How DJs Can Use The “Profit First” Financial Management System

Profit_First_Cover

By Gregg Hollman, “Party Professional”

One of my favorite business book writers is Michael Michalowicz, author of titles including “The Toilet Paper Entrepreneur” and “The Pumpkin Plan.” The principles from Michalowicz’s latest book, “Profit First – A Simple System to Transform any Business from a Cash-Eating Monster to a Money-Making Machine” are the subject of this blog article.

Financial management is a critical skill for any DJ, no matter how big or small your operation. Managed properly, your business should serve you. You should not be in servitude to your business. Many entrepreneurs who start a business on the basis of passion soon find themselves in an epic fight for survival. Symptoms of being in servitude to your business include excessive work hours, owner compensation that resembles minimum wage, difficulty paying bills, depletion of your savings accounts, sky-high stress levels, and neglect of your family and health.

Author Michalowicz developed the Profit First system in response to his own financial mishaps. Following are key takeaways from the system.

Re-Working The Profit Equation

The traditional formula of

Sales – Expenses = Profit

can be re-arranged mathematically to:

Sales – Profit = Expenses

With this change, you as a DJ should select your targeted profit level for the upcoming year. Profits are no longer leftovers as with the traditional formula, but are now the main course.

Let’s imagine a fictional DJ, “DJ Bob” who has targeted total compensation for himself in 2015 of $60,000. Of this $60,000 total compensation, $50,000 is in the form of salary paid to himself, and $10,000 is profit. For sales, Bob believes that he can book 50 weddings at an average price of $1,500 per event, resulting in annual revenues of $75,000.

Plugging these figures into the equation: $75,000 (Sales) – $10,000 (Profit)= $65,000 (Expenses). Re-written, expenses become the leftover account. DJ Bob is assumed to get his profit of $10,000 no matter what. The total expense level of $65,000 is composed of Bob’s $50,000 salary and $15,000 of other expenses.

What happens if after re-writing the equation, the resulting expenses figure is lower than what you currently spend? Let’s say that DJ Bob was planning to spend $17,000 in his budget in 2015 rather than the $15,000 indicated from the Profit First equation. This is where Michalowicz’s “small plate” philosophy comes into play. That is, you must learn to operate with less expenses. As per the author, if there is not enough money for expenses after re-writing the equation, it means that “you can’t afford those expenses and need to get rid of them. This will bring more health to your business than you can ever imagine.”

Michalowicz doesn’t specifically mention DJs in his text. Here are my top cost-cutting ideas for DJs:

  • Avoid over-spending on gear. Instead of purchasing that top-of-the-line new MIDI controller, consider purchasing the model one step down;

  • Repair and refurbish equipment rather than purchase new gear;

  • Trim underperforming advertising programs and bridal shows;

  • Replace paid advertising programs with networking and Social Media marketing;

  • Re-allocate tasks currently performed by paid outside vendors to the business owner;

  • Reduce overheads by sharing office space or using more fuel-efficient vehicles;

  • Shift client communications from paid postage to free email;

  • Use video conferencing for sales and planning consultations to save on fuel expense;

  • Consider a new staffing/pay model. For example, rather than recruiting seasoned veterans who command a premium price, you could train and develop entry level DJs at a lower wage. Note: it is not advised that you reduce the pay of your current DJ staff;

  • Join customer loyalty programs to receive discounts from equipment retailers and other businesses that you frequently patronize (e.g., Starbucks, Panera);

  • Avoid credit cards and their associated high interest expense. If you are using credit cards, transfer balances to lower interest rate cards or consolidate the debts into a single low interest payment.

For a wealth of other cost-cutting strategies, see Jay Conrad Levinson’s book “Guerrilla Marketing for Free.”

Protecting You From Yourself

Another important principle of the Profit First System is reducing the temptation of raiding your profit account. To accomplish this, Michalowicz instructs Profit First practicioners to regularly allocate the calculated profit allocations from their primary business checking account at Bank A to a separate bank account at Bank B. It is human nature that we will borrow or steal our profit allocations if they are co-mingled in our primary business checking account. Make it difficult to steal from yourself by stashing the money away in a separate bank where it is extremely inconvenient to access the money.

Back to the example of DJ Bob, he targeted a profit of $10,000 in 2015. This equates to $833 per month ($10,000 / 12). In the Profit First System, DJ Bob would transfer funds from his primary checking account twice per month. So twice a month, he would transfer $416.50 ($833 / 2) from his primary business checking account at Bank A to his Profit Account at Bank B.

Note: Simultaneous to the profit allocations paid twice per month, the business owner would also be allocating a percentage of revenues to a separate account at Bank B to reserve for estimated tax payments. A business owner can create additional allocations and accounts. For example, a DJ could allocate some percentage of revenues towards continuing education or a particular DJ Expo. Or 1% of revenues could be allocated towards a capital improvement fund. Creating these reserves ensures that the funds are there when needed. Of course, the more funds being allocated to outside accounts means that there are less funds available for expenses. A scarcity of funds for operating expenses will naturally cause a business owner to become more efficient.

Reward Yourself

Just like the stockholder of a publicly-traded company, as a business owner you will also receive cash dividends. In “Profit First,” Michalowicz recommends that you pay yourself quarterly dividends. These dividends should be equal to 50% of your profit allocation.

In the case of DJ Bob, he allocated $833 per month, or $2,500 for the quarter, to his Profit Account. Thus, he is eligible to write himself a check of $1,250 ($2,500 x 50%) for a quarterly dividend. According to the author, this check should not be plowed back into the business. Remember, the business is now serving you! Take that dividend check and spend it on your family. Take a vacation. Put a downpayment on an in-ground pool. Place the money into a savings vehicle towards your child’s college education.

As for the 50% of the Profit Account that you do not pay out in the form of a dividend, this account can be your Rainy Day account. If the balance in the profit account becomes swollen over the years, it can be reduced by paying yourself a special dividend.

Get Started

Changing habits is hard. According to Michalowicz, if you want to embark down a path towards financial freedom, then make a commitment to Profit First today. The action step to take today is opening up a bank account – your profit account – at a separate bank. “Today is the first day of the rest of your life.” Even if you decide to allocate just an insignificant 1% of annual revenues to a profit account, then do so. If you can’t afford just 1%, then you need to seriously ask yourself if you belong in business at all. Over time, you can and should increase your profit first allocation. For most mobile DJ companies (annual revenues less than $250,000), Michalowicz recommends a starting profit allocation of 5% of revenues.

For those DJs among who do not prepare a budget, your action step is to create one! Spend a quiet evening and create a spreadsheet with columns as months, and rows as revenues and expenses. Compute your monthly and annual profits. Having a budget will be immensely helpful in guiding your DJ venture towards success.

The 10/25 Rhythm

One final feature of the Profit First system is the 10/25 rhythm. That is, a business owner should pay bills twice a month. Michalowicz suggests the 10th and 25th. This ensures that bills are paid on time. In the interim, owners can focus on running their businesses and be less reactive to bills. The 10/25 practice also allows a business owner to perceive patterns and easily identify unneccessary recurring expenses. For example, in conducting my own review, I identified a $25 per month recurring expense for a Chamber of Commerce that I am no longer active in. After paying bills, make your profit and tax allocations from your business checking account at Bank A to your Profit and Tax Accounts at Bank B.

To Review

Well-intentioned and talented DJs can easily become ensnared in underperforming businesses. Remember, a business should work for you! To ensure that you earn the profits that you deserve, shift your thinking from profits as leftovers (i.e., Sales – Expenses = Profits) to the Profit First mentality of Sales – Profits = Expenses. If expenses are too high to realize your targeted profit level, then reduce expenses and re-calibrate your business.

Twice a month on the 10th and 25th, transfer your profit allocation to a separate account at Bank B. Make it difficult to access these funds. At the end of every quarter, write yourself a dividend check equivalent to 50% of the Profit Allocation. Do not plow these funds back into the business. Rather, reward yourself and your family with the fruits of your labor.

My brief blog article has very simplistically described the system. For a more detailed presentation, see Michalowicz’s book available on Amazon.com as either an eBook or hard cover book. The Profit First system is applicable to any industry.

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