Laying The Foundation of Profit First For Real Estate Investors
“With Profit First, you can stop living paycheck to paycheck PERMANENTLY!”
Behind closed doors, these people often can barely make ends meet.
It doesn’t have to be like that!
Join us in today’s episode where we discuss:
• The foundation of Profit First
• And why it’s the best financial management system for real estate investors
• And more!
David: Hey, everyone, back for another exciting episode of The Profit first REI podcast. This is David Richter, your host with simple CFO Solutions, and I really hope you’ve enjoyed our podcast and that you enjoy every single episode. I’m excited about what we’re doing here now to some of the episodes. We have that one central theme, and that’s what we want to do, and we want to make sure that we give you those one themes that you can take back and actually Implement something or really get something from those podcasts. We’re actually going to be going through the books now over several of these different episodes so that way you have a solid foundation of profit first, talk about maybe even some of the nuances in the real estate world too as we go through the actual book. So today, we’re actually going to be talking about profit first, going through that first chapter and really just the foundations of Profit First and some of the things he talks about right at the beginning of the book. Jaren is my co-host; he’s here with me, and Jaren, you want to just say hi real quick?
Jaren: Yeah, what’s up, guys? I’m super excited to be on the show today.
David: Yup, and I love that Jaren is on here too because he- he not only works with simple CFO and is one of the profit first coaches, but he is also implementing it in his land business, and he’s seen a drastic change. That’s why I love having him on the show, too, because we’re not just over here implementing it in other real estate investment businesses but in our own businesses, not just simple CFO but in the real estate businesses that we own too. So that’s how we differentiate ourselves, and we really want you to know that we’re here to help you, and that’s why we want to jump into here. Anything you want to add before we jump in? To the-
Jaren: No, man. I just- I love how I action pack our shows are, so let’s- let’s just get into it.
David: Awesome. Well, then let’s dive right in. so in chapter one, the chapter title I love the chapter title your business is out of control cash eating monster. So how many of you listening to this right now who own a business you not only own it but it owns you? Where you go to work every day, and you basically are just spinning your wheels and then you come to when is payday whenever you might pay yourself and say where in the world did all the money go? So I don’t know if anyone out there feels like that or is hFirstas ever felt like that when you actually run your own business versus being a W-2 employee where you’re “guaranteed” that paycheck I’m putting a little are quotation marks so you- for people just that- if you are just listening to this, so I want to actually go through this, and this whole cash eating monster and really talk about that from his first chapter in the book and really help you to just kind of decipher what does that really mean and where are you? where are you in this business? And Jaren, do you have anything about your land business or about your business in general? Just can you speak about that about it being a cash eating monster, or have you ever run into that?
Jaren: When I read this chapter, it hits so close to home because nobody talks about this stuff right, but like- my internal dialogue there have been times where I’ve literally hated my business like I’ve literally been such a point of stress and it’s growing, and it’s doing well and I can’t just- I’ve put so much into it I can’t sit there and just say welp I’m done with this I’m going to the next adventure, right? Like so many people have been there like you get- you get stuck you’re like you create this monster that you’ve to keep feeding and feeding, feeding and here’s more of my effort, here’s more of my money, here’s more dollars for marketing and yeah I mean I super relate. Businesses are not supposed to be this way. Guys, there is a better way to do it. Business is supposed to be a huge blessing that provides an opportunity that provides a profit, that provides the family vacations and the private schools and the things that you care about, that you want to provide for your family. That’s why businesses exist, but for a lot of us out there, because you don’t understand the financial management side of the business, we get stuck with this ugly Frankenstein thing like literally and in the book he talks about your business becomes like Frankenstein, and it’s like it’s terrible and ugly and so true- so true. So I’m really excited to like just pulled the curtains back, and let’s just be honest, I like a lot of us out there we hate our business, and we have a love-hate relationship going on.
David: And that’s why I love having you on this especially while we’re talking about this profit first because you- you’re living it in the real estate world right now while we’re helping other Real Estate Investors and we’re helping other people go from this and where every single client we’ve worked with basically had that relationship with their business when we first started. Except for one we are working with one where he didn’t know his numbers but he thought he was profitable and pretty profitable and when we did we made all the numbers pretty and everything then he knew how profitable he was but that’s only happened one time so there’s that you know like when we throw percentage is out there 90% or 95% of businesses don’t know their numbers or aren’t profitable or whatever it might be he was that- he was that like 5 or 10% but most other people literally don’t know if they’re profitable cuz he says in the book most businesses are profitable no matter what they say number one because they don’t know their finances and they don’t even know those numbers I remember another client when I first talked to him he said I’ve built my business like a battleship and he had cash on hand but he didn’t know his number so he didn’t know if that Battleship had a holes in it or if it was leaking money here or there or like what’s the actual cash for the business was going to and I just think that’s where a lot of investors think I need a pump money back into my business I need to go out there and just really I really need to reinvest. When all that means is you’re so inefficient in your business, you have to keep piling money back in because you’re so inefficient, and you don’t know where those holes are, and you’re just trying to plug the leaks in that battleship.
Jaren: Throw everything at the wall and see what sticks.
David: Exactly, so I love it where it’s in the first chapter talks about- he gives a great story about the piggy bank that changes life because he was really down on his luck. I’ll let you read the book if you want to read that story but the real difference between- between income and profit is where you make money that’s income that’s your sales, that’s your revenue that’s that top line, but when you take money that’s real profit in your pocket meaning like if you look at your profit and loss statement because that’s probably the financial statement that most business owners know the most. Your profit and loss might say $20,000 and bottom line, but did you take $20,000 out? No, you probably didn’t you- probably didn’t- you probably took what you needed to live and who knows if that was that profit or if you took out more than that profit, so you’re real profit or like what he calls real profit in his book is cash that you actually take out of your business to use for yourself, to use for the actual profit that you saved up it’s when you actually get to take that money out and not just set an account to reinvest for your mistakes later, so I love how he makes that differentiation in the book between making money and the income and taking money which is the real profit. So-
Jaren: Yeah, in the book, he gives an example of one time sitting down with his account and his account being. I love that.
Jaren: I mean it’s- the reality is guys, your goal in your business should be to make money, and I love how Mike says that growth this size of your business will take care of itself based on how much money you want to make that’s how- that’s what you need to start with that In mind it at what- how much do you want to make through your business make that your number one priority and then grow to where you can make that much money. It’s really simple.
David: Isn’t that so simple? it sounds so simple, but how many people because of what you’re taught- once you go down that- you step out as an entrepreneur guess what you go into entrepreneurial land and where everyone tells you you have to be bigger you have to be you have to grow grow grow you have-
David: No one ever tells you, or I like it’s not mainstream for them to tell you what do you want out of your business? What do you at the end of the day, what do you need? First of all, to support your family or to support yourself, and then number two, what do you want to grow it to? Because if you have these big wild dreams because you want to make $1000000 net or you want to go out there and save you know you have a big “Why” because you want to go actually to Africa and save- save children and like get them cleaner water cuz I have some real estate friends who actually do that they go out there their big “Why” in their business, they want to be profitable so they can go and they actually take trips over to these different countries and actually help people but that that’s what motivates them to be profitable, so it’s what- what do you- what do you really need from your business? What does that look like? And then you need to reverse engineer in and say it how am I going to get there? Instead of like, let me throw all this money onto this burning pile to this fire, and just hopefully, I can take something out without burning myself. so it’s like-
Jaren: Yeah, real- real talk man like just being super vulnerable I would have kept so much of my money in the land business if I had it- I had somebody who is doing a lot of volume in a seller financing terms like in land you can sell on terms and generate like cash flow we are going to interview them at REtipster, and he is doing quite a bit of stuff, and I asked him privately like how much do you spend in the mail? Like every single month? And he is like I sent out four thousand letters and he said as long as you commit to sending out four thousand letters per month every single month you’re going to grow like there’s going to be a compound effect it’s going to happen just commit to doing that and so I said all right I’m going to do it and there were times because land move slower than other asset classes like you know it takes typically 3 to 6 months for me to move a property and the with the way that I do it I only do cash it and do any seller financing and so there would be months where I have great properties and they’re in inventory and they’re in their time frame of 36 months but I don’t have any money so like I’m like but I’m like by golly I’m going to send $5,000 a month every single month to you know the cover over head no matter what cuz I’m a business I got my big boy pants on and I’m going to do this thing right? and men if I would have just waited until I just sold some property and said hmm how much money do I have to actually put towards marketing? And I took it from that approach; my goodness, I’d have so much more money in my account I would’ve been so much more happier I would probably be less dead, and everything would be so much better, so that’s what I’m doing now I’m implementing profit first in my land business, and already it’s- it’s- it’s becoming exciting again already is becoming a joy again because you know when you first start a business, it’s like falling in love is like oh the sky you know it’s exciting, but then bills start piling up things, and things start happening, and it gets to become a pain instead of a privilege you know or a blessing so.
David: Yeah, so true because how many of you listening right now you feel that way in your business and you feel like you’re just throwing money and you’re just you’re not seeing those returns, and it’s where you have to- might take a step back and I know that we’re talking about the financial side and that’s like okay what return to this really get me? You know, like if I invest in my financial education obviously right now if it- what’s working if what if- what you’re doing right now isn’t working for you something needs to change and a huge saying about profit first is saying what do I really need? Because bigger is not better I love that he talks about this right up front in his book profit first book and I you know what I mean there’s a couple other things to do- I’ve got a- I was working with a company when I first started out in the real estate world I worked for a company where literally bigger was the- the mantra basically we went from about 5-10 deals a month to at the high point we were doing about 30 deals a month and bigger was the mantra and we went from about I think from 5 or 10 employees to about 25 employees so we were doing- if you can see there the employees almost went up as much as a deal we works there is immense amount of overhead we had to always be all- you know every single month it was just painful because we had to either do more deals or you know it’s never good enough because there was- there was always always too much overhead or too much expense is going out the door and it was like what we just need more we need to do more instead of taking a step back and say and what do what does this business really need? With the people we have right now, what should it be doing? What could it be doing? Do we need to scale back? What does he- where does the owner want to take it? so and that’s not to beat them up because now they have scaled back and they’re doing better now, so it’s what they needed at that time there was not to get bigger it was to make sure that hey we’re in this for doing it- because we were doing turn keys, wholesale deals, fix and flips you know the rentals, rent to own, seller finance deals. So we were spread out all over the place, but it didn’t help us make a better profit. We were just looking at that Top Line, and just like yeah, we are doing millions and millions in revenue or whatever, but that didn’t matter. It matters more to what are we keeping? Like what is that bottom line? And are we- is the owner actually- is this putting more stress on him? Or this is you know, is this actually an efficient business, and are we actually making a profit that the owner wants to make? And not just growing for the sake of growth. So that was- that was an eye-opening event and speaking of event too because right in this section Mike talks about that profit is not an event profit is a habit profit is something that you get into, and you make sure that it’s a habit and that’s what profit first is all about making profit a habit and not just like yes we sold all these properties now we have a profit what you then go and turn around and stick in your business and now it’s not a profit anymore now covering your operating expenses or your debt or whatnot instead of it being true Profit that you can go and make a life and make it make your why to happen, so that’s where bigger is not always better. It’s only better if you make your systems and foundation better, and if you want to get bigger and know how to grow it from there.
Jaren: yeah, man, another thing that I really enjoyed from reading the first chapter of the profit first book was this concept of living you know check-to-check like we don’t think about that in the business context like that terminologies more feel like personal finance of people living paycheck to paycheck, but the reality is us the Real Estate Investors we live deal to deal that’s just- that’s the truth we like when money’s in the bank because you just had a big silver like yeah I’m amazing look at me I can spend I am a big spender now and then like two weeks later and when money is really thin we are like in panic mode fire sales discounts across the board you know like. It’s so funny, but a living deal to deal in a business context or in a real estate context, it’s no way to live, man.
Jaren: I remember almost every single month because me and David have a similar background where I helped gross a company called Simple wholesaling they were just doing wholesale deals, but we would buy everything in house we didn’t do any assignments, but we I have the growth that coming from 8 to 12 deals a month to around 25 to 30 deals a month and every single month it felt like- like the last day of the month was either going to be the greatest month of the year or the worst, and it all depended on how many deals or have many titles companies can get closed out. I remember when I stopped working at simple wholesaling the next day that I stopped working, I had slept in and I woke up, and I straight up had like a PTSD or whatever it’s just like, but I would literally jump out of bed, and oh my God I got to go to work what’s going on? Why am I sleeping? And I realized, wait, I don’t have to do anything. You know, because it was like Christmas, it was like birthdays every single time I was always constantly working because we had to there is no other way it was like sink or swim, you know so we had- we were fighting for ours lives there. You can have a system in place to profit first where it doesn’t have to be your reality where like you can say, hey, I’m going to do a handful of deals my goals are to make this amount of money I’m going to make sure I make this amount of money and just have this thing be something that actually is enjoyable and not the green-eyed monster like that’s cash eating you know like.
Jaren: it’s super super solid and one thing I- I was going to mention earlier David like in real estate ego is such a big deal like everywhere you go you got to these networking events and this people are walking around like yeah you know we did x amounts of deals this year or we did x amount of revenue and guys I have a secret for you that means absolutely nothing behind closed doors they could be- they could be making millions of dollars a year but there’s so money so much expenses that they’re barely profitable and most business owners they don’t even take an owners pay or if they do they pay themselves the least amount of salary and then just like keep the- keep the thing going cus it inflects their ego because you know they they feel like I’ve given my heart and soul into this thing so no matter what I have to make this thing work and I have to keep it going and I have to keep it growing in order to- just because they’ve been giving everything to it so they have to keep feeding it and keep feeding it, keep feeding it. It doesn’t have to be that way.
David: No, it doesn’t, and I love- I love that he talks about the check to check mentality because when you first read it, it’s like well that doesn’t happen in business, you know because that is really applied more to- to when that phrase is- is said really to that personal level but it is so true I love everything that you said it because you do you see it all the time in the real estate world a living deal to deal and these could be the people that are beating their chest saying we’re doing hundreds of deals in a year or whatnot and they literally have to do that in order to not go out of business. Not just because they’re living their best life ever it’s because they’re they need to do that in order to- to just cover payroll or to cover the next expense that’s going out the door, so most businesses don’t think about living deal to deal or paycheck-to-paycheck and but a lot of- a lot of investors are that’s for sure, and that’s why at simple CFO we want to help you we want to make sure that you have those numbers in front of you sure you’re not living paycheck-to-paycheck that’s what we’re all about that’s what this podcast is all about we want you to be armed with that information to say hey we don’t have to live this way this does not have to be how I wake up to my business every single day, so I really wanted to make sure we hit on that. Jaren, I’m really glad you brought that up from the book, too. Another thing I wanted to hit on is a lot of the money problems because that goes right in line with the check to check where most people just increased spending with their revenue and as your sales increase your spending just increases and it just then goes ballistic it just it gets way out of hand, and that’s where you end up where you are paycheck to paycheck because a lot of people- think about it- think about most people when they get a raise at their W-2 job what do they- do they don’t automatically say oh yes I now have a hundred or $200 extra a month to save it go out there, and they go get a haircut they go immediately fill that that overage and it’s the same in business you have some overage oh I should sink this money into something now you need to take a step back and say okay am I making what I need to make? And then that’s when you get into the real problems if you’re not taking that step back and taking that profit first because then you get into the paycheck to paycheck style the- the cycling the cash flow crunch I like to call it that- that you always are in that cash flow cycle where you’re just doing that rat race like Robert- Robert Kiyosaki mentions in his book the Rich Dad Poor Dad series then you’re going into that and you’re like what in the world happened I got out of my W2 job so I wouldn’t be in the rat race and now here I am right in the rat race doing what Robert Kiyosaki told me to do all this whole system is how you pay yourself first, how he talks about paying yourself first, how do you make sure that you- we’re in the- we’re in the true language of business and money and it’s not even accounting is the language of business and finances but then the profit first makes that accounting language even simpler so I believe in our next podcast episode we’re probably still going to- probably going to need to make another episode just for chapter one cuz there’s a lot of meat still on a bone from chapter one but in this one it’s all about- we want to make sure that you go out and get that bank account open start saving some money but then don’t get into those money problems because let me ask this do you ever run into a deal where you’re like I have money in the bank right now I know that that money in the bank is for this other deal that I’m working on but I need that money to go and buy that deal?
Jaren: or taxes.
David: or to pay for your taxes-
Jaren: or payroll.
David: or payroll you know that money is designated for a property or something, but then you spend it on something that you shouldn’t with that money if that’s ever happened to you this is what that system helps alleviate and actually throws at red neon sign out there saying well you can’t be doing that you know so this is what that system is about because we don’t want you stealing from Peter to pay Paul we don’t want that be your mantra it’s what a lot of Real Estate Investors do and it dangerous it’s dangerous doing that because if you run out of money guess what? You are going to have to owe a whole lot of people and you’re just you’re basically running a Ponzi scheme if you keep that going so we don’t want you living that paycheck to paycheck the deal to deal that lender you know like go under funds to lender funds where the new funds are covering these old debts so what we want you to do is be actually a- an actual business owner who is on top of their finances who can make their finances simple to understand that’s what we’re going to be- our goal with this whole podcast is to do that especially with this series with the profit first ever going to and going through the book chapter by chapter so those money problems a bigger is not better not necessarily better check to check panic to panic we don’t want you that deal to deal we don’t want you getting into that so that’s where we might- we’re probably going to line it down here but I do want to say that most people like I said live deal to deal most investors live check to check they’re stealing from Peter to pay Paul so you’re not alone, you’re not alone but a lot of people who we’ve helped guide to have gotten out of that hole there is light at the end of the tunnel. I’m not here to just beat you over the head to say, you dirty rotten person.
Jaren: yeah, that’s not the heart behind that at all.
David: that’s not the heart behind in our heart is to say okay we know there’s an issue so what-
Jaren: and we both lived it like we both- I’ve been in that in my own land business you lived that with the company you used to work for, and I mean we’re coming- I mean we are Real Estate Investors first guys like Real Estate Investors that didn’t know how to manage money, and then we figured it out and then-
David: Years and years of hard knocks.
David: We’ve figured it.
Jaren: Yeah I think you know you said you wanted to land it sooner rather than later one last final point I think for me man is I know that in the first chapter he talks about the LIE the big lie of accounting that says that revenue minus expenses equals profit and I was literally just talking to somebody that I hold dear earlier today about profit first and about implementing it in their business and their biggest question to me was like wait but you don’t understand Jaren like the way my business works is that the expenses are already accounted for like they’re on autopilot they’re going to be taking out, the monster has to be fed right? and I was letting him know actually that’s not true man if you make profit first your number one priority and then whatever is left you give to expenses you’ll find that you can run your business much more efficiently and accounting formula Revenue minus expenses equals profit is a lie because what we humans do is we- we prioritize things in the first order so nobody goes to the doctor and finds out that they’re sick and they have to lose a bunch of weight otherwise they’re going to die in this is you know what I think I’m going to put my weight on the- my health on the back burner I think I’m just going to wait on that no they say all right come hell or high water we’re going to go get this thing done I’m going to lose weigh and I’m going to start juicing, I’m going to do whatever that becomes your number one priority and that’s the first thing that you focus on. Well, profit needs to be the first thing that we focus on, and we need to learn how to run our business on- on our leftovers no longer are we going to give our leftovers to ourselves and our family our families and ourselves are going to come first and that’s what profit first is all about is so.
David: Yup, yup and that- and profit really unlocks your big “Why” too because some of you might be thinking well you know like that’s great and all, but I want to do for the greater good you’re never going to do the greater good if you’re not healthy if your business isn’t healthy you’re going to be killing yourself, and you’re not going to be able to expand out.
Jaren: You can’t think even think, man.
David: You’re right, you can’t. So that’s why we’re here, we want to help you, and I’m glad you ended on that note, Jaren, because that’s where I want to pick up and in the next- in the series too about the traditional accounting that formula that he was talking about we’re going to be talking about that at a high-level here. In the next episode and I really really appreciate you listening to this episode and about basically going through the chapter 1 in The Profit first book your business is an out-of-control cashing in monster we want to help you and have it not being out of control cash eating monster we wanted to be something that you look forward to something that actually funds your lifestyle and funds your big “Why” in your life and so if we had that one tip go set up a new bank account right now and start saving a small percentage of everything that comes in the door and because if you could live off of 99% or if you couldn’t even live off of that and you’re stealing from Peter to pay Paul that’s a bigger issue but if you- if you can live off that 99% now you going to live off of the 100% you can live off the 99 so make sure you go and get that 1% into a bank account don’t touch it we’re going to get more in the proceeding episodes or the following episodes are going to have what to actually do but I want you to have it at least an action stuff one thing you could take away from here remember bigger is not always better remember that you’re- if you have money problems and you’re living check to check or deal to deal you’re not alone you’re really not alone and this is why we are started this podcast, this is why we created simple CFO solutions so that way you there’s people here that can really help me that really want to, really fundamentally change the mindset of Real Estate Investors and the whole business, the whole real estate investing world to make sure that you can take your profit first so we really appreciate you listen here Jaren thanks for sharing about your personal experiences.
Jaren: Yeah, man.
David: Love having you on the podcast sharing about your real estate business and then just your experience before in the real estate world, so thanks again for being on and for co-hosting, and then we appreciate every one of you that is listening right now.