558. Your Top 10 Profit First Questions Answered

Speaker A: Welcome to the Financial Lifestyle Freedom Podcast with me, Annette Ferguson. I hope you are very well today and I appreciate you tuning in and listening to the podcast. Now. If you do get value from it, I would love if you want to subscribe and also leave us a uh, review in whichever podcast player you happen to be listening in. It really does mean a huge amount to us and it helps others find our podcast as well. Now you're about to listen to a session that I did which was a Q and A session all around Profit First. If you have any Profit first questions, so do make sure that you pop me an email with those and I would be happy to answer them. You can email me at, ah, admin A D M m I n netandco.co.uk I'll also put this in the description to this podcast episode. Let's dive in. Hello. Hello everyone. I hope you're well today. It is lovely uh to see you metaphorically of course on uh, the live stream today, the UK Profit show. Thank you so much for tuning in and joining me. And if you are watching please say hello. Even if you're tuning in on the replay, please give me a hello in the comments, let me know that you are here. It is always lovely to um, connect with those of you that are watching. Um, today is going to be our Profit First Q and A session. So I have a number of questions that I have already been sent and have already been submitted. However, if you have a question please, please ask in the comments and I will answer that as well. I'm not only going to answer pre submitted stuff so if you do have a question for me then please do ask that question in the comments and I will um, get round to answering that too. Now if you are tuning in on the replay and you have a question again, please just ask in the comments. I will come back and check those to be able to then answer any other questions that may come up during this session from anyone as well. So please do make sure that you ask, for those of you that don't know me, if you are stumbling across this live. Um, my name is Annette Ferguson. I am CEO of uh, Annette Company, a UK based accounting firm. I am, I'm a charged accountant, certified Profit first professional and small business financial strategist. And fundamentally we help business owners take home more money from their business for them and their families to enjoy. Today we are speaking all about Profit first and answering your Profit first questions. Now for those of you that don't know, Profit first is a book by Mike Michalowicz and in this book it outlines a cash management strategy for businesses. Most businesses already have a transaction management strategy in place, be that Xero or QuickBooks, a method of recording the transactions that happen in your business. But in order to have a financially healthy business we need both a cash management strategy and, and a transaction management strategy. So both need to exist. And whilst most businesses, as I said, have a transaction management strategy, many, many businesses do not have a cash management strategy. And that's exactly what Profit first is. It doesn't mean anything comes second. It doesn't mean that your employees or your ethics or your morals or anything comes second to profit. We are talking about the allocation of funds and the management of cash in a business when we are speaking about profit first. So please don't get it confused with anything to do with morals m or ethics or humans or anything like that. This is the movement of cash that we're discussing. So profit first, as I said, is a pretty robust cash management strategy, one that we have been doing with business owners for over 10 years now. And it makes a massive difference to the businesses that have this implemented and uh, continue to operate it through in their business. And I say continue to operate it because it's not a set once and done system. It does need managed like any system in a business does. So today, as I said I am answering your profit first questions so please do let me know in the comments if you have any. Please ask your question. I will come round and answer those as well as the ones that I have pre submitted. But I'm going to dive now in to some of the questions that we have already had through so that I could answer those and perhaps some of those are ones that you may already have had as well. Before I do that, I am um, going to take a quick drink of my tea and then we will uh, look at the questions. So the first question is who is Profit first for? Is it suitable for all businesses? This is a question I get asked quite frequently either in relation to industries or in relation to revenue. I had a call with a prospective client the other day who was wondering if their business was too small, had too little revenue in order to implement Profit first and have that in place. And the answer is really that Profit first does work on all businesses, all business sizes and all industries. But you may need to tweak it to work for your business size and your business industry. Profit first straight out the book, exactly as is written in the book, doesn't necessarily always work straight away for every business Type and every business size. Whilst the book gives us a great guideline and as to how profit first works and what our optimum percentages are, it doesn't mean that that is the starting point actually for any business regardless of industry or size. And it is a system that typically needs modeled and molded to your specific business. So that is exactly what we do for clients when they first come on board. We establish what their starting profit first percentages will be and how we will move them towards the ideal percentages that want. But that is a situation that you most businesses, 99% of businesses cannot pluck the percentage allocations straight out the book and implement them straight away in their business. Most of the time when we see that happen with business owners, they try it and then they end up taking back all the money back out the pots and the system collapses. So it is suitable for any business, any size, but with modifications. Okay, so um, next question that I have here, the book talks about setting up multiple bank accounts. Do I really need them? The very short answer is yes, you do. Now with uh, some of the challenger banks we have slightly different setups and systems. So for example storage, Starling has something called Spaces, Monzo has something called pots. And so they don't necessarily need to be separate actual bank accounts. You can utilize that functionality within the challenger banks that exist. So for example, in my business we use Starling for banking and that is what we run, Profit first, we use Starling. But you do need some way of segmenting the money, of physically segmenting them. Because a follow on question from this that I sometimes get from people, although I don't think I've had it submitted today, is can I just track this on a spreadsheet instead and not physically move the money around? And the answer is no you can't because that takes away part of the benefits that you actually get from profit first. So having the tax money physically set aside, if you do it in a spreadsheet, you can spend that money, it goes. Whereas having monies physically set aside for its different purposes is part of what you get as a benefit from profit first, it helps both with mindset and um, actually the cash not being available in places it shouldn't be and being available in places that it should be as well. So the answer is yes, you do need some way to segment the actual money into different bank accounts and um, or pots or spaces, whatever that happens to be with whatever bank you, you are using at this point in time. Okay, and the next question we have here is how do I determine the right percentages for my profit. Owners pay tax and operating expenses. So as I briefly mentioned, this is an exercise that we do with clients when they first come on board. Over the first six weeks we build out uh, what we call a profit plan. It is a forward looking cash projection fund for the business with the principles of profit first layered into it. So we can establish our initial profit first percentages which more than likely are um, probably nowhere near the percentages you will find in the profit first book. But we need to start somewhere with our percentages. So what I recommend that you do to determine your initial percentages that you're going to use is that you build out your own version of, of a profit plan. You build out a forward looking cash projection and you calculate where those percentages start so that you can get a good understanding of how the business is operating now. And then you can map out how you're going to move closer to those profit first percentages that exist in the book. Now speaking of books, I do also have a book called the Profit Plan. If you want to do this yourself then the book is a uh, Kindle book. It is only 77 pence or something like that on Amazon. So if you go, ah, go on to um, Amazon and you search the profit plan, um, I suspect if you search my name, Annette Ferguson, it will also come up. But if you search the profit plan book, it's called the Profit Plan, the Science of Predictable Profit. As I say it is 77 pence to buy on Kindle, also available on Kindle Unlimited. So you'll be able to access that there as well if you want a step by step guide on exactly how to have your own profit plan in your business as well. Um, so our next question, how often should I be allocating my income to the different accounts? Can I just do it monthly? So the idea, part of the idea of profit first. There are lots of benefits from profit first, but one of them is that you can actually see the cadence of cash coming in and cash going out to your business. And we recommend that you do actually do profit first on a weekly basis. So you can see that and you're in touch with the money more. And I know that um, Mike has spoken in the past saying that he often does his allocations weekly now as well and not just not sticking to the 10th and 25th. So we recommend that you do it weekly and you choose a day of the week and you set aside 10 to 15 minutes in your diary as a recurring diary entry with yourself. So that you can get into the habit of doing your Profit first allocations on a weekly basis. That enables you, as I said, to get closer to the cash, to understand the income incomings and outgoings much more closely. And also lets you see that cadence of money coming in and coming out so that you can start to get a really good handle on what that looks like for your business. That's really important part doing this. Therefore, if you leave it monthly, you don't get to see that it takes away. It also typically means that many people would forget if they don't do it as frequently. And um, that's what we typically found with the 10th and 25th method is people would forget or the 10th would fall on a Sunday and they wouldn't actually be working that day. So that's why weekly and choosing a day of the week that's going to work for you typically works best for allocations. And we do recommend that you don't leave it to monthly, that you do do it much more frequently than monthly, ideally on a weekly basis. Um, remember, if you have any Profit first questions, please, please do ask those in the comments. I will answer any that we get in live as they come in. So I will answer those for you. If you are tuning in on a replay and watching this back out, uh, with the live session, you can still ask questions in the comments. I will make sure that I come back and check those for any questions that you have so that I can answer those for you as well. Um, our next question in how does VAT fit into Profit First? This is my biggest concern. So VAT is not covered at all in the Profit first book because it's not a tax that exists in the US and Mike is a US author. But how we work Profit first and VAT is that we need to have a separate account for VAT in the business. And how we do this with clients is we actually get them to allocate the VAT money out straight away before they even make allocations to profit. And that is because the VAT money is just not yours. When you are a VAT registered business, you are collecting VAT on behalf of the government. You are a tax collector. This is not your money. And therefore setting it aside at the very beginning, before you work out how much you can allocate out, uh, to the different pots is really important. So that's what we really recommend when you are VAT registered with Profit first is that the VAT goes out straight away to your VAT account and it waits there for when you get to make your VAT payment typically quarterly over to hmrc. Um, next we say have um, are there any specific UK banking recommendations for setting up the multiple bank accounts required for Profit First? I touched on this in one of my earlier answers but any bank you can work with Profit first, you can have um, current accounts and then multiple savings accounts set up. We haven't seen a bank yet that, that cannot be put in place. One of the traditional banks or having these kind of pots spaces functionalities that the challenger banks have. So you can use either. Some people have a mixture of the two. So they may have for example a tax hold account in a traditional bank and they may then have their sort of day to day working accounts that they're using um, in, in a challenger ah, bank like, like Starling or Monzo. That is a good way to, that's a good way to run it is to have, have that sort of set up um, in the business is, is a typical setup that we would recommend nowadays. These things of course um, change a little bit over time as well as different banks come in with different types of service offerings. But that's the type of thing that I would be looking at. Um, and as I said we use Starling in, in my business to implement Profit first with as well. Um, next we have. I've been using Profit first for a while but my operating expenses still seem too high. What are some strategies for reducing that percentage? I like to tell people to have a look at our money leaks exercise. You can find it on the YouTube channel if you're watching on YouTube and I will briefly speak through it now. But the idea is that you gather together all your business bank statements, business credit card statements, PayPal, wherever business spending is happening, you gather together all the transactions for the last 12 months and then you can go through. And if you have the physical copy, I take a highlighter and a red pen to those and I would go through every single page, every month, every line and ask yourself first of all when you do the first pass, is this expense 100% necessary to keep the proverbial lights on in my business? And if the answer is yes, you can highlight that transaction and you ask 12 months for some things and that's okay because they recur and you've got 12 times, that's all right. Then you go back through the transactions and with your red pen this time ask yourself is this expense 100. Sorry, is this expense delivering me a positive return on the money I'm spending out? So am I getting more money in or is it releasing my time for me to go and be revenue generating? And if the answer is yes, you can circle that, then what you end up with is you end up with some transactions circled, some highlighted, some both and some with nothing marked on them. And the question I have for you is, with nothing marked, what are those expenses? What is the purpose? And typically the purpose is they are nice to haves. And whilst nice to haves are nice to have, we need to also remember that nice to haves inflate our operating costs and decrease our profit. And therefore are you willing to keep that nice to have are to you willing on that basis? And the answer might be yes. But then you now know that you're doing this consciously and you're not just overspending in the business. So that is what I recommend. If you are in a situation where it still feels like your operating expenses are too high, going through them and making sure that they are either 100% necessary to keep the lights on or they delivering you a positive return on um, in your business in terms of money or in terms of time. Okay. Okay, what have we got? Next up? Let me take a drink of my tea whilst I read, uh, and have a look at uh, see if we've got any comments in as well. Um, how does profit first help with making big financial decisions in the business like hiring new team members or investing in software? So this tallies in with what I was mentioning before about building a profit plan, building a forward looking cash projection for your business with the principles of profit first layered in. Because in that situation you can do scenario analysis and you can set up a pot for your thing that you want to implement in the future and you can start putting money aside for it. So not only can you do the scenario analysis to check and make sure that it's going to work from a cash perspective, you can start actually making it work from a cash perspective perspective by putting money aside now and making sure that nothing else falls over as a result. So let's say you want to take on a new team member. Will you start putting that money into your team pot so that you know that you can afford that new team member? Because as you're doing that you can afford it and that's the best way to work those things. Let's um, see what else we've got. Uh, can I use accounting software like Xero or QuickBooks with profit first or does it make things more complicated? You have to, you have to have a method of transaction management as I Mentioned at the beginning, we need a method of transaction management and a method of cash management in a business for it to be financially healthy. And most businesses have a method of transaction management that's your Xero or your QuickBooks. But most do not have a method of cash management that is typically profit first. So you need to have both in the business. Um, therefore you need to have Xero or QuickBooks when you're implementing profit first because those things are what help you review the actual profit and loss account. Your balance sheet, your cash statement, your accounts receivable, your accounts payable. All these things are really necessary to understand the financial health of your business as well, not just managing the cash in the business. Not to mention that it is a legal requirement in the UK to keep up to date and accurate books and records. And those online softwares help and support you to do that as well. So yes, you absolutely need both. And you should make sure that all your bank accounts are connected to your software for transaction management. They all need to be in there, whether that's separate savings accounts, your current accounts, whether that is, um, PayPal accounts, Stripe accounts, all those things, credit card accounts, they need to all be connected within your transaction management system. Um, and the final question that I have that was a, was a pre submitted question. I, as I say, I'm happy to take other questions. Just let me know in the comments what your question is and I will answer that. Um, I'm starting to feel a bit overwhelmed. Where do I start? So where to start with profit first, the ideal position is, is to build out a cash flow forecast and work out what your starting percentages are. But if that all feels way too much, that's okay. Start with your money leaks exercise that I described earlier. So understanding whether the spending in your business is 100% necessary to keep the lights on delivers you a positive return. If it is neither of those two, then it's, uh, a nice to have. And while it's nice to haves are great to have, we don't necessarily want them in our business when we're trying to change the financial trajectory. And therefore understanding that the more nice to haves you have in your business, the less you have profit. Therefore, establishing whether some of those nice to haves shouldn't exist anymore and you should cancel those. That is the very first thing to do if the whole idea of getting this in place is overwhelming. Get your money leaks under control first and then you can move on to getting profit first. Set up and in place a little bit easier because you will have freed up some funds in your business to give yourself a little bit of breathing room if it feels like you have none at this point in time. Right. Any questions that are coming in from our um, various platforms that we are on. I'm just going to check the streams on my phone as well because occasionally, um, they don't actually show on, on my dashboard here, but they will show in, uh, they will show if I click on them in the streams so I'm just checking there as well. But if you do have any Profit first questions, please do ask them in the comments. I would love to answer those for you, so please do let me know. I can't see any coming through here. I think everyone must be shy today, but that's okay. If you are, as I said, tuning in on the replay, you can also ask um, after the fact and I will come back and answer those for you as well. I thank you so much for tuning in today too. I know your time is incredibly precious, so I really do appreciate you some spending some of it with me. I hope this has been helpful as well for you on your Profit first journey. As I said, we have been implementing profit first for over 10 years now, both in our own business and with our clients businesses as well. And we have seen massive, massive results from those people that do implement profit first. So I really hope that you get a chance to start working on this in your business if you have not already. If you want to have a chat with us about how we can support you to help get Profit first in place, then please do book a call with me. It's annetteandco.co.uk fitting is our URL for our call. It also should be in the description to this video as well. Um, or you can just head to the website anet&co.co.uk and you'll be able to click the link there, um, to the relevant page for booking a call. But as I say, thank you so much for tuning in and joining me today. I do appreciate your time. I know it's incredibly precious. So thank you so much for spending some of that with me today and I will see you all again really soon. Take care everyone.