Busting Common Profit First Myths

On this week’s episode, we’re tackling some common myths and misconceptions we’ve heard about Profit First – the cashflow management system itself as well as how to implement it in your business. 

These are the myths we’re discussing this week:

  • I can implement Profit First using just a spreadsheet or my current accounting system – I don’t really need to open a bunch of separate bank accounts.
  • Profit First doesn’t work…it’s just a fad or a gimmick. 
  • I don’t have to wait to take my profits out quarterly; I can take them out early if I want or need to. 
  • The Profit First system is something I can set and forget, without making any continuous adjustments. 
  • I can have someone else run the Profit First system for me in my business without getting involved as the business owner.

Stay tuned for Part 2, where we’ll be discussing more common myths about Profit First. Have one you want us to cover? Get in touch at the links below.


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[00:00:00] Rob Williams: Welcome to the Contractor Success Forum. Today, we’re talking about the myths of Profit First. Sounds pretty spooky. So this is the Contractor Success Forum, where we discuss financial strategies for running a more profitable, successful construction business. 

And we have in one corner, Stephen Brown, the construction master bond agent with McDaniel-Whitley Bonding and Insurance Agency.

And in the other corner, we have Wade Carpenter with Carpenter and Company, CPAs helping contractors nationwide to become permanently profitable. And I’m Rob Williams, your profit strategist with IronGate Entrepreneurial Support Systems, helping you drive profits in your business. And we are the Contractor Success Forum, we are discussing the myths of Profit First today.

So. We’ve gathered our myths that have actually been put together by Mike Michalowicz and his crew and some of us–

[00:01:17] Stephen Brown: But we gathered them.

[00:01:18] Rob Williams: We gathered them.

[00:01:19] Stephen Brown: Yeah, we did.

[00:01:20] Rob Williams: We did. So…

[00:01:21] Stephen Brown: Alright. Myth number one.

[00:01:23] Rob Williams: Myth number one.

[00:01:24] Stephen Brown: All right, myth number one: you can take this Profit First system and just put it on a spreadsheet or in your accounting system. You don’t need to set up different bank accounts.

[00:01:35] Rob Williams: No, don’t do that. Wade. Why don’t we do that? Why don’t we just put it in spreadsheets?

[00:01:41] Wade Carpenter : Well, it’s because of the behaviors behind it. I think the biggest thing that I’ve tried to teach people for years is like balance sheets and income statements are great ways to run your business, but people don’t go look at it before they make a decision. They look at the money that’s in their bank account.

And when you put money in a bank account, you create a natural barrier to spending it. So moving it around. And spreadsheets and putting it in the accounting system doesn’t do that.

[00:02:12] Rob Williams: Yeah. There’s a natural behavior. We have a natural tendency now that we have iPhones and we have these things to look at our bank balances in our phone. I mean, back in the old days, I didn’t, when I had a company and I had a controller, I did not look at my bank balances. Profit First didn’t exist back then. 

But now there’s so much technology. It’s natural to look at that. But part of that psychology– and Wade said, so I’m going to kind of say the same thing is, you have everything in one bank account still when you have those spreadsheets, but people will break it down. And I sort of did that when I tried to implement Profit First myself, but it still doesn’t have that same mental edge, because even when you have it broken down, you’ve got to go to that spreadsheet and you got to see it.

You got to do these things that you’re not going to do naturally. So even if you have just a spreadsheet, which a controller will want to do sometimes, you’re still gonna look at that . Bank balance sometimes, especially if you’re in a hurry or if you’ve got a lot of things going and you see $140,000 in there, and you may only have $30,000 for your operations that week or something.

And the psychology just doesn’t work when you do that. It may work for the controller that’s sitting there doing some spreadsheet every day, but it doesn’t work for everybody that needs to do that. How about that?

[00:03:35] Stephen Brown: It’s gotta be hard, making that decision about taking money out.

[00:03:43] Rob Williams: Yeah, because people don’t want to go through and do the reconciliations, and they say it’d be easier to just put it in the spreadsheet, but it doesn’t take long to do those reconciliations. The trade-off for doing those reconciliations, it might be a lot of time compared to the bookkeeper, if they don’t spend much time on their books each month, if it’s pretty automated. But for the owner, it makes a huge difference. So just take those few minutes. So don’t worry about the reconciliation of each account because the impact of Profit First really depends on having the separate bank accounts.

[00:04:19] Wade Carpenter : Yeah, it really doesn’t take that much more time to do a reconciliation. I know people fear that, but it really doesn’t.

[00:04:26] Rob Williams: Yeah. To me, I kinda like it, it spreads it out and it, you kind of know. Usually, I can just hit reconcile and they work out, most of them. You kind of get some of them separated out. And so if, you do have a problem it’s narrowed down to smaller numbers. So I don’t really mind it either.

 All right, we’re ready to go to number two?

[00:04:47] Stephen Brown: Myth number two, Profit First, it doesn’t work. It’s just, I don’t know, a sham. It’s a gimmick. It’s just the latest fad. So what are you going to say? What are you going to say about that?

[00:05:02] Rob Williams: Wow. It doesn’t work. It actually can not– it’s a possibility, if you don’t do it right, and things, it doesn’t work. But it will work. And I think one of the points on that one, which Wade reminded me earlier, is when somebody says that, kind of the first question we say, well, how did that go for you? And they’ll say, well, I didn’t try it because it doesn’t work. It’s like, well, how can you say it doesn’t work if you haven’t tried it? So most of the people that are saying it doesn’t work are people that have not tried it. And I think they say that in earnest, probably because they’re thinking the technical parts of accounting. And it’s a psychologically based, or what do they say? A behaviorally based cashflow system. It’s not an accounting system, and it’s based on psychology and behavior and getting you to have better habits. 

And I, like for me personally, it sort of hits that panic stop button. Like, don’t spend something because it’s in those things, because you have those smaller accounts. And it really does work for me, especially when I see an expense account and it, for me, it’s really small compared to my overall cash, you know, and it really panics me over and over again, to be in that rhythm of seeing that. Works for me. You know, How about you, Wade?

[00:06:27] Wade Carpenter : I mean, it definitely worked for me. And the last couple of years, since I’ve implemented, I’ve never taken home as much money as I ever have. But, having worked with clients for many years and some people take different forms of it. They create a building account or they read the book and they half do it, they do pieces of it.

They don’t get advice on it. They try to create their own system and it doesn’t work and they don’t understand why. And it’s because they’re not really following it. Or maybe they try to set their allocation percentages by the book when they first started and they say, I can’t do this. Something goes wrong and then they need to steal from their vault account or whatever to keep going. That happens. But part of what working with somebody like Rob or myself on this is starting slow and starting smart. And if you jump in with both feet and then just, get poor results, think about why. And think about maybe reaching out to somebody like Rob to get some help on it.

[00:07:32] Rob Williams: You know, that’s a great point because Profit First still does not create your profit. Your business creates the profit. I tell people when they call us, Profit First does not print money. It’s not a counterfeit printing machine. It’s a system that helps you in your business. You still have to do the work in your business and you have to have a viable business and you have to create the sales.

You have to do all these things to make Profit First work. It doesn’t work by itself. It’s a scaffolding around your business that helps you build that business and build those profits. So Profit First is just the system. You still have to run your business. It just helps you run your business and it helps you be aware of your business.

If the business model you have is not viable, Profit First won’t fix that business model. It’ll help you find more viable business. So Profit First in itself does not make the profit. It helps you be very keenly aware on a short term basis, not just the long-term basis of your financials.

 I ran into that a lot. There’s a lot of discussion about the longterm benefit of the financials and the short-term benefit of Profit First. It keeps you in the here and now. 

[00:08:49] Stephen Brown: You don’t know what you don’t know and it keeps you in the here and now. Okay.

[00:08:53] Rob Williams: There you go. I like it.

[00:08:55] Stephen Brown: Okay. Y’all ready for myth…

[00:08:58] Rob Williams: Number three!

[00:08:59] Stephen Brown: Number three, guys. Myth number three is: you can take your profit distributions out early. True or false?

[00:09:09] Rob Williams: You want to talk about that one, Wade? Why do keep your profits in there? What is on time, by the way? Start with that. Is that quarterly, or?

[00:09:16] Wade Carpenter : Well it– in Profit First, we do say quarterly. And there’s a reason for that. If you constantly are taking money out, you don’t feel the excitement and the joy of seeing the profit build up and, part of it is, you know, Mike Michalowicz, he talks about the dopamine effect of waiting for that profit to show up.

And then when you do, it’s like you’re rewarding yourself. And as owners, we need to reward ourselves. You know, we’ve taken a risk to be in business and too many people– we’ll get into this I’m sure, but you know, plow their profits right back in. And they never reap the rewards. But other people go the other way and then they’re pulling the profits out prematurely, and they don’t allow their equity to build up and that kind of stuff.

[00:10:05] Rob Williams: We need our dope at the end of the quarter. Our dopamine. Wade mentioned our dope that we–

[00:10:11] Wade Carpenter : didn’t say our dope.

[00:10:12] Rob Williams: The dope. dump. Yeah. So at the end of the quarter, there’s, there is that celebration that it, as we just, as we talk about it, it’s a psychological system. It’s a behaviorly based system. So when you have that and you grow it to the end of the quarter, a couple of things happen.

You get that dopamine, you get that excitement and that build up of it, but it also gives you a little bit of extra time to maybe make some more rational decisions and let it build up as well, because maybe you won’t buy that shiny new truck you saw on the, on the showroom that week or something.

If, If it’s actually, this is the profit distributions that you take for yourself outside of the business, but you may not do something. You think a little bit more rationally when you have more time to think about it in addition to that celebration factor too. So don’t take it out early, let it build up. That’s what your, all your other envelopes are for, or accounts, is to pay for them. So profit is for profit and take that time to have some meaningful spending.

[00:11:19] Wade Carpenter : We advocate, I guess I should say, doing a quarterly distribution. And then at the end of the quarter, that’s the time that you should be looking at, every quarter, what’s going on in your business. What do I need to do with that money? And, if you just go ahead and take that out, you don’t get to make the decision right then.

[00:11:35] Rob Williams: Yep.

[00:11:36] Stephen Brown: Okay guys. I’ll buy that. I’ll buy that.

[00:11:40] Rob Williams: Buy it man! 

[00:11:42] Stephen Brown: I think too, when you’re sitting on just a ton of cash in a bank balance, you just think you’re richer than you are. I don’t care who you are when you’re looking at your bank statement. And you’re just gonna make dumb decisions. You’re going to just, you’re not going to spend your money wisely. That’s just human nature. Isn’t it?

[00:12:00] Rob Williams: Yeah. You know, One thing we didn’t talk about, it’s it goes over to the other account too, where it’s hidden. If you can take that and move it to the other bank, so you don’t see it and spend it. That may help as well. All right.

[00:12:13] Stephen Brown: Well, maybe, maybe that should go back toward myth number one then.

[00:12:18] Rob Williams: Yeah.

[00:12:18] Stephen Brown: Okay. Myth number four, back to myth number four, guys. Let’s push it on. Profit First— you just set it, you put it together, you set it and then you forget it. And then you just let the magic work. Is that the way it works?

[00:12:33] Rob Williams: Oh, you don’t just… it is a nice system that you can set up, but don’t set it and forget it. It’s a dynamic building, growing process. Wade, do you set it and forget yours? Or do you–

[00:12:47] Wade Carpenter : Absolutely not. I mean, Going back to what we said about the quarterly, every quarter, you should be looking at what those numbers are, those percentages. And, for a lot of people, they think they can jump out and take the percentages in the book. And practically speaking, a lot of times it will take time to get you there.

I was on a two year path to get my numbers where I wanted them to be, and sometimes it takes that. I mean, you can find maybe some initial cuts, but getting to the, those, the deeper cuts to get you those profits gets harder and harder as you go. 

And it takes time and you need to plan it out and things happen in your business. You may have additional overhead that, you hire somebody or move to a bigger building, then, your overhead goes up. And you got to change those percentages to go along with it.

[00:13:39] Rob Williams: You don’t just set it and set to those TAPs. Those are goals. That’s where you’re striving for. And even if you get there, you still always want to be improving. So you usually are not close to the TAPs. Most of the people, but some people come in and they’re already to the TAPs. So– the Target Allocated Percentages. But you always want gonna be getting better and you’re working your business. You’re improving those numbers and those, those that you have, that’s always just a goal. It’s a point for maybe your 90 day goals. And that’s typically, people reevaluate these every quarter, and that’s why it’s so important to have an accounting system, because this is your short-term based system, Profit First is. Then you really, it’s important to have your traditional accounting in books that you analyze it and you shoot for ways to improve. You don’t stop doing that and just run your business off of Profit First. You have Profit First for your short term targets and operations, and then you analyze your history, and work it out to see how you can improve it and whether you’re growing in volume or percents, just different things. So you’re always trying to improve. Constant and never ending improvement. Kaizen. That’s the Japanese word for that. How about that?

[00:15:03] Stephen Brown: All Good. 

[00:15:04] Rob Williams: That’s a bow, Stephen there. If you can’t see.


[00:15:07] Stephen Brown: How about myth number five? Myth number five: someone else can do this Profit First system for me. Y’all are the experts. Why don’t I just pay you to do Profit First for me?

[00:15:22] Wade Carpenter :  I have the perfect example that just recently happened to me. We took on a contractor doing the full back office, remote bookkeeping, the CFO services and came through us. He wanted to implement Profit First as well. And we got his bookkeeping going and that kind of stuff.

And then he wanted to implement the Profit First piece of it. And, we worked with him to create the percentages in our initial percentages. And then he said, okay, well you just go start making the allocations for me. I’ll give you the bank account, the ability to transfer money. And I didn’t want to do that.

You know why? Because the owner didn’t learn a single thing. If they don’t know, they’re not paying attention to how much cash is in the bank, if they are not watching… They don’t have to do like all the mechanics of it. They don’t have to mess with the reconciliations, but if they’re not looking at the cash and not being constrained by putting it in these buckets, number one, they didn’t learn a thing. And number two, they’re not going to change their behaviors around it. 

So that is the one thing that I kind of insist on is that at least need to pay attention to it. Look at it at least once a week most business owners will check their bank balance multiple times, sometimes multiple times a day, if not, several times a week, and you need to pay attention, you need to make decisions around it. That’s why it works.

[00:16:51] Rob Williams: That’s great. The client, the owner needs to be involved in this. So they are getting that behavioral change. If somebody is just doing all the allocations, and a lot of the Profit First people do make those actual deposits for them. I like it if the owner will do it, if somebody in the business will do that. Because like they see it and they see how it works. And that hands-on experience just gives you a little bit more impact and understanding of it. But you need to be in there and looking at those accounts or the whole psychological part won’t work.

 There is the factor, if you are a little bit larger company and you have other people, that if there’s no money in the account, because some people, they’ll have an operations account and that’s all that this department can spend out of. So it’s going to kind of work on these other people because they’re going to be out of money. And they’re not going to have it. But the owner still needs to be involved in that.

And know when they come back and forth to know what’s going on. 

[00:17:57] Stephen Brown: You already go onto our next—

[00:17:59] Rob Williams: Let’s do number six.

[00:18:01] Stephen Brown: Number six myth is that profit first is an accounting system. Wade, you’re an accountant and what’s the answer to that? Is a Profit First an accounting system?

[00:18:12] Wade Carpenter : Absolutely not. It’s a behavior system and you can have your QuickBooks or your, Zero or Peachtree, or I guess nobody has Peachtree anymore, but you know, your accounting system, but this kind of lives on top of it. And we actually look at things very differently from a Profit First perspective than you would from a CPA, you know, accounting perspective. 

The one major difference is we look at profit as cash that went up from one year to another. And if you know, there are certain things that, you’re going to be servicing your debt. Those things are not expenses. You may have depreciation and things like that, that are non-cash. But we are looking at strictly cash basis from the standpoint of, did cash go up? And making sure that the system supports that is just kind of plugging it in on top of that.

[00:19:11] Rob Williams: Yeah. said that great. Profit First is a cash management system and a behaviorally based cash management system, not your profit gap system. It’s not going to do that. It’s not going to tell you your true profit, it’s going to tell you your cash, which for us, we say that is the profit. That’s our definition of profit, not taxable profit. Profit is the cash that comes out of the thing, not a book profit based on taxes.


[00:19:42] Stephen Brown: Okay.

[00:19:43] Rob Williams: Not an accounting system. 

All right, well, this is, this has been great. This is our part one, right? Of our myths. So this has been great. We will wrap this one up here.

 We are the Contractor Success Forum, helping you drive profits in your business. Stephen Brown, construction bond agent with McDaniel-Whitley and Wade Carpenter, Carpenter, and Company, CPAs. And I’m Rob Williams, your profit strategist with IronGate Entrepreneurial Support Systems, driving profits in your businesses. 

Look at our show notes, get these questions, go to ContractorSuccessForum.Com and maybe get more information about all these myths. So I’m excited to do this and we’ll see you. Don’t miss part two. More myths coming up.

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