Ep #6 | Master Your Money: The Profit First Approach to Keeping More of What You Earn

Welcome to Episode 6 of the Roadmap to Business Success series, and the first episode of Quadrant 2: Keep More | Profitable Operations!

You've done the work to generate revenue. Now it's time to talk about the part most business owners avoid until it's too late: keeping it.

In this episode, Sam takes the lead on one of her favourite topics: money. Not the fluffy version, but the practical, roll-up-your-sleeves kind that actually changes how your business feels to run day to day.

"Most business owners know what they're earning. Very few know what they're actually keeping."

In this episode, you will learn:

• Why traditional accounting often fails business owners: How accounting is largely historical and tax-focused, and rarely designed to help you make better day-to-day decisions.
• Markup vs margin: One of the most common and costly mistakes small business owners make, explained clearly and simply.
• How to make your chart of accounts work for you: Why restructuring how you categorise income and expenses gives you far greater clarity over where your money is going.
• Cost of goods sold vs operating expenses: Why separating these properly is essential for accurate forecasting and understanding your true profitability.
• The Profit First method: How splitting income across separate bank accounts for profit, tax, operating expenses and owner pay creates automatic financial discipline.
• How to build a cash buffer: Why a financial cushion isn't a luxury, it's a necessity, and how to start building one even when cash feels tight.
• Adjusting your Profit First percentages by business stage: Why the right allocation for a startup looks very different to an established business.
• Why you must never "steal" from your profit account: The habit that keeps business owners stuck in financial stress, and how to break it.

Sam and Kate also discuss why money slips through fingers even when revenue is strong, and why the solution isn't always earning more, it's managing better.

Recommended Reading: Profit First by Mike Michalowicz, the book that underpins Sam's entire approach to profitability.

Join the Workshop: Kate and Sam are hosting Profit Unlocked on Wednesday 20 May, 9–10:30am AWST | 11am–12:30pm AEST

You'll get 90 minutes of live profitability coaching.

🎟️ Attend LIVE: $110 | 🎧 Replay only: $50 

👉 Register here

Coming Up Next: Episode 7 — pricing for profit, why you're leaving money on the table, and how to price based on value rather than time.

Connect with Your Hosts:

Kate De Jong, PhD | Inspired Business 🌐 Website: https://katedejong.com/ 📱 Instagram: @katedejong.inspiredbusiness ✉️ Email: kate@katedejong.com

Sam Morris | The O8 🌐 Website: https://www.theo8.com/ 📱 Instagram: @the_o8crew ✉️ Email: sam@theo8.com

Thriving Business Podcast 🌐Website:   https://www.thrivingbusinesspodcast.com/ 

Transcript

SPEAKER_00 0:02

Hello, everyone, and welcome back to the Thriving Business Podcast. Hi, Sam. Hello, Kate. We uh this is a very fun episode because this is your domain of expertise. We're talking about money mastery today.

SPEAKER_01 0:18

Yes, yeah. You'll probably have to shut me up today, Kate.

SPEAKER_00 0:22

Which is a good problem to have. Yeah. So just for everyone's um understanding, we are now on episode six of um season two, and we have walked through um the revenue. What do we um it's the the roadmap to business success? So episode one was talking through the entire roadmap, and then we had four episodes talking about revenue generation. Um, we looked at business identity, crafting an irresistible offer, then how do you take that offer to market, and then how do you how to sell um powerfully. So now we're up to episode six, which is moving into quadrant two of the thriving business wheel, which um following on from revenue generation is all about profitability and keeping the money that you earn and making it work for you in your business and in your personal life.

SPEAKER_01 1:13

Yes, I think there is so much focus out there in you know, marketing and in our feeds and and the perception that it's really important to nail your sales and marketing. But a problem that I see a lot of is that people don't know how to manage that revenue once it comes into your business. They just there is a real there are some some big holes in education as far as money management goes. Absolutely. And I I I've said this to you before, Kate. I think sometimes when we're good, really good at something, we take it for granted and we expect that people must just know this because it comes so naturally to you. And the the more I talk about how to manage your money, and with the, you know, my focus is on helping small business owners. But the more there is, the more I talk about it, the more I realise there there is a massive gap where people just don't understand the fundamentals and because nobody's teaching them.

SPEAKER_00 2:18

That's right. And this is where you're really good, Sam, because you didn't come from a traditional accounting or b um bookkeeping background. You, as if as most listeners know by now, you started out of the Navy and then um started helping your um husband to grow your business that you still run 25 years later. Is that right?

SPEAKER_01 2:39

Oh, we're not quite there. My husband sometimes fit says it feels like a hundred years. Yeah.

unknown 2:44

Yeah.

SPEAKER_01 2:45

But we're we're in we're up to about 22, I think. So yeah, we're nearly at 25.

SPEAKER_00 2:51

But you have been the one managing the books and and the money flowing in and out of that business, right?

SPEAKER_01 2:57

Yes, from day one. Yeah. And I did not like the the system that I use now to manage money was not how I started at all. So when I talk about the you know, the gaps in education, um, I'm very aware of them because I used to have them. But the system that I run now is so second nature to me and feels so natural that I forget that other people are just really stuck and and haven't figured it out. And look, even in the Navy, that there were parts of my job that required me to manage money, not real money, not stacks of money, but I had to manage budgets and I had to do forecasts and things like that in my job. So there was a little bit of that learning early on. And before I joined the Navy, I was doing accounts receivable, accounts payable, and you know, sort of dancing in that arena. Um and even when I started my degree, I actually started a Bachelor of Accounting. Right, yes. I did first year, and I honestly I asked myself the question, do I really want to be an accountant? And the answer was no. So And what was it, what made you say no to that? Because the thought of doing tax returns for a living was making my brain bleed. And and honestly, I went into studying accounting simply because it felt like a natural extension of the work I was doing. But Stone of Genius, it is it is not, it is not my passion. However, playing around with numbers and making them work, yeah, that is that comes really easily to me. And I know it doesn't for everybody. Yeah. It does come easily. I I can I can very easily pick up on how to manipulate them and and when they look off.

SPEAKER_00 4:56

Yeah. Yeah. And yeah, I think that is your genius, is um, you know, is is understanding money and and giving people oversight and helping people make sense of it and making good decisions around it. And the vehicle that you now use is the profit first model, right?

SPEAKER_01 5:12

Well, a hybrid of it. I've read the book. I'm not I'm not a profit first certified person. Yeah. So so I have to be very careful to say no, it's not exactly a profit first. So I do and and I have adjusted a little bit to suit the the audience that I work with, like the customers, the clients that I work with. But but quite similar because the the principles were there. And honestly, Mike McAllowitz in his book, he explained it so beautifully. My brain just got it. It was like the light bulb turned on and I saw it all, and I was like, I can figure this out, um, which I did really easily, and it just it just grew from there. And like I say, I've adapted things and I've learned um that there are some parts that probably are missing for some people, just you know, that I just help. Yeah.

SPEAKER_00 6:10

So there's there is a difference, isn't there, between sort of traditional accounting, bookkeeping, and and managing money and and money mastery and making money work for you in the business. And that's the gap that you fill. And I'd love for you today to help all our listeners get a bit of a better understanding in layman's terms of you know, yeah, um, of of what this all means and how they can really become a master of their money. And I remember you telling that story when you first went into your accountant's office with your husband back in the early days of your business. And yeah, do you want to tell that story quickly? Because I think it's quite good.

SPEAKER_01 6:43

I do. Um, so it's really exciting when you start a new business, and you know, like you the the first goal that we had, you know, in my head, the first goal we had was to just get in the black, show something positive on the books. Yeah. So it was very, very exciting when we achieved that. You know, and we went into the accountant's office and he's looking at the PL after he's done all his adjustments and uh and you know, because that's what the accountants do. They do the allowable adjustments that are regulated by the tax office in order to provide financial reporting on behalf of the business to the tax department so you can be taxed appropriately. Yes. However, those reports mean nothing to a small business owner.

SPEAKER_00 7:31

Yeah, yeah.

SPEAKER_01 7:33

They just don't.

SPEAKER_00 7:34

And I know for the When you say they mean nothing, you mean they don't provide you meaningful information to make good decisions about what you're doing.

SPEAKER_01 7:41

Is that right? Yes, yeah, yes, because those reports and and what your accountant prepares is all historical. They tell you what has already happened. That doesn't help you with what is going on today. That doesn't help you with the fact that you don't have any money in your bank today and you can't pay bills. Yeah. Maybe you can't pay payroll. So what this is all about is okay, there are experts that take care of the historical stuff, what's already been and gone. This is about what you can do for yourself today, or you know, get someone like me who will manage this for you. And it's about okay, this is where we are, and we do a little bit of forecasting to see where we're tracking going forward, because accounting and bookkeeping is looking backwards, and business owners need to look forward. Most people don't know how to do it. The thought of doing budgets and forecasts is just mind-boggling because you have to wade through a chart of accounts that doesn't make sense. That's all the accountant, you know, you pay an accountant and a bookkeeper to manage all of that stuff, and they set it up, and it's really great for them to do their job. Yeah. But the everyday business owner who is highly skilled in whatever they're in business for, it it's double dutch to them.

SPEAKER_00 9:17

Yeah, it's a big disconnect there, isn't there?

SPEAKER_01 9:19

There is a huge disconnect there.

SPEAKER_00 9:22

So, what if we start there, Sam? So basically, in today's episode, we want to give people an overview of money mastery as as we call it, which is, and um, we'll focus on using the profit first model just because thanks to you, I've also been using it and getting clients to use it. And it is a game changer. Um, like the story I like to tell is of my client who was making$300,000 but never had any money in the bank and said, Where is it all going? And then we started using the profit first model, and now he said he can sleep at night. He always has money for tax, and now he's got profit and he's going on, you know, um holidays, and it really changes the way um you feel in business because suddenly you have control, you have oversight, and you have that optimism that comes from seeing that profit account growing and then being able to use that. And that's where the joy comes into it, and that's where business suddenly becomes fun because now you have choices and and and that's it's sort of an upward spiral, isn't it? Once you get into that into that mode.

SPEAKER_01 10:20

Yes, yeah, and it can become really addictive to watch that profit account grow. Yeah, but what this system does is gives you visibility over the money that's coming in, and it it straight away it shows you your shortfalls. So before the bills become overdue, you'll be able to see that your expense account isn't going to cover things. Now, before you start to feel really down about that, this is where you need to do a little bit of education or getting somebody to help you to understand the steps you can take to avoid those catastrophes before they happen.

SPEAKER_00 11:03

Yeah. So it's about being proactive, isn't it? It's about understanding, understanding what how your money needs to work for you, what the dem what the requirements are in your business. Um, and yeah, so if we step it back and um take it through. So you you mentioned that chart of accounts is where where you start with clients, is that right? Could you tell us a bit about that?

SPEAKER_01 11:27

So the chart of accounts is, you know, and the look, there are a lot of business owners that it just use the generic chart of accounts that the software will set up for them.

SPEAKER_00 11:38

Yeah, which is um what I think I'm I use. Yeah. So it's a default template that came with zero. Yeah. And just for those who don't know, if if you're new in business, the chart of accounts is the the categories, the allocation of money that flows through your business to different categories, right? So yes, yes.

SPEAKER_01 11:55

So if and it's designed for accounting because it the a basic chart of accounts categorizes things in in three broad areas, which make up the accounting formula, and it it gives you your uh your revenue and it gives you your expenses. Yeah, and then you have a balance sheet, yeah, and that's where all of your assets, your liabilities, yeah, and your equity sit. So there's two reports that you know people are supposed to look at and understand. Yeah.

SPEAKER_00 12:32

I don't know. I was guilty of just looking at the PL because everyone focuses on the profit and loss report, right? But that's just one element of the balance sheet.

SPEAKER_01 12:40

Yeah. That's right. Yeah, that's just one report. But it's a really important one because at the end of the day, that number down the bottom, the net profit, you want to see that as being a positive number. Yeah. So the chart of accounts is how all of these things are categorized and how they sit in these reports. However, those reports are accountant friendly, they're tax office friendly, they are not business owner friendly. Now, one of the one of the things, one of the terminologies that people get confused with is margin and profit. Because people think, and and you know, and there's a thing called a profit margin. So there's misconception around the margin that you put on top of whatever you're selling. Yeah. And, you know, and it could be called a markup. There are a number of different words for it, but it is a very common misconception, Kate, that margin or markup is the amount of profit that you're going to make. So if you put a 50% margin on something or a 50% markup, there is this misconception that that means that, oh, that's 50% profit for me on that thing.

SPEAKER_00 13:54

Without taking into account all the other expenses that you have in the business that need to be taken care of. Correct.

SPEAKER_01 14:01

And unfortunately, the way the stock standard chart of accounts is set up, it's going to mislead you as to what your margin should be. Okay. So when I first start working with people, I look at their chart of accounts because I'm like, did you know that you don't have to stick with this chart of accounts? You can actually re-categorize things so that this report will be a lot more telling.

SPEAKER_00 14:29

So, what are some of the things you have to typically re-categorize for people?

SPEAKER_01 14:34

I like to adjust the chart of accounts so that it shows costs of goods sold and people normally associate that category, and that I know that's an accounting term, and I I still do fall back to that because I do have a bit of training experience on that side of the fence. Some terminology are very is very helpful and yeah, and I think that's a reasonably self-explanatory one, the cost of goods sold or cost of services sold if you're a service-based business.

SPEAKER_00 15:01

There are all the money you have to spend to deliver that product or service. That's right.

SPEAKER_01 15:07

But but a stock standard chart of accounts doesn't divide the cost of goods sold up with the rest of their expenses very well. Right. Because I find there are a lot of things that sit below that cost of goods sold that should be up the top. Right. And so there when you do profit first and you work out your percentages, your chart of accounts can be very misleading with regard to how you do your allocations in profit first. Okay.

SPEAKER_00 15:38

Yeah. So I guess you what you're saying is you um first help someone sit it set things up so that um what needs to be accounted for and cost of goods sold is clearly there, sits there, and whatever is not part of that sits somewhere else. So it's just getting that delineation set up properly from the start.

SPEAKER_01 15:54

Yes, because from that report, that's when we're going to calculate how much you need to run your business from day to day. And it's and there are there are two different numbers that you really need to know. The first one is how much money do you need every week to just be open for business? Yes. Let alone actually do anything that makes money just for having your shop open, or you know, and let's not forget digital businesses. There are costs involved there. You've got to pay for internet and things like that. You're paying for internet whether you're working or not.

SPEAKER_00 16:29

That's right, yeah.

SPEAKER_01 16:30

So these are that this is where we've got to separate the things you have to pay for, whether you are working or not, versus the things that you pay for when you are specifically doing any kind of activity that is going to generate money.

SPEAKER_00 16:46

Yeah. Okay. So um, yeah, what are some of the traps people fall into aside from the profit margins and my and cost of goods sold? Are there in terms of setting up that chart of accounts, are there any other main major things that people need to look out for?

SPEAKER_01 17:02

Uh there, look, that that's probably just about it because I don't like to I don't like to overcomplicate it. And and starting with the chart of accounts can feel pretty overwhelming.

SPEAKER_00 17:12

Yeah.

SPEAKER_01 17:13

Uh especially if you don't understand fully uh how to slit things up. You know, like I I remember I explaining to a clo one client, I said, Oh, you've got parking fees down down here. When are you paying parking fees? Oh, when I have to go and do client visits. So directly related to revenue generation, then you don't pay parking fees unless you're out there. And and your client visits are part of revenue generation, right?

SPEAKER_00 17:40

So that's technically a cost of goods sold.

SPEAKER_01 17:42

So I'm like, that has to go up here. You're not paying parking fees unless you're out there working.

SPEAKER_00 17:47

Yeah, that's the cost you need to incur to be able to deliver your service. Yeah.

SPEAKER_01 17:51

Yes. Right.

SPEAKER_00 17:52

So getting that real clarity around um the split or the delineation, as we said, is really important so that people um I guess when we move on to the percentages that you've talked about, which is um the profit first model. Um, yeah, do you feel like we're ready to talk about that bit now? Yeah, yeah, we absolutely can.

SPEAKER_01 18:13

And with the percentages, the these have to be calculated and you have to take in a couple of different factors. The first one being where you are in business, because a startup can't pick a 10% profit margin. That's right. Like the percentage has to be much lower for your profit allocation when you're starting out compared to an established business that has that great historical data that we can look at.

SPEAKER_00 18:44

And they've got um consistent cash flow coming into the business.

SPEAKER_01 18:49

Yes, yeah. So the starting point is to use the percentages based on your historical data.

SPEAKER_00 18:57

Yeah. So give us an overview of what the percentages are.

SPEAKER_01 19:00

So the percentages are, and look, I I don't follow the strict profit first rules with this. Um, like I said, I'm not certified, and and you absolutely can go and find certified professionals who will can do all of this for you. I do it a little bit differently. So I have an allocation to profit, an allocation to tax, an allocation to operational expenses, and I have an allocation to uh what I call my like it's like a longer term holding account. And that covers things like long service leave and holiday pay and things like that. Because, you know, God forbid, if you have a and that's only relevant if you've got staff, right? But God forbid you have a person who has five weeks worth of leave on the books and they quit because you have to pay people out. Right. Yeah. That can really hurt. Yes, yeah. So you you know you have to pay for people while they're on leave, and you know you have to pay people long service leave once it once it's there. But the thing is that payroll actually calculates percentages for how much these things should be. So I like to have an account where you just put that little bit of money aside too, and that that means that you know, worst case scenario, because all this is about being prepared for the surprises and being prepared for things.

SPEAKER_00 20:35

Yes, let's knowing knowing what's coming up and having enough money there to deal with that thing that's coming up.

SPEAKER_01 20:40

Yeah. Yes, exactly. So I like to have a little pot where I just hold on to those things related to, you know, things that I know I'm potentially going to have to pay out at some point.

SPEAKER_00 20:52

Yeah, yeah. So um if we if we pull it back to a business that's um, you know, um, because you're dealing with, you know, a larger company with staff and and there's payroll and there's um super and wages and all of that. Um yeah, so if we pull it back to a a lot of the people that listen to to uh to our um podcast are small operators, right? So either they're solopreneurs or they're up to five people, small tight teams. What are the categories they need to be looking out for? So we've mentioned operating costs. So basically you've got a the profit first model breaks it down into you have different bank accounts, right? You have one which where the revenue comes into the business called revenue or um whatever you like to call that. What do you call yours? I call mine revenue. Oh, mine's just called income. Income. Yeah. Yeah. Yeah. Um, so yeah, one where the money comes into the business. Then you've got a you've got different buckets, you could say. So different bank accounts. And the next one you said was tax. So you put it you put a certain percentage aside um every time you get paid. Or we'll talk about that in a minute. But You put some aside for tax, you put some aside for operating costs, and then you put some aside for you're saying holdings for other unforeseen.

SPEAKER_01 22:08

But what would a um Yeah, a smaller business would instead of having that account that I spoke about, a smaller business, you know, maybe it's just you, but that would be where you would put your pay. Yes. The whole point of this is to make sure that as a business owner, you're being paid. Correct, yeah.

SPEAKER_00 22:33

Otherwise, you've built yourself a charity. And that you're not pulling money from the other um buckets, you're pulling it from the one that I call for my business salary. So that's the money I'm allowed to spend on my living costs and on me and my family. But um I'm not allowed to draw from the OPEX, the operating um costs account or from the tax account. And that's the whole thing magic of the profit first model, right? You when money comes into the business, you um you then split it into these different buckets. Yes. And those buckets are then they're set, they sit there to serve the purpose they're intended for, whether it's to pay tax, whether it's to pay your operating costs, and or whether it's to um is whether that money is for your own salary to spend. And that's the beauty in it. And I think that's the mindset shift a lot of um first-time business owners need to make, isn't especially when I deal with people coming out of the corporate world where the money coming into their bank account is their spending money from when they get paid. That that's the money they have available to spend. But in business, money coming into your business account is not money that you can spend for on yourself. A fraction of it you can.

SPEAKER_01 23:45

So yes, because yeah, that's the thing. In business, um, you've you've switched from you're the one that you're standing there with your hand out every week waiting for your pay to the one where you be you're paid, and everyone is standing in front of you with their hand out. The suppliers are standing there with their hand out, the top office standing there with their hand out. There are responsibilities you have financially to pay other people, even if you don't have staff, you still have responsibilities to pay pay your bills, pay the government.

SPEAKER_00 24:20

Yep, that's right, and pay all the things that you need to run your business, like all the subscriptions and the correct.

SPEAKER_01 24:28

So this is about you know, and what this system does is it to some extent it calms the ebb and flow that is the fluctuations in revenue, because you know, you might have a really good month and then a really small slow month. And what happens is the really good month is when people go out and splash the cash. Yeah, and then the next month, what happened? There's no sales, yeah, and I have no money. So this is protecting you from these fluctuations you have in the amount of money coming in. So, and and it's a good thing to learn really early on, and it's a good thing to do right from the start, is to get into the practice of not just running with it when your bank account looks really good.

SPEAKER_00 25:18

Yeah, yeah. And I had to learn that harsh lesson when I got a$9,000 tax bill that came out of nowhere in the early days of business and and I think we've all got stories of where, yeah, these things come at you by surprise and you're not prepared for them. So this whole approach is about putting aside a portion. So typically for tax in a small business, that's 20 to 30 percent, right? Everything you're bringing in, you're putting aside a percentage there. And the percentages change, and and what I've found is you start off with a sort of default percentage. Initially, I started with 5% profit and then I have 30% operating costs, and I think 30% for tax. And over time, you start to see where um you know, if if that's about right, and you can adjust them as you go.

SPEAKER_01 26:06

Yes, and you do have to monitor this and adjust it. Now, just talking about the tax account alone, getting that percentage right, there are a number of things that you have to think about because it depends on the structure of your business. You know, a sole trader is on a different tax structure to a company, for example. A GST registration will affect how much you have to put away. So there are a few things to think about with these calculations. It's not it's not necessarily straightforward if you don't understand all of those nuances that go into working this out, which is when they need to reach out to you and get some advice.

SPEAKER_00 26:42

Yeah. And um, and superannuation is another thing that I know small business owners are bad at paying themselves super, but it's now um a legal requirement, right? As of soon, they're tightening all of the regulation around that. So that becomes another bucket that you've got to put money aside for.

SPEAKER_01 27:02

Yes, and and superannuation if you're running payroll, if you're paying wages, even if it's to yourself, yeah. Uh, it will be a case of superannuation will legally have to be repaid every time you run payroll. So if you are running payroll weekly, you will be paying superannuation weekly in your payroll as part of your pay run.

SPEAKER_00 27:26

And I think they're trying to instill discipline in people, right? That you know, you've got to be very disciplined in building that future wealth for yourself, that um, you know, putting money away for your the future you.

SPEAKER_01 27:40

Well, yes, and I think there's been far too many instances of of businesses that have staff that haven't been able to pay their superannuation bill when it because it used to be quarterly, you know, what you were allowed to pay it quarterly, but as you can imagine, it it builds up over three months, and then businesses weren't prepared for it.

SPEAKER_00 28:01

Yeah, they were running this system, Kate, they weren't prepared. That's right. So this this model uh and we and which but which boggles my mind because sure these businesses have accountants and bookkeepers, so how are they not prepared for that?

SPEAKER_01 28:14

Or again, because accountants and bookkeepers, their focus is making sure that you are compliant historically, yeah. Yes, not looking forward. And and that's not to look, there are accountants out there that do run prop at first, and there are accountants out there that are very proactive in in the future of their clients' businesses, but uh they're more the exception than the rule.

SPEAKER_00 28:40

Yeah. Right. So this is about being proactive. And and um I I tend to um split the money when I I do mine sort of twice a month kind of thing. When the revenues come in, then I sort of split it into the different buckets. It does depend on the volume and the I suppose the uh frequency of the money coming into your business and how often you should do that. But if you, you know, if you're on your own or a small business, you could start with twice a month, right? Just taking the money and the revenue account and just splitting it across, just transferring it into the the other accounts. And basically you end up with five bank accounts and and they're all linked into zero or my ob whatever accounting software.

SPEAKER_01 29:22

Or you're you know, maybe you run this, maybe you run your accounts on a spreadsheet, you know, because you're just starting out.

SPEAKER_00 29:29

Yeah, yeah. That's right. And I know a lot of new businesses that are still doing that. Um which um, yeah, obviously uh ideally you'll get onto accounting software once you can, just because of the the the robustness of that and the reporting it gives you and all of that good stuff. Yes, but um um yeah, so then you've got all your bank bank uh you know um buckets of money sitting there in your zero dashboard, and um yeah, then you've got really good clear oversight of your of your cash flow coming in and out of the business, and you're able to um pay those bills as they come in. And it just takes the stress out of everything because there are no surprises. If when when you're required to pay your super, the money's there. When you've your GST, if you've got to pay the GST back, the money's there. You know, it's just yeah, having that that control and comfort and ease with, yeah, okay, knowing that you're on top of things. I think that's the m the beautiful emotional benefit of it, that you feel on top of things.

SPEAKER_01 30:36

Yes, yeah. When you think about the amount of small businesses that go out of business, a big one is the money.

SPEAKER_00 30:46

That's right. Poor cash flow management, poor money management.

SPEAKER_01 30:49

Yeah, and and profitable businesses too, that just can't pay their bills. Yeah.

SPEAKER_00 30:56

Yeah. Yeah. So this is the exciting part of profit first. It's a lot of people, you know, they want the they want to be able to spend the money. That's the part a lot of people I speak to say, well, that's why I've got a business, because I, you know, I want to be able to spend the money when it's when it's there. But that's it's it's actually you've got to to succeed in business, you have to be disciplined and you have to really um adapt to whatever stage your business is in, right? If you're in a in a sort of growth phase, there are phases where you need to really tighten the belt and really focus on building that cash buffer in the tax account, or or you know, you've got to, yeah, at times sometimes you need to really be disciplined and fight, and that's not what business owners want to hear a lot of the time. They want to spend the money if it comes in. But yeah, the the ultimate goal for everyone is to see that profit account growing because that's the fun bit, as you said. You're slightly addicted to watching that profit account growing because that's where the freedom and the choice and everything comes in. All the other stuff's taken care of, and now it's like I've been working hard, I've got this profit there. How am I going to spend it? Is it, you know, is it back up to the business?

SPEAKER_01 32:05

Yeah, that that's the fun part. This isn't, you know, it's it's like it's like telling someone they've got to go on a diet.

SPEAKER_00 32:13

Yes, that's what I mean. People don't want to go on the diet.

SPEAKER_01 32:16

You can never spend the money.

SPEAKER_00 32:19

Yeah.

SPEAKER_01 32:19

This isn't what this is about. This is about making sure that when you do spend money, you're spending it responsibly. You don't have buyers remorse because you know that if you, you know, and there are parameters around doing this the smart way versus I've got money, I just want to spend it. Yeah. Because I I always advise doing a quarterly review or a six-month review. And again, depends on your business and depends how all of this, you know, interlocking pieces work. But if you know, for example, each quarter, the way this is set up, that each quarter you can go, okay, profit account always leave half in there. So every quarter, you know, you can confidently pull out half of that profit if you want to. And if it's part of, you know, and this is where you the conversation with the accountant has to be had because how much you pull out of your business affects how much tax you're gonna pay and all that sort of stuff.

SPEAKER_00 33:23

And what's the foundation for half? What where does that come from?

SPEAKER_01 33:27

Because you've got to have a buffer. Yes. And look, there's no more relevant time to talk about this than right now because of everything that's going on. Yeah, you need to have what is termed a runway for your business. You have to have enough money in there to keep you going when times are hard. That's right. So making sure that you always, you know, yes, pull out some money and have some fun. If that's, you know, if that's the way all this is set up, do that, or pull half the money out, go buy that piece of equipment your business needs, whatever it that money is for, but leave money in there so that if the worst case scenario happens, your business can manage for a set amount of time without you falling in a financial hole and going bust.

SPEAKER_00 34:19

Yeah, and and um we all have sort of a number, don't we, that we need in our cat in our cash buffer that um and I know some, you know, the bigger the business is, the bigger that cash buffer needs to be because you've got staff that needs to be paid. And you know, for me as a solo operator, having 10,000 in there as a cash buffer feels like you know, the safe amount. Um and sometimes it gets quite low, and sometimes it goes up, but like um never being in like if it gets below 5,000, that's when I start sweating, you know, because you know that there are things that do come up, sometimes unforeseen, or um yeah, you've got to always have that buffer there. So it is about, I think there was a great analogy that you gave about the um the diet. Nobody wants to go on the diet, they just want to eat what they want to eat. But this the diet is the pathway to freedom, though, in the in a financial sense. Being disciplined, having that process in place is the gold that gets you to the enjoyment and the fulfillment piece.

SPEAKER_01 35:22

Yeah, and it actually isn't restrictive, it's actually liberating to do, but it just involves a change in the way you think about money and a change in the way you you do this on a weekly, fortnightly, or monthly basis. It's just it's a bit of a switch in routine. But what you get back from this is actually a lot more money in your pocket and a lot less worry about how you're gonna meet your obligations. You know, earlier when we were talking about the chart of accounts and how to set that up so that you knew the exact number every week, every fortnight, every month, how much money you had to have just to keep the lights on, as they say. Yeah, knowing that number and and knowing how many weeks runway you want to have, yeah, like how easy is that to calculate? You know it's a thousand dollars, whether you work or not a week, for example. If you want to have a 90-day, like three months worth tucked away, then you know how many thousands of dollars that is.

SPEAKER_00 36:32

Yeah, and typically you should have uh, in terms of runway, around six months up your sleeve, right? Minimum.

SPEAKER_01 36:39

Yeah, you should really, and and that obviously that is not possible in the beginnings of your business. No, that's right. Uh, but once you're up and running, this is what you need to work towards. And smart business people and people that stay in business for longer do this. Yeah, and that's not just for big business, this is about staying in business.

SPEAKER_00 37:03

Yeah, and it's such a simple model, but so powerful if if just every business owner knew about it. And it is hard for startups. I've had a few young businesses say, Oh, the profit first model never worked for me. And um, yeah, that and I think that's because the stability of their revenue wasn't enough that they'd have to keep drawing out of the operating account, or they they'd split the money, but then they'd have to draw it back again. Do you know what I mean? In those early days.

SPEAKER_01 37:27

Um I I would suggest their percentages.

SPEAKER_00 37:31

Yeah.

SPEAKER_01 37:33

Yeah, that's true. And the other thing that of running this model to do it successfully is that if you can see that what you're putting into your operational, you know, expenses bucket is not doing it, you adjust your percentages. Yes. If in the early days, there probably isn't any profit for you, so you just make that one percent. Right, yeah. So it's a little bit of something because you know it's a lot of hard work for not much reward.

SPEAKER_00 38:03

And profit is what's left after you've paid yourself, right?

SPEAKER_01 38:05

So we probably need to make a point that the focus should be on paying yourself a wage as the as the first priority because that's and look, but you know, if you're in business by yourself and you're starting out, that's probably gonna be really, really low number two. It is, and negative quite often in the beginning. Yeah. But here's the here's what we need people to understand is that if the money you've got coming in isn't covering your expenses, it isn't about you know stealing from those other buckets. Take a look at your expenses. Yeah, because if you're not making enough money to cover it and you're constantly having to rob from other places to chop this up, your business is running too hard. Yep, and you need to get out and make more money. Yeah, yeah. And this is these are all of the different things that people don't think about. They think it's simply a matter of pulling the profit money to cover the expenses. No, no, no. So many things you have to do. Cut your expenses is one of them. Uh increase your sales is another. That's right. Increase your profit. Yeah. Uh negotiate with suppliers for longer trading terms. Yeah. Get your customers to pay you quicker. There are all of these other things that you need to do to that can help this work.

SPEAKER_00 39:24

And you and I've talked about when you, you know, the golden rule is once the money's in the profit account, don't touch it.

SPEAKER_01 39:30

Do not touch it. Do not touch it. And it then it is your that is your reward. Yeah.

SPEAKER_00 39:36

And if if you if you're really in a tight spot, go and chase the outstanding debt debtors or go and go and look at where you can reduce costs or or go and figure out how you can make more money. And that's usually the priority, isn't it? Is just make you know, find ways to make bring in the cash flow, but never touch the profit account. Because yeah. But the that's a good great thing about this model is that it drives the right kind of behaviors. So yeah, rather than pulling from the profit account, it's like, what can I do to bring the money and what can I do to um chase the money outstanding? You know, it really drives the right behaviors as opposed to just, oh, well, I'll just take it from there and think about it later.

SPEAKER_01 40:15

Yeah, because if you're going to if you're going to circumvent all of the things that you really should be doing in business, then you're not going to last in business. If you're if you're out for the easy fix every time, which is just to steal the money from the profit account and top up and pay your expenses, you are not going to last long doing it like that anyway. You're going to have to resign yourself to the fact that there are things, you know, and we we did we did the episode on sales, like it's an uncomfortable truth that in business you have to do sales. So this might show you that you're gonna have to go out and do some more sales. Don't avoid it by robbing your profit account because you're gonna have to do this to stay in business.

SPEAKER_00 40:55

That's right. Yeah, so great overview, Sam, of all the I guess it's it's basic financial literacy, isn't it? Basic understanding of the mechanics of how business works. And um highly recommend you get a copy of the book Um Profit First by Mike McKellowitz. Is his name, is that right?

SPEAKER_01 41:16

Yeah, he's got a lot of books, but that that's the one.

SPEAKER_00 41:19

Yeah. To understand that philosophy, that concept of um the different buckets that money needs to be allocated to in business, and then making sure that you are putting enough into each of those buckets to cover your your requirements. And then that's what creates it's that. I don't like to think of it as a diet, I'd think of it more as just um healthy discipline.

SPEAKER_01 41:41

Yeah, yeah. This is about a healthy lifestyle, not restrictive diet.

SPEAKER_00 41:46

Exactly, because you're still paying yourself a wage. Um, and yes, you might need to pull the, as we said, the belt in at times until you can get to the point where you can increase the amount going into your you know you know into your salary account or or there's more cash flow coming in so that the percentage is is a higher wage for yourself, which is all the exciting bit, the more you the more you grow, the more you can pay yourself, which is exciting. But as you said, you're not gonna have a business unless you implement these basic financial money mastery practices.

SPEAKER_01 42:18

Yes, yes. And here's where we segue into you know, if you don't want to read the book or you read the book and it's just over your head, which you know it's it's going to be for some people, yeah, then the workshop's the place to come.

SPEAKER_00 42:32

Yes. So the end of this, thank you, Sam, for reminding me. You have the opportunity to come along in um, you know, at the in four weeks' time. Um the dates are on our website, it's in May. I cannot remember the date right now, but we will have a workshop where you can come along and get your questions answered um by Sam around money mastery, managing your money and profit first and applying it in your business, how to set up your chart of accounts, what do you need? So, yeah, come along and and get access to all Sam's wisdom or 20 plus years of and yours.

SPEAKER_01 43:07

You you're doing you're running it too.

SPEAKER_00 43:09

Yeah, but I feel very much like a newbie in this area relative to you because you've been doing it so long in your family business. And uh, for me, profit first is something quite recent in the last couple of years that I've been applying. Before that, I was a typical business owner flying by the seat of my pants financially, and then yeah, you get whacked with tax bills and or you have things that are unforeseen, you suddenly, oh, your super's due, and you're like, Oh, didn't think about that. And then, yeah, you're yeah. Um, yeah, so this has given me such freedom in now that I understand, as you said, what I need to make each month just to keep the lights on. Then what I need to make on top of that to yeah, you know, to do all the other things. And then the the icing on the cake is what you get to pay yourself and and spend you know your money on. And and the chase of I find that chase really exciting as a business owner. Yeah.

SPEAKER_01 44:05

Yeah. And um and if you're a bit of a if you're a bit of a data nerd and numbers nerd like I am, this system is a brilliant springboard into so many other important metrics that, you know, as your business grows become very relevant to you. Yeah. And I love that about it as well. It makes it really easy for people that aren't, you know, aren't necessarily into learning about accounting or, you know, struggle with the the business side of being in business. This makes it very, very simple and easy to access the data that you need to understand and know.

SPEAKER_00 44:44

That's right. Yeah.

SPEAKER_01 44:46

Yeah.

SPEAKER_00 44:47

Exciting stuff. So everyone, if you um if you want to come workshop all this with us, come along. We will be sending out the details. And if failing that, you can go to thrivingbusinesspodcast.com and all the details are on there about upcoming workshops. So we hope that today was a valuable episode. And you know, we wish you all the best in Martin, um, your um money mastery. Any closing thoughts, Sam?

SPEAKER_01 45:17

No, no, I think I think I've downloaded a lot of my a lot of my nerdy stuff on being.

SPEAKER_00 45:26

And I love the way you get all excited and and um you can just see the passion that you have for it all.

SPEAKER_01 45:32

Yeah, yeah, because it's it's just one of those things where I'm like, people, you don't have to struggle with this. Like that there is there is a better way to do it.

SPEAKER_00 45:40

Yeah, yeah, yeah. Beautiful. Well, thank you, Sam. And we will be back next week talking all about pricing strategy so that you can yeah. Um, continuing on the profitability theme. So we look forward to speaking to you all then. Until then, bye for now.

SPEAKER_01 45:56

Bye bye.