I like to call it my lightning in a bottle moment. It is one of the most profound experiences I’ve had in my life. Little did I know when I started reading the pages of Profit First how it would change my business forever.
I had just finished a two-week RV trip with my family to the sunny state of Florida. We had a fantastic time. Somebody had recommended the book Profit First by Mike Michalowicz.
Money is a subject I’ve always had a lot of fascination with. I grew up in a middle-class family that was instantly thrust into poverty when my parents divorced. There were many lean years as a teenager, and I was determined that I was not going to repeat the life that my parents had provided me.
Money had taken over our lives, and we suffered much from a lack of money. As a teenager, it seemed quite ridiculous that paper and ink could lay such a strong hold on a person’s life. Lack of money shackled our lives. I knew I needed to learn about money so that it could become my master.
In college, I read The Richest Man in Babylon by George S Clason. There are so many nuggets of wisdom regarding money. I learned that the key to gaining control of money lies in two simple truths:
- Pay Yourself First.
- Spend Less Than You Earn.
These two sentences hold the power to unlocking a life of financial abundance. It really is that simple.
Pay Yourself First and Spend Less Than You Earn
If you never learn anything more about money than those two kernels of wisdom, you will know everything you ever need to know about money.
Even though it is that simple, simple does not mean it is easy. Then again nothing in life worth having is easy.
It’s not easy because we are human. For some reason, humans have a grand ability to complicate even the most simple things.
Just because one has the knowledge to do something does
Profit First is a groundbreaking book in the world of business money. There is an adage in business that Cash is King and nowhere is that more apparent than in Profit First.
Profit First is a simple money management system that takes the guesswork out of running the money side of your Realtor Business. There are enough complicated things in business; let’s do our best to simplify where we can.
For the remainder of this article, I am going to refer to you the Realtor as a Business Owner. The reason for this distinction is I want to think of yourself as a Business Owner. If you confine yourself to only buying and selling homes, you are capping your earnings.
Your income potential is limited to the amount of money you can personally generate. Consequently, you put your personal finances at risk. If you have some event that prevents you from working, you will lose your ability to earn, and your business will most likely move towards a liquidation event.
Many Realtors make the mistake of thinking that every dime of their commission check belongs to them. When I started my first business, I made the classic rookie mistake. I lived within my means, but I had not paid any estimated taxes.
Lo and behold my CPA prepared my tax returns at the beginning of March, and he gave me the pleasant surprise that I had a hefty tax bill.
It was horrible.
I didn’t have the money so the next six weeks I had to scrimp and save every dollar I made. Then I had the distinct pleasure of sending everything off to Uncle Sam.
What I learned that year was not every dollar I earned in business belonged to me. Some of it belonged to the Tax Man.
What you need to realize is that as a business owner you are not the only one that gets paid. It might seem like you do all the work, so you should get all the money. That could be a logical thought. However, the reality is other parties have helped you earn the income in your business.
When you are a business owner, four parties need to get a gets a cut of the income from your business. The four parties are:
Each of these parties must get paid, or someone is going to get irate.
When I explain Profit First to my Realtor Clients, I tell them that they have four buckets for your business money. The Four Buckets of Money for a Realtor Business are
- Owner Pay
- Operating Expenses
Each of these buckets safeguards its money until the money is delivered to the owner
The Profit Bucket
Profit is how your business gets paid. When it comes to business, there is a simple question to ask to know if the business is successful.
Is the company profitable?
If the answer is no, then the business is sick. If the business remains in a state of sickness, it will eventually die. We call that a Liquidation Event.
The profits are distributed to the owners of the business as a reward for owing the business. The business owners started or invested in a business to make money. Profit is the money that belongs to the owners.
The Owner Pay Bucket
When an owner works in a business, the owner is an employee of the business. One of the biggest mistakes business owners make is not paying themselves an honest wage.
Think about it for a moment. Who works the hardest in the business? Who is the first person to get to work each day? Who is the last person to leave the office each day? When the business is short on money, who lends the business money? Who provides the business with the startup capital?
The Business Owner.
Yet, in so many businesses the owner is the most abused person in the business. The owner works for chicken scratch. The owner pays everyone else first. Then at the end of the month if there is anything left the owner takes the last scraps.
It is disgusting. Nothing makes me angrier then to see a business owner allow themselves to be abused by their business. Anyone that says torture doesn’t exist in America has never looked at the average business owner that is barely eking out a living. It needs to stop, and it needs to stop now.
The owner pay bucket is set up to ensure the owner gets paid and the owner as an employee needs to get paid before anyone else. If the owner isn’t happy, then nobody is happy.
The Tax Bucket
Nothing will put you out of business faster than not paying your fair share of taxes. Many people grumble about paying taxes. This is utter lunacy. There used to be a time when most Americans were proud to pay their taxes.
As Supreme Court Justice Oliver Wendell Holmes Jr. said, “Taxes are the price we pay for a civilized society.”
I often tell people that I wish they would pay a million dollars in taxes each year. Think about that for a moment, if you paid a million dollars in taxes each year you would be making millions each year. Paying taxes is a sign that you are successful.
Do you want to know a simple way to pay zero taxes? Earn zero dollars. Then you will pay zero taxes.
I think we can both agree that our lives are better off when we pay taxes.
Taxes are super complex. There are more pages in the US tax code than there are in the Bible. Some people wish that taxes were simple, but that ship has sailed. I could also wish that nobody died. Neither of these is realistic.
There are only two things that are certain in life.
Take pride in paying your taxes. You may not agree with how all the tax money is spent, but that doesn’t change the fact that by paying taxes you are contributing to this great nation that we are blessed to live in.
The Operating Expense Bucket
Operating expenses include all of the vendors that provide us with the goods and service we use to manufacture the goods and services that we sell to our customers. Operating expenses also include the payments we make to our hard-working employees. Without vendors and employees, our business would have a cap on its earnings. Why? Because the owner would have to do all the work in the business.
Anytime a business only has an owner as an employee that business is at risk. Everything is dependent on the owner.
Without vendors, we would have to dig coal into boiling water to power a generator to produce electricity. We would have to dig holes in the ground to lay power cables, so the electricity will run from the power plant to our office.
All this work would have to be done before we could switch the light switch to bring light into our office.
Think about that next time when you start to grumble about a bill. Instead, be thankful that you have the means to be able to delegate that work to someone else.
Now that I’ve defined the Four Buckets of Money in your business it’s important to view income as a big money pie. There is one money pie, and it must be divided between the four parties of the business. Each one must be fed a piece of the pie. Once the pie is divided up, the pie is gone.
Now if the vendors take 80% of the money pie and taxes take 10% of the money pie, and the owner takes 10 percent of the money pie, that means business goes hungry. This is a disaster waiting to happen. Nobody should go hungry. All should be well fed. If anybody goes hungry, it is the owner’s fault because he mismanaged the money pie.
So it is in your business each month we will take all the money in your business and divided the money up evenly between profit, owner pay, taxes, and operating expenses. I used the word evenly deliberately. Even does not mean equal. If the pie needed to be split equally than that would mean each stakeholder would get 25% of the pie. That’s typically not the case on how the money pie is split.
If your business earns $500,000 to $1,000,000 here is how I would split the money pie.
- 15% goes to Profit
- 20% goes to Owner Pay
- 15% goes to Tax
- 50% goes to Operating Expenses
Remember how I said not every dollar that a business earns belongs to the owner. The reason that every dollar does not belong to the owner is because the owner doesn’t earn every dollar. There are a multitude of parties that enable the owner to make money by selling goods and services to customers.
Each of those parties needs to get paid. By using the Profit First system, you can easily manage the money side of your Realtor Business. The benefits of Profit First ensure that your Realtor Business will be profitable, the owner gets paid an honest wage, all taxes are paid on time and vendors, and employees are appropriately paid for their contribution to the company.