Recently, someone asked Fernando how he handles his money management or cash flow management not only for his personal income but with the multiple businesses that he runs as well.
There is a great book that he would like to recommend and it’s called “Profit First” by Mike Michalowicz.
According to him, the basis of Profit First is number one, you have to take a profit. As opposed to what most entrepreneurs do they spend first and then just see if there are some profits left.
This book focuses on profit first and then compute all expenses to see how much will be placed in operating expenses. If you are not making enough to sustain what you need in the operating account then you must realize that there is something wrong with your system and you need to fix that.
There are levels of profit first. How it works is you set up multiple bank accounts for each business or for each venture even for your personal life as well. It goes all the way from a start-up that is not making any money or revenue all the way up to an F-class business that’s making $50million in real revenue per year.
If you continue watching this video you’re going to have a vivid idea of what is Profit First. Listen to Fernando as he further discusses the details of this book.
Fernando O. Angelucci is Founder and President of Titan Wealth Group. He also leads the firm’s finance and acquisitions departments. Fernando Angelucci and Steven Wear founded Titan Wealth Group in 2015, and under his leadership, the firm’s revenue has grown over 100% year over year. Today,
Find out more at
https://www.TheStorageStud.com
https://titanwealthgroup.com/
Listen to our Podcast:
https://thestoragestud.podbean.com/e/profit-first-the-storage-stud-pov/
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So, recently I got a question on how I do money management or cashflow management? Not only for me personally, as an individual, but also for the multiple businesses, I have. Making sure that we always have cash for what we need. So there's a great book that I really recommend everybody read. It's called, Profit First by Mike Michalowicz. And the basis of Profit First is that number one, you got to be taking chips off the table, right? So, you have to be taking a profit. And then from there, you pull down all of your other expenses and then what's left over that's your Operating Expense Account. So, as opposed to what most entrepreneurs do, which is they spend, spend, spend, spend, spend, and to see if there's any profit leftover, we focus on Profit First and then everything else will get funneled out. And then, that will tell us at the end of the day, how much we have to spend on our operating expenses.
And if we're not making enough to spend for the things that we need in our Operating Expense Account, then we have to go, there's something wrong in the system and we have to go and fix that. Maybe it's more marketing and advertising. Maybe it's, you know, higher profitability deals. Maybe, there's a bunch of costs that we have that are not really necessary. So, there's levels of profit first and how it works is, you set up multiple bank accounts for each business or for each venture, for each even I use Profit First in my personal life as well. So, it goes all the way from a startup, which is not making any money in real revenue, all the way up to an F class business. That's making 50 million in real revenue per year. So, let's just start with the startup and then I'll go to the next level up, which is being an A-class business.
So, in the startup, usually what you do is every time there's money coming in a traditional startup investor, you know, not one from Silicon Valley here, but just someone that started in the real estate business for the first time, they usually have one bank account. And the problem with having one bank account is everything. You don't really know what each of the buckets are inside of that one bank account. 'Cause you only see one number. So, what they do is they tell you to set up a minimum of five bank accounts. And so, that usually is going to be, you know, your first one's going to be your Income Account. That's where all money comes into the company, but no money goes out of that income account to exterior accounts, right? You're going to, all the income comes in there. Then, twice a month for us, it's on the 10th and the 25th, an automatic distribution will be made from that income account into your multiple sub-accounts based off of a percentage.
So, next you have your Profit Account, then you'll have your Owner's Pay Account because you're an owner of the business. So, you need to get paid. Then you'll have a Tax Account and then last but not least you'll have an Operating Expense Account. That's just the basic level. Once your business starts getting a little bit more complex, you can start setting up additional accounts. Like for example, we have a Payroll Account, we also have a Fun Account. And then, you apply these splits, to get to each one of those accounts on the 10th and the 25th. So, let's take a perfect example. Let's go through my wholesaling business.
So, in my wholesaling business, there is a Owner's Pay Account. 34% of all checks that come into the wholesaling business goes into the Owner's Pay Account. Then, we have an Operating Expense Account. 30% of any check that comes in, will go to that O P E X Account, that Operating Expense Account. So that, what that does is it limits me, on how much money I could spend every two weeks or every month, if I don't have the money in the O P E X Account. Oh, that new lead source looks super interesting if I don't have the money for it, that means we can't pay it. Or Hey, you know, I really wanted to get this company vehicle. Well, if you don't have the money for the company vehicle and the O P E X Account, then you can't get it. And it kind of limits you and makes you really prioritizing, like what are the costs that are really have to spend on that are to drive the business forward and increase this operating expense account?
Next, I have a Fun Account, and I think it's very important to build a great culture in your company. So, 1% of all of our real revenue will go into a Fun account. And then, what we'll do with that Fun Account is each quarter we'll have a quarterly, you know, team building or fun event. So for example, last quarter we did go-kart racing on go-carts that go 50 miles an hour. The quarter before that, we took a boat out onto Lake Michigan, and I bought a bunch of booze for all the employees. Quarter before that we did a, an extra fun account where we had a bunch of people show up and we did these games. So, think that's super important. We do. 1% of our real revenue goes into the Fun Account. Next is the, Profit Account. We do 5% of our real revenue goes into a Profit Account and the Profit Account acts differently than the other council explained that here in a second, after that we have the Tax Account 15% of our real revenue will go into the Tax Account.
And the reason for that is one of the biggest issues, new entrepreneurs or new real estate investors make is, and I made this mistake as well is, paying last year's taxes with this year's revenue. You're basically robbing Peter A K future growth, to pay Paul A K past performance taxes that you owe. So, by setting up a specific Tax Account, when you get it to the end of your fiscal year and your tax bill comes, you're not caught off guard, because you already have a separate account that has all of the tax money that you need to pay that off. So, it doesn't hinder your growth for the previous year or for the next year and allows you to grow up pretty quickly. And then, last but not the least, we have a Payroll Account where we'll put 15% of our real revenue into that Payroll Account.
And so the nice thing about a Payroll Account is, as that Payroll Account starts getting bigger and bigger and bigger, then you're saying, Hey, we have the money now to hire a new employee. Maybe I hire an acquisition person. Maybe I hire a disposition person, maybe it's time to hire a lead manager, but if we don't have the money in that account, then, we don't have the financial means to hire somebody. And usually I like to have about six months worth of their salary saved in that Payroll Account before I'll bring a new person onto the team. So, that's how we will split our accounts. We also have some sub-accounts, which don't want to get too much into, but we have an Earnest Money Account. You know, we have a Working Capital Account, so just some extra stuff. Let's go back to the Profit Account.
So again, the name of the book is called, Profit First it's by, Mike Michalowicz. I really recommend you go buy that book immediately or get it on, you know, on audible or some audio tape, if you're bad at reading. Because it's going to it. When I implemented this in each one of my companies, it changed the way we operate and it really made things so much easier, less thought involved and allowed us to scale and grow much faster. So, with the Profit Account, it operates much differently because, as money goes into the Profit Account, it doesn't come out every two weeks. Like it would on your Operating Expense Account or on your Payroll Account or, you know, on your Fun Account. Our Fun Account comes out quarterly for our fun events, but you can, I know some companies where they, every two weeks they'll pay for lunch or they'll, you know, they'll pay for everybody to go to the bar or, you know, whatever it is, go to dinner. With a Profit Account, that money is for the owners in that money is not allowed to be reinvested into the company because you're defeating the whole purpose.
You got to take chips off the table. If you're constantly reinvesting all of your money that you make in the company you're gonna get burnt out. Number one, because you're never getting paid. And number two, you're not going to see any real growth. So how the Profit Account works is once a quarter, whatever's in the Profit Account, you cut in half. So say there's 50 grand in the Profit Account. That means half of that account, 25 grand is available for distributions to the owners. Okay. So say there's five owners of a company that means each owner gets a $5,000 check each quarter, if, or I guess that quarter, and they're not allowed to reinvest it in the company. So I like to buy gifts for people or go on vacation or whatever it is. It's just a nice extra bonus that you get for being an owner on top of your, either your W2 or your distributions that come out of the owner's pay account.
So super interesting. And then again, the Tax Account that gets diminished, depend on what type of entity. If you have a C Corp, you're gonna have to pay your taxes quarterly. If you have any other type of tax entity. So, if you have an L L C that's passed through, if you have a partnership, that's, you know, taxes as a partnership, whatever it is, then that Tax Account will get paid out at the end of the year. So, super important. I really love it. I love it so much. I decided to take that same principle and apply it to my own life. So, and I'm probably divulging too much here, but in my, I also have five bank accounts for my personal life. I have an Income Account. I have a Living Expenses Account. I have a Fun Account. I have a Reserves Account, which is kind of like your do not touch account.
That's like your, that's your emergency money until it gets to a certain amount of expenses. And then, I also have an Investment Account. So, and this is investments that I make outside of my company. Because it makes, you need to diversify the way your income streams. So, don't plow all of your personal money back in your company, invest in say someone else's company or in a fix and flip deal or in stocks and bonds or in annuities. What have you, depending on what, where you are in your life. So in my personal life, all the money comes into my income count. And then on the same days that, I do the Profit First for the businesses, you know, on the 10th and the 25th, I also do the same thing for my Personal Accounts. So, 15% go into my Living Expenses Account.
This is things like groceries, mortgage payments, rent, you know, fixing the car, you know, any thing that is considered a living expense that you need, but is not superfluous, right? So like your Netflix Account does not go into your living expenses, does not go from the living expenses. Your, you know, your bar tab does not come from your Living Expenses Account. That stuff comes from your Fun Account. So in my Fun Account, I will, that's how I pay for vacations. That's how I pay for, you know, going out to the bar. It's a really nice dinners with friends or family. That's where I will buy gifts for other people out of that account, buy gifts for myself. Anything that is not considered living expense, we'll go from that account. Then, we have the Reserve Account, right? So, the Living Expense Account was 15%.
The Fun Account was also 15%. Then we have the Reserve Account, which is the majority. It's 40% of my income will go into my Reserve Account. I like, I'm someone that I like to have a safety net in case 2008 happens again. Or if there's another, you know, black Swan event like this pandemic, the pandemic has actually worked out really well in my favor. But, if something happens, that's unforeseen, that's where that Reserve Account is. And I personally like to have three years worth of living expenses. So, super easy to do this right. 40% of your income goes into that Reserve Account until you hit three years of living expenses. How do you know what three years of living expenses is? Well look at how much came out of your Living Expense Accounts for last year, triple it. And that's what you need to put in your Reserve Account.
Once you hit that mark in your Reserve Account, that whatever it is for you, if it might be six months, it might be three months reserve. It might be five years reserve. I talked to investor that has 10 years of living expenses in a Reserve Account. Once you hit that level, then anything that rolls over trickles down into your Investment Account. So the last but not least my Investment Account is 30% of my income that comes in, I put into my Investment Account and that gets divvied up into multiple things. You know, stocks bonds, hard money lending, other real estate investments that are not my own life insurance using the, you know, the becoming your own banker kind of Infinite Banking Concept I B C. It could be buying gold. It can be you know, collector cars, whatever, anything that is considered investment, not through your business, but through your personal life,
goes into that count. So as, your reserves get topped off and you're hit your number, then anything that goes extra then gets starts funneling into your, into your Investment Account. So, really recommend that book, I recommend everybody read it, apply it to your business, apply it to your personal life. And those are kind of the basic accounts that I was talking about. The Income Account, owners pay, O P E X profit and tax. I added a few more accounts, but I've talked to people that, you know, they have 10 accounts or they have 12 accounts. The whole concept though, is it's in separate buckets, separate accounts, so that you're not tempted to spend that on things that you're not supposed to. One of the things that Mike Michalowicz recommends is for your accounts, they get paid out much longer. Let's say your tax account gets paid out once a year.
And let's say your profit account gets paid out quarterly. He says, try to make it as difficult as possible to pull that money out so that you're not tempted. So one of the things he recommends with those accounts is to put it at a different bank that makes it super difficult to draw, put it in a Savings Account, do not get online access for that bank. So if you need to make a distribution from that account, you have to physically go into the, into the bank, get a cashier's check, drawn up and then go deposit into your regular bank of use. So say you're, you know, you work at a community bank or you bank with a community bank like I do. You can have your tax account, like at a chase or whoever offers the highest rate on their Savings Account, but it has to be at a different institution that you have no access to.
So you won't be tempted. So that's what I recommend. Hope that helped you guys. If you have any questions or if you want me to discuss anything else in my business, feel free to put in the comments below. Love sharing the knowledge here. So, truly anything you want me to talk about. Just drop me a line, give me a call, shoot me an email, check me out on my website. All those things will come to me. So, until next time, have a great day and I'll talk to you soon.
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