Ever wondered how to transform your business's financial stability and increase your profits? We're joined by Susanne Mariga, a CPA and fractional CFO with two decades of expertise. Susanne shares the revolutionary Profit First model, a strategy that has been a game changer in our own business. We dive into the basics of this model, shedding light on the importance of having multiple bank accounts and how to pay yourself as a business owner. It's all about intentional profitability!
We then walk through the practical implementation of the Profit First system and emphasize the need to start with your current financial position and gradually increase your percentages. Susanne also debunks some common misconceptions and explains how this system can help determine your pay and eliminate randomness in your results.
Understand your firm's financial percentages and get started with Profit First by visiting www.profitmap.co
Ever wondered how to transform your business's financial stability and increase your profits? We're joined by Susanne Mariga, a CPA and fractional CFO with two decades of expertise. Susanne shares the revolutionary Profit First model, a strategy that has been a game changer in our own business. We dive into the basics of this model, shedding light on the importance of having multiple bank accounts and how to pay yourself as a business owner. It's all about intentional profitability!
We then walk through the practical implementation of the Profit First system and emphasize the need to start with your current financial position and gradually increase your percentages. Susanne also debunks some common misconceptions and explains how this system can help determine your pay and eliminate randomness in your results.
Understand your firm's financial percentages and get started with Profit First by visiting www.profitmap.co
Hey everyone, thank you for tuning in to Center Stage. As always, this is a little bit of a bittersweet way to start this show, but after today's episode, center Stage will be going on an indefinite hiatus. I'm not saying that we won't ever come back, but as of right now, center Stage will not return in 2024. I really do appreciate all of you who have continued to listen, who have continued to send in feedback, for all of the ratings and reviews that you gave us. Thank you to all 150 guests that we had on this show over the last three years. This was a really great project to be a part of and to work on, and so again, never saying never. Not saying it's not going to come back, but, as of right now, the show is going to pause after today. But we have a great episode for you today, a ton of value, as always, and we hope you enjoy. This is Center Stage putting your firm in the spotlight by highlighting business owners and other industry experts to help take your firm to the next level.
Speaker 1:Hey everyone, and welcome to Center Stage. I'm your host, john Henson, and this week we are talking about your firm's finances and how you can really do a lot to increase your profits and get into a better financial situation. Now I know what you might be rolling your eyes at that statement, because I know that there are a lot of snake oil salespeople out there who claim oh, we can 10X your profits in 30 days, and blah, blah, blah. I don't like those people either. Right, and this is not what that is right. This is something that we have been doing internally here at Spotlight Branding for the last few years, and it has radically stabilized our business. It's helped us grow, and I am talking about the profit-first model of managing your finances, and so I am a little bit familiar with it. I handle our finances internally, so I know how to use it, I know how to navigate it, but I wanted to have someone on who can explain it much better than I could, and so I am joined by CPA and fractional CFO, suzanne Mariga. Thanks for joining us.
Speaker 2:John, thanks for having me Excited to be here today.
Speaker 1:Awesome. So yeah, before we dive in, give us a little introduction. What's your background? Why are you so passionate about the profit-first model?
Speaker 2:You know I have been a CPA for over 20 years. I think at some point you just stopped counting, right, it's cool, but not cool. Right, it means that you're getting older. But for over 20 years I have worked with many, many small businesses and I think that, as small business owners, we do what we do because we absolutely love what we do. Right, you guys are attorneys. You love defending the law, you like pushing buttons potentially and really helping your clients be successful, and that's what you're amazing at. And whether our entrepreneur is a plumber or a construction worker or an attorney, many of us start our business because we absolutely love what we do and it's our calling in life and we love it so much that we probably would actually do it for free right.
Speaker 2:And I remember when I started out with my business, you know that's exactly what I did. You know, I literally had my daughter and I wanted to create a world where small business owners could have access to really quality accounting and tax services without paying an arm and a leg. And unfortunately, you know, when you're good at what you do and you don't charge a fair price, you get a lot of clients right, you have a door that never stops closing and also they tell their friends, so you get more of those type of clients. And it was interesting because probably around year three or so, you know, I realized that. You know this was not getting me where I wanted to go. You know, in fact I worked way more hours than I did at my last corporate job before I started the firm I. You know I hardly got to see my daughter, which is why I started the business, to be able to balance work and life and be able to see her grow up. And frankly, I had nothing to show for it. You know, I didn't have. I didn't have these, I didn't have the profits, and it really started me on this journey of profit first, and profit first is a concept by Mike McAllister. I also wrote a book with Mike later on, called profit first for minority business enterprises. But profit first is a model where we create intentional profitability.
Speaker 2:So in Mike McAllister's book, what happens is we do it through the use of bank accounts. You guys may have heard of Dave Ramsey. You may have heard of his envelope systems. As attorneys, I don't recommend that you keep envelopes when your client brings in cash, but instead we want you to create bank accounts. Is what happens? And what happens is these bank accounts function very similarly to, like, the envelope systems. You know you have one bank account that receives all your collections. Right, it receives all your revenue Not that I owed him money, but it but all of your revenue is what it'll it'll receive. And then what happens? On the 10th and 25th, you're going to transfer money to different bank accounts based upon their purpose. So what's going to happen is you're going to immediately transfer, on a 10th and 25th, a fixed percentage to your profit account and this is a fixed percentage of your revenue. And so what's happening is you're creating intentional profitability.
Speaker 2:Day one You're going to create another bank account called owner's pay, and that's where you're going to transfer your own or salary. Yes, you're going to take that off top line and and it's interesting because a lot of times when I ask owners who's their most valued player, you know they look at their favorite all star employee. But the reality is you train that all star employee and the day you walk out the business doesn't exist anymore, and so it's important as a business owner that you compensate yourself fairly for the work that you're doing. That third account that we're going to create as tax account, because reality is, if you've got intentional profit happening, you've got owners pay, you're going to have a obligation. No matter how great your accountant is, you're going to have some tax obligation. Now your accountant's going to use some great tax strategy for you. However, that tax is going to be something that we don't want to be worried about how we're going to pay last year's taxes with this year's money. So we're going to put that money away and we're going to again put away a fixed percentage of revenue into that tax account and that last account.
Speaker 2:That last account is an operating expense account and that means that after I funded my profit, after I funded my owner's pay account, after I funded my tax account, whatever's left over is going to go to my operating expenses, meaning that that's the account that I'm going to make decisions. Right, I'm going to say can I afford that big office space or can I live in a and work in a virtual environment, especially now that we've kind of tested it in the post COVID world? Do I need those magazine subscriptions that that I've been paying for? I know for us. You know, we walked into our office probably around May of 2020, and it was a ghost town, but we had all these magazines that were like, not even creased and open. I was like, why are we paying for these magazines? But again, you know, this is where the account that you're going to make decisions based upon this is all the money to get transferred here after I funded my profit, after I funded my owner's pay, after I funded my tax account, and so this is the account that I only have left to make operating expenses.
Speaker 2:And what I like about the system, john, is that it uses our natural psychology as business owners. You know, I always tell people it's kind of like feast or famine. You know, if we go back to those, those, those generations of, go right when, when there's plenty of food, we eat a lot, right. We store our fat, we get ready for the winter. When we're in famine, we eat a lot less. So that's the same way it is with business.
Speaker 2:You know, the day that we got paid, if all the money is flowing in one account, right, it's like I can afford that new computer, or I can sign that new contract, you know and, and I can bring on that new person, I feel like the world is invincible. But towards the end of the month, when the payments have all been received and all the money has been spent on bills, I'm feeling like I can't wait to for for billing to happen the first of the month, right. And so what's happening is we're working with something called Parkinson's Law, we're working with our natural human Tennessee and that OPEX account. What it does is it creates an illusion of scarcity, meaning that, you know, when I'm looking at that OPEX account, when I see that there's money in there, right, I'm going to make different decisions, and when I see that money is dwindling, I'm going to make very different decisions. Yeah, absolutely, while I'm creating intentional profitability.
Speaker 1:Yeah, and and honestly, like kind of kind of the way that it made sense to me when I was first learning about this is that it's almost like you're you're making profit, an expense line item on your profit and loss. You know, it's like you're you're before anything else, I eat profit first. You're taking that percentage out and it's already accounted for in your total revenue and it's almost. It almost becomes an expense line in your, in your P&L, which, like you know to your point, it creates that sort of intentionality where you're. You now know, okay, this is really what I'm working with. I don't, I don't technically have look at the end of the day, you also need discipline with this. Yeah, because, like, what's what really is stopping someone from being like, well, it was a leaner month, I don't have as much in the operating account as I wish, but I've got all this extra cash over here in my profit account or in my owner account or in my tax account, absolutely, absolutely.
Speaker 2:And the thing that I like about Prophet First is it creates physical boundaries, right. It's kind of like you know, if I don't buy junk food, I'm not going to eat junk food, right? If I don't have it in my presence, I'm not going to be focused on it. And that's exactly what Prophet First does. It literally takes money from out of sight, right, and to out of mind is what it does. And, and you can hide those accounts you know those, those profit accounts and owner's pay you can even forgive that they're there. And what it does is it creates these boundaries, it creates these rules of the game, as I call it right. And, and you know, for us, you know we like to make Prophet First a game. It's like how much can we win this month, right?
Speaker 2:And we're going to win by staying within our operating expense account.
Speaker 1:Yeah, absolutely yeah, I mean, and it's also it's fun for me, you know, whenever I run the transfers, it's like, okay, how much, how much am I sending over to this account this month? Or you know this cycle or what, and it's and it's just interesting to watch it grow. The one thing I want to ask you those you know how, and I know that in the original book from Mike and Callowits and I'm curious to see if you kind of deviate from this or if you hold true to it, but I know that there were set percentages for each different account based on, you know, whatever. I mean, I think it's something like 6% to the tax or 4% to the profit, something like that. Anyway, how you know, is that, is that really just kind of what you recommend people do, or do you kind of encourage them to say, alright, how much profit percentage do you want to start at versus? You know, in that initial set, what do you, you know, advise people with?
Speaker 2:You know that's a great question, john, and what happened was profit first. Professionals, as a corporation, did a study and they did a study of what does a healthy company look like, and, and, and. These percentages were derived based upon the study. And these percentages they actually change depending on the phase that the company is in. For example, when a company is itty bitty and they are just starting out, right, and it's owner operated one attorney at the show, maybe a secretary under $250,000 in revenue, it's going to look a whole lot different than when that company hits $10 million plus in revenue. Right, the percentages are going to look very different because when he's small, most of the money that's being generated is going to go to the owner. Right, because reality is the owner is doing most of the work. Right. He's actually doing the sales. He's shaking the hands, he's doing the fulfillment right, he might have one person supporting him, but he's doing all the work. He's cleaning the bathroom right.
Speaker 1:Yeah.
Speaker 2:And so 70% of the revenue is going to go to the owner in a healthy company. Now, by the time he's $10 million and he's got attorneys underneath him. They've all got their support, their paralegals underneath them. You know his, his operating expenses, his wages, are going to be a whole lot more. It's a percentage of that revenue, right? Because now his firm is running based upon the power of the team, meaning that he could probably step out for four weeks, go to go to go to Tahiti or someplace exotic, and his firm will still run without him, right, yeah? And and so does percentages look a lot different. Operating expenses could easily be 65% of the collections at that point, because, again, it's based upon the team. Now his profit has grown, right, his profit as his company's gotten bigger, as a percentage has grown, because now you know he's more of an investor and he needs to make sure he's getting a return. But his owner's pay as a percentage of the total revenue is a lot smaller. Now he's still got a salary, it's just that he's not, he's not the main guy anymore, right, yeah? He's the CEO now. He's the managing partner of that firm, and so his percentages look a lot different. So the percentages that you're referring to, john, are what a healthy company looks like, and we actually do have a giveaway for anyone that's kind of interested in benchmarking, where they should be based upon their size. If you go to wwwprofitmapco, you can download that, those those charts, and it'll literally show you, based upon your revenue today, what percentages a healthy company has that's similar to yours, so that you can work your way there.
Speaker 2:Now I'll. You know, one thing that I'll tell you is very few companies start out at those percentages right. These are what we call target allocation percentages, and I always say start with where you're at. You know, don't try to run the marathon within a day. You know, if I say, john, we're going to run a marathon tomorrow, now, john, you may be an amazing shape, but you know, if you tell me that, suzanne, we're going to run a marathon tomorrow, I'll be like John. I know that tomorrow is today, but I decided not to come because I feel like I'm going to get really sick, but I'm going to be watching you on TV and rooting for you.
Speaker 2:Now, john, if you said, hey, suzanne, we're going to run that same marathon, but we're going to run it next year.
Speaker 2:But we're going to practice and we're going to build up your stamina, and so we're just going to walk them out tomorrow, we're going to walk to you the next day, and then the third day we're going to run one of those miles and we're just going to gradually build up.
Speaker 2:You know, in a year from now, john, I'm going to show up to the race that day, right, because I'm prepared, I know how to pace myself, I know how to make sure that I maintain the endurance to get through this marathon. And that's the same way it is with companies that are starting profit first. You know you may be in a lease right now that you can't get out for the next four years, and so we're going to have to start percentages a lot differently than at our goal, right? And so what I tell people is you know, start with, just go up one percent. Just go at one percent of where you are today. So, if your profit is already at one percent, go up to two percent. If your profits at two percent, go up to three percent and just gradually increase them until you get there.
Speaker 1:Yeah, absolutely, and I mean even I mean I think we started doing this probably 2019, I want to say, and like we've changed our percentages, you know, over that period. But one thing that you mentioned that I wanted to ask you about, you mentioned, you know, I want to talk about the owner pay a little bit, because you said you know the owner still has a salary and I wanted to kind of clarify that point because I don't, you know, and correct me if I'm wrong here, because I know what we do. It's not that you take your payroll off the books entirely, like you. Your payroll still shows up, but maybe your pay, you know, maybe on the books your pay is, you know, maybe set it like 30,000, instead of whatever you really want it to be 80, 90, 100 or more, you know, per year, because the rest of that is what comes out of that owner account, right?
Speaker 2:And you're exactly right with that. You know profit first. One of the things I really want to emphasize is it's not an accounting system. It is not an accounting system, it is, it is a cash management system. It's a system literally it's physics is designed to create that intentional profit bill that you move money from one bank accounts to another. You don't touch it, then naturally you're going to have profit right now.
Speaker 2:Now, in terms of accounting and tax law, it's a little bit different because, depending on how you're set up I'm a legal entity standpoint you know if you're a sole proprietor, you know you might be getting all of that right as a distribution. But if you're an escort, you've got to take something called a reasonable compensation right in order to be in compliance right with tax law. And so you know really what that owners pay is. It's a fixed dollar. It's not a fixed dollars, a percentage right. It's a fixed percentage of your revenue that you are going to pay yourself. Now how you run that through your payroll system, you're going to follow your tax law. That's appropriate for your entity right. So if you're a sole proprietorship, it's going to be a distribution. If it's a escort, you're going to take a reasonable comp, and then you're going to ask for distribution right.
Speaker 2:That's how you're going to do that, and so really, it's just it. Just it helps you determine the amount that you're going to be taking and also it's a guardrail because you know, as business owners, you know, I meet a business owner and they had a million dollars and they're taking $100,000 salary. You know, a few years from now they're at $10 million and they're still taking $100,000 salary. And I'm like, okay, when do you when? When do you when? You've obviously have killed sales, you've learned how to sell, but when do you reward yourself for the work that you're doing, right, yeah, and so really, by keeping a percentage of collections, you're able to reward yourself and grow as your company is growing.
Speaker 1:Yeah, absolutely. So you know kind of to kind of zoom out a little bit what you know, I know that you know this. My this is obviously not the standard. I think it should be Right. I think this is something that every business can benefit from, but obviously it's just not how most people think to run a business. So, in your experience, what have you seen, like what kind of mistakes or issues have you seen business owners make that profit first and using that system, easily resolves?
Speaker 1:So in terms of implementation, john like so just in terms of like you know just kind of how they manage their revenue and their cash.
Speaker 2:Got it. So the first thing that I see and this is like the ones that are not using profit first is that you know they're getting random results. And what I mean is, you know, as a tax accountant, you know I would have clients that would come to my office and they would be on pins and needles when they picked up their return and I would be like, suzanne, how much do I owe? And I would be looking at them. I'm like you don't know what she owe. I mean, you don't know how much you made. I'm like, and literally they wouldn't know. They wouldn't know. It was literally, you know, it's like shooting in the dark. It's how they're running their businesses all year, and so really it gets to figuring out why are we in business? Right, why are we in business? You know, when I look back from my three years of starting my business, when I first started it it was like wait a minute. I started my business to spend time with my little girl. I started my business to have freedom of time. I started my business to why not make some money too out where we're at it, right? And really, you know I love Simon Sinek. It says it starts with why. You know why did I do this? And making sure that your actions align with the why right and the goal, and so that cash management system is there to facilitate the goal.
Speaker 2:You know, the next thing that I see you know I'll dive into profit first things that go wrong is, you know, is just getting started. You know, like, like John, you know I'm proud of you. You know you've been doing this since 2019, right, this is awesome. And you know a lot of entrepreneurs they go oh, you want me to set up high bank accounts. You know what I said that's a lot of bank accounts. I'm like I'm gonna have to go talk to my banker. He's gonna think that I'm crazy and you're absolutely right. Your banker will think that you're absolutely bogus and crazy. You're absolutely right, so get ready for it. But you're gonna make a whole lot of money, right, and he's gonna be asking you in a few years to become a private banking client, right, and so you know it's just to getting started. You know there are free banks out there now, like Relay Bank is the official bank of profit first. It'll let you start up to like 10 bank accounts with no fees and has free bank accounts for you. You know there's ways to negotiate with your banker. Hey, if I keep a minimum balance, will you get me free banking? But don't let the initial starting up the bank accounts really be something that holds you back with that. You know, I think a lot of times that when you're doing profit first, you're absolutely right.
Speaker 2:John, you're gonna run into some roadblocks, especially starting out. You know, it's kind of like running that marathon we talked about earlier. You know you don't run a marathon day one, you run the marathon after about a year. Right, and that's the same way a profit first. You know you're gonna.
Speaker 2:You may have fixed contracts that you're in that you can't get out of, but if the key is not to get discouraged, the key is to create a plan. You know, if I have, you know, just like you know going to college you guys were going to law school you had to think about what classes am I gonna take each semester in order to graduate, because if you miss one key course, you can't take the next course. So they compound and build. That's the same way that finances. Okay, I know I got this fixed payment for the next five years. I'm gonna build that into my projections.
Speaker 2:But where else can I maneuver things at? You know what's my Pareto principle? I mean my 80, 20,. What 20% of my clients are producing 80% of my results right? What cases are am I most likely to win? Because maybe that's where I wanna be focusing at and getting really good at those areas. And so really not just, you know, not just like running business random, but thinking about, hey, where do I, you know, what are my goals, what do I need to do in terms of creating a path to get there and expecting the hurdles along the way, but creating a path forward, yeah.
Speaker 1:And so you know, I think to kind of start to wrap this up a little bit I think you know one of the nice things about this profit-first system is that it gives you that intentionality of like now you actually do have profit. So what do business owners do with it? Because I gotta imagine it's gotta be a weird feeling for a business owner to be like okay, I have all of these expenses on my P&L and then over here I am literally just putting money away as profit. I also am putting money away in my owner account to pay for myself. I also have money putting over here to pay the taxes, so I don't even have to worry about those. So what do I do with all of this money in my profit account?
Speaker 2:So the way that profit versus set up is one of the goals of profit versus to build that retain earnings we call it the vault. And the great thing about profit versus that vault, which is going to become your retain earnings, it's going to actually match cash right, which is even better right. And what you're going to do with that profit account is, every single quarter you're going to give yourself a dividend. It's like you know, if you own stock for Procter Gamble, they're going to give you a dividend. Your company is going to give you a dividend, and what that means is you're going to take half of what's accumulated in that profit account and you're going to pay yourself a check. You know, I remember my first dividend check. I went and bought a piano for my kids because I wanted them to take and learn piano right. It seemed like I ended up using it more than AIDD, but you know I wanted them to have a gift of music, right?
Speaker 1:Yeah.
Speaker 2:Now you know we talked about earlier that some companies are starting from different places. Some companies are starting with that, and so what happens is, instead of potentially giving that big dividend, you're going to give yourself a real gift, and that's the ability to sleep at night. And so what that means is you're going to take half of that profit and you're going to do something called the debt snowball, and what that means is you're going to pay down your smallest debt, first with that profit distribution, and then, the next quarter, you're going to pay down your next smallest debt, and you're going to keep on doing that until you eradicate that debt because you want to be able to eat. There's nothing like running a business debt fray.
Speaker 2:Now, that other part of the profit that you have, you're going to build, retain earnings. You're going to put that money into a vault account. You know, I always like to say if you're at one of those big banks, you're going to put it in one of those far, far away banks, you know far, far away and you're going to, you know, small community banks that doesn't have online banking. It's got to stand in line for like 20 minutes to even say hello to a teller.
Speaker 2:You're going to put it far away into one of those accounts and you're going to grow your retain earnings every single quarter. So you know, when we weather storms, like we did during COVID, you're going to have money there. You know we've had clients that build their vault to the point they were able to get down payments for buildings and they were able to buy buildings which is what we did. Congratulations. And so you're going to have a lot of different options because you're building that vault.
Speaker 1:Yeah and so, and the thing here is, you know I mean obviously you're going to have a lot of different options and so basically anyone who's listening to this you're not going to. You know this is this conversation is designed to entice you to learn more about it, because I mean there's, you know it's not something that I think you should try to do on your own. You know, should definitely, whether it's the original profit first book from Mike or even checking out your book that you wrote with him. You know, and learning all about it and working with someone who can help you set it up is really important, making people get in touch with you to learn more, potentially work with you and also to check out those resources that you have.
Speaker 2:Yeah. So the best way is, first of all, get your profit back, get your profit map. You know that's a free give me, that John's going to give you as a gift, and so go to wwwprofitmapco, make sure it'sco notcomco, and get your profit map. Figure out where your healthy company is of your size and figure out you know where you, where you should be, and my contact information is on there so that you'll be able to connect with me. And if you're wanting to take that next level, I am here for you.
Speaker 1:Awesome. Yeah, we'll definitely put that in the show notes. Profit mapco. I have one final question for you before we wrap up here, and if you had one final piece of advice for our listeners, what would it be?
Speaker 2:So my final piece of advice and I think this is anything that you want to accomplish in life is figure out what does winning look like for you, meaning that, at the end of the day, when you look back in your life five years from now, 10 years from now, what would make you feel like you've won right, and then, algebraically, work back, create the processes to create that, that life for yourself.
Speaker 1:Absolutely yes. Let's start at the end and figure out what it looks like to get there. It's always, always a great sentiment, so that is going to do it for us here on Center Stage. Thank you so much for continuing to listen and all of the feedback that you're sending our way. That's going to do it, suzanne. Thank you so much for joining us. Thanks for having me.
Speaker 2:Thanks for listening.
Speaker 1:To learn more, go to spotlightbrandingcom. Slash center stage.