountsareintheaccountnametoindicatetheallocationamounts.

• Asecondbank(Bank2)isalsosetuptotransferProfit,Taxandother“temptationremoved”

accounts.

Income

BANK 1 (For My Business Operations)

ACCOUNTNAME BALANCE

Profit (15%)

Tax – Gov’t Money (15%)

Operating Expenses (39%)

Petty Cash ($75)

Employee Pay ($1,500)

Reimbursement (0%)

Drip (0%)

**3942

**2868

**4365

Owner’s Pay (33%) **0407

**5764

**4416

**8210

**4247

**8264

$13,432.23

$0.00

$0.00

$4,881.88

$3,767.18

$142.66

$1,845.46

$212.58

$27,500.00

Profit

BANK 2 (So My Temptation Is Removed)

ACCOUNTNAME BALANCE

Tax – Gov’t Money

**1111

**2222

The Vault **3333

$14,812.11

$5,543.91

$10,000.00




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CONTACT MIKE

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THEOFFICESOFMIKEMICHALOWICZ ATTN:CarlySimon POBox73 MountainLakes,NJ07046

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