There are a lot of process and some very specific math involved in starting Profit First but, in my opinion, there is no better way to start out the new year than gaining control of your finances. So, let’s discuss two primary cycles to help you make it all work: a 10/25 rhythm each month, and a quarterly rhythm. Once you see the benefits of these methods, you won’t be able to resist the rhythm of cash flow!
Resolve to Find Your Rhythm
Rhythms create routines that just become second nature. Not having to think about your new habit makes sticking to a resolution so much easier, and you definitely want to make cash flow management stick. Rhythms also create trends. When you’re paying bills daily, there is never a good understand of what time of month your money gets a little tighter. Each day is a different data point.
However, if you will look at your books twice a month on the 10th and 25th like Mike Michalowicz suggests in Profit First, you will notice patterns. It might be that your warehouse rent and commission payments are both due at the first of the month, but there are only a handful of subscriptions to be paid at the end of the month. For this reason, your cash may be pretty tight during the first few days, and then loosen up around the middle of the month. When you’re using the 10/25 rhythm, your financial patterns become obvious.
10/25 and Biweekly Payout Rhythms
The 10/25 rhythm is created using the idea that most bills fall due on the 15th and 30th each month. In order to accommodate for mailing time, you’d want to send out checks on the 10th and 25th. However, since we’re in the business of ecommerce, I find that most clients want to use credit cards or have payments auto-drafted.
Receipt of income, however, is going to be determined by either biweekly payments from Amazon or daily deposits from your merchant processor. If you get biweekly payments from Amazon, my suggestion is to manage your accounting following that same schedule. This would mean on the 10th or the 25th, or the day you get your payout, you allocate income into the Profit First accounts.
Take a quick forecast of upcoming bills for the next 2 weeks, and see if there are enough funds in the accounts to cover the bills for that time period. If there isn’t you have calculated the percentages wrong or you’ve had some unusual one-time expenses that you hadn’t accounted for. Perhaps you even have some things changing in your business model. Whatever the reason is, you need to understand what’s happening.
We once had a client that was confused because she hadn’t had enough income to cover her operating expenses for two full cycles. When we looked closer, we found that she had started a new advertising program that wasn’t producing the results she had predicted. Another client’s income didn’t match up because he had changed his product mix and the products that were selling weren’t created the gross margin he needed. In both of these situations, the problem was caught early on because of the allocation cycles of Profit First.
Quarterly Profit Distribution Rhythm
The last day of every quarter is the day to reap the rewards of money saving in the Profit account! It works like this:
Check the balance of your Profit account on the last day of the quarter. When you know the balance, there are two options: one is a method Mike created and the other is one I created. Using Mike’s method, you will take ½ the balance of the account and use as your Profit Distribution. The ½ stays there you create your rainy-day fund.
With my method, take a look at the funds you’ve added over the last quarter. Take ½ of what you have added over the last 3 months, and pay yourself! This is my favorite method for clients that don’t already have a rainy-day fund to cover at least 3-6 months. Taking just ½ of your quarterly savings depletes the account slower and allows you to build your cash cushion a lot faster.
No matter the method you choose, you have to take the money out of the business. You can’t use it to buy inventory or fund a new product. This is just propping up the business. The only exception here is debt. If that’s the case, figure your profit distribution and then use 90% of it towards your debt. You still get to celebrate profits and also debt reduction with the 10% left. This majorly increases your rate of debt reduction which is definitely worth celebrating!
If you’re moving to the cash flow rhythms, you’ll be on top of your business and cash flow in no time. So, start 2023 off right and make a rhythm resolution for the new year! If this is something you need help with, reach out to the bookskeep team and plan to get started today!
Interested in Profit First?
If your ecommerce business isn’t where you’d like it to be in terms of profitability, check out my book, Profit First for Ecommerce Sellers. It answers important questions about how to implement Profit First in an ecommerce business. Take control of your money and your business, and put Profit First to work for you!
You can also sign up for the Profit First for Ecommerce Sellers Online Course. As a Mastery Level, Certified Profit First Professional, I will teach you why Profit First works so well for ecommerce businesses and the particular challenges for businesses that have physical products requiring inventory management. You will learn how your behavior drives your money management habits for your business and how you can set up your business bank accounts to work with your habits.
Check out all our ecommerce accounting and profit advising services here!
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