How to Avoid Being a Starving Artist Using Profit First
At the start of Covid, Donald Miller interviewed author and business guru Mike Michalowicz, the author of Profit First. (A book that every business owner needs to read!). The gist of the interview was how small businesses could survive the lockdowns and the steps they should take immediately for said survival.
Shortly into the interview, Mike discussed the common-sense accounting model he advises small businesses to follow. He mentioned his book, Profit First, where he outlines what steps businesses take in the model. Before I had finished listening to the interview, my copy of the book was ordered!
The book arrived, and before the end of the week, I had finished it and began implementing the accounting model taught in the book.
What is Profit First?
Simply put, you take your Sales – Profit = Expenses.
Before you get all up in your head
- Sales is the money left over from each booking/product sale minus the cost of paying your labor (your second photographer or editor.)
- Expense is the money your business needs to be open, taxes, and your personal income from the business.
How is Profit First different?
The GAAP (Generally Accepted Accounting Principles) formula for determining a business’s profit is Sales – Expenses = Profit. The problem here is that human behavior rarely allows an excess of money to sit in an account untouched. It’ll get spent for one reason or another.
With Mike’s accounting model, you take your PROFIT FIRST (a predetermined profit percentage from every booking/sale), and only the remainder is available for expenses. The remainder is how you’ll pay yourself and a photography business’ endless expenses.
How to Setup Your Banking
So let’s dive into how to setup your business according to what is taught in Profit First.
- First, you will open FIVE checking accounts at one bank and two at a separate bank. Look at your local community banks, credit unions, and some regional banks to see which ones don’t charge a fee for additional checking accounts. (I bank with Huntington with no additional fees here in Northeast Ohio)
Checking Accounts to Open and How to Label Them
- Income
- Profit
- Tax
- Owner’s Compensation
- Operating Expenses
- Complete the Instant Assessment to determine the percentage of income allocated to which checking account.
- Ensure that the money from every client transaction you complete is transferred into the INCOME Account.
- Mike teaches that you make money transfers on the 10th and 25th of every month.
- Until you reach your Target Allocations, you will revisit your percentages every quarter.
How to Advance This for Photography
Mike gives suggestions on how to take Profit First and make some advanced tweaks to the accounting model. One of his suggestions is opening additional accounts for specific needs.
Here are the additional accounts that I opened:
- Sales Tax
I’m a Wedding and Portrait photographer in Ohio. Therefore, I have to charge sales tax on the tangible goods I sell. Almost every transaction has money I collected for the State. Consequently, I have a sales tax checking account. - Subcontractors
I pay a second photographer and an editor for each wedding I photograph as a wedding photographer. I opened a checking account, which has money set aside to pay them. When I receive a final balance, my budgeted amount is subtracted from my sales before I transfer money into my other checking accounts. - Pay Holding Account
This account came a few months into following Profit First. And I believe this is the real secret to the success of running a creative business.
Planning for the Famine during the Feast
Unless you have a studio, your creative work is 90% dedicated to an outdoor space. If you live somewhere with extreme weather (pretty much anywhere besides Southern California!), your business experiences busy and slow seasons.
One month, you might gross 25k; the next, you’ll collect retainers. And let’s be honest—we can’t pay our bills with retainers alone!
Let’s say your typical yearly gross income is $100,000. Because you complete the instant assessment from the book, you know Owner’s Compensation is a little more than 2k, and Operating Expenses are $1,250 a transfer. (Download the Instant Assessment here)
Example of a Business with Real Revenue at $100,000:
Owner’s Pay transfer is 50%.
50% of 100k is $50,000
$50,000 divided by 12 months is $4,1666,
Or $2,083 every two weeks.
Operating Expenses transfer is 30%
30% of 100k is $30,000
$30,000 divided by 12 months is $2500,
Or $1,250 every two weeks.
On transfer day, you’ll determine the amount in your income account and complete your percentages.
Let’s say it’s May, and you collected five final wedding balances for the upcoming Summer. Your income account has $24,000 in it. You put your numbers into your Profit First spreadsheet, and the owner’s comp considerably exceeds $2,0833.
You could quickly transfer all the money into your account. What’s the likelihood you won’t spend the money if it’s sitting there? The chances are high that money will be spent in less than two weeks.
Or, you could plan for the famine during the feast. Per the screenshot above, there is an excess of $5,301.59 that you could transfer to your pay-holding account.
Then, come February, when you have collected only a few wedding retainers, you will have money saved to pay the bills.
This simple accounting method has changed my business. I no longer stress about money during the slow season. (Well, okay – yes I do. But I can still pay my bills and buy groceries thanks to my pay holding accounts)
Over the last four and a half years, I’ve tweaked what Mike Michalowicz taught in Profit First and created my own transfer spreadsheet. A beta version of the spreadsheet will be launched in 2025. If you want to participate in the beta, you can sign up here.
Before implementing Profit First, money came into my business and for no rhyme or reason, money was just spent. I sometimes had enough money in my business savings account to pay taxes. I certainly never followed an accounting method for my business. I was flying by the seat of my pants. This is the one book I wish was put in my hands at the start of my business.
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