od, where I looked at the business checking account, determined what bills I could pay, and hoped there would be money left over for me. Profit was an afterthought until I read the book “Profit First” by Mike Michalowitz. Michalowitz describes what is known as Parkinson’s Law: when a resource is made available, we con - sume it all. For example, if we have a project to get done, and we have four hours to do it, miraculously it takes four hours. Also, he mentions that the dinner plate size has increased over time, and so have our waist - lines, because it is typical for most of us to consume everything on our plate. The thesis is “that while the formula of SALES – EXPENSES = PROFIT is very logical, it doesn’t take into account for Parkinson’s law and normal human behavior.” He suggests that we should work with our normal behavior and not against it, proposing a new formula that would be consistent with our typical behavior patterns: SALES – PROFIT = EXPENSES. The new formula con - tains all the elements of the GAAP formula, but it works much more effectively with our behavior patterns to help maximize profits and still get the bills paid. Last year, after coming home from the presentation of the accounting standards at the National Associ - ation of Residential Property Man - agers (NARPM) Conference, I was eager to implement the standards and start reviewing my ratios, but as the owner of a 100+ door com - pany, I have struggled to find time and resources to fully implement the accounting standards.
Personally, I was more success - ful in immediately implementing a Profit First System for my business while working on integrating the accounting standards over time. This first-step approach has allowed me to see changes that I need to make more quickly in my business while working towards implementing the full accounting standards. Like so many small businesses, I have typically operated my business on the “Bank Balance Accounting” method where my decisions were driven by my bank balance. Not only is that method more stressful, it also does not give a clear snapshot or clear picture of the financial health of the company. I am sharing my own take on the Profit First Formula here with the hope that it may help someone else take the next step away from Bank Balance Accounting and move towards a better system and better business metrics. My Profit First System works like this: As money is earned by my manage- ment company, it goes into a general revenue account. I have opened five additional sub-bank accounts. From the general revenue account, on the 10th and 25th of each month, I divide up the revenue that has been earned for that time period and make the following transfers to their respective sub accounts in accordance with the percentages listed below:
While these percentages are a work in progress, this Profit First System does allow me to make adjustments each quarter to get the profit to where I want it to be and the other expenses in line. The goal here is to modify these percentag - es by only 1-2 percent per quarter. For example, if you have not been taking profit out first, then start with 1-2 percent and modify that slowly as you are able to control payroll, marketing, and operating expens - es. These percentages were derived from my company accounting report and best fit my business in the states in which I do business. Remember that these percentages are of total revenue. Let’s be honest, if logic works, then we would all be rich. We all know to spend less than we earn but finding a way to do that in a way that will maximize our income is essen - tial. Setting aside the profit first is the key that is working in my busi- ness. I can use the profit to pay off debt and buy assets (more rentals) that produce more income so I can work less. With this system, I can manage expenses more effectively and having a system that makes sure I get paid helps me run a more effi - cient business. •
Derek Seal is the Principal Broker for Gorilla Rents in Sandy, Utah, and Designated Broker for Gorilla Rents in Arizona. Derek started his property
Profit
5%
management company in 2010 after seeing the need to help owners when they unexpectedly became landlords during the housing crisis. Derek joined NARPM® soon thereafter. Derek nowmanages more than 125 properties in Utah and Arizona. Derek is a member of the NARPM® Phoenix Chapter and the NARPM® Utah Chapter.
Payroll/Labor
58%
Taxes
10%
Marketing
5%
Operating Expenses
22%
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