Managing cash flow in an inventory based business can be tricky for the best of us. Get it wrong, and you are in deep trouble. Get it right, and the health of your business will improve dramatically.

In today’s episode, I’m joined by Cyndi Thomason, a certified Profit First practitioner and founder of Books Keep (bookskeep.com).  In our discussion, we talk at length about what Profit First is, why to use it, and how to get started.

Full Transcript

Click here to read transcript

Trent: Hey, everyone. Welcome back to another episode of Bright Ideas podcasts. As always, I’m your host, Trend Dyrsmid, and my job here is to shine a light on the tools, the tactics and the strategies that are working in e-commerce today and I always do that by inviting experts onto the show to share with you and with me exactly what is working for them in their business today. And this episode is no different.

But today’s topic is a little bit different. We’re not going to talk about something that’s necessarily e-commerce specific, but we are going to talk about something called Profit-First, which is a financial management strategy practice. I’m not sure what the right word to describe it is, but my guest who I’ll introduce in a moment will. It’s something that we use in our own business and I highly recommend.

So, with the stage set, Cyndi, thank you so much for making some time to come and be on the show. Maybe let’s start with you in your own words; who are you and what do you do?

Cyndi: Okay. Well, thank you for having me, Trent. My name is Cyndi Thomason and I’m the founder of an accounting firm called Books Keep. We are mastery level, profit-first professionals and we work with our e-commerce clients to help them get a handle on their accounting, as well as their cash flow.

And profit-first is a cash flow methodology; it’s the way we describe it. And it helps our clients just be prepared, from a cash perspective, for whatever the business might throw coming your way.

Trent: All right. So, let’s assume that you and I are in the coffee shop (we’re in the virtual coffee shop) and unlike coffee, I have water. But let’s just assume that I have no idea what profit-first is and I kind of want to know. So, maybe let’s start there; like what the heck is it in layman’s terms and why did you make it a thing in your business?

Cyndi: Well, profit-first is the title of a book by, Mike Michalowicz. He wrote it based on some challenging times that he had in managing his businesses. He had a couple of different businesses that developed and performed very well, but he saw that always cash flow was a struggle. And through trying to help small businesses, he kind of got himself in a mess with not having the cash to operate. And from that place, he had to figure out a way that he could operate and help other small businesses operate, having more intention and more understanding of how the cash actually moves through their business.

The book describes, kind of one of the primary tenets of profit-first, is understanding Parkinson’s Law. And Parkinson’s Law is an economic theory economic law that was developed by Northcote Parkinson back in the 1950s. And it’s a really simple law that says, “You use what you got.”

And you use what you got in terms of whatever your resource is; if you’ve got cash, if you’ve got time. We tend to fill up and use up whatever is available to us and if we have less of something we conserve.

And so, the example that Mike uses in the book and that I think we can all relate to is a tube of toothpaste. And when you’re sitting there with a full tube of toothpaste, it’s just real easy to pull out of a long bead onto your toothbrush. But if you have just a little bit left, you’ve got to make it last till you get to the store. We conserve and we put just a little dollop of tooth paste on our toothbrush and we make do with that.

And the same thing holds true with our cash in our business. Looks like there’s a lot of money in our bank account, the wheels start turning and we start trying to think, “Okay, what can I do with all of this money. It’s time to get that new computer or buy more inventory or launch that new product.” We’re never short of ideas of ways to spend the money.

But if you look at that cash that may be in your bank account and realize that it’s really pre-programmed for certain things, like part of it needs to go to pay you as a business owner, part of it needs to go to pay you as a someone who works in the business, part of it has to go to the government and part of it is there to be you know inventory or operating expenses. If we can get real intentional about those different buckets of money, then suddenly, it doesn’t appear that we’ve got as much as maybe it looks like if it was all in one big bucket altogether.

Trent: So, if someone had asked me what profit-first was and I’d like you to correct me where I’m wrong, I would have said to them, “We have money that is all for different purposes (like you’ve just described). So profit-first, at its core, tells me to put all of that money in different bank accounts, so that I know, for each role, how much money I have on hand.

And this is something that we actively do. So, we have our credit {indistinct 06:22} looks at this like, “Why do you have so many accounts?” “Because we’ve got our profit hold account, we’ve got our tax hold account, we’ve got our inventory account, we’ve got our OpEx account, we’ve got our payroll account.

So, at any point in time (and I look at these numbers every single week) I know exactly (we’ve got an inventory account) I know exactly how much money is earmarked for each one of those things in my business.

Is that a good way to describe profit-first?

Cyndi: Yeah, yeah. Absolutely. And what you’re doing by having an account for profit, for example, an account for your own payroll, is your recognizing your value to the business. That’s another component of it.

Too many times, entrepreneurs think they don’t have to pay themselves; they’re going to reinvest back in the business, but we can’t sustain business like that for very long. It takes a toll on us, it takes a toll on our family.

So, recognizing that a true business should operate from the perspective that it pays its most important employee and it should reward us for taking that risk and investing in our business, those are fundamental things that should just be a part of the business equation and our bright light is shone on those things through the profit-first method.

Trent: Absolutely. So, Cyndi, in a minute, I’m going to ask you to tell us a story about one of your clients that was struggling before profit-first and how things have changed.

Before we get to that, I just do want to bring a quick message from the sponsor of this particular episode. And it’s funny that we’re talking about cash flow and availability of cash because the sponsor for this episode is Payability.

Have you ever found yourself in a situation where you’ve got the right product, you’ve got a great Amazon strategy and all you need is the cash? Well, I know that I have and so have many other people. And that’s the problem that Payability solves.

They are a financing company on a mission to give e-commerce sellers fast and flexible access to capital. Approval is based on your Amazon account health and your Amazon performance. So, there’s no credit checks and you can get your money in less than 24 hours.

So, if you’re tired of banks not taking you seriously because you’re a small business and you sell online and maybe they don’t understand even how that works, I would encourage you to go check out Payability and you can do that at brightideas.co/payability.

And when you do through that link, they will give you a $200 sign on bonus as well as some discounted fees. And again, the URL for that is brightideas.co/payability.

All right. So, let’s talk about that particular client that was struggling and I’m sure you’ve had many, but I know we talked about one in the pre-interview. So, tell us know, without naming them, a little bit of kind of what industry or what do they do and then what were they struggling with and how did profits-first help them to navigate their way through those struggles.

Cyndi: Well, I can name him. He’s been very gracious with sharing his expertise. His story is told in my book. His name is Mark. He is a digital nomad. He sells cross fit equipment and he sells on Amazon and his own website.

He called me back in December of 2015 and he was pretty frustrated. He was on his third Book Keeper that year. And it’s the end of the year; he didn’t have numbers.

His busy time starts kind of like late in the year, but first quarter is huge because everybody’s got their resolution and we’re all gung ho. And he was really frustrated because he had had to place his order for inventory and he really didn’t always business stood. He didn’t know exactly what was going on with cash. He didn’t really know what level of inventory he had that he could have a good sense of that information. And he was really concerned that if he didn’t order enough during his busy season, the Chinese New Year, where his manufacturer shuts down for a whole month. And so, he had to place those orders well in advance.

And he said to me, “I feel like I’m flying blind. I feel like I can get a handle on every aspect of my business but this one.” And so, I took that as a personal challenge. And I’m like, “Okay. Well, you’re not going to fly blind anymore.”

So, first, we got his books in order because you really do have to understand from an accounting perspective what’s going on to analyze things effectively from profit-first.

So, we get its books in order and then we started with a basic profit-first installation. And for me that’s three accounts. And I know Mike in his book recommends five, but four for my clients, I find that they really need to get a good handle on how things move. And when you separate inventory out from the cash flow of your operating expenses, suddenly you’ve taken a lot of cash that looks available and may be available, but it’s designated for a purpose like we talked about before. So, I’d like to get that working. And then once that’s working well, then we expand to other accounts.

So, that’s what we did from Mark. We created a profit account, we created an inventory account and he of course, already had an operating expense account. We worked with that for a few months.

After we had the hang of it, the bugs are worked out. We knew that we could reliably set aside, from each Amazon pay out, the money that we were going to need for inventory and OpEx. Then we expanded that and added things like an owner pay account and a tax account.

We continued to work together over the next year or two and talked once a month about how this whole thing worked and how he needed to understand what the numbers were telling him, what his bank accounts were now telling him. Because once you implement profit-first, you don’t have to look at your accounting system as much.

Because we all kind of have a habit of logging on and looking at our bank account anyway. And so, profit-first kind of works with that behavior that we already have. “You can look at your bank account.” “No.” “Okay, I’m not going to get my Amazon pay out for another three days. Is my cash going to hold up till then in my OpEx account or am I going to have to make a big inventory payment? Have I got that money set aside?

So, you start to get that rhythm just by handling your accounts on a regular routine basis. So, we did that…

Trent: I was going to say I think for new entrepreneurs also it’s important to understand that oftentimes they’re going to look at their PNL, but the PNL is very different than the cash flow statement and in some businesses, it’s even more different than it is in ours. But just because your PNL says you’re profitable doesn’t mean you have enough cash to go another three days.

Cyndi: Exactly. And inventory is really a challenge for people to figure out because you buy maybe a new product introduction and you pay an initial run, but sometimes you will have the cash out of that before you need to order the next run. And so, just getting a handle of how that flow has to work is a challenge and being able to start to understand that by looking at your bank accounts this is what profit-first provides for you.

So, I’ll finish up with Mark of that’s good.

Trent: Yeah. Please do.

Cyndi: Okay. So, Mark is still a client of ours. I don’t have his year-to-date numbers in front of me, but I will tell you at the end of last year, owner pay was up like 500 percent, profits were up 23 percent from the year before. Every metric that we look at, he is really performing well at and able to do that without having a tremendous debt load that he’s staying up at night worrying about.

Mark has found it so beneficial. Last count I think he had 15 bank accounts. So, he’s kind of gone off on steroids here. And he has he has accounts for like licensing, he has accounts for shipping, he has accounts for sales tax, just many different accounts that he uses. And he knows what percent he puts into those account each month.

So, it’s really easy for somebody to say, “Well what percent do you spend on advertising?” He knows because that’s what the money he puts in there every month. Anyway, he’s really a success story and I’m really proud to have him as a client.

Trent: Yep. And I have to say that having that clarity is really refreshing as you don’t have to just look at that one account and see that big pile of money and wonder, “Well, gosh. What should I use this for?

So, from a psychological perspective, I know you talked a little bit about Parkinson’s Law before, but why do you think this works so well?

Cyndi: Well, I think because it does work with our behavior. We’re programmed to look at things and decide how to use up those resources. So, by splitting things into different bank accounts, we can start to see the purpose for them. So, I think just because that’s human behavior is one reason.

Another facet of profit-first is about getting in a rhythm, not handling your money every day. Now, I do this, I think most of my clients do this. We look at our bank accounts every day, but we don’t go in and actually allocate the deposit from Amazon, but every two weeks is a typical situation. And we don’t pay our bills, but every couple of weeks.

And by getting yourself on a schedule for doing that, it takes the randomness out that happens when you touch your bills and your payments every day. So, if every day you go in there and you pay something, you don’t ever really get the sense of how the flow is in your business. You won’t have that awareness of, “Okay, my Amazon deposit is going to come in three days. Am I Am I good for three days or not?” Because if you catch it every day, you just don’t get that sense of rhythm in your business.

And another aspect of profit-first is rhythm. Another component of it is called the primacy effect. And in looking at first things first, profit account is always the first thing we allocate to because we know that we have to reward ourselves for being in business. Then it’s owner pay and taxes. And then what’s left is our operating expenses.

And so, many people want to forego setting aside money for themselves or and the government and put it all into running the business. The challenge with that is you’re kind of artificially propping up the business and you cannot long-term sustainably operate without taking care of yourself and the government.

So, you may as well build that habit in from the very beginning and learn to operate with the funds that your business is generating because that’s the true measure. If you’re not having enough money to buy everything that you need and you think you truly need it, then maybe your margins are off and maybe your model is off. And that’s a really big red flag that we shouldn’t gloss over. We should pay attention to and get it right.

Trent: Yeah and I think that’s especially common with first-time or newer entrepreneurs is they don’t pay themselves a paycheck and they look at their business and they go, “Oh, look at how profitable it is” but they’re not accounting for what their market value is of their particular contribution to the business. And if they were to do that they might see well that maybe it’s not such a good business or maybe I’m not running it the right way or I need to make some decisions about my margins or my expenditures or what have you.

Because when you’re properly accounting for your owner wage and your owner profits to give you a return on your investment. Because at the end of the day, an owner, we’re just an investor. That’s really what put that hat on and think about it from those terms.

And I know that I made many of those mistakes in my first business. I didn’t paying myself for years and I just lived off of drawers and debt and credit cards and every other thing and you kind of delude yourself into thinking that your business is in better shape than it is, which then impacts or impairs the decisions that you’re making. Don’t you think?

Cyndi: It definitely does. And people think that they’re getting a head that way, but I’ve found that it’s just the opposite. What happens is if you’re not operating efficiently and frugally and innovatively, somebody else will {indistinct 20:14}.

And so, by putting that pressure on yourself by yourself, you know, putting that onto the business, it sets you up with the right set of questions and concerns that you should be paying attention to.

Trent: In our pre-interview, you highlighted two accounts that you really wanted to make sure that we talked about and that was a dedicated inventory account as well as the profit account.

Now, I think we just kind of covered the importance of the profit accounts, so maybe we don’t need to go down that rabbit hole again. But why inventory? Why is it so important to have? Like why is inventory separate from OpEx or what have you?

Cyndi: Well, inventory really does have a different flow. Most people order batches of inventory in bigger quantities and then that has to work its way through the sales cycle and then at some point, you know you have to reorder. You may have terms that maybe you put 30 percent down and you’re not going to have to pay the other 70 percent until the item ships.

It has its own rhythm about it and it’s typically very different than the rhythm that you would have for your OpEx. Opex, excuse me, has a pretty predictable month-over-month type of expenditure. You know, if you’re paying yourself monthly, you’ve got to pay yourself a couple times a month; we hope.

You may have employees that you’re paying regularly during the month, you may have a warehouse that you’re paying the rent on, your insurance, you know, all of those types of items recur on a monthly basis. And so, that that flow looks really different than the flow of, “I’m going to place an inventory order and it’s going to last me three months and I’m going to have to do a re-order a month beforehand and then I’m not going to have to go…”

That’s just a whole different scenario. And so, separating those two things really allows you to see each of them discreetly and learn what those patterns are.

Trent: Yeah, that makes a lot of sense. Debt. Debt is something that newer entrepreneurs and even older entrepreneurs or more experienced entrepreneurs have to deal with and manage on an ongoing basis. How does how does debt city once this whole process?

Cyndi: Well, let’s talk about the profit account for just a minute because it has a unique strategy to play with debt, if somebody already operates and has debt in the business.

So, the profit account, the percentage that you put in that account is going to build up over a quarter. So, every time you get an Amazon payout, just start right now; put one percent in your profit account. At the end of the quarter, you’re going to look at what you added that quarter and you’re going to say, “Okay. So, I’ve got $2000 in here. What do I do with it?”

You’re going to leave half of it in there. So, that $1000 is going to stay in the account and that starts to become your rainy day fund. That’s the money that’s set aside should Amazon lose your inventory or suspend your account.

Trent: Suspend your account.

Cyndi: Yeah, exactly. And so, that money is starting to build up so that you have it there should you get in a tough spot.

The other half of it is what you take out of the business, not plow back or reinvest in the business. You totally take it out. It is something for you and your family. It’s what you use to take your kids to Disney World because you haven’t seen a {indistinct 23:49} in two weeks because you’ve been trying to get a shipment out. But it really is meant for you to enjoy outside of the business.

Now, the one unique thing about this account is if you have debt in the business, then you use the portion that you take out, you use 90 percent of that to pay off debt, so that you start to snowball your debt repayment. Always, during the month, pay back your minimum obligations and any more that you can. But every quarter, until you’re debt-free, you’re going to be taking a big chunk of that profit distribution and putting it towards reducing your debt.

Because once you do that, then your cash frees up so much more that you have more money to be able to do the things you want to do like buy inventory and grow your business.

Trent: So, for folks who are thinking, “Hey, this resonates with me. I’d like to get started with this profit-first thing.”  I know obviously they can go in and buy the book, but maybe that’s not necessarily the best first step. Do you have any, I think you said you have a quick start guide or something to that effect; right?

Cyndi: Yeah, I do. And people can e-mail me and I’ll be happy to send them our quick start guide.

It basically describes the strategy we talked about where, in addition to your OpEx account, how to allocate money to an inventory account and into a profit account and just talk you through the basics of how to make that happen and get that flow going. Once you get that going, then you can expand and all of the strategies are in the book as well.

But this is just a one-page sheet that will outline each step you need to take and I’ll be happy to send that. If people can send it to my email address. It’s cyndi (C-Y-N-D-I)@bookskeep(B-O-O-K-S-K-E-E-P).com.

And if they put the word “Profit” in the subject line, I’ll know exactly what they’re looking for and be able to send it to them easily.

Trent: Okay, and we will include that information in the show notes for this episode which you can get too at brightideas.co/280.

Cyndi, thank you so much for taking some time to be on the show. It was a pleasure to have you here.

Cyndi: Thank you, Trent. Really enjoyed talking with you.

Trent:  If you enjoyed this episode, I have two small, but very important requests. Number one; help another entrepreneur discover all of the golden nuggets by sharing this episode on your social profiles or wherever else you would like to.

And then number two; if you would take a moment and head on over to the iTunes store and leave us a 5-star rating along with your comments. Man oh man. I would be eternally grateful for that. Thank you so much.

Thanks very much for listening to the Bright Ideas Podcast. Check us out on the web at brightideas.co.

Alright, show is over. I’m tired. 

Questions Asked During the Interview

  1. Who are you and what do you do?
  2. What is Profit First and how did you get started?
  3. Tell me about a client that was struggling before Profit First and now that they have implemented it, how things have changed?
  4. Why does it work so well?
  5. Why does Profit First say that we need multiple bank accounts?
  6. Why is it so important to have an account dedicated to inventory?
  7. What about the Profit account?
  8. What about how to deal with debt?
  9. For those who want to get started, what is the first step?

Leave some feedback:

Connect with Trent Dyrsmid:

Want to Discover Even More Bright Ideas?

Today’s Guest

Cyndi Thomason is the author of the bestselling book, Profit First for Ecommerce Sellers. She is a Mastery Level Certified Profit First Professional, and the founder and president of bookskeep. Her company consists of a virtual team located across the United States, providing bookkeeping and Profit First consulting services to ecommerce clients all over the world.

Cyndi devotes much of her time speaking at various events such as ASD Market Week, SellerCon, ProfitCon, and other industry events. She also participates in numerous webinars, teaching eCommerce businesses how to implement the Profit First method. She is a regular contributor to The Private Label Insider, Inventory Lab and eComEngine blogs and newsletters.

Growing up in North Carolina, Cyndi attended NC State University where she obtained a bachelor’s degree in Economics. Living in the Ozark Mountains in Arkansas, she loves to hike with her family, garden, and hang out with her menagerie of beloved fur babies.

Links Mentioned

What You Missed