Debt! It’s like cinder blocks chained to your ankles as you attempt to maneuver about your day. Debt weighs you down. It prevents you from moving forward at the pace you desire. We want debt eliminated from your business as much as you!
The principal portion of your debt payments never hits your Profit & Loss, only the interest does. However, that large chunk of cash comes out of your bank account and definitely affects your cash flow. CASH FLOW IS THE NUMBER ONE REASON ENTREPRENEURS GO OUT OF BUSINESS.
Profit First is about cash flow. Sum of All Numbers can show you a way to attack that debt and eliminate it completely.
As the owner of your business, Profit First has you set up three separate accounts specifically for you: Owners Pay, Taxes, and Profit. Let’s talk about the PROFIT bank account.
Each month as you successfully transfer revenue from your INCOME bank account to your other bank accounts (Owners Pay, Taxes, Profit, OPEX, and any others specific to your circumstances), the balance in your PROFIT account will begin to increase.
What is your PROFIT bank account for?
The ultimate goal of your PROFIT bank account is to reward you, the business owner, for the blood, sweat, tears, tireless nights and efforts you have put into building your business. Often, rewarding yourself must take a backseat to two other areas:
- Eliminating debt
- Establishing a “rainy day fund” (this may get renamed to COVID19 after 2020!)
At the end of each quarter, 99% of the balance in your PROFIT account will go towards eliminating debt and building your rainy day fund.
Let’s Dive a Little Deeper
What if you have different types of loans with different interest rates? Which one of those should be paid off first? Logic (and popular opinion) would be to determine which debt has the highest interest rate and eliminate that first. This is NOT the methodology of Profit First. Profit First is more about leveraging human behavior and truly focusing on cash flow.
Let’s Get Started
List all of your debts in order of the remaining balance: smallest to largest. Use funds from your OPEX to make all minimum payments to each and every loan. Use that 99% of your PROFIT account and pay off the smallest balance first. Once this is done, pay off the next smallest debt. Continuing with this strategy, you will have a series of early successes and it will have a snowball effect.
I know you’re thinking this goes against the rule of taking out the debt with the largest interest rate first. Why do we attack debt in the manner just described? Because Profit First is about CASH FLOW and, when you are able to pay off a low balance, you have that much more cash to apply to the next debt.
What about that 1%? Reward yourself!
This is hard work. Even though 1% might not be very much, we still want you to be rewarded. Whether that 1% gets you dinner out with your friends at a fancy restaurant or is only enough to buy a new cell phone case, take the cash and do something for yourself. Sum of All Numbers knows this works- you are more likely to follow your strict routine if you reward yourself.
Remember: do not reinvest that money in your business. That defeats the purpose of the exercise. Spend that cash on what makes you happy.
Profit First is a habit. Be consistent in performing your allocations every 10th and 25th of the month.