Don't just work an entire year hoping that by some magical force, you're going to have this extra money to put aside. It's not going to happen. You have to do it in small baby steps, in increments. This is Boosting your Financial IQ, where I help business professionals with financial responsibility to elevate their careers and run profitable companies. My hope is that you'll apply these lessons to achieve your greatest ambitions. Cheers and enjoy these lessons to achieve your greatest ambitions, cheers and enjoy. I'm about to explain to you the number one thing you could do in your business and in your personal life to ensure you are setting aside the profit or the money that you want to earn and save. It is so simple. You're gonna be like Steve okay, that is so easy. But guess what? Just because it's easy doesn't mean that people do it. So that's why I'm so passionate about this topic and I'm gonna share with you today exactly what to do to radically transform your financial position, and that is to pay yourself first, right, yeah, mind blown, all right. Now. It may sound easy, but when it comes to execution, there are certain steps that you need to follow in order to make this stick. So, number one in business, and I'm going to talk about it from a business perspective, and then you can just take all of these principles and just translate them into a personal sense. All right. So when it comes to business, the first thing you want to do is to identify what is your industry average profit. Let's say you are a plumbing company and your industry average profit is 9%. Or let's say you're in technology and the average industry profitability is 18%. Well, whatever it may be, find out what the industry average profit is. Now, don't get too hung up on this. You don't have to come up with a precise answer. And let's say, one source reports that the industry average profit is 8%, the other one says 10%. Just take an average of the two, it doesn't matter too much. But you want to figure out what is the industry average profit and this is going to serve as a baseline when you define what is your desired profit. The reason why I point this out is because, let's say, you're in an industry that earns 5% average profits and you want to earn 20% profits. It doesn't mean that it's impossible. It may just mean that it's more difficult to achieve. That's why I like to look at the industry average profit as a baseline, so you can have a reality check here, all right. So let's just say we want a desired profit in the business of 10%. All right, we're just gonna keep it really simple by defining this desired profit. We're ready to move on to the next step because we know how much to set aside every single month paying yourself first, right.

So part two involves setting up a bank account. So you have to go to the bank and set up a separate account, or go online, if you could do it online, open up another account in your business. Remember, we're talking about a business here. You could also do this in your personal life. But open up a separate account and this is going to be your profit account. All right, pay yourself first account. In other words, this is going to serve as the account you transfer money into every single month as a percentage of your revenue, which I'll explain in step three. So in step three, you have your desired profit and once again, in our example we talked about a 10% profit margin. We now have the bank account set up. This account that's going to hold the profits. Now what you do is, every single month, when you earn revenue, that's your sales right, the revenue that you're earning in your business. You're going to take that number and you're going to multiply it by your desired profit percentage. So in my example it's 10%. Let's say my company earns $100,000 in one month. I'm going to take $100,000, multiply that by 10%. That's $10,000. And I'm going to transfer that money into my profit account.

Now, what if you don't have enough money to transfer into this profit account? I'll explain that here in just a minute, but that's the system that you're going to follow. Now, depending on how your company works, maybe you get paid after 30 days of performing work, or maybe you get paid in smaller increments. It doesn't matter. Just know that that's the amount of money you need to set aside and then transfer into this profit account, because you want to pay yourself first.

All right, which leads me to the last point. What if you don't have enough money to transfer into this account? The good news is is that it's a super easy mechanism to track whether or not things are working out well for you and your company, because if you can't make the transfer, it means that you may have a working capital problem or you're not earning the profits that you should be earning in order to sustain your business. So it's like an early warning system these bells are going off. Right, I don't have the money to transfer. Something is wrong and if this is the case, there are two areas that you should look at in your business. Number one is your working capital.

Now, working capital, just from a high level, is the difference between your current assets and your current liabilities. Current assets involve inventory, your accounts receivable, your prepaids, just to name a few. Your current liabilities include your accounts payable, the amount of money you owe your vendors, your payroll liabilities, other accruals and other items that are due and payable within 12 months. So current means within 12 months, on both sides, with current assets and current liabilities. So, when it comes to your working capital, these balances sit on your balance sheet. They don't show up on your income statement. That's why you could look at your income statement. You could show the profit, but you don't have cash in the account which matches your profit. That's why 70% of companies that go bankrupt they're actually profitable when they close their doors because they don't pay attention to their working capital, mostly they run out of cash. So, when it comes to making this transfer, if you don't have the cash to do it, you don't want to look at your working capital Now.

Where I see most problems in organizations with their working capital is with their accounts receivable or their inventory. Either they're not getting paid fast enough from their customers or they're not managing their accounts receivable. In other words, they're going out there and they're performing work and they're saying, hey, I'll bill you and I'll give you 30 days to pay me, are going out there and they're performing work and they're saying, hey, I'll bill you and I'll give you 30 days to pay me. But when 30 days passes by, the customer still hasn't paid. And if nobody's managing that, those balances can grow bigger and bigger and bigger. And guess what? Your customers have your cash and you don't have the cash and therefore you'll be struggling. Same thing is true with inventory. Inventory could just pile up, pile up, pile up, pile up. I've been in some stores where they just have boxes and boxes of inventory. So if you're not managing inventory, that's true, cash tied up in your product sitting on your shelf in the back of your warehouse, wherever it may be, but that could be a big cash suck for your business, all right. So those are the two things to pay attention to when it comes to your working capital, your accounts receivable, managing your money that your customers owe you and your inventory.

And here's another thing that may seem a little counter intuitive when it comes to your current liabilities. Your accounts payable, that's the amount of money you owe your vendors. If you're paying your vendors early let's say they give you 30 day terms but you're paying them in like 10 days because you get a bill and you just pay it right Doesn't mean that it's bad as long as you have the cash to do that. Or if you're getting discounts in the process. But sometimes paying your vendors early, before the terms, right Before the due date, may actually be hurting your cash position. So consider that as well. But managing your working capital will enable you to have more cash to make those transfers that I'm talking about.

From a profitability standpoint, this is separate from working capital. From a profitability standpoint, if you're not charging enough, if you're not getting enough customers, if your cost structure is too high In other words, if you're just not making money after taking your products and services, pricing them, fulfilling them with your customers and then just running your overall business, there's a problem. So this system of paying yourself first will help you to identify. Okay, if I own the cash, it's either working capital or, if it's not a working capital issue, if everything's working well over here, it's a profitability problem. And before you get down the line realizing there's a problem, you can make incremental improvements along the way.

See most companies. This is what they do. They just go out there and like, okay, this year I want to make a 10% profit margin and then they just go work all year long. They work really hard and then at the end of the year they're like, oh, didn't do 10%, we actually did 3%. We're going to try harder next year. But that doesn't work. You can't just spray and pray and hope that profit will come in the door. You have to manage it. You have to manage your business and by doing this every single month, you'll know very early on whether or not you have a problem and then you can make adjustments. That's why I love the system.

Now let me translate this in a personal sense. You can do the same exact thing in your personal life. That's what I do Every single time I get paid. I just have an automatic transfer, go into a separate account. That's the pay. Steve, first account. Right, that just happens automatically. I don't even see that money. It just flows right out of the incoming cashflow. And by doing this, I'm ensuring that I'm investing in my future. And guess what? If you can't make the transfer, in your personal life the same thing applies. Either you have to increase your earning potential or you have to reduce your spending.

But you could catch this early on. Don't just work an entire year hoping that by some magical force you're gonna have this extra money to put aside. It's not gonna happen. You have to do it in small baby steps, in increments. So I could tell you, if you do this in your business, you will know right away if there's a problem. And guess what. Pay yourself first and then you're going to constrain the rest of your business in a positive way. Because when it comes time to investing in upgrading your website or spending money with this partner or making this investment or whatever it may be spending the money here and there, if you pay yourself first, you're going to set aside the money and then you will make smarter decisions in your business. And guess what? Your business will grow and you'll be more successful.

The same thing is true in your personal life. Pay yourself first and then, guess what You're going to be constrained in other areas of your life in a good way, because you will be investing in the right things. Because, think about it If you're sitting on all this cash, you're going to be tempted to buy that thing. That was never important before, but now that you have the cash, you're going to just spend it on these things frivolously. All right, so that's what I've done, both in the business world and in my personal life, and it's made all the difference in the world. The best of luck to you as you implement this in your life. Thanks for tuning in and until next episode, take care of yourself. Cheers.