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Profit first - Mike Michalowicz - Coggle Diagram

- - - - 1: any sale feels like a good sale, because sales help to temporarily lift you out of crisis.
        
        rarely think about the opportunity costs or discern the profitable from the debt generating income
        
        not about driving towards our vision its about taking some action any action to get out of crisis
      - 2: fools us into thinking we are moving (inching) toward our vision
        
        by chance some crisis decisions will move us towards our vision
      - 3: all our focus will be on revenue generation
        
        never forget that not all revenue is the same - some costs you more in time and money some costs you less - you must distinguish between the 2 as 1 is profitable and the other puts you out of business
    - - SALES - EXPENSES = PROFIT
        
        SALES - cost - expenses = owners pay and profit
        
        makes us believe bigger is better and more sales = more money and more profit
        
        becomes a relentless cycle
      - 1: the fundamental flaw of GAAP is that it goes against human nature - however much income we generate we will always find a way to spend it
      - 2: GAAP teaches us to focus on sales and expenses first - whatever we focus on we grow - whatever gets measured gets done
      - 3: overly complex and requires and accountant
- - - - start with your historic levels then add 1% to all the accounts
        use these numbers for 90 days or 1 quarter
    - - need to cut expenses by 3% to pay for above
        
        work out
        1: all expense for last 12 months
        2: all recurring expenses like rent etc.
        ADD ALL UP AND CUT IT BY 10%
  - - - From today forward, your team can quickly determine their most profitable tasks. If something will likely make money for the company within the next sixty days, give it a $. If it is something for a top client, give it a smiley face ☺ ; and if it is a system that can be created so that other people or things can do the task perfectly and you no longer need to do it, give it a ∞.
      - Next, write down the tasks you have. Code each of them with no symbol (if it doesn’t apply to the three categories above), or one of the symbols above. In some cases, a task will get two symbols or all three. Then prioritize your to-do list based upon the symbols in this order:
      - Then do $ This task means you are bringing in money. Profit, baby!
      - First do $ ☺ ∞ These are God’s gifts to tasks. When you do one of these, you will make money, make a client happy (which, by the way, is the most powerful form of marketing) and systematize the task as a repeatable process. That way, the next time this task presents itself, you just hand it off and it will be done perfectly! Profit with a client loving it, and you will be able to do this on automatic going forward.
      - Next is $ ☺ Happy client paying you money = a happy life. Then $ ∞ This is a task that lets you make money and develop a system to make it happen automatically. Maybe not for the current client, but automatic money usually means new clients down the road.
      - Then do ☺ ∞ This is a task that makes a client happy. You will develop a system so that it happens on automatic. Consider it automatic client retention and automatic marketing.
      - Next, do ☺ You might not make money immediately by performing this task, but a happy client is key to sustainability, is powerful marketing and usually leads to more money in the future.
      - Then do ∞ With this task, you build a system so that you don’t have to do it anew every time.
      - And lastly, do “ ” That is a blank. I just put the air quotes there so you could see it was blank. In many cases, as you think of tasks and write them down, you will notice that most are blanks—they don’t or won’t make money in the near future, they don’t serve clients and they aren’t building systems. Do these things last.
      - By having everyone at your company prioritize their to- do lists with this simple system, you push Profit First. Don’t just give this to-do system to a few people. Share it with your entire staff. Help them focus on the three things that matter most: profit (the lifeblood of your business, without which you can’t sustain the business), clients (the real boss; without them there is no business); and systems (the only way you can grow and compete).
- - - - 1: research public companies in your industry, divide the the net income figure by the sales/revenue no. to get the pf% take the average or 3-5 companies - use that figure
      - 2: Review your previous tax returns for the last 3 - 5 years and find your most profitable year by % - use that
      - 3: pick your profit % based on projected revenue using the table from the quick assessment
      - if u r a manufacturer use gross profit as the real revenue number
      - You need profit % to grow past 5% asap as this also serves as your rainy day fund
      - If your sales were to stop completely, with not a single deposit coming in, here’s a good longevity rule of thumb:
        
        5% profit allocation = 3 weeks of operating cash
        2 . 12% profit allocation= 2 months of operating cash
        3 . 24% profit allocation = 5 months of operating cash.
      - Goal is to make profit % as high as possible
    - - Your salary should be on par with the going rate for the work you do, in other words—the salary you would have to pay your replacement.
      - Take a realistic look at the work you do. If you have a small company with, say, five employees, you may call yourself the CEO—but that’s just the title on your card. Likely, you are doing a lot of other work. You probably spend a lot of time selling, completing projects, handling customers and dealing with HR concerns. In reality, around two percent of your time is spent actually doing the job of CEO—vision planning, strategic negotiations, acquisitions, reporting to investors, addressing the media, etc. Determine your salary based on what you are doing 80% of the time, and what you would reasonably pay employees to do those jobs.
      - 2 . Evaluate pay for all equity owners who work in the business. Add up the salaries that represent your Owner’s Pay draw. The percentage of revenue must, at minimum, cover Owner’s Pay draw. Remember, you will likely get raises—maybe even a bonus for a job well done. So make the percentage one-and-a-quarter times the amount you determine for your salaries, so you can adjust for revenue fluctuations.
      - or pick the figure from the instant assessment
      - My business serves me; I do not serve my business . Paying yourself next to nothing for hard work is servitude.
    - - 1: Look at your personal and business tax returns. Add up your taxes and then determine the percentage of taxes you paid compared to your Real Revenue. Do this again for the prior two years. Looking at your taxes as a percentage of Real Revenue for the last three years will give you a good sense of your ongoing tax responsibility.
      - 2: From your accountant get your estimated tax responsibility for your business, year-to-date (YTD), and then determine your tax percentage of your YTD Real Revenue.
      - 3: Find tax rate for this year on google
      - 4: use 35%
- - - - Cancel everything that is superfluous
- - - - In this account, you collect all of your income deposits so that you can clearly see how much cash you collected between your 10th and 25th allocations. This will separate incoming from outgoing cash, both of which were being managed by the Operating Expenses Account in the simple version of Profit First.
    - - short-term emergencies. At a certain point, leaving 50% in your Profit Account to act as a rainy day fund is not prudent since the money flow is a little unpredictable. A bad quarter won’t contribute much to the Profit Account. Then you take 50% out for a profit share, and now that Profit Account reserve might be too small for a big business.
      - Must establish certain rules for its use. What I mean is that, when you have a situation so dire that you need to access this money, you also have instructions written in advance on how to proceed.
    - - This is an account for big purchases and to fund stocking parts of your inventory. Allocate stock/time amount to this account for large purchases etc.
    - - Some businesses receive income from customers that is not to be allocated for Profit or Owner’s Pay. Sometimes you may provide a service or a product to your customer at cost (or near cost), and other times you may be reimbursed for costs outright.
      - If I have paid the bill in advance, the money is deposited into the Pass-Through Account and then transferred (on the 10th or 25th) to the Operating Expenses Account, from which I paid the initial bill.
    - - If most of your revenue (as indicated in the Instant Assessment) falls into top line revenue and does not flow through to Real Revenue, then most of your income is pass-through revenue and the core of your business is basically the management of that pass-through. If this is the case, set up a Materials Account for the money that is allocated specifically for purchase of materials. Do not allocate it for anything else. (Ever!)
    - - If your business does not purchase materials, but uses contractors or people paid on commission instead, this is where you allocate the funds to pay these fine folks. Treat it just like the Materials Account, but apply it to contractors and commission-based team members.
    - - Employee pay is relatively predictable—full-timers are on salary and part-timers, for the most part, work an average number of hours per week. This means you can look at the cumulative gross pay for your employees plus the payroll taxes you’ll incur and allocate funds from your Income Account (if you use advanced Profit First) or Operating Expenses Account (if you use basic Profit First) to the Employee Payroll Account every 10th and 25th.
    - - Similar to your Stocking Account, this account is for big purchases you may need to make farther down the road, such as new computers or a high-end 3-D printer. Estimate how much you might have to spend on future equipment purchases, divide it by the number of months you have to save up for it, divide that number by two and allocate that amount every 10th and 25th to accumulate enough money for that big purchase.
    - - This account is for retainers, advance payments and pre-payments on work your company will complete over a long period of time and for which you have yet to expend resources.
    - - Set up a bank account and get a debit card for petty cash purchases, such as client lunches. Then, allocate a regular dollar amount from your Operating Expenses Account to petty cash.
    - - If your business collects sales tax, every single, stinkin’ penny of the sales tax you collect is immediately allocated to this account.
    - - Create a single-page document that defines the function of each account. Explain what purpose each account serves, and the process you will follow.
    - - You get what you focus on, so stop focusing on expenses. Focus on profit and the expenses will be taken care of by default.
      - Screw the “monthly nut.” Instead, focus on your Required Income For Allocation (RIFA). This is the money you need to deposit by the 10th and again on the 25th to have a healthy business, to pay the salary you want from your business and to take the profits you deserve. Period.
    - - For each full-time employee, your company should generate Real Revenue of $150,000 to $250,000 (ideally more, but this is the minimum).
      - If, on the other hand, you are in a “cheap labor” field, such cost. For example, let’s say you’re a manufacturer with $6,000,000 in Real Revenue. If you hire “cheap labor” (like assembly line personnel), you will divide $6,000,000 by four to get $1,500,000. This means that your total labor cost (the people on the floor and the folks in the office) should not exceed $1,500,000.
- - - - Print and Markup docs
        1: Print out 12 months income statement
        2: draw a box around labor cost - exclude owner salaries
        3: Highlight expenses that were required to generate immediate revenue.
        4: Next, highlight any expenses that are absolutely necessary to keep your business open. This does not include employees or contractors, or any people you boxed with your highlighter already in Step 3.
        5:With a red pen, circle expenses that repeat every month, quarter or year and will continue to do so. Note: Some expense items, like labor costs, will get highlighted or boxed and circled.
      - Do some math
        6: Add up all the expenses for the year; include everything you highlighted, circled, boxed or left blank. Exclude tax payments and owner’s distributions or salaries. Divide the result by twelve to determine your monthly “nut”—the total amount you have decided you need to cover each month.
        
        Determine the difference between your current monthly operating expenses and the number it must be according to your Instant Assessment.
        8: To avoid having to keep chipping away at debt, it’s best to plan to cut expenses until you are operating at 10% below the target number on your Instant Assessment.
      - Build a leaner team
        9: Labor cost is usually the most expensive part of operating any business. Evaluate each person and determine if her role is mandatory for operations to continue (not the person, but the role). If a person wears multiple hats (for example is your receptionist and in-house sales person), ask yourself if each role is mandatory for operations to continue.
        10: Next, evaluate your staff. Are there any people who aren’t “A-players”? Do you have any people who are actually bad for the company?
        11 . Ignoring the salaries and how you feel about the people, determine the following: a) which roles must stay in-house no matter what, b) which roles could be outsourced and c) which roles the company can continue without.
        12 . Next, look at your people. Look at yourself. What roles could you take on? Now look at your best employees, the A-players. Can they be shifted around to cover the roles that must stay in-house? Are there any must-have roles that can only be handled by a specific person?
        13 . Plan the layoffs.
        14 . Call your employment and/or business attorney. Never, and I mean never, proceed with terminations or layoffs without talking with your attorney first.
        15: Among the highlighted, boxed expenses, you also have commissions and bonuses for employees, freelancers, etc. Look for ways to cut down on or remove these costs entirely, but always remember that in doing so, you are reducing someone’s pay.
        16: Start the layoffs. Choose a second person to witness the layoffs and help you explain the situation with each employee.
        17 . Once each person is laid off, call a staff meeting with all your remaining employees. Share what you have done and why you did it. Explain how difficult it is to have to do this, and that you take responsibility for both the financial problem you got the company into and for fixing it. Assure your team that everyone remaining is here to stay, and that you have taken action to immediately stabilize the company.
      - Time for more cuts
        18: Now the hardest part is over, call your bank and tell them to stop all automatic withdrawals from all of your accounts, except for any that you have highlighted in Steps 2 and 3. Then notify your vendors that you are stopping the withdrawals and will pay by check going forward. I am not suggesting in any way that you should not pay what you owe, or break a commitment. I simply want you to be acutely aware of every payment you make.
        19: Call each credit card company for which you have a card and ask them to issue you a new card with a new number. Tell the credit card company that no payments that were being processed on your old card should transfer to your new one. This will stop all automatic charges
        20 . Cut every single circled red expense that you can. Recurring bills are sneaky; they seem small and insignificant until you look at how much you spend cumulatively, over time.
        21 . Renegotiate the highlighted expenses.
        
        Put a big check mark next to each highlighted expense you successfully negotiate or replace.
        23 . Now go through all those expenses that are left on the list. It’s time to wipe them out. Put a big X through each expense that you commit to not incurring again—at least not for another two years. You are going to take a sabbatical from these expenses and discover how much your business can accomplish without unnecessary expenses.