EP54: Profit First Accounting With Alicia Osthus

Awesome. So like I mentioned in the intro, you've been my bookkeeper for probably about a year and a half now or so, somewhere around there, maybe two years, coming up on two years.

And whenever I got into Profit First Accounting, the idea, you know, something foreign to me and I really like implementation of it was something that I didn't really want to get into. And that's where you came in because you're an expert in this. So before we dive into Profit First Accounting. Why don't you just give me a brief overview of your background, kind of how you got into accounting in general, and then the profit first method.

Awesome. I'm a little naive here. What's the big four?

Ah, gotcha. It's like one gigantic building full of a bunch of number counters and they're all trying to figure out things.

I'm trying to be nice here. Awesome. So, okay. So you got into, how long have you been in working for yourself? Had your own business?

Okay. And when did you get into the profit first? accounting methodology?

So for those that don't know any idea of what we're talking about, Profit First. accounting methodology or method is something that Mike Michalowicz, I don't know if he created it or not, but he wrote the book Profit First. Yeah, it's just called Profit First, right? That's the name of the book. Yep, yep. And he kind of simplified it to make it really easy to understand. There's another book that came out for contractors, Profit First for Contractors. I think that was Sean McAdden. Is that right?

Sean Van Dyke, sorry. So both of those books are really good. I kind of like Mike's. version a little bit better because it's kind of goes into more of the, it's not so much for construction. Both books are great. I would recommend obviously getting both books and reading them if you're a contractor. So he has a program then where you can be certified through their processes. I'm sure there's some kind of training or thing that has the application that has to go through to become a, and I'm assuming there's different levels because it's, you're a mastery level. So why don't you speak to like what's the different levels and stuff?

Awesome. So it's kind of like a mastermind group. within that with other certified professionals.

I've always wondered, and I'm sure he is, but Mike seems like just an honest, genuine guy, really wants to help people. So I've always liked all of his books, The Pumpkin Plan and everything that he's wrote, really, really, really good books. So when it comes to accounting in general, not even profit first, just like bookkeeping, accounting, we can specifically talk about bookkeeping, but what do you see most with contractors? that is probably like the single biggest thing that's really hurting their business in regards to bookkeeping and all that stuff?

It's almost like the old shoebox accounting where they just put all the receipts in a shoebox and then hand it to you at the end of the year. I'm like, how much money did I make this year?

And you're like, well, you actually lost $20,000. What? I have, you know,15 in the bank. How does that make any sense? So I, I hate numbers. Like I despise numbers. It's a part of the business that you have to do, right? Whether you have a bookkeeper or not, like, you have to do this stuff. And I think for most contractors who are usually craftsmen, you know, it's one area that we hate. And so we just kind of shove it under the rug and hope that one day it's, it works out all for the better. You know, I've talked to contractors that are like, even on Facebook groups, like even as little as last week, they're, you know, contractor Facebook groups and they're posting things like, Hey, I have this. situation with payroll and do I need to save money for taxes and blah, blah, blah. And I'm like, just hire a bookkeeper, hire an accountant. Why are you trying to figure this stuff out on your own? You know what I mean? It's like, do what you're good at and then hire people for the other parts that you're not good at. Whether it's in-house or you sub it out or you hire a professional, whatever, stick to what you're good at and then hire professionals. So that's why I sought you out because I wanted to do the profit first accounting, but I did not. Like I struggled really hard with the setup process because it is, there's a little bit of trickery that goes in and you have to kind of manage it for a while. So without going like super deep into what, how it's all set up, like what is the, how would someone get started in profit first accounting if they were trying to do it themselves? Like what's the best way to do that?

Well, I have to remind you that we are contractors, right? Sometimes following directions is not. That's why we became our own business owner. We don't like following directions. So I'm only speaking from my own experience. So what's the benefits besides traditional accounting versus profit first accounting?

But Alicia, if I look at my bank statement, it says I have $20,000 in there, then I can go buy a new truck, right?

I think that there was three, when I started using Profit First, there were three main things that really, that I love. And even if you don't even use Profit First, like these should be three things that you probably do. One is having a separate account for deposits, you know, customer deposits. That way you're not taking that $5,000 deposit, putting it in your regular account and spending it on something else. That's huge for me. And then the owner's pay. like the bonus, not the pay, but the bonus. And three really is just the idea of having multiple bank accounts. Just that by itself was, for me, really changed everything. But what I love about the bonus pay type thing is where he tells, you put so much in every month and then once a quarter you take half out as a bonus. And that just slowly builds up money that way. I always look forward to your email. You're like, hey, it's the end of the quarter. What do you call that when you take out money? Your

Yeah, it's time for your profit distribution. And I'm like, yes, I can go buy that gun I've been wanting to get.

Yeah, it's like this is just for you to spend money on. I mean, you know, for your family or whatever, but it's not really to save. You're not keeping that money to save to pay off a bill or whatever. It is purely your money to go. have fun with. So I love those three things. I mean, it's obviously way more than just that, but even just sitting, you know, trying to run out of one bank account in my mind is crazy. Like just absolutely crazy. I did a video on TikTok about this. I think it was yesterday, actually kind of just explaining how to have multiple bank accounts to separate stuff. And, you know, people were like, well, I only have one bank account, but I'm a one man show. And I'm like, okay, but what happens when you start doing more work? Because I used to be a one-man show. It starts to get crazy and it becomes a full-time babysitting job of your finances. And if you're not babysitting them, then you forget that you made that payment to something else. And then you go to pay another bill and then you bounce checks and all these different things. What's the best benefits other than clarity on your finances? I mean, like as far from a stress point, like how does that benefit contractors when you start using profit first?

Yeah. Whenever you came on board and started doing stuff for me, I just remember that the feeling of having everything worked out. And then it's just like, once you figure out your percentages for your distribution, it's like, you know, it doesn't matter if you're putting $100 in the bank or $100 million in the bank. It's the same percentages across the board. And you know where the money's going. I mean, you're telling the money how to work for you, right? As opposed to reacting to the money. We didn't really touch on it, but let's stop. I mean, why profit first? I mean, there's a whole methodology behind that. Like, what is that about?

No, I mean, like, the actual idea of paying yourself first. The profit first.

Yeah, I've been there many times over the years where it's like, you know, I have $2,000 in the in the account and I haven't paid myself that much. And it's like, yeah, but I need to have a buffer in there, you know, in case something happens or whatever. You know, it's a mindset shift and how to think about your business, you know, paying yourself first and then whatever's left over paying your expenses. Right. I think Mike talks in the book about, you know, once you pay yourself. if you don't have enough money to pay your expenses, then you have to make some decisions on like, do I really need these expenses? You know what I mean? Do I really need, you know, whatever software that costs 200 bucks a month? Like, am I using it to its full advantage? Like it really forces you to look at where you're spending your expenses or what you're spending on your expenses. So, I mean, obviously you could overpay yourself, you know, a salary. Like if you're only... If your company only makes $100,000 a year and you're paying yourself, you know, $90,000, you're probably paying yourself too much. So I'm sure there's some like percentages or some guidelines of where you should be at in relative to your revenue. Is there like, is there any kind of guideline on that? Just because I get this question a lot. Like I know contractors that are doing five, six,700, you know, a million dollars and they're only paying themselves 60,000 a year. And then I see some that are making, that are only doing $200,000 in revenue, but half of that is their salary because they're small and lean. Is there some kind of guidelines on what you should be paying yourself?

Awesome. So you said if you're doing like $250,000. after your materials, after subcontractors, that stuff, not expenses, right? Just the cogs, the cost of doing business, cost of goods sold, that you should be doing 50%. So if you're doing $250,000, you should be making $125,000 a year. Correct. I know people listening to this right now are probably like, you know, their mind's blown, jaw dropping. Like, I'm not making anywhere near that much money. So is that an indicator of like, too much expenses? Like they have too much going out in expenses or what would you say would be more like if someone's doing $250,000 a year and they're only paying themselves $60,000 or $80,000 or whatever, like what would you think is going on with their business?

Hold on, I need that. I need that $1,000 a month truck payment. Come on now. I got to look good when I pull up on the job site. You do.

yeah. I mean, uniforms. I have uniforms for work, but that's what I pretty much wear all the time, right? Because I'm just wearing that every day. And so, in a sense, it's like not buying any clothes. You know what I mean? Because the company's paying for my uniform, which I'm wearing every day. That's a small example. But cell phones and all that stuff that could be transferred over. I want to ask this question. This is more about just a general accounting question. Like having offices at home and like trying to write off that stuff. To me, that's like a gray area. I've heard things like if you do that and you move out, you got to pay some back and all these crazy different things. Can you like summarize just that aspect? I know a lot of contractors work from home and they may be missing out on deductions that they could get. Can you just speak to that for a second?

This is not tax advice. This is hypothetical.

So what I heard you say was hire a professional to figure that out for you. Pretty

You said, but you said something about if you're a sub S, if you're an S corp, does that matter if you're an LLC as a sub S corp or is it just if you're an S corp?

Okay. So you can't have an office, basically, at home if you're an S-corp?

Well, I mean, people don't pay taxes either.

Sure. Yeah, absolutely. Okay. Well, I didn't want to go down that too much. That's one thing that I always, I mean, a lot of contractors work out of their house and I've seen people say you should take deductions and not take deductions. And so I just want a little bit of clarification on that. Basically, every situation is unique and that's why you need to hire a professional to figure that out for you. And I would even go as far as saying is one that has experience in construction because isn't construction a little bit different in terms of like the cogs and how you do the bookkeeping than like a traditional business or am I just making that up?

Gotcha. One other question I want to ask in regards to best practices, because I see this all the time. What's the difference between a 1099 contractor who's treated as an employee versus a real employee? Because contractors are terrible about doing this. They just have their buddy come work for them. They're basically an employee, but they send them a 1099. What's that all about?

Well, I think there's a lot of misconception that people believe that if you're an independent contractor, you get all the deductions. I heard this just the other day. It's like, yeah, I pay him as a... a 1099 because he can claim all the deductions. And in their mind, that may seem like a good idea, but really on paper, they may be losing money if they're a 1099 employee. And so what about like if you do temporary assignment, like if I'm doing a project and I need a specialized person for a three-month project, can that be like a 1099 employee, even if I'm dictating like we're working eight to five every day? Like it's a short-term project. At the end of that time, you're done. You're not an employee anymore. Or is that another gray area?

Gotcha. So really the main differentiator is... Do you pay them based on hourly, like how many hours they work? And can you dictate when they like have to work? I mean, isn't that pretty much the two main things?

I can think of one time I hired a buddy of mine. He had a contracting business. He was a carpenter. And I had a kitchen that I was working on. And I said, hey, man, can you come and help me for a day or two days or whatever it was? I'll pay you by the hour. But it was just like him for those two days. And then he sent me an invoice and then I paid him. That would be an okay scenario, right? Because it wasn't like an employee type thing.

Even though I was paying them by the hour, it was still like a short term. Like that was the contract we negotiated.

Gotcha. And again, this is all hypothetical.

The tax advice is hire a professional. That's the actual tax advice.

All right. Well, I didn't want to get you in trouble by getting out tax advice or anything crazy. I just, those are two things I see all the time is like home office and independent contractors,1099. Really guys, just don't try to cheat the system. I remember one guy's like, well, I've been 1099 people for 10 years. And I'm like, holy cow, it's IRS found out and they could, I mean, they can go back years, right? And just penalize you for all of that.

Yeah, and I don't think a lot of people realize if they don't have insurance and you get audited, which you will get audited every year, then they will charge you for their workers' comp if they're not carrying it themselves.

Yeah. Yeah. That's a, that's a whole nother thing. Make sure you're getting those, um, certificates of insurance from your subs every year. Keep that up to date. I have my audit I got to do. Of course, I've been pushing it off. They've been sending me letters. We need you to do this audit. Again, we hate doing that stuff because it's not productive for us, right? It's not making us money. It's just stuff that we have to do and it's such a pain in the butt to do all that, but that's the requirement of owning a business. When you can offload your bookkeeping, you know all of that paying your invoices payroll like all those little things that don't make you money it's so much worth it to have that peace of mind and i don't have to worry about it like i just it's contractors are terrible at charging they want to get top dollar for their what they charge But then they don't want to pay anybody anything because they're like, well, I don't want to pay that much money. That's too much money. I don't want to pay a bookkeeper 300 bucks a month because that's too much money or whatever it is. It's like, yeah, but you're spending 20 hours a month doing this task. How much money could you have made billing out 20 hours versus what you're paying for that professional? Yes. Mathematically, it doesn't even make sense. But a lot of us contractors want to be cheapskates in our own business. And then turn around and expect our clients to pay top dollar for what we do. And it's like, it doesn't work that way.

Oh, absolutely. Like the energy that you, that you hold onto, you project it back out. So yeah, I mean, when there's a, there's a saying that, you know, we sell like we buy. And so if you're a cheap buyer, then you're going to sell like a, like a cheap seller. Like you're, that's, that's the, that's the. vibe you're putting out and then you're turning around and saying, well, you know, customers are all cheap and they don't want to pay for my services. Well, I mean, you're cheap too. Like you don't want to pay for services. So like you get what you pay for. Like it's kind of like, you know, whatever goes in goes out. Garbage in, garbage out. I mean, that's, that's the equation. So this isn't a podcast to say you need to go out there and spend a bunch of money on people. But like just today, this morning, like, and yesterday, I, a task in hammer and grind as far as managing people you know like leads and different people that are coming in there's a there's a software i can pay 27 a month that automates this whole thing versus me spending five to ten minutes every time a lead comes in and having to put them in different locations and track all that and i'm like i don't really want to have any more expenses than what i already have But if I look at how much time I'm actually spending, like $27 a month is nothing. Because I'm probably spending, you know, three to four hours a month doing this task. Yeah. And it can be, you know, and it can be automated with $27. So a lot of times, and that's the same with like hiring bookkeepers or hiring attorneys for contracts or like all these different things. Yeah, they may be expensive. But the alternative to not hiring a professional is going to be way more expensive on the back end if something's not right. If your books aren't right and you get hit with a $17,000, you know, workers comp claim or a deduction that you took that really wasn't a real deduction and all these different things that could happen. It's just not worth it.

One of the things I like about your service is when I get the email on Friday and you're like, hey, here's the updates of what's going on. And it's like, we need some more money. We need some deposits collected or we need to get those final. I mean, there's times where I just haven't invoiced somebody, right? It's like the money's out there. All I got to do is send out an invoice and collect it. It could be $5,000 or whatever. And you're like, yeah, you need to go get that money or you're going to run out. So having that accountability of like, hey, you need to be doing this. That's valuable in and of itself. One last thing I'll talk about that I love about what you do for me and really what any Profit First certified accountant can do is it's basically when you need to buy it, make a purchase is allocating that money ahead of time. Right. So like we talked about buying vehicles and stuff and you're like, okay, the vehicle is going to cost this much. We need to make this purchase in the next two years. So therefore we need to set aside X amount per month into a separate account and allocate that percentage for that. And I think a lot of us are like, oh, I need a new, I'm busy. I'm busy right now. I need to buy a new truck. I'll just go and get a loan, you know, an $800 a month loan for that truck. And then three months later, There's no work. And now you're stuck with a $600 a month truck payment or whatever it is. So that's something that I really enjoyed about that process of how to do that. We're coming up on the end here. Is there any other things that you think are important about Profit First that we didn't talk about that we need to bring up?

Yeah, I'd agree with all that 100%. When you were talking, it was reminding me about when you're not charging enough, right? And you said, because your expenses may be in line. You may spend whatever 20% is on expenses, and that may be kind of a national average or in line with similar-sized businesses. But it could just simply be you're not making enough money. And that's what we talk about all the time on the podcast is. You need to be charging higher gross profit percentages, a 50% gross profit. Because when you do that, now you can't afford to hire a bookkeeper. Now you can't afford to hire an attorney. Whereas a lot of contractors, and I did this for many, many, many years, it's like, well, I don't have the money. I can't afford it. So therefore, I'm going to go without it. And it was simply, I wasn't charging enough, right? It wasn't like I was out of line on expenses or anything else. I was just simply too cheap because I didn't fully understand what it costs to be in business. So I, I love the profit first accounting. Um, if you guys, if you haven't done it, go read the books, both of them, profit first and profit first for contractors. If you can only pick one, I would say read, just read profit first, even though it does is for contractors. I think Mike does a little bit better job, but I would recommend reading both of them. Final thoughts, Alicia, what's, I mean, what's your final thoughts on all of this other than go and hire someone or do it? What's the departing tip that you have for contractors?

Love it. That's, I mean, really in anything, creating systems, marketing, whatever, just start. Like that's the hardest part is just start because a lot of us are perfectionists and we're like, oh, I got to have it perfect first before I start. No, just start and figure it out along the way. So if somebody wanted to get in touch with you or find out more about Profit First, how can they do that?

Oh, one last question I'd like to ask everybody. What book are you reading right now?

I didn't know they had one.

I'm glad you said that. I actually do that in my own business with like, I'll watch. woodworking videos or I'll watch metal working videos. I don't do anything with metal, but I'll see a guy use a technique and how he does the metal. And I'm like, oh, that would apply in construction. And I'll take that technique and apply it across there. So I love that idea. All right. Well, Alicia, I thank you so much for being on here today and sharing that knowledge with us. You can look her up if you got any questions, like she mentioned. We'll put the links in the show notes. Guys, as always, you can find out more about us on our social media platforms, Hammer and Grind podcast. Pretty active on TikTok right now. And don't forget about our free Facebook group as well as our coaching program if you're wanting to step up your business. So I appreciate you all. And until next time, be the best you.