Being a freight brokerage business owner means you’re always learning new ways you could run your business. Not to be confused with implementing each and every new entrepreneurial method into your business; there’s not one perfect way to run a business. But there are really good ideas and tricks out there by others who succeeded in the startup phase, who are willing to share those ideas and tricks, and some of those are worth testing. This is one of them.
Mike Michalowicz was recommended to me years ago. You might not recognize the name, but you’ve probably heard of the book The Toilet Paper Entrepreneur. That book has been mentioned by (what feels like) dozens of entrepreneurs as their favorite helpful book on the Entrepreneur on Fire podcast. That book might be Michalowicz’s most popular work, but his most famous piece should be Profit First.
If you’re an established freight broker, skip The Toilet Paper Entrepreneur. If you’re looking to improve the profit margins in your established business, Profit First should be at the top of your reading list. Much like Dave Ramsey is the mastermind behind The Total Money Makeover (also recommended by Michalowicz for personal finance management, and I personally endorse it, too), Mike Michalowicz just gets how to run a financially healthy business.
Mike Michalowicz repeatedly gives this same advice over and over: it’s not about being cheap; it’s about being frugal. Cheap doesn’t get us anywhere—we can make bad purchasing decisions trying to be cheap. Being frugal assures we’re investing our valuable operating expenses exactly where they need to be to benefit the business and your profits.
How To Make a Profit…
According to the book, the Generally Accepted Accounting Principles formula for determining a business’s profit is:
Sales – Expenses = Profit
Michalowicz saw (and personally experienced) that this method has the potential to ruin entrepreneurs.
There’s this thing called Parkinson’s Law. It’s technically a book written by C. Northcote Parkinson, but generally speaking, it’s his theory that a demand for a resource will increase to meet the available supply—“work expands so as to fill the time available for its completion”. If we have 2 weeks to do a project, it’ll take 2 weeks. If we have 8 weeks, it’ll take 8. Michalowicz takes this even further: if we have $1,000 to do something, it will cost $1,000. But if we only have $800 to do something, we’ll find a way to get it done with just $800. The best way to accomplish this is to reduce the supply for our demand to require.
…Without Really Trying
The Profit First Formula to determine business profits is:
Sales – Profit = Expenses
While the entire book is worth the investment and read, here’s a breakdown of how your business can bring in profit every month according to the Profit First Method:
Set Up Multiple Bank Accounts
Much like how you’ve set up a personal checking account and personal savings account, do this for your business as well. Have 3 checking accounts, as some banks might penalize you for withdrawing from saving accounts as often as you will need to touch each one of these accounts. The accounts are nicknamed Income, Owner’s Pay, and Operating Expenses (OpEx).
All revenue will be deposited directly into the Income account.
Next, you’ll have to do something you might not have expected. To avoid the temptation of touching some money altogether, Michalowicz recommends opening two savings accounts at a completely different banks. These accounts are nicknamed Profit and Taxes.
Establish Your Target Allocation Percentages (TAPs)
Now to allocate funds to each of those accounts. Rather than choosing based on monetary numbers, which is probably our first instinct, base allocations on percentages. A recommended TAPs chart is available on Michalowicz’s website, and we’ll use those numbers here.
(But your business might not be in any shape to immediately contribute 5% of the total revenue to the Profit account, what then? That’s where the book will come in handy, as he has an entire section with other numbers and examples of businesses who had to take painful baby steps to get to this point.)
For now, we’ll use the publically available recommended TAPs for this example:
As mentioned before, all revenue goes into the Income checking account.
Regardless of how much your firm makes, the recommended allocation for Taxes is 15 percent across the board. Talk to your accountant to make certain you’re square with taxes, just to be certain.
A Word About Taxes
Setting up a Taxes account and regularly allocating funds to it is crucial—particularly for our agents. Since LDI does not withhold taxes when we pay our agents, every freight broker should be setting aside some revenue for the government come tax time. Tax allocation escapes many entrepreneurs and self-employed contractors attention throughout the year, and panic sets in at tax time as there’s sometimes not enough money in the account to pay the government. Implementing this step alone has turned a lot of business owner’s lives around for the better! So, no matter what allocations you follow below, absolutely prioritize the 15 percent (or what your accountant tells you) to a savings account for taxes.
Back to TAPs
For the remaining percentages, say your freight brokerage firm brings in less than $250,000/year. Twice a month, from your Income account, send 50 percent to Owner’s Pay, 30 percent to OpEx, and then 5 percent to the Profit savings account at the other bank.
If your freight company makes between a quarter to half a million in yearly revenue, the TAPs move to 35 percent Owner’s Pay, 40 percent OpEx, and 10 percent Profit.
Regularly hitting between half a million and a million in yearly revenue? Those percentages switch again to 20 percent Owner’s Pay, 50 percent OpEx, and 15 percent Profit.
See what’s happening here? When you see all the revenue come into the Income account and accumulate, you get excited! Look at all that cash! We have an emotional reaction to those numbers.
Then, twice a month (Michalowicz recommends predetermined days practically written in stone), distribute those funds to the other accounts. Twice a month on the exact same days, you’ll send those allocated percentages into your other accounts.
All bills and expenses are going to come out of the OpEx checking account. When an expense comes up that you “need,” look at the OpEx account, not your Income account. The only money moving out of your Income account is going directly into other accounts.
Here Parkinson’s Law goes into play—you’ve shrunk the available funds for operating expenses. There’s not an arbitrary number to play with anymore, there’s only 30 (or 40 or 50) percent of your total revenue to work with. You’ll now find alternative ways to accomplish the ends, or you’ll realize you didn’t need that expense anyways.
Now, this is a severely watered down Reader’s Digest version of how to allocate funds. I’m leaving out a lot. For the actual step-by-step process of how to make these TAPs work for you, check out this Profit First Overview available from Michalowicz’s website. Confused as to how to use it? All the info is in the book.
Also, I’m basing this entire write up on the first edition of the audiobook. A second, new and improved edition has been released since I downloaded it from Audible. The second edition is possibly even better and more helpful, so that could be worth checking out! If you read the second edition and the info is a little different, that’s probably why.
And Now You Have Profits Without Really Trying
Hope this brief overview to Profit First has given you enough information to know if you want to purchase it for yourself! The book is engaging, inspiring, and short. The audiobook is narrated by Mike himself, and he loves to go off on side stories about personal experiences and gives extra examples in the moment (you’ll know when this happens because he’ll finish with, “Ok, back to the book”). It’s almost like a podcast rather than an audiobook, which is fun.
For more pointers on how to effectively run your freight brokerage, and tips to help increase your profits, contact our LDI business developers at 1-800-554-3734.