Take Your Profit First! and Other Smart Business Principles for Roofing Business Owners

If you've ever scratched your head at the end of the month, wondering where all the money went, you're not alone. I've been in the roofing game for 15 years, and I've seen it all. Today, I'm breaking down a game-changing roadmap for all of us in the business: the Profit First Method.

The Profit First Method is a system developed by serial entrepreneur Mike Michalowicz, author of cult classics such as The Pumpkin Plan and The Toilet Paper Entrepreneur. Mike has amassed significant profits from his multi-million dollar companies, and he's got a thing or two to teach us about cash flow analysis. His method offers a counterintuitive cash management solution to help small businesses achieve early and sustained profitability by managing cash flow properly.

The Old Way Ain't Working

Proper cash flow management is the real MVP in any profitable business. But, and this is a big 'but,' a staggering number of folks are in the dark when mastering this. Traditional business accounting tells us that you take your income, subtract your operating expenses, and whatever's left is your profit. Sounds simple, right? But here's the kicker: It's setting us up for a financial tumble.

Reinvesting Profits: A Slippery Slope

We all want to grow, right? But pouring all our profits back into the business? It's risky. Before you know it, you're dealing with sky-high costs and a bank account balance running on fumes. This kind of instability can be fatal for a slow sales period and can cause you a bunch of cash flow problems in the long run.

Financial Literacy: More Than Just Numbers

Ever looked at a financial statement and felt like you were reading a foreign language? You're not alone. A whopping 40% of small business owners feel the same. As a business owner, you need to get a grip on your finances and not just the basics.

Emotional Spending: The Silent Profit Killer

We've all been there. That shiny new truck, the swanky office space, looks so good, but do we need them? We get attached to these purchases, and cutting them out becomes a battle. Studies on compulsive spenders support how emotions play a big role in our buying decisions. This kind of emotional attachment can make trimming operating expenses super challenging. People tend to rope themselves into believing that buying something new will increase their happiness. Some do it as a way to deal with shame. Whatever it might be, it's going to cause cash flow problems. Now, another thing contributing to this instability is that financial statements are often really complex and difficult to navigate – even for accountants. This makes it hard for business owners to recognize when things are heading south.

The Profit First Method

The Profit First Method has four core tenets to make business owners make healthy financial management decisions. Here's the breakdown:

Limit Your Resources

Use only what you need. Assigning just a portion of your income to expenses ensures efficient spending. The idea is simple: the more resources we have, the more we use. Conversely, with fewer resources, we use less.

Order by Importance

Profit isn't an afterthought; it's the main event. Put thing sin charge of what matters most. Start with profit – make it your number one. This taps into the "primacy effect" in psychology, where we focus on and remember the first thing we're told.

Dodge the Temptation

Set up separate accounts for profit and essentials. Make them hard to dip into. The harder it is to get to that money, the less likely you'll spend it unwisely.

Stick to Good Habits

Regularly split your income between profit and expenses, and consistently pay your bills. By keeping an eye on your bank account balances, you'll spot financial shifts and handle them smoothly since you'll see them ahead of time.

Setting Up for Success

Are you bought into the four core tenets of the Profit First method? Great. Me too. Now, let's set it up:

• Open Accounts: You'll need seven new bank accounts - or six if you've already got one. Break it down into five checking and two savings accounts. Open these at your go-to bank.
• Income Account: This is where all your deposits land first. It gives you a clear view of your total revenue before divvying it up.
• Profit Account: Deduct your profit from your income and park it here. This step reinforces that profit is your top priority.
• Salary Account: Pay yourself from here. If you aren't drawing a salary, start now. It's crucial, both for your pocket and for potential business valuation. Think of it as 'owner's compensation.'
• Tax Account: Set aside funds for all your tax obligations here.
• Expenses Account: Use your existing business account for this. It's where your main expenses come from and helps you make financial decisions based on your balance.
• Savings Accounts: Open two of these at a different bank to complicate access. One's for tax savings, where you transfer from your tax checking account. The other is for-profit savings, where you shift funds from your profit checking account.
  

Once set, evaluate your business's financial health. Check how you allocate income across your business and compare it to a well-running business's allocation.

Assess, Don't Guess

Take a good, hard look at your financial health. Compare your spending to what a healthy business should look like. While this section gives a basic guide to gauge your business's financial health, it's not a replacement for expert financial advice tailored to your business.

To understand how your income is distributed:

Determine Total Income

Calculate your total income from the last 12 months.

Calculate Material and Subcontractor Costs (M)

Sum up all expenses on material and subcontractors.

Find Adjusted Revenue (R)

Subtract M from your total income.

Breakdown of Allocations

1. Profit: How much did you pocket without reinvesting?
2. Salary: Your earnings last year.
3. Taxes: Include both business and personal taxes paid from the business.
4. Expenses: Total expenses from the past year minus M.

Calculate Percentages

Divide each value by R to see the allocation percentage.

Compare with Benchmarks

Match your percentages with industry standards. The closer they are, the better your financial health.

Remember, these are just starting points. Adjust them based on your business's unique needs and industry standards:

Ideal Profit Percentage

Research successful companies in your industry. Use their profit-to-revenue ratio from the past 3-5 years as a benchmark.

Ideal Salary Percentage

Pay yourself what you'd pay someone else for your job. Divide this by last year's adjusted revenue (R).

Ideal Tax Percentage

Combine your business and personal taxes paid last year. Divide by R.

Ideal Expense Percentage

Subtract your profit, salary, and tax percentages from100%.

Once you've determined your ideal allocation percentages, take your time matching them. If you shift too much from your current expenses, you might need more to operate. Instead, adjust gradually. Start by tweaking just 3% from one category to another. Allocate your income to your bank accounts and pay bills biweekly. If you're worried about changing your payment schedule, remember you set the terms. If there's a cash flow issue, tools like SquareDash can help.

Cut Costs, Boost Profit

Here's the golden nugget: focus on cutting expenses rather than chasing more sales.

It's the quickest way to boost your bottom line. Review your expenses, trim the fat, and watch your profits soar. Ask if each cost is vital for your business or customer satisfaction. If it's not a firm "yes," either cut it or find a cheaper alternative.

By learning to handle business banking efficiently and manage cash flow in your own business, you can turn it into one of the profitable cash cows that pave the way to achieving financial freedom and ensuring steady cash flows.

Wrapping Up

The Profit First Method isn't just another business book. It's a cultural movement, and one that roofing contractors should adopt. Dive into the book, understand its principles, and give your business the boost it deserves. And remember, keep it simple and real, and keep killing it out there.

Need help preparing your roofing business’s cash flow for growth? Give SquareDash a ring at +1 214-740-6148.