Decades back, I had put most everything my wife and I had to purchase our family’s shop from my uncles. After the purchase, a smart businessman I knew named Chuck asked me a question, “How is your new business going?” Because of pride, I told him things were going OK, even though I was working myself to death, etc. I also told him I would fortunately have something to sell for retirement down the road. Chuck stopped me in my tracks and gave some, unbeknownst to me at the time, words of wisdom. He said, “Greg, when you look at retirement, you need to look at it as though your business will be worth nothing!” After just investing our life savings a year prior, I was a little ticked off with Chuck’s statement!
Fast forward several years later. After swallowing my pride and investing in consulting/coaching, my business had grown several times over, profits were much higher, we had a great staff and even built a new facility. I was at the point that I was debt free and then able to build up a nice reserves account. Then I started pulling out cash for investments. Ironically, when good things come, they always bring new challenges. It seemed like every time I pulled money out of my business—bam, I would get a surprise bill, whether a piece of equipment needed to be replaced or an estimated tax bill was just around the corner, or even some large jobs were piling up in A.R., etc. All at once, I was now stressed with cashflow issues. Then I would end up dipping into reserves and move cash around to weather the storm. After the storm had passed, cash would build back up and I would then pay back the reserves account. Then maybe a month or two later, pull more cash out for investments, then—bam, another surprise followed by cashflow issues. It was just a vicious cycle.
Overall things were good, but I thought there just must be a better way! So, I did what most anyone else would do and Googled it! I searched for books on profitability. I was trying to figure out a way to pull profits out like clockwork and not have cashflow issues. Well, I ran across a book that probably 25% of those reading this column have already read. The book is called “Profit First” by Michael Michalowicz. Yep, that’s right, the book is about taking your profit first and then paying your bills. Many of you are thinking, good luck with that!
Here is the deal, for my business I have nine actual bank accounts: Income, parts paint sublet, sales tax, owner’s compensation, profit, personal (estimated) tax, operational expense (OPEX), equipment and reserves. All incoming dollars, whether that be checks, cash, EFTs or credit card payments go directly into the income account. Then every week or bi-weekly (pending your payroll frequency), all funds in the income account are allocated to the other eight accounts. The income account becomes a giant serving tray. The other eight plates are the dinner plates. There are CAPs (Current Allocation Percentages) and TAPs (Target Allocations Percentages). Through an assessment process, you can determine your CAPS and then strive to reach your TAPs by cutting out waste, increasing sales & innovation, etc. There is lots more to this, but hopefully you get the idea. Disclaimer: I had an advisor help set mine up, as my time is too valuable to dilly dally. One of the coolest parts is, every month the money is there for sales tax, for parts paint & sublet, for my quarterly estimated tax, for payroll, for new equipment, for my paycheck and, most importantly my profit (it’s all mine!).
Some will say, I know how to read my P&L, have a good net profit, and don’t need anything like this. Here is my challenge to this thinking, can you take out a desired amount of money like clockwork and not affect your cash flow? The P&L is great way to manage our business, of course. Here is the catch, our P&L may say we made, for example, $40,000 last month in net profit, but where is that cash in our bank accounts?
In summary: If you read the book, but then put it back on the shelf, I encourage you to re-read it and then act. “Profit First” works in a $500,000 or a $500,000,000 per year business and I will NEVER run my business without this system. As far as Chuck’s statement to me decades back, I now fully understand that the sale of our business should NOT be our retirement fund. Rather it should be funding our retirement now. Fortunately, I was able to thank him recently. And he is also, by the way, a decamillionaire.
