Financial Gumbo by Wendy Knutson CPA and Certified Profit First Professional

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Last week, I told you how my young business lacked a plan and was held together by Band-Aids and Duct Tape. But then, this marvelous book Profit First came into my periphery.

This week, I want to share more about Profit First.

To recap, the standard GAAP (Generally Accepted Accounting Principles) equation for finances is:

Income – Expenses = Profit

Unfortunately, while mathematically sound, the GAAP profit equation doesn’t account for human behavior. Profit becomes merely leftovers after the beasts of expenses and taxes ravage your bank account. It’s something that is just a glimmer of hope that rarely appears as most businesses struggle on their check to check survival.

But Profit First says the way you look at your business should be:

Profit = Income – Expenses

Logically speaking, the math is the same, but the entrepreneur’s behavior is radically different. With Profit First, you take a predetermined percentage of profit from every sale first, and only the remainder is available for expenses. It’s the old adage, “Pay yourself first”, or as that great little book on finances – The Richest Man in Babylon put it, “Start thy purse to fattening.”

Parkinson’s Law:

Why are you bringing up a law, Wendy? Here’s why: Author and historian C. Northcote Parkinson theorized that our demand for a resource increases to meet the supply of it. That is why when we are given two weeks to do a project it takes two weeks, and when we are given eight weeks to do the same project it takes eight weeks. That is why when given $1,000 to complete our work we get it done with $1,000 and when given $10,000 to complete the same work, it takes $10,000. Profit First makes Parkinson’s Law an asset. By taking your profit first, the money available for expenses lessens, and we are forced to be more creative about how we spend our money.

FINANCIAL GUMBO – A.K.A. Bank Balance Accounting

Most likely you have one business bank account, but really it’s a nebulous gumbo of the 5 key ingredients that make up your business’ finances:

  • Income
  • Profit
  • Taxes
  • Operating Expenses
  • Owners Pay

When all these ingredients are floating around in the same bank account, do you really have any idea just how much you can take in profit, or how much you have set aside to pay the IRS? Do you know how much your operating expenses should be for the month? No, you are flying blind. The old “Bank Balance Accounting” method where you log onto your bank account every day and check your balance is a poor way to make financial decisions, but it’s where most of us are stuck. If what we see in the account looks good, we tend to be a little looser with the check book. If the balance looks low, we panic and do whatever we can to make another sale.

Profit First teaches us that we should take those ingredients out and individually assess them, even going to the extent of setting up separate bank accounts for each of the key ingredients. Then, we work a plan to allocate pre-set percentages to each key area. When we follow the Profit First plan, we can continue with our old ways of Bank Balance Accounting, but we are truly only spending what is AVAILABLE to spend.

Next week, we will dive into how Profit First works, what in the world I’m talking about with multiple bank accounts, and a few ways to whittle down those nasty Operating Expenses.

My Business: Held Together By Band-Aids and Duct Tape

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Last week, I told you my BIG WHY that propelled me into business and also what keeps me motivated to push forward. Where I left off was after I started the company. You see, when I started Knutson CPA, I didn’t really have a “business plan”. My plan was to secure an office, hire the right marketing person, get the word out, and start serving customers. And in the beginning, that’s just what we did.

People came our way, and we would take them on as long as they had a checkbook (and heck, even sometimes when they didn’t!) We worked for anybody and everybody that could pay us, and that fostered crazy growth.

We grew so fast my head begin to spin. Challenges and obstacles cropped up all over the place. There was no time to seriously look at an org chart, software solution, or a growth plan, so we used Band-Aids and Duct Tape on the issues that arose.

By our third year in business, I can say with confidence my business was held together by Band-Aids and Duct Tape! Did I realize there was a problem? You bet! But I didn’t know how to craft a cohesive operating plan- a plan that would allow me to become profitable and actually pay myself. (Moment of truth? I went for two years before taking a paycheck.)

Speaking of taking a paycheck, we have discovered that many small business owners go months or years without paying themselves. Sure, they pay their employees, but their paycheck is the last to be considered when it’s time to run payroll. This can lead to resentment on the owner’s part:

  • Resentment toward the wonderful employees they hired to grow the business. And,
  • Resentment towards the business itself. The business of their hopes and dreams. Their baby.

Fast forward to the fall of 2014. I discovered the book Profit First by Mike Michalowicz. When I read this book, I learned a new way to look at accounting and a way out of my Band-Aid and Duct Tape mess.

The standard GAAP (Generally Accepted Accounting Principles) equation for finances is:

Income – Expenses = Profit

But Profit First says the way you look at your business should be:

Profit = Income – Expenses

The math is the same, but the perspective is incredibly different. It says that PROFIT is what you shoot for. PROFIT is what you look at first. YOU, business owner, get paid.

Want to know more about this revolutionary way of running a business? Want to hear how it completely pieced together my Band-Aided and Duct-Taped mess?  Stay tuned for next week’s blog post!

Why I Went Into Business In the First Place

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My Big Why

FREEDOM. Really, that’s what it all comes down to. It’s my BIG WHY. Freedom is why I got into business in the first place. I wanted freedom to run a business the way I saw fit. I wanted freedom from the “old” standard practices of accounting firms. I wanted freedom from being on someone else’s payroll. I wanted freedom to be creative. This is why I started Knutson CPA in 2010. Freedom is why I push forward to grow the business. Freedom is why I take risks and grow and change.

What’s your big why? Why did you start your own business, whether it was years ago or weeks ago? Was it to spend more time with family? Was it to have a legacy to pass on? Was it to have financial freedom? Think back to those days when you first started and the reasons you took the plunge, and remember them. (We will be talking about your WHY in blog posts over the next few weeks.)

What Motivates Me to Serve Businesses

An Out of Business sign. A simple cardboard sign scribbled with a black Sharpie taped to the front window of a Mexican restaurant on my daily commute. Every time I passed that sign, I grieved. I envisioned an older, weathered man writing out that sign with his wife standing by his side and his two children standing behind them. That sign represented their hopes, their dreams, and their shattered finances.

That sign comes to my mind on a regular basis as I grow and build my own business. I don’t want to be that business owner writing out the sign. I don’t want to hear about businesses in my community putting that sign in their window. And I certainly don’t want to serve clients who have to write out their own sign. I yearn to create a company that helps business owners build entities that thrive and grow rather than wither and die.

What keeps you motivated? What helps you get up and push on every day? What helps you when you stumble and fall down?

I would love to hear from you on your big why and what keeps you motivated. Please leave a comment below!

My Capsule Wardrobe and the Amazing After Action Review

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Welcome back to my blog and my take on how a Capsule Wardrobe is similar to a Capsule Business! As we discussed in my first post on the Capsule Wardrobe, when you come to the last two weeks of wearing your Capsule Wardrobe during a season, you should review what you have, purchase or incorporate what you need, and discard what you don’t for the upcoming season. I consider those two weeks to be clarifying weeks, when I carefully evaluate what I have, what I want, and what I need.

This is SO similar to two critical, intentional times of reflection in business:

  1. The After Action Review which occurs after any meeting, consultation, proposal presentation, or staff/customer interaction.
  2. Scheduled times on a regular basis when, from a big picture stance, you intentionally evaluate your customers, products/services, and market.

First, the After Action Review, or AAR, has been used by the US Army for several decades, and has been promoted for business use by value pricing guru, Ron Baker. (Here’s where he describes why the AAR is the most awesome learning tool ever.)

I believe by practicing the art of the AAR, you can skyrocket your business success! In an AAR, you should ask:

  • What was supposed to happen?
  • What actually happened?
  • What are the positive and negative factors here?
  • What we learned and what should we do better next time?

In my business, AARs are fast becoming the standard right after any client or prospect-facing meeting and even after many staff meetings. Each person who participated inherently knows ways to improve the next time around, and capturing this knowledge is critical for growing and improving. Ron Baker said:

Your firm’s intellectual capital is the most important source of its long-term wealth creating capacity… Capturing the tacit knowledge that exists in the heads of your human capital and making it part of your organization’s structural capital will insure that your firm knows what it knows, and can deploy it quicker and at a greater value than the competition.

I would encourage you to try implementing AARs into your business, whether you are a business owner or an employee! The insights you will gain will propel your business on its way toward more focused operations.

Second, regarding times for broader reflection on the overall direction of the business, these will not be as frequent as AARs. (I recommend quarterly for the frequency.) These are times you set aside from working in the weeds to discover and prune clients, services, products or markets that do not bring you the ROI you thought they would. During these reflecting times, you may find that your services or products don’t bring the joy they once did or that you may want to seize some opportunities you have set to the side. It’s a healthy thing to intentionally create times of focus, planning and pruning in our lives, whether quickly after key interactions or less frequently for deep thought.

As business owners, we can get so buried in the day-to-day operations of our businesses that we find them drifting whatever direction the wind blows with no real mapped plan. We must remove ourselves for a time of review, renewal and refocus so that we can effectively steer the ship we are sailing.

Back to the capsule: if you’re interested in creating your own Capsule Wardrobe, I would encourage you to read the following posts for inspiration and clarity:

What reviews are you doing that are helping your business grow? I would love to hear about them below! Happy Capsuling, Niching, Focusing and Reviewing in Your Business!

My Capsule Wardrobe and Capsule Business Focus

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In previous posts, I introduced the Capsule Wardrobe concept and explained how the Capsule Wardrobe is similar to choosing your business niche.

Today I want to discuss focus and how the Capsule Wardrobe’s seasonal focus relates to business focus.

A Capsule Wardrobe requires you to stay focused on wearing only the clothes you selected for three months. Fashion trends can change in the blink of an eye, but a Capsule Wardrobe gives you a focus on set pieces of clothing for three months so that you aren’t tempted to buy every new outfit you see. Embracing a Capsule Wardrobe forces your shopping to become intentional and focused. You now shop with a purpose – to fill specific voids in your Capsule with items that bring you joy – rather than simply shopping to kill time, spend money, or bring a bit of happiness.

It’s important to trust that the pieces I originally picked for my Capsule are the right pieces for this season. I can dive into the selections in my wardrobe and really get creative with putting outfits together. It’s been said that scarcity fosters creativity.

Capsule Wardrobe FocusThat creativity can be found when we stay within our focus area. Similarly, I have found that once a business carefully niches, it then needs to focus on its niche. Just like fashion trends or sale items, business opportunities will come your way. If the opportunity fits within your niche you should jump on it quickly. However, if it is a distraction that will take you away from your chosen niche, you may need to place that opportunity on a shelf while you focus on your business niche for a set time. Focusing on your business niche will ensure you are providing the value your customers need instead of chasing after distractions.

I have a personal tendency to be sidetracked by “Ooooh shiny” distractions and find that it’s critical to quickly identify whether it does or does not fit within my area of focus and whether it’s actually an opportunity or a distraction. Of course, it would be silly to be completely blind to business opportunities, so we have to practice discernment.

My husband and I recently took a weekend getaway trip, and while eating at a restaurant I noticed some cute t-shirts in the gift shop. In the past, I would have snatched up two or three and been on my way with my fun purchase, only to later realize that they weren’t the cut or fabric I prefer to wear. That would result in me wearing each shirt only once or twice and then donating it at Goodwill. This time when presented with these shirts, I knew it wasn’t time to shop for my Capsule, so I was able to pass them by, knowing that they didn’t fit within my Capsule focus for the season.

In a similar sense, various people, businesses, connections and events frequently come my way as a business owner. It’s critical that I focus on what I set out to do in my niche and believe that what I choose when I created my niche is still the right choice. When it is the right time to think about other directions, the right opportunities will come along.

Here’s to staying focused on your business niche and running a successfully focused business!