For me, this discussion regarding Profit First starts with Dave Ramsey.
I am a big Dave Ramsey fan. I’m a fan because his system works. (If you haven’t read The Total Money Makeover, please, do so.)
After being mired in the student law school loan debt for eight years, Ramsey changed my thinking.
About two years ago, I was dealing with a growing law firm and more people on payroll. I was responsible, not only for my family, but for a growing number of others. That’s stressful in its own right, but couple that with debt from law school, and my wife’s masters and doctorate degrees, and it was too much.
Too much psychological stress, that is. Debt weighed on me every morning when I woke up every morning, and I took it to bed with me every night.
Ramsey promised a system for offloading debt quickly (quickly if you work like a dog to pay it off). It’s based on putting together a true budget (not round numbers) and attacking every debt with fury until it’s gone, then moving on the next one. I figured it couldn’t hurt to try, so we ran the system.
Like I said before, the system works. We paid off $150,000 in debt in 12 months — our entire student loan debt that we had racked up over the previous 11 years.
I can’t tell you the relief when I made that last transfer and paid off our student loans. I no longer felt like Sisyphus rolling a boulder up a hill for all eternity. Unlike him, I made it to the top of the hill and walked out of Purgatory.
Since paying off our personal debt, I’ve thought about how to implement a Ramseyesque system in my law firm. We don’t run debt in our firm (never have, never will), so that part was taken care of.
The primary problem I have been experiencing since paying off personal debts was this: as business revenues increased so did business expenses — almost in lockstep. They shouldn’t have done this since we don’t have variable costs pegged to revenues, but they did anyway.
This means the profits that drove my ability to pay off mountains of debt had decreased. Where had the profits gone? And how could I systematize them so they didn’t prove ephemeral?
Profit First, by Mike Michalowicz, answered both of those questions.
First, Mike explains that Parkinson’s Law (a gross generalization of which is: “The demand upon a resource tends to expand to match the supply of the resource”) governs how we as law firms (56% of which are solos) spend money.
In other words, we spend everything we think we have. If we look at our operating account and see $50,000, amazingly, we’ll adjust our spending to, you guessed it, spend around $50,000.
So, the answer to my first question was: profits had been transformed to business expenses, because there was money to cover them.
As Mike explains, the solution to this problem is to systematically segregate monies for things like profit, taxes, owner’s pay, etc. in a place where they’re difficult to access (and out of sight), so we don’t think they’re there to spend. (Sounds so simple, but almost none of us actually do it.)
Second, Mike explains how to keep profits from becoming ephemeral: take profit first.
Yep, before you do anything else, take a predetermined percentage of your revenues and pay profit first.
Then, and only then do you pay out things like taxes, owner’s compensation, payroll, etc.
Makes total sense, right? It’s like Ramsey in the sense that you prioritize the payment of debt above all else, then you adjust accordingly to make things work.
Why Is Profit First so Important?
By doing what’s in Profit First (and there’s more to the process than I’m letting on), you are assured a profitable law firm from today forward.
Not many law firms can say they are profitable, because, well, they aren’t. They tend to pay out pretty meager salaries to their founders, and no profit distributions. (Attorneys don’t admit this in public, but you talk to enough of them alone, and you figure out it’s true.)
The real magic of Profit First is it gives you an easy system to follow to become and maintain high levels of profitability.
Mike discusses everything from taking profit first, to determining which parts of your law firm are sucking up too much money (hint: operating expenses) and which parts aren’t sucking up enough (hint: profit), to paying off business debt. It’s simple; it’s effective; it’s genius.
(Click here for a quick overview of the entire system.)
Within five minutes of starting Profit First, I knew it would help me and those I knew to run permanently profitable law firms.
Not law firms that are highly profitable for a short period, but ones that are highly profitable in the long term.
Mike has come up with a fantastic and easily run system for business profitability, much like Dave Ramsey came up with a fantastic and easily run system for paying off debt and accumulating personal wealth.
Implement both and watch the results kick in.
Get A Legal Consultation With An Experienced Utah Attorney
While this website provides general information, it does not constitute divorce advice. The best way to get guidance on your specific legal issue is to contact a lawyer. To schedule a divorce consultation with an attorney, please call or complete the intake form above.
The use of the Internet (or this form) for communication with the firm (or any individual member of the firm) does not establish an attorney-client relationship. Confidential or time-sensitive information should not be sent through this form.