Podcast  |  Finance,

1.11: How to Quickly Become a Profitable MSP With Profit First

profit first profitable msp happy business owner

Photo: Yan Krukau on Pexels

“It will change your entire outlook on how you run your business”

MSP owner Lori Hardtke was working hard but barely getting paid—then she implemented the Profit First methodology from Mike Michalowicz. Within 18 months she saw a “night and day” difference in her business, breaking a six-figure personal income for the first time ever. In this frank interview, Lori shares:

  • The basics of the Profit First methodology
  • The key that unlocks the true magic of the system
  • How Profit First works for any MSP at any stage of development
  • Common misconceptions about getting started
  • The name of the US bank that’s staffed entirely by Profit First professionals

Who’s on this episode

Host: Jennifer Tribe
Guest: Lori Hardtke, ByteWize

Lori Hardtke is the owner and president of ByteWize, Inc. She’s a solo MSP and entrepreneur, a technology educator, and author who specializes in highly effective technology strategies for small businesses. The most interesting aspect of her Arizona-based business, where a majority of her clients are located, is that she lives full-time in Hawaii. Lori is also a certified Profit First Professional who focuses on transforming a MSP’s cash-eating business into a money-making machine. The soul of her business and teachings is to proactively contribute, not only to her client’s financial success, but also their emotional, physical, and spiritual well-being: Wealth, health & happiness.

Episode transcript

Jennifer: I’m Jennifer Tribe and this is Workflow, the podcast about growing a happier, healthier MSP. More profit, less stress.

Today on the show, we’re focusing squarely on the first half of the Workflow promise = more profit. Although the system we’re going to talk about today should also help nicely with “less stress” as well.

That system is called Profit First. Profit First is a financial management methodology for businesses outlined by Mike Michalowicz in his book aptly named Profit First. The book was first published in 2014 and since then it has helped a lot of businesses, including many MSPs, get their financial house in order.

My guest on the show is Lori Hardtke, CEO of an MSP called ByteWize. Lori implemented Profit First in her MSP starting in 2019 and as you’ll hear, she found it life changing. So much so that she’s in the process of launching a Profit First academy specifically for MSPs, to help managed service providers like her use and benefit from the system.

If you haven’t read Mike’s book, I highly recommend that after listening to this episode that you grab a copy and dig in. In the meantime, here’s what it’s all about in a nutshell.

“It flips the standard accounting formula”

Lori: Basically it’s a cash management system and it’s a way of getting you into a rhythm of taking your profits before your expenses. It flips the standard accounting formula that we’ve all been taught: sales minus expenses equals profits. When you do that formula, your profits are what’s left over. So we all hope that there’s a nice surprise at the end of the year. Right. The Profit First formula is a sales minus profits equals expenses. So a slight difference but a big difference. You’re taking your profit first and what is left is expenses.

Jennifer: At a high level, it is literally that simple: Take your profit first. If you’ve ever read content from personal financial planners about saving for retirement, it’s a similar principle—pay yourself first and then work with what’s left. Because if you do it the other way around—pay everyone else first and then see what’s leftover for you, too often what’s left over is nothing.

Lori: There’s actually a study done by the SBA that 83% of small businesses survive check by check. So they’re not profitable. That means most of us are running our business by looking at one bank account, crossing our fingers and hoping that we have enough money month to month to pay our bills and stay afloat. We really have no idea if we’re going to make a profit until year end. And a lot of us don’t even pay ourselves a decent salary, if at all. You think okay, well, maybe I just need more clients, more marketing, just a little more of everything. A new tactic or whatever. And all you end up doing is increasing your expenses, not profits.

It’s a tough gig to be an MSP. A lot of stress, a lot of hours, and a lot of us are working for… you know, I was making more money in my other job years ago. So it’s like, well, what am I doing? Eventually, you become overworked, underpaid, and the longevity of your business is at really at risk. So that was me year after year until I found Profit First. Once you do this, it makes you feel empowered. It literally reverses all of those problems.

Jennifer: OK the philosophy is great but how do we put this into action? The great news is that it’s a low investment, low risk project so it is very fast and easy to get started. There’s no software or expensive consulting to buy. It doesn’t involve re-arranging your accounting books. In a quick start implementation, you simply set up one new bank account.

“You’re going to get into that rhythm”

Lori: If somebody just wanted to get started and not maybe follow the book, you can just open a second bank account and you’re just going to name it Profit. And then on the 10th and 25th, usually two times a month, you’re going to transfer just 1% of what’s in the money that all your income is going to. You’re going to take 1% of that and you’re just going to transfer that over to that Profit account. And then you just leave it there, you don’t touch it. Then you can, the next quarter, increase from 1% to 2%. And you’re just going to get into that rhythm and follow that until you can get, if you can get your profit up to 10%, you’re doing great.

Jennifer: We start with 1% because we don’t really know how much we might be able to sustain when we first start it, right?

Lori: Yeah.

Jennifer: And is it 1% of your gross revenue or 1% of whatever is sitting in your bank account at the time you make the transfer?

Lori: Whatever is sitting in your bank account.

Jennifer: So in the quick start version, your profit is coming off cash on hand vs revenue. Let’s say you get in $5,000 at the beginning of the month and you pay a bunch of bills before the 10th when you do your first transfer to your Profit account and so on the 10th, you’ve got let’s say $1,000 left. You would put 1% of that — $10 — in your Profit account versus $50 if you were taking 1% of your $10,0000 revenue?

Lori: Exactly. It’s just whatever’s left.

Jennifer: The quick start is just as it sounds — a fast way to get into the habit of transferring Profit into a different account twice a month. But remember it’s a percentage of cash on hand not revenue which can make a big difference to your results so if you want to go further faster, the detailed implementation isn’t all that much more work.

“Take a little bit to celebrate your achievements”

Lori: You’re going to have five accounts. Three probably are going to be with your current bank and they’ll be labeled Income, Owner’s Pay, and Opex or operating expense. And then you’re going to have two at another bank. They call it the non-temptation bank and those two accounts are going to be labeled Profit and Tax. And you determine a target allocation percentage, which we call TAPS, and then current allocation percentages, which we call CAPS. I actually have a checklist that I can provide that you can download an initial assessment, and it kind of helps you figure some of that stuff out.

So the TAPS are what we’re striving for over a period of time, and then the CAPS are what you’re going to start out with and usually we recommend starting real low. You want to get into a rhythm of being diligent with taking your profits first. And so then the goal over the next 12 to 18 months is to move the slider a couple percentages or whatever you feel comfortable with, little by little, until you can get to those target allocation percentages. When you do this, you might find that your operating expense is 50 or 60% or more. In that case, you need to adjust, but everything needs to total 100%.

You’re going to see you don’t have enough money to do all of this right in the beginning. It takes a little time to get used to. So you have all this money coming into your Income account and then on the 10th and 25th, you’re going to transfer the funds that are in the Income account to these other accounts based on those percentages. Every quarter, this is what’s fun, is you take 50% of the money that’s in the Profit account and you distribute that as a profit distribution to you, the owner, or you can share that distribution like I do with another employee or all employees.

And/or more importantly, if you have debt, you’re supposed to use that to pay down debt. The book still recommends that you take a little bit to celebrate your achievements even if it’s $10. When you first start out, it’s not much. But it really is it’s so rewarding to see that little by little, and then all of a sudden it’s like, oh, my gosh, I’m doing okay.

“I found was it was actually less work”

Jennifer: Five accounts across two banks, multiple transactions and transfers a month. Do you find that this creates any problems in terms of bank fees or complexity for your bookkeeper, anything like that?

Lori: That’s a common misconception. People are like, Oh my God, I can hardly handle one account and all the work that goes with it. What I found was it was actually less work. The beginning, the first three months, you’re getting your bank account set up and you’re going through all that can be a little time consuming, but like in your Tax account, there’s just money going into it two times a month and then money’s coming out of it once a quarter. So to reconcile those bank statements only take a second.

The other harder piece is finding a bank that gets Profit First. Some banks you have to have a minimum balance. You can’t bring it down to zero. Luckily, the Profit First organization we have partnered now with a bank that gets it. All the employees are certified Profit First Professionals. It’s really changing the way this can really become automated. They have special banking rules so that you can set it up because like the 10th and 25th, you’re typically just taking a percentage of your income and they have rules that you can set up. It’ll just do it for you. So it’s very, very cool.

Jennifer: The name of that bank that is Profit First-friendly is Relay. It’s an online bank, available to businesses in all 50 states. The URL for the bank is relayfi.com/. Of course, I will put a link to that in today’s show notes.

Speaking of banks who are on board with the Profit First mentality. Is it also difficult to find a bookkeeper or an accountant who’s in line with that thinking?

Lori: It helps to find a CPA that is familiar with both Profit First and the MSP industry. I do have a couple that I refer clients to. You can also go to Profit First professionals dot com and search the directory for one as well. Most of those listed are certified. Well, everyone is certified Profit First professionals, but many are CPAs and techs and financial advisors as well.

“All kinds of amazing things started to happen”

Jennifer: Let’s hear about your experience with implementing Profit First. What was the situation in your MSP when you came across this idea and you thought, Oh, I need to try that?

Lori: I first heard about Profit First in 2018, but it wasn’t until April of 2019 when I’m like, okay, it all makes sense to me. I’m going to do it and see where it goes. Luckily, I kept track of all this stuff. So prior to 2019, my combined payroll and owner’s draw never got past $75,000. My revenue as a solo MSP, it’s just me and a part-time person, really. I was around $330,000 a year. And then four months after implementing Profit First, all kinds of amazing things started to happen. I was able to pay off a $19,000 0% credit card in full. And by the end of 2020, my revenue jumped to $375,000 and I broke the six-figure mark for my owner’s pay for the first time and no looking back. It’s just keeps getting better.

When I started, my Opex was close to 67% and my owner’s pay was 16 and I had well she was overpaid a subcontractor, but I didn’t know it at the time because again, I’m kind of winging it and so I could only put like 1% to my Tax and to my Profit account. It was really just a huge eye opener when you see that. And now my Opex is down to 37%, my sub account is 8%, my Owner’s is up to 27, my Profit is 10 and Taxes 15%. It’s night and day difference.

In addition to paying myself quarterly bonuses, I’m also giving my 1099 contractor a quarterly bonus. And I feel that’s really powerful because you want your employees to be invested in the success of your company. I think it helps them look for ways to be more efficient because we don’t want to hire more people. We want to keep it as simple as possible. So, yeah, it totally changed the cash flow in my business. It taught me to really think twice about all the tools and gadgets I was using. I got rid of a lot. It made me realize that getting rid of $500 a month in expenses was much better than winning $1,000 a month client. There was no headaches with getting rid. I just got rid of stuff instead of taking on more burden.

Jennifer: Really looking at your expenses makes sense because part of being able to grow the percentage that you’re putting into your profit or tax accounts is that operational expense account coming down. I think you said for yourself going from 67 to 35% or something like that. So tell us about the process of reviewing expenses.

Lori: The book recommends and I did this, you take your if you’re using QuickBooks, you can run a report. Just list out all of the vendors that you’ve paid for the entire year and do it so that you can see it monthly. You’ll see then which ones you’re paying monthly. You’ll see which ones are just once a year. And I just went through that list and I’m like, Oh, yeah, that’s right. I don’t want to bash any vendors because I think we have amazing vendors that have amazing products that can help. And if it helps you be a more efficient… Part of this too is there was a point where I decided I like being small. I don’t want employees. I want to just see how far can I take my business in revenue but be profitable? So that was kind of my mission.

So I ended up getting rid of I don’t know, Audit IT, for example. It was at the time, for me, like a couple hundred dollars a month, I think. And there were just other little things, every little thing like Lucid Charts. I had a subscription for I don’t know how long. It was only $12 a month. You know you’re like, oh, what’s $12. And I kept track of all this. All of a sudden, I have just saved like $1200 a month. And that’s huge. Again, I’d rather do that than get a $2,000 client because it was a lot less work. So I would say that this whole process in about 18 months is when you’re going to really see the benefits.

I’m making more money with fewer clients and I have more time. I have more time to work on projects for my business or personal projects as well. So it really was a life changing, altering process.

“It grows leaps and bounds”

Jennifer: It all sounds pretty easy. Open up a few new bank accounts, move some money around on the regular and voila, your business starts getting better. I asked Lori what she thought was the real magic to the system and she said it really comes down to habit and process, a topic MSPs know very well.

Lori: It’s the rhythm. You start out and you only have that first very first 10th of the month, I think I had maybe $10 in my Profit account and I was like, well alright we’ll see where this goes. It took about 18 months and then it kind of because it grows leaps and bounds ironically your Profit account and then all of a sudden it kind of tapers off and it’s just the way that that works.

The other important piece of all of this that is really critical in any business, but especially for us as MSPs is we really need to get our process and procedures in place, whether it be on the financial side, but all across the backend, everything we do. So actually Mike’s other book, Run Like Clockwork, is really good and he really gets the small business issues, mentality, and he really puts together some really decent material to help us with all of that. So I think if you can just get into some really good practices and rhythm with paying yourself even. It really will just change your entire outlook on how you run your business. You’ll be able to make decisions quickly because if you need that new hire or you want to run a new campaign, you just look to see how much you have in that account. So it’s really helpful to be able to open up your app on your phone even, and just yeah, we can afford that. Let’s go do it.

“It works for any business”

Jennifer: The Profit First system clearly works for improving existing businesses, like it helped Lori’s business. But what about brand new companies? Can you implement it from day 1 of your new MSP?

Lori: Startups especially benefit from jumping right in because they create the proper rhythm and good habits right from the start. So it’s totally beneficial for them. Smaller businesses, they can keep it relatively simple if they want with just three bank accounts as well. And then you can just always add and grow too as time goes on, you can add more bank accounts. And larger businesses, they can be a little bit more complex because they have maybe multiple accounts for different departments or divisions, but the underlying principles are always the same. You just want to prioritize your profits, allocate funds based on those percentages, and just continue to maintain that financial discipline. So it works for any business, any industry, any size.

Jennifer: Lori’s parting advice.

Lori: Really consider implementing some version of Profit First, whether it’s that little 1%, you really want to keep it simple, it really makes a difference.

Jennifer: That was Lori Hardtke, CEO of ByteWize and founder of the Profit First for MSPs academy, launching later this year.

Will you be trying Profit First? Or have you already implemented it in your MSP? I’d love to hear about your experience with it. Leave a comment below or send me an email: podcast@syncromsp.com.

Until next time, this is Jennifer Tribe. Thanks for listening.

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Jennifer Tribe

Jennifer Tribe

Syncro’s director of content. Espresso-fueled Canadian nerding out over plain language, productivity, and podcasts.

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