Using Profit First in Your Freelancing Business with Baz Baruah

SUMMARY

Our panel talks with Baz Baruah about Profit First — a cash-management system for your business designed by author and entrepreneur Mike Michalowicz. We discuss using the methodology of Profit First to build a reliable business, being a freelancer versus a business owner, and Baz’s journey to becoming a Profit First coach.

SHOW NOTES

Links

Guest

Baz (Rahoul) Baruah learned many lessons about the mechanics of running a sustainable business during his own journey as a freelance software developer (which included a detour of taking an investment of a half a million pounds). Today, Baz is a Profit First Professional who helps coaches and consultants escape the anxiety and build a business that supports them so they can live their best life.

Panelists

Kai Davis
Erik Dietrich
Meg Cumby

PanelPicks

Each episode, the panel (and guest) share their picks: a book, app, service, resource, or something else that they’re enjoying and recommend you check out:

Clockwork by Mike Michalowicz (Baz Baruah)
Hire a financial professional! (Meg Cumby)
The E-Myth Revisited by Michael E. Gerber (Erik Dietrich)
Blog post series on being a business owner as a freelancer (Erik Dietrich)
Tools of Titans by Tim Ferriss (Kai Davis)
Tribe of Mentors by Tim Ferriss (Kai Davis)

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WHAT IS THE BUSINESS OF FREELANCING?

If you’re a freelancer, then you’re not just an expert in your field. You’re also a business owner, responsible for everything from bookkeeping to marketing to customer satisfaction to business development.

On the Business of Freelancing, our panel of experienced freelancers discuss the issues that they have encountered while building up their business — and give you practical, actionable advice to take your career to the next level. We also invite expert guests to provide their opinions and perspectives on how you can better succeed in your freelance career.

Episode Transcript

Kai: On today’s episode of the Business of Freelancing, talk with Baz on the Profit First methodology. Being a freelancer versus a business owner, how a Profit First coach can help you on your journey, and Baz’s positioning journey, how we ended up where he is today. I think you’re gonna love it, dear listener. On today’s episode, we have Meg.

Meg: Hello.

Kai: We have Erik.

Erik: Hi, everybody.

Kai: We’re joined by our special guest Baz.

Baz: Hi there.

Kai: And I’m Kai. So Baz, I’m really excited for the conversation today and diving into Profit First and how you work as a Profit First coach. But before we jump into that, I’m a bit curious about the journey of your positioning. What’s that journey been like? How did you end up here? Tell us a bit about that.

Baz: So, I position myself, my position is I help coaches and consultants build a reliable, consistent business for themselves. But how I ended up here, it’s been quite a long thing. I started off as a freelance while I started my business in 2007. Working as a freelance software developer, and I’ve had quite a few bends in the road along the way.

I took investment, spent half a million pounds of someone else’s money with nothing to show for it, which was a big lesson. I thought I was gonna get sued, but I managed to get away with it. And then, but because of that, I thought… We had a company where there were five of us working together, and that’s how we spent that much money.

The guy who managed the investment he came, we said, “We’ve spent all your money, you’re gonna sue us.” He said, “No, just close the company down. And we’ll say no more about it.” I was like, really? That was like half a million pounds. He said, “I put that much money into 10 companies every year and I only expect one of them to make a return.”

So the lesson there was like this, this number that you think is the biggest thing in the world is actually just like a grain of sand to other people. So, I tried to take that into my pricing. So I went on this big journey. There’s two parts to it. So one I’ve been working with my friends, and I’ve gone back to working on my own, so I decided I wanted to have a team around me.

So I hired freelancers to work with me. But obviously, I needed to get more money coming in. I went on this sales journey. So that’s how I first came across the UK is because I was learning about value-based pricing. That message about that number that I think is huge, actually, it’s not that big to someone else if you frame it correctly.

I got better and better at raising my prices. I got these bigger and bigger projects. I got a bigger and bigger team of freelancers working with me and then I realized I was losing money. So that’s when I bought the book Profit First. I hit the… There’s one rule right at the start that might be kind of it says, at the beginning of the book says, “Make sure you do this. Don’t try and do it your own way.”

Of course, me being me. I didn’t do it the way he said, and it took me another year of losing money before I actually implemented it. But one of the things I was doing… So again, I know you’re familiar with Pipe Drive, I was doing some Pipe Drive consulting for people. I had a client come to me and she said, I need this CRM system setting up. But when I was talking to her, it became apparent that what she actually needed was her revenue, equalizing. It was up and down, up and down.

When I presented my proposal to her where stage one was, we were going to do some email marketing. Stage two was implement Pipe Drive, and stage three, I can’t really remember. We were sat in this cafe, I put the proposal in front of her and she burst into tears and I’m like, “Oh, my God, what have I done?” And she was like, I was I didn’t sleep last night because I thought I was gonna have to close a business down, and you showed me I’ve got a future.

And I was like, “This is the greatest moment of my life. I want to be doing more of this.” So, I signed up for some coaching qualifications. Then I got an email from Mike Michalowicz saying I’m running this thing called Profit First professionals, would you like to join us? I was like, that’s a brilliant way for me to become a coach that’s differentiated from everyone else.

So, that was maybe 18 months ago. I’ve changed things around a bit more what with the pandemic and everything but that’s how I got from being a pure software developer, to being someone who helps other businesses run like businesses.

Kai: That’s crazy cool. That is a monumental journey. Well done.

Baz: That moment there it was like a life-changing moment when she when she said that to me.

Kai: I mean, it sounds like it like that’s… It’s so powerful to have somebody both admit or share that vulnerability and be able to credit you and say, “Wow, you showed me the path forward.” Well done. That’s exciting. So now your positioning is around, or it’s primarily focused on coaches and consultants or web developers? Tell me a bit about what that specificity looks like.

Baz: Yeah, so it’s one of those things. This might sound really mean, but I can say it with love because that’s where I’m from. I thought I would concentrate on technology, freelancers because that’s my background. Unfortunately, where the problem with technology, freelancers is they’re very, very smart people. And because of that, they quite often believe that they don’t need to learn from someone else.

So, what I’ve done is I’ve what I have found is I get on really, really well with coaches, and people who are a bit more consulting based rather than then pure, technically based. Because of that, and they have the same problems. They have the same things where they got into their business, they got to do what they do, because they love it and they’re really passionate about it, but they never got that framework of business education around it. So, they tend to get into get into difficulty a couple of years in when the initial passion starts to run a bit dry,

Meg: The people that you work with now, what kind of like issues or challenges are they coming to work with you to help them with specifically?

Baz: So for example, actually a perfect example she’s not a client yet I was just speaking to her yesterday. So hopefully, later today she’s signing the contract. It will be amazing. She’s a perfect example of everything I’m looking for in my clients because she’s been running her business for about five years. She absolutely loves it. But about half her time is spent doing stuff that she hates doing.

So she’s really passionate about the business but she’s spending more and more time doing this, all the crappy stuff that she doesn’t like. When I said, “What would you like?” The question I like to ask is, “If we sat here in a year’s time with big grins on our faces, because this projects been such a success, what would be the reason for that success?” She said, “Structure.” And that’s exactly it.

So my software background comes into play there because I can give people that little step by step process the things that they just need to… The little steps that they need to take every single day to make sure they get there.

Kai: Time and time again, I see like small consistent steps, just making sure you’re doing the basic essential things but doing it consistently making it a habit really be almost like the most powerful lever to move. It’s not just do this one big thing. It’s well you got to sort of change your lifestyle, change the way you think about this, change what you’re doing as this baseline if you really want to see that change, externalize and manifest.

Baz: Yeah, definitely. That’s also… That’s reflected. One of the things that’s happened in the last couple of months is I’ve changed my sales process completely. So when I started out, I thought right how do coaches sell stuff to people. I took a load of courses spent, wasted a lot of money on stuff that I shouldn’t have spent money on. I felt that the classic Facebook adverts go into a webinar, go into a sales call. Then you have a script for your sales call and it ends with, “Oh, you don’t have that much money. Well, why don’t you get into debt to get the funds?”

It felt awful. It felt horrible, and it wasn’t me whatsoever. So what I’m doing now is I’m actually just giving away an outline of my program and say, right, these are all the things I’m going to ask you to do. If you want to go away and do them yourself. Go away and do them yourself because it’s not the knowledge. That’s the thing. It’s the doing, that’s the thing, and I’m going to make you do it. So that’s that’s why I’m selling something slightly different.

Erik: What is the Profit First methodology in a nutshell? Like, what does that involve?

Baz: So the easiest way to explain it is if you think back to the olden days, your probably grandparents or maybe your great grandparents, they worked in a factory. They get paid in cash. On a Friday afternoon, they would take that cash home. Your great-grandma would sit there and divide it up and say right, I’m going to put $10 in this envelope for food, $10 in this envelope for rent, $10 in this envelope for heating. She would seal the envelopes and whatever was leftover your great-granddad could then go and spend on beer.

Because it didn’t matter if you spent all of it or none of it, because all the important stuff was locked away and you have to unseal the envelope to get at it. Profit first is exactly that, but for your business. So, most people don’t think about their tax bill until tax time comes around. Most people don’t think about if they aren’t going to hire a freelancer or a staff member. They don’t think about where the wages are going to come from until they hire them.

So it’s all about putting money into sealed envelopes, locking it away, and then only accessing it when you really need it. And then whatever’s leftover, you’re free to spend as long as you want. One of the things we do instead of using envelope as well then so we use bank accounts for doing that.

So literally, we set up multiple bank accounts. Actually, I don’t know if you’ve got those. So in the, in the UK where I’m based, there’s a few new online banks, which have muddied the waters a little bit. But if you have actual separate bank accounts, and you have to do a drop bank transfer between them, it’s that little bit of extra friction the same as on sealing the envelope. So if you want to spend that money, you have to go in and access it from somewhere else.

That’s the step that Michael Michalowicz says, ” You have to do this. If you don’t do this, the system won’t work.” And it took me a year to get around to doing it. So again, the knowledge isn’t an office that doing that makes the difference.

Erik: So I’m actually in the process of writing this series of blog posts, I’m doing kind of aimed at freelancers, the difference between being a freelancer and a business owner. A lot of the people that would read this are technologists. I think that at least what I’ve observed is that a lot of those like freelance software engineers, for instance, struggle with profit versus cost when it comes to how they pay themselves.

Is the idea of Profit First, then, with these different envelopes these different bank accounts that like, I’m just inferring from the name, that you make profit of first-class goal of the business. It’s not just the spillover when you’re done, that you’re determining what your profit is going to be in advance, or how does how does that work?

Baz: Yeah. So the core concept of it, I guess, beyond the envelopes here it seems. So if you look at your profit and loss statement in your accounts, it’s structured as you have your top line revenue, your income. Then underneath that, you have your expenses, and then the bottom line is your profit. So it’s an equation sales minus expenses equals profit.

So, say you make five grand, you spend four grand, you’re leftover with a grand. But if you spend that equation round, so it’s sales minus profit equals expenses, mathematically, it’s exactly the same. But what you’re saying in your head as a human being, what you’re saying is, “I’ve made five grand, I’m reserving one grand, that leaves me four grand to spend.” So it’s a completely different way of approaching the same numbers.

So what we’re saying, although it’s called Profit First, actually, the key account for especially for small businesses, and for freelancers, the most important envelope that we’re putting the money into is the owners pay envelope. Because we’re always going to make sure that you as both employee number one and shareholder number one, we’re going to make sure that you get paid. Of course, many freelancers, they get to the end of the month, and they have to go without because they’ve spent it on everything else that they’ve got going in.

Erik: Right. So there’s like, I would think a fail fast element to this. If you’re putting Profit First is the first thing you set aside. You’re going to learn really quickly whether you have a viable business, or whether you’re like literally running yourself into debt running your business? I would assume?

Baz: Absolutely. So yeah, one of the things again, we set up, I call them the rhythms of your business, which are the things that you do every week, the things you do every month. One of those I do it weekly, and I tell my clients to do it weekly is you do your Profit First allocations, which is you look at how much income you’ve had, and you move it into your different bank accounts.

If your expenses account is then empty, after you’ve done those allocations, you know, that very week that your business is telling you something’s not right. So you get that if you can because it happens so early. Yeah, you can test fail fast, you can take action there and then rather than waiting till three months, six months, or even when your accountant tells you, actually you’re in trouble,

Kai: Rabbit holing for a second in that sort of fail fast scenario, what do you typically advise is it you know, Hey, you got to cut costs here. You have to rethink your entire business model. You got to make sure more money, I guess what levers do you recommend pulling for somebody in that situation?

Baz: It obviously it depends on their exact situation, but in most cases, the first thing to go is costs. It’s actually, you end up so, especially with technology, freelancers, you’ll end up with software subscriptions and little bits and pieces. So it’s like $5-$10 a month that you’ve completely forgotten that you’re spending. So it’s just a matter of going through your bank accounts and just highlighting all the software.

Actually, do I really need this or is this making me money? It’s another one because you might be spending a fortune on a project management system, but if is it actually, do you need that? Is it is it making you money? The one for me is I keep on hiring an office and then going and actually what’s the point? And then coming back to working from home.

Meg: So sort of like the Marie Kondo technique, expense cutting. Does this spark joy? Does this bring money?

Baz: Yeah, well, actually, to be fair, and the way I do it is you literally you print out your bank statements, and you sit there with highlighter pens, and the first one is green, and that’s this makes me a profit. So it might be you spent 150 quid on Facebook ads, and you’ve got 200 out of it highlighted in green. But if you only got 90 quid out of it, then no you don’t.

Then you go over in red, and then in orange, so the orange being stuff, you might be able to cut a bit in the future. So that might be a rent or wherever.

Kai: I love that process of going through the statements and just sort of like literally color coding to see what’s working and what isn’t. I have previously I’ve heard about a riff on that where it’s basically how guilty do you feel about this purchase? Or how much enjoyment do you get like, maybe somebody listening or means specific? It’s like, “Oh, you know, every week I might spend 20 or 30 bucks on coffee.”

And while it could be like, does this really, you know, help the shareholders of Geico make more money? No, but it’s something that might spark joy for me. “Oh, I get to walk to the coffee shop have a coffee. Think about it.” I guess either approach or both approaches together. I really like as a way of looking at your expenses more than, “Oh God, I’m spending too much money on this. Well, does it help you make money? Do you enjoy it? I think those are very valuable things to ask oneself.

Baz: Absolutely. I hear the word there is value is, if you’re spending the money on that coffee and you love that coffee, then it’s worth having.

Erik: So one of the things that I’ve encountered I guess the reason I mentioned writing a blog post series is because I have a blog and a following. I’ve kind of transitioned from working for myself, or from being an employee to working for myself to now running a business and I’ve learned some lessons along the way.

There seems to be some mismanagement or trouble, I guess, reasoning about things, especially in the early going, maybe for freelancers, there’s some like imitating there. So for instance, to make this a little bit more concrete. I’m a freelancer, I hear on podcasts, they talk about doing this thing where you hire a VA to help you with stuff, I guess I should do that.

So, I’m teeing up this question here. If you’re kind of putting aside some things first, and then you have this envelope with expenses in it, do you find that this methodology really helps you answer questions like, does it make business sense for me to hire a VA? So does it become a symbol for that freelancer is looking and saying, “Hey, is there money pulling in my expenses envelope or not?” Does that make sense? Like, am I asking a question here?

Baz: Yeah, so it absolutely does, because it’s… Michael Michalowicz, it’s in the book, he calls it Bank Balance Accounting. So what you should do is you should look at your accounts package, and you should look at your cash flow forecast, and go, does it make sense for me to hire a VA, but none of us ever do that? What we do is we pull out our phone, we look at our online banking App and say, “Oh, I’ve got $500 in there.”

When you do it that way, and you see the amount in your expenses account is going up and up and up every week, then you know that you’ve got money to spend. If it’s going down and down and down, you know, you haven’t got money to spend.

Now with the hiring someone, one of the things I recommend to my clients is we actually set up a new bucket, a new envelope, specifically for wages. So what you do is you might run, you might put, say, 10%, or 15%, or whatever, of your income into this wages bucket every week. Because what you’re doing then is you’re training the business to run on less expenses. So you’ve got less money to spend because you’re pre-allocating it. And you can see how that feels, see if it’s viable in real terms.

Then when you do come to pull the trigger and hire someone, what you’ve actually got is you’ve got three months or six months of wages already backed up as well. So you’ve got a buffer just in case you do hit some hard times and you’d have to suck them straight away.

Meg: It is a little different getting rid of person subscription that it is, “I can’t afford your services anymore.” There’s a little bit more commitment or emotional weight to that decisions.

Erik: I really like that because when I think about our business, that we have the content business, when we first started hiring employees, the way I went out to provide stability is just kind of projected. Alright, here’s our monthly revenue, here’s our expenses. There’s a Delta here, I think we can afford this. But what I did is I went and got a business line of credit. And that was my buffer. I probably would have felt a whole lot better if I had a bunch of money in a bank account but my buffer instead of debt, so I think that’s a really powerful strategy.

Baz: Absolutely, yeah. Especially if you actually have to call on it.

Erik: Yeah, we locked out there so that was [laughter].

Baz: Well, that’s what that’s why I got into the Profit First in the first place or so I didn’t.

Kai: Thinking of that for a couple moments. I’m curious. Are there scenario where Profit First just does not make sense for somebody like, is there a listener who should know, “Hey, if you are experiencing A or B kind of want to look in a different direction.” Or does this apply pretty universally to any business out there?

Baz: The one where it doesn’t fit at all is if you’ve had investment, because the reason the investor has invested in you is because they want fast growth, and Profit First is about slow growth. It’s about making sure you stay within your means.

What sort of by definition investment is a huge load of debt? Whether you pay that back is either by sacrificing control or by actually sacrificing part of your company, but it is a huge load of debt and Profit First is all about avoiding debt. So, in that case, especially in the tech world, where they get all these companies where they go for market share, and make a massive loss and then hope to make it up further down the line, Profit First is a no for that. Absolutely no.

Kai: Tell us a bit more about I guess, the ideal scenario or why it makes sense for somebody to do Profit First this way, instead of just staying with the old methods, is it more security, more insight, more intentionality?

Baz: So, all those things rarely. So the key thing is, because it’s such a simple system because it’s built on this rhythm and these habits. It’s one of those things it just becomes. So I used to do budgeting, I used to use like, you need a budget and all those kind of budgeting Apps where you’d, look at your income and you’d set yourself categories.

Then you’d record what you were spending and then you’d see if you’ve gone over on one category you’d like bury yourself and you’d have a go at yourself, you go like, “I’m such an idiot.” Then within three months, you would go in over on all the categories because actually that that way of doing things that trying to change your internal behavior does work.

Whereas with Profit First, the idea is because you’re, it’s your habit anyway to just look at your bank balance on your phone and see you’ve got $500 in there, that $500 is safe to spend. So it doesn’t matter if you spend it or not. So it’s working with you, the behaviors that you’ve already got ingrained within you. It’s just amplifying them and taking them to a different level.

So the difficult bit is setting up the accounts in the first place, and then getting into the habit of doing the allocations. But once those little rhythms are in place, and they’re only small things that the bank accounts, obviously, it takes a couple of hours to do that. Then it might take you 15 minutes every week to do the allocations. Once you’ve got into those bits, then the rest of it all just sort of almost magically falls into place. That’s the advantage of it.

Kai: It’s always amazing to me how much the tiny bit of friction of having separate accounts and needing to move money between them really does act as a barrier. I’ve always thought it’s similar to what you’re alluded to at the top of the call, “You just keep it in one account, you’re fine.” But when it’s literally, even if it’s just like clicking a couple buttons in a web interface or on your phone, it takes this additional level of intentionality, I am doing this action. I’m not just spending, I am moving this money from one bucket to another.

That often gives me enough pause just to stop and think about it and say, “Well, maybe I’ll do this anyways, but I’m gonna sleep on it first, I’m gonna see if there’s another option out there. Always amazes me.

Baz: You’re telling yourself I’m doing something that I’ve already told myself, I don’t want to do. Yeah, you bring it to your attention. It’s like a little red flag for yourself.

Erik: If you’re talking about freelancers out there that are listening, maybe new freelancers or longtime solo practitioners or what have you, and they find this intriguing. Is the Profit First methodology something that is better or exclusively done, I guess, with coaching, or would you recommend it as a reasonable path for them to just go by the book, read it, implement these things?

And I guess if that can be a reasonable path for some where’s the point where you might need coaching? Is it a question of like scale or scope? Or like, you know, who can kind of self-direct versus who should get some help?

Baz: Yeah, so I did it myself. As I said, I did it wrong. Then I did it right the second time around. It’s a very, very simple system. It’s not hard to implement yourself once you get over yourself. But sometimes we need that push to get over ourselves. Sometimes we need someone just to hold us on track. That’s where the coaching part comes in.

So for some people, yeah, you can go out, you can do it yourself, if you if you trust yourself to stick to it. If you can get over that initial hurdle, I’m pretty sure you can trust yourself to stick to it, then yeah, you can do it yourself. And that’s one of the great things about it, that’s liking it. It’s like everybody knows the way to be successful in business is to buy low, sell high. The knowledge isn’t the important bit to some is actually doing it and figuring out the steps to get there. So sometimes it’s nice to have someone just to give you a little prod and make sure that you do it.

Meg: Yeah, in and of itself. It’s not necessarily… I’ve read the book myself, and I haven’t implemented the system yet. But I know that there is that initial resistance to this, it’s if this was the only thing that was on my plate for the day? Sure. But you as a business owner, we’ve got all these things taking your mental capacity and it there is that a bit of even if the steps are simple, sometimes there is some emotional resistance or just, you’re just top, sometimes there are a couple of complicating factors.

I know for myself, I deal in two different currencies. So there’s a couple of additional accounts to set up, which is interesting. Then it’s, “How do I explain this to my accountant?” I’m understanding the concept of maybe somebody like as a coach like yourself is a good idea to help like, okay, when you come up against that barrier, you get over this.

Erik: Speaking of which do accountants and CPAs or bookkeepers? Do you get pushback from people like, so if I went out and said, “Hey, we’re gonna do this, and we have folks working for us, CPA firm that we retain, and then there’s somebody that keeps the books that isn’t me.” Do you get pushback from parties if it’s a bigger business, when you’re doing this coaching that are resistant to it, or how does that typically go?

Baz: I tend to work with quite small businesses so I’ve not heard that from the business themselves. But I have spoken about it to accountants, and some of them are like that never work. It’s almost like you can see this fear in their eyes because part of it it’s taking, it’s changing the nature of their job.

So a big part of it is, as far as I’m concerned, what happens with Profit First is you’re now just dealing with cash. You’re not dealing with ledgers and you’re not dealing with allocating money. The way the law tells you to allocate it, you’re dealing with it, allocating it the way that you need it. So, for a lot of accountants, I think that takes… It’s not, it sounds a bit mean and not really, right it is. It doesn’t take away the power but it takes away a bit of the mystique of what they do to some extent because you’re learning to look after yourself.

Then what I relied on my accountant to do is at year end to take all these buckets of cash and then make them add up for the legal purposes for compliance. So I’m giving them a different job per say.

Erik: Interesting. Is it typically a reduced job like somebody goes and implements this? Do they need to pay an accountant less for those your entries are like some of the things they do might it reduce somebody’s spend on accountants?

Baz: Possibly, yeah. So I’m certainly recommending that to one of my clients, so they use their account for all their bookkeeping as well. Actually, where we’re moving all that into Cloud-based software, so it takes all the bank feeds and stuff like that. So it’s taking that part of out of it, but what a fact or most of the other Profit First professionals across the world, a big chunk of them are accountants who are realizing that their job is changing, and so they’re using Profit First as a value add. So in that nature base, it’s definitely changing the nature of accounting.

Kai: When it comes to that shift in the nature of accounting, what’s driving that? Improved access to online banking, these tools, shifts in the way people are doing work, I guess, what’s adding up to the shift?

Baz: Yeah, so I think it’s exactly that’s still a part of it is the whole role of a bookkeeper is going out the window because it’s become that automated bank feed and you just, even it, most of the time, my system will tell me what all the money that’s going in and out of my accounts is without me having to do anything, all I need to do is approve it.

So that whole part of its gone completely. Then your accounts package now that it knows what categories which ledges each piece of money belongs to, then it can also calculate your tax returns and all that stuff for you. So in the UK, we have VAT, which is our version of sales tax, it’s a little bit different, but that used to be something that every accountant used to have to do for you every quarter. Now it’s literally I just click one button, and not only is it submitted, but it’s paid automatically.

So what used to be two weeks’ job is now like a 10-second job. So whole swathes of what accountants used to do is just going because of the technology,

Kai: Thinking about sort of like the journey into and through this Profit First transition, are there any common stumbling blocks that people run into? Where does like, say, a month or two months into this, where does the friction tend to show up? Where does the pain start to show up?

Baz: The way I do things is I’ve got a particular… We sort of front load everything. So the first month and a half is all about getting answers and understanding where you’re at, and then putting together an action plan to do it. Once that part is done, then actually the rest of it is pretty simple.

The main sticking points after that happen if something unexpected happens if there’s like, what site like what’s just happened.

[laughter]

Baz: What happens then is… I’ve seen this with two of my clients, and this happened with myself about 18 months ago, where when suddenly you have a massive drop in revenue, you panic and you start to think, actually, I can’t afford to do the Profit First system, I’m just gonna spend all the money that’s coming into my business.

In many ways, it’s if you need to do that, you need to do that. But you need to get back on track as quickly as possible as well. Because obviously, by doing that you’re actually damaging your business longer term.

Kai: It reminds me in a sense of like doing a diet, like, ideally, you’re eating less than if you want to lose weight, you’re eating less than your body needs. But sometimes life throws craziness at you, you’re on a big trip and you break the diet. That doesn’t mean the diets done forever. It means you say, “Hey, this was fun. Time to get back on track.”

Similarly, with Profit First, there might be those weeks or months where, “Hey, revenues dropped. To make it through this. I need to pay myself less for these expenses.” But that doesn’t mean moving forward. You should always be like paying yourself a dollar you should be writing the ship once you’re able to but the small blip doesn’t destroy the system. Am I reflecting that correctly?

Baz: Yeah, absolutely. And it’s not even… So it might be dipping into your tax account just on the hope that you will make it up for the down the line as I guess that’s like Yeah. Speaking of extra cake or something.

Erik: So I have kind of an almost an ancillary question, but I think it’s something you’re well suited to address. I’ve heard a lot of freelancer’s kind of say, “Why would I distinguish between what I pay myself like salary and profit? Isn’t everything so?

So I have this business, I’m a freelancer. I have a handful of expenses, but then I bill 100 bucks an hour? Isn’t everything that it doesn’t go to expenses, isn’t that just all profit? So number one, why might you say that’s not true?

If you were talking to these people, and two, what’s the importance of distinguishing between call it profit and salary? Because I think a lot of people listening are in this boat, like, I have a handful of expenses, but mostly it’s just billable hours. So it’s a profit, isn’t it? So? Yeah, I’m curious about your take on that subject.

Baz: So yeah, so the difference is when it comes down to do you see yourself as running a business, just a very small business? Or do you see yourself as working as a freelancer? Because working as a freelancer, yeah, you’re just basically paying yourself, you’re just earning money. It happens to be earning money for several clients instead of a single employer. But you are just earning money.

Whereas if you’re running a business by paying yourself a salary, you’re saying you’re part of the costs of that business and your fixed costs, and you’re going to make sure that that cost is dealt with, but you’re also putting money aside as profit. Because you’ve actually got two roles in the business, your employee number one, the most important employee, but you’re also shareholder number one.

So not only are you an employee who’s doing the work, but you’re the shareholder who’s taking the risks, and the profit is your reward for taking the risks, and that’s a different thing. One of the things in the book, so it doesn’t apply to most freelancers, but it might apply to some is as you grow the company and your revenue hits different levels, we alter the percentages. So for up to a quarter of a million dollars, the profit percentage is 5%, and the owners pay percentage for standard ones are 50%.

So you put aside 50% of your income to pay yourself your salary. But as you get to a bigger and bigger company, the ratio of those changes so you put more aside as profit and less as owners pay. The reason behind that is because as the company grows, and this is assuming obviously that you’re no longer just a solo freelancer, but you’ve got staff working for you, and so on.

So your role as an employee diminishes in importance, but your role as the business owner increases importance. So by altering the balance of how you’re paying yourself, you’re also reflecting the changes in your own business. So, it’s all about… I’ve used the word grown-up before, it’s a grown-up way of looking at what you’re doing. I think that might be a bit mean, but it’s kind of the right sort of idea.

Kai: It definitely feels like a more mature way of looking at your business, looking at your finances. It’s not just how you got started. It’s recognizing the growth, the change, and the development that happens. And I guess yeah, putting on your grown-up business pants.

Baz: Yeah.

Erik: So I think a lot of freelancers, maybe they think of themselves as business owners as in like, hey, I’ve hung out my shingle, but that role of shareholder I don’t think of as something a lot of freelancers out of the gate really reason about at all. I’ve created this business and maybe their reasoning about themselves as the operator of the business. Not really the owner of the business in a sense, like creating the ideal job like optimizing for the business, they would want to be an employee of not necessarily the business they would want to own. So yeah, that seems like it.

Baz: Again, that comes back to the… And this touches on all the other stuff like URI myth and everything like that is all the different roles that you have. When you’re a freelancer, if you just want to be the operator, if you just want to be the technician, you might as well have a job because you want to do the doing all the time but to be successful and to have a decent lifestyle, as a freelancer you have to do all the other stuff as well. So Profit First is just making your cash flow reflect the fact that you’re doing all those other things.

Meg: I like that framing of it too. And correct me if I’m wrong, even as a sole proprietorship or whatever the equivalent is in the different countries around the world that may be listening to this. You can still use that framework and that methodology even if you don’t have let’s say, if you’re not incorporated but like you can still use the profit to reflect that role that you are still operating as a business even if it is a sole proprietorship.

Baz: Absolutely yeah because you still have to pay tax, you still have to have reserve put aside in case of hard times. So yeah, it all amounts to the same stuff. I’ve stopped doing it now but I did for a little while running Profit First on my personal finances as well but I set all categories like going on holiday and saving for a new car and so on. It just worked, and then I went on holiday and spent all the money.

[laughter]

Kai: Tell us a bit more about the overall idea of resilience within a business and how Profit First connects to it. Is it as simple as you now have more control over your finances or does it touch on internal feelings of self-worth or competence that, “Oh, the business is durable.” Where do you see resilience come up?

Baz: So on the surface, the resilience comes because part of the point of your profit allocation is it gives you that buffer, you’re building up your runway. So if for whatever reason you didn’t have any income for a couple of months, you’ve got something to fall back on. So that’s the obvious bit of the resilience of the business.

But you’re right. It’s all about the internal feelings. It’s about how you see yourself and your position within the business. That’s why the shareholder bit is so important because it’s all about migrating from being the person who’s running around, doing all the work, answering the phones all the time and completely stressed out to be in the business owner who is sat on a yacht having a margarita.

Kai: Good thing to aspire to, good growth to aspire to as a business owner.

Baz: Yeah, absolutely.

Kai: So for anybody that’s listening and are wondering, “Hey, how does a Profit First coach plug into this? What benefit does working with a coach add?” What would you say to them? What would you point to as the benefits of working with a coach?

Baz: So the benefits of working with the coach, the number one thing for me is, it’s about the accountability. One of the things I love about coaching as opposed to mentoring, so mentoring is, obviously, you’re relying on someone’s experience and guidance, so they can tell you the stuff that you don’t know you don’t know.

Whereas coaching, there’s obviously a lot of crossover with that. But coaching is more about asking you the right questions, so you can find the answers within yourself. But once you found those answers, it’s what are you going to do with those answers? Are you going to make a difference to yourself? Now that you’ve learned that or are you just going to sit on it and stay where you are? And so the accountability part of coaching is one of the things that I think is really, really important. It’s this is what you’ve said needs to happen. Now let’s make sure that it actually does happen.

Kai: I like that you touched on it. So part of it is the follow-up part of it is the accountability. Part of is just having this other person who you know, every week or two weeks or month will say, hey, you wanted to do this thing? Have you done that thing yet? If not, wait, what barriers have popped up and helping them get over it, rather than just saying I guess to switch metaphors, burners are hot, don’t touch it, once the kettle comes off. Instead, you know, make sure we turn it off, make sure we’re doing the proper systems around our business or in the kitchen.

Baz: One of my first clients, and it was a very different version of my current program that I was running with her. But one of the things I used to do was we built a 12-week plan and that’s still part of what I do. We would break it down. So, this is where you want to be at the end of three months.

So on week one, you’re going to do this, on week two, you’re going to do this and so on and so on and so on. Her problem, as it were was she was very all over the place, so she couldn’t focus on one thing at a time and the fact that I used to get my VA just to go through her list of tasks, and ring her up on a Friday morning and say, “You said you were going to do this? Did you do it?”

Just the fact that she knew she was going to get that phone call meant that when she was in that state, where do I do this? Or do I do that she focused on what her business needed, rather than what she wanted to do at that moment? She might do what she wanted to do later on, but she always made sure she got the important stuff done first.

Kai: Makes a ton of sense. I love that as an example of sort of the value of a coach, being able to have that person on your team, bring them up, say do this next, or have you done this thing. It’s sort of the 1% that provides 90% of the value in any coaching relationship.

Baz: Absolutely. Yeah. It’s a very simple thing, and it’s not a time-consuming thing. It’s just knowing that you’ve got someone there on your shoulder

Kai: Switching tracks for a little bit. So for somebody listening that says, “Hey, I’ve enjoyed this conversation, I’ve enjoyed Baz’s answers. What’s the first step for me to get started with Profit First?” What would you what are the first one or two steps you recommend them take? What should they do once they finish listening to this?

Baz: The easiest thing to do is to take a look at the book and see if it’s for you. Because again, one of the things with it, it’s the… My approach to it as well is very, very step by step quite methodical. So we have 20 days and you have like 15-minute tasks one per day, just to get to that the baseline sort of setup.

So it’s quite a slow way of doing it. There are other Profit First coaches, there are other coaches out there who are aware of Profit First but aren’t certified in the method and they will have a different way of doing it. So when I started out, I did it much more the way a traditional coach would do it, which is I’m going to We’re going to have a meeting every two weeks, and we’ll sit down for an hour and go, and it will be very, very unstructured, and we talk about it.

I stopped doing that because he didn’t feel like me because of who I am. But I guess for some people, that’s the way they want to do stuff, they want it to be a bit less structured, and they just want to have that little bit of more leeway and how things are done. So it’s a matter of finding the right coach for you to that extent. It’s obvious, I don’t expect everyone to want to work with me.

[laughter]

Meg: That means you’ve got good positioning, not everybody should.

[laughter]

Kai: If somebody is listening to this and says, oh, but you know, you’re saying Baz might not be for you makes me want to work with him even more which they’re gonna find out a little more about you or just see how your services or your knowledge might be able to help them on their journey?

Baz: So if you go to clientrobot.com/program that is where you can download my whole program. As I say, I give the whole thing away because the actual questions I ask you, although they’re important for setting up your baseline, they’re not the value in what I give you. So you can go away and you can go through that and you can obviously read the book as well and then put the two together and you can figure out if I’m the right person for you to do it. Do it with.

Kai: Wonderful. Meg, Erik. Any other questions come to mind on your side? We’ve touched on everything I wanted to and more this has been great.

Meg: Same. Yeah, yeah, thank you so much, Baz for all this.

Baz: Thank you very much.

Meg: Yeah.

Erik: Yeah, I’m good. I don’t have anything else that comes to mind.

Kai: Well, then let’s flip over to one of our favorite segments. Let’s talk about our picks what resources books tools out there we recommend for our dear listeners. Baz, I think you brought something in you wanted to tell people about so if you’re cool of kicking it off.

Baz: Well, first, there’s a couple of things. One is, Eric, you touched on it right at the start, which is it’s very easy to sort of get drawn off in a different direction you hear or listen to a podcast and you think, “Oh, I need to get a VA or something like that.” That’s always been my problem.

So I’ve stopped listening to as many podcasts as I used to because I just got too many ideas and I go off in different directions. So one of the things I’m doing with my reading at the moment is I’m sticking very, very closely to Michael Michalowicz because of the Profit First stuff because I don’t want to get distracted myself.

But I absolutely love his book Clockwork, which is kind of the next step in that business owner journey, which is all about figuring out what your processes are, what your standard operating procedures are, and then delegating them to other people so that you can concentrate on the bits that you love doing, and they can do the bits that you don’t like do it.

The key concept in there it says a difference. Most people delegate tasks to other people which is fine and it saves you time, but as soon as something varies from the instructions that you’ve given them, even the slightest, they come back to you and ask you to make a decision. Making a decision in isolation is really, really hard. It’s very easy. If you’re doing the work, and you have to make the decision, then you can instead easy to do, but if you’re making the decision because someone’s asked you because they’re halfway through a task is very, very difficult.

That’s why so many people hire a VA, or hire someone to help them out. Then they go, actually, I might as well just do it myself, because I get asked for all these decisions. So the next step is to delegate the decision making, and that’s really, really scary. But if you can get the get it done right, then that’s when you become liberated from all the stuff that you hate doing. So that’s what Clockworks all about, and I’m really enjoying it.

Kai: It’s been on my to read list forever. I’m definitely going to have to bump it up in the stack. Meg, how about yourself any picks for this week?

Meg: Yeah, I started thinking about like what to recommend this week and not so much a specific service or product but if people listening out there haven’t yet gotten some sort of financial professional for their business. I know one of my first, my very first thing that I paid somebody else to do for my business was an accountant. So, that’s if you’re not using, if you’re just doing everything yourself my word, I think the next step up is then moving to something like Profit First and getting something more maybe even financial, somebody who can help you with your planning and things like that.

But at the very bare minimum, get yourself an accountant. I went from spending so much time on my taxes each year to just being so grateful for paying hundreds of dollars to say please just take, make this problem done for me. So that’s what I would recommend, if you dear listener do not yet have an accountant get thee one, to use phrasing that I’ve heard Kai use before get, get thee an accountant.

Kai: Eric, how about yourself any Top of Mind Pick this week?

Erik: Sure, I do two things that are thematically adjacent, especially when it comes to this dual role of like shareholder and employee number one. The first came up in the discussion, but I’ll call it out explicitly as a good book to read The E-Myth Revisited that talks about your different like personas in starting a business and how important it is to sort those out and cast yourself in these different roles and recognize when you’re in those roles.

Then the other one I had kind of mentioned, I’m writing this series, so I’ll do a self-plug just for this blog post series that I’m writing that is also about. If you’re a freelancer, you’re a business owner and an employee, and how do you kind of sort those out and for a lot of newbie freelancers, it’s just recognizing that you are a business owner, and not just like creating the sort of employment paradigm. So, those are my picks.

Kai: Excellent. All great pics and you’ll find them in the show notes dear listener and two of mine now. On topic Top of Mind I recently started rereading Tools of Titans by Tim Ferriss excerpts from interviews he’s had on his podcast. On the recommendation of my friend Mike J, I just ordered Tribe of Mentors and I’m excited to read through them.

So both are definitely skimmable, lots of great chapters highlighting different information and different people. So if you’re looking for something to read, they’re definitely books that I suggest.

Thanks so much for listening to this episode of the Business of Freelancing. We hope you enjoyed it. If you’re curious about how a Baz could help you on your journey, please check out the show notes where he has links to his program and the resources and books he recommended.

And as always, if you have any feedback or comment, feel free to write us a message and send it on in and let us know your thoughts. You can find instructions on that in the show notes as well. Until next time.