Lifepoint Financial Design – LifePoint Financial Services – Mike Metzger Financial Planning

As a financial planner based in Salt Lake City with real estate professional clients around the country, it’s important to practice what I preach. In saying that, there are minimal financial strategies that I discuss on the Lifepoint Blog that I don’t implement for myself. And for those that I don’t, it’s only because it’s not applicable to my unique financial situation.

For solopreneurs’, like myself, and like real estate agents, trying to figure out how to pay yourself can be challenging.

Do you pay yourself a salary? Do you throw everything back into the business and live off credit cards? Or maybe pay out all expenses and then whatever is leftover is your income for the month??

All three of these scenarios are the most commonly used by business owners. Especially solopreneurs, or business owners’ without employees.

Personally, I’m guilty of the latter scenario. I had considered myself similar to a cutting-edge business start-up and my sacrifice now was injecting as much money back into the company as I could.

I thought, “well, it’s the long-term investment strategy that will pay major dividends down the road”.

Here’s the problem with this thinking. I’m not a start-up, and that’s a completely unnecessary sacrifice to both myself and my family.

I inherently knew this, but didn’t think too much more about it. That is, until a respected peer told me about Profit First Bookkeeping. The system makes perfect sense, but, ironically, is not taught is any finance classes. What IS taught, is the GAAP method of accounting, which tells you Sales-Expenses = Profit. So, what’s the problem with this?

Well, the above formula has a solopreneur focusing on sales and expenses. Those are the first two components of the equation, so, sales and expenses are your concern. And maybe, just maybe, the more you spend (expenses), the more revenue (sales) comes in.

After all, there is a whole philosophy around why people do just this.

Parkinson’s Law states that the demand for something expands to match its supply. This is exactly why expenses keep increasing in perpetuity with the increase in revenue. This is exactly why it happens to most of us entrepreneurs!

And, it’s exactly why we need to change our thinking when it comes to profit. Its’ why Mike Michalowicz, proposes that, we entrepreneurs, take PROFIT FIRST! That is, to allocate a percentage of the revenue to a profit account before you pay out expenses.

I’ve talked about how to figure out your allocations and how to make your expenses fit within them. If you didn’t get a chance to read that blog, I would start here first. And, it would also be wise to read the book for this bookkeeping method for it to really click.

But, as a believer in this entrepreneurial financial system, I went all-in.  I first hired a Profit First bookkeeping firm that helped me find a system for all of my wife and I’s entities. This is where I found it extremely helpful, having both short-term rentals and self-employed businesses. For my business, I started by using their recommended formula for allocations and the bank accounts needed.

It looked like this, using a $20,000 hypothetical monthly income:

After having spent considerable time going through my expenses line item by line item, I put them into categories, as recommended by the Profit First book.

The expense categories are as follow:

  • Profit (the expense directly leads to profit)
  • Replaceable (the expense can be replaced with a less expensive option)
  • Unnecessary (the expense doesn’t lead to profit and is not necessary for running your business)

This worked for me for a couple of months. But, then I realized there were some expenses that came up that were not a monthly recurring charge or hard to determine because it varies year-to-year.

In addition, after having been able to cut so much in unnecessary expenses, I wanted more to be allocated to profit and to taxes, so I don’t fall short on either. As a reminder, the profit account gets paid out to you quarterly as a bonus, and can be used for whatever fun personal purpose you have in mind! For me, that travel! The profit account that gets paid out to me quarterly funds my family’s next big vacation. And, I mean BIG! We love to go all out on the adventure!

I went back to the drawing board. I re-read the Profit First book and remembered that Michalowicz mentioned that adding additional accounts for other expense items is perfectly fine. For example, I love connecting with my peers and advancing my knowledge by going to conferences. But, it’s hard to put a number on what those will cost me every year. For starters, I don’t know which conferences I’ll go to, the flight costs, or hotel expenses.

So, what do I do? Add it as a separate expense account! I’ll estimate the costs, and then divide it out monthly to make sure there is some money left for those trips.

Here is what my new Profit First monthly accounting system looks like using the same hypothetical $20,000 monthly income:

When the income comes in each month, it’s immediately allocated out per the allocations above. First, the monthly dollar amounts that I previously figured out for the Vault (Business Reserves), Conferences (trade conferences), Petty Cash (lunches, client gifts, etc.), Dues (association dues), and Employee Pay (assistants/interns) accounts.

Those allocations get made first!

Then, the income amount leftover after those allocations will get transferred using the percentages into the Owners’ Pay, Profit, OpEx, and Tax accounts.

If there is no money left in the accounts to pay for additional expenses that come up, guess what?? I don’t need to spend money on those items! Or, if I find it will directly create profit, then I will add another account for that expense so I account for it in future months.

Clearly, the most important step in this financial process is to get very aware of your expenses, how and when they come out, and whether or not you can cut them.

The more unnecessary expenses you can cut, the more money that can be allocated to your profit and owner’s compensation accounts! And that’s a beautiful thing!

The Profit First financial method of accounting has changed my business dramatically! And it can for you too!

At first glance it might seem more complicated with multiple accounts and allocations, but once you have this system operating, it actually makes everything so simple! I highly encourage you to find a Profit First bookkeeper who can make the accounts and allocations for you and leave you to focus on your company. This is exactly what I am doing, and I can tell you that I am very happy and satisfied with my bookkeeper making all the minute allocations and books that hinder me from doing what I do best. Financial Planning!

For all of the real estate professional solopreneurs out there, I hope this offers a better solution to making sure that your money goes to profit and not to those ever-expanding expenses.

After all, profit is one of the biggest benefits of being your own boss!

If I can help you gain more clarity, please don’t hesitate to reach out!


Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

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