In this episode, join Harrison and AJ as they discuss the importance of managing external costs and optimizing cash flow for a healthy business.
Harrison starts the conversation by highlighting the problem of running out of money due to high external costs. He explains the current allocation of funds, with 50% for operating expenses (Opex), 30% for owner's pay (split between him and Weston), 15% for taxes, and 5% for profit. While the owner's pay account should ideally grow, Harrison prefers using percentages to gauge the business's performance and ensure a steady cash flow.
AJ shares that their business has lower external costs and higher labor costs. They discuss their method of setting fixed salaries for themselves and allocating a portion of incoming funds to a profit account for growth. However, they express interest in transitioning to a profit-first system like Harrison's to improve their financial management.
Harrison explains the concept of profit first, where businesses can divide their accounts to track specific expenses. He mentions the possibility of subdividing Opex into material, employee, and tooling accounts as the business grows. The goal is for Opex to grow at a rate sufficient to cover new expenses while owner's pay shrinks in proportion to higher revenues.
The hosts also touch on the importance of planning for business growth, such as accounting for equipment purchases. Harrison suggests allocating such expenses to the Opex account. They discuss the difference between owner's draw and a fixed paycheck, and the potential switch to a payroll system when hiring employees.
Towards the end, they briefly explore the legalities and advantages of different business structures like LLCs and partnerships. While AJ prefers staying as a partnership for tax purposes, Harrison highlights the protection an LLC can offer, especially in job shop work scenarios.
Join us in this thought-provoking episode as we navigate the intricacies of financial management, growth planning, and business structures. Discover practical strategies to optimize cash flow, ensure profitability, and create a solid foundation for your business's success. Tune in to the Profit First Podcast now!

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