Several non-Big Tech companies have been in the news over the past 24 hours. Here’s a summary of recent stories about a few of them:
Southwest Airlines: Southwest is the first airline to install new, FAA-mandated secondary flight deck barriers on its Boeing 737 MAX 8 jets. These barriers are designed to prevent cockpit intrusions and are a new safety feature for the airline.
Spirit Airlines : The low-cost carrier, Spirit Airlines, has filed for bankruptcy for the second time in under a year, continuing its financial struggles.
Nestlé : The Swiss food and beverage giant, Nestlé, dismissed its CEO after an investigation found he was in an inappropriate romantic relationship with a direct subordinate, which violated the company’s code of conduct.
Cracker Barrel : The restaurant and gift store chain faced customer backlash, particularly in its hometown, over a recent logo rebrand. Following the negative feedback, the company reversed its decision. This situation has also drawn attention to the company’s financial struggles.
Intel: The U.S. government will take a 10% equity stake in the semiconductor company, Intel, as part of a move by the Trump administration.
Anker Innovations is recalling more than 1.1 million power banks. The recall was prompted by reports of the lithium-ion batteries inside the products overheating, which poses a burn risk to consumers.
General Motors: A news report mentions that the company is facing a decline in factory output in China for the fifth consecutive month, as trade talks with the US continue.
TVS: The company aims to boost its market share in the electric two-wheeler segment with its new “Orbiter” model.
CoreWeave, a cloud computing and AI infrastructure company, has made a significant acquisition. It has purchased Core Scientific in a deal valued at $9 billion.
Factoring can meet the working capital needs of businesses impacted by rising tariffs. Contact Chris Lehnes to learn if your business is a factoring fit.
Upward Revision of Q2 GDP: The US economy saw a stronger rebound in the second quarter than initially estimated. The Bureau of Economic Analysis revised its Gross Domestic Product (GDP) figure for April through June to an annual rate of 3.3%, up from the previous estimate of 3.0%. The growth was primarily driven by a sharp drop in imports and an increase in consumer spending. This follows a 0.5% contraction in the first quarter of the year.
Consumer Confidence Falls:The Conference Board’s Consumer Confidence Index dropped slightly in August, marking a 1.3-point decrease from July. Consumers’ assessments of both current business and labor market conditions, as well as their short-term outlook, worsened. Concerns about higher prices and inflation, with tariffs being a notable contributing factor, were cited by consumers in their responses.
Tariffs and Trade Policy: The ongoing US trade policy and the imposition of tariffs continue to be a dominant theme in economic news. The recent 50% tariff on Indian goods, in particular, has created uncertainty and is weighing on market sentiment. The unpredictability of these policies has left businesses unsettled and cautious about investments and hiring.
News for Business Owners (Big and Small)
Small Business Lending: The Kansas City Federal Reserve reported an increase in demand for small business loans for the first time since the first quarter of 2022. However, the report also noted that fewer loan applications were approved, indicating tightening credit standards.
SBA Reforms: The Small Business Administration (SBA) has reinstated fees for its 7(a) loan program, which were previously waived. The SBA administrator also announced the relocation of several regional offices to new locations aimed at better serving the small business community.
Corporate Transparency Act: Enforcement of the Corporate Transparency Act’s beneficial ownership reporting requirement has been suspended, with the US Treasury Department making an announcement to that effect. This provides a reprieve for many US citizens and domestic reporting companies.
AI Adoption by Small Businesses: A recent survey by Goldman Sachs found that 68% of small businesses are now using artificial intelligence (AI), a significant jump from the previous year. The survey indicates that business owners are using AI to enhance their workforce rather than replace jobs.
“Profit First” by Mike Michalowicz introduces a revolutionary approach to business financial management that flips the traditional accounting formula. Instead of the common “Sales – Expenses = Profit,” the “Profit First” formula is “Sales – Profit = Expenses.” This system leverages human behavioral tendencies, rather than fighting them, to ensure businesses are profitable from the moment of their next deposit. It emphasizes a “small plate” approach to managing money, creating separate bank accounts for different purposes (Profit, Owner’s Pay, Taxes, Operating Expenses) and allocating funds in predetermined percentages, with profit being taken first. The book argues that many businesses, even seemingly successful ones, operate in a “check-to-check” and “panic-to-panic” cycle due to a sole focus on revenue growth and the inherent flaw of GAAP (Generally Accepted Accounting Principles) when it comes to human behavior. “Profit First” aims to empower entrepreneurs to achieve permanent financial health, reduce debt, and live a life where their business serves them, not the other way around.
II. Main Themes and Core Principles
A. The Flawed Traditional Accounting Formula and its Impact
Traditional Formula: The prevalent business financial management approach, “Sales – Expenses = Profit,” leads entrepreneurs to treat profit as an afterthought or “leftovers.”
“Simply put, the Profit First system flips the accounting formula. To date, entrepreneurs, CEOS, freelancers, everyone in nearly every type of business has been using the ‘sell, pay expenses, and see what’s left over’ method of profit creation.”
This often results in businesses barely surviving, accumulating debt, and never reaching true profitability, regardless of their revenue size.
“Most entrepreneurs are just covering their monthly nut (or worse) and accumulating massive debt. We think bigger is better, but so often all we get with a bigger business are bigger problems.”
GAAP’s Misalignment with Human Behavior: While logically sound, GAAP (Generally Accepted Accounting Principles) goes against human nature by encouraging a focus on sales and expenses first.
“Logically, GAAP makes complete sense… But humans aren’t logical… Just because GAAP makes logical sense doesn’t mean it makes ‘human sense.’ GAAP both supersedes our natural behavior and makes us believe bigger is better.”
This leads to spending whatever is available and justifying all expenses, often in pursuit of growth without concern for health.
“No matter how much income we generate, we will always find a way to spend it—all of it. And we have good reasons for all of our spending choices. Everything is justified. Everything is necessary.”
B. The “Profit First” Formula and its Behavioral Foundation
The New Formula: “Sales – Profit = Expenses.” This simple reordering fundamentally changes behavior.
“The math in both formulas is the same. Logically, nothing has changed. But Profit First speaks to human behavior—it accounts for the regular Joes of the world, like me, who have a tendency to spend all of whatever is available to us.”
Leveraging Human Nature: The system works with natural tendencies, not against them, by creating the experience of having less cash available for expenses than actually exists.
“The solution is not to try to change our ingrained habits, which is really hard to pull off and nearly impossible to sustain; but instead to change the structure around us and leverage those habits.”
The “Small Plate” Metaphor: Inspired by diet psychology, the core idea is to allocate money into separate, smaller “plates” (bank accounts) for specific purposes, preventing overspending.
“When we use smaller plates, we dish out smaller portions, thus eating fewer calories while continuing our natural human behavior of serving a full plate and eating all of what is served.”
C. The Four Core Principles of Profit First
Use Small Plates (Account Allocation): Immediately disperse incoming revenue into different bank accounts with predetermined percentages for:
Profit Account: For owner’s profit distributions and cash reserves.
Owner’s Pay Account: For consistent, realistic owner salaries.
Tax Account: To reserve money for tax obligations.
Operating Expenses Account: For all other business expenses.
“When money comes into your main operating account, immediately disperse it into different accounts in predetermined percentages.”
Serve Sequentially (Prioritize Profit): Always move money to the Profit Account first, then Owner’s Pay, then Tax, and then whatever remains to Operating Expenses.
“Always, always move money to your Profit Account first, then to your Owner Pay Account and then to your Tax Account, with what remains to expenses. Always in that order. No exceptions.”
Remove Temptation (Separate Bank Accounts): Keep Profit and Tax Accounts at a separate bank, making it difficult and inconvenient to “borrow” from them.
“Move your Profit Account and other accounts out of arm’s reach. Make it really hard and painful to get to that money, thereby removing the temptation to ‘borrow’ (i.e., steal) from yourself.”
Enforce a Rhythm (Bi-weekly Allocations): Implement a consistent schedule (e.g., 10th and 25th of each month) for allocating funds and paying bills. This creates control and clarity over cash flow.
“Do your payables twice a month (specifically, on the 10th and 25th). Don’t pay only when money is piled up in the account. Get into a rhythm of paying bills twice a month so you can see how cash accumulates and where the money really goes.”
D. The “Survival Trap” and the Illusion of Growth
Crisis-Driven Decisions: The traditional revenue-focused approach often leads entrepreneurs to make short-term decisions that pull them away from their long-term vision.
“The Survival Trap is not about driving toward our vision. It is all about taking action, any action, to get out of crisis.”
“Bigger is Not Always Better”: Constant growth without financial health only creates “a bigger monster” with “bigger problems.”
“Most business owners try to grow their way out of their problems, hinging salvation on the next big sale or customer or investor, but the result is simply a bigger monster.”
All Revenue is Not Equal: Some revenue is highly profitable, while other revenue sources (e.g., bad clients, unprofitable offerings) can actively generate debt and pull a business down.
“Never forget: All revenue is not the same. Some revenue costs you significantly more in time and money; some costs you less.”
E. Importance of Efficiency and Focused Operations
Efficiency Drives Profit: True profitability comes from increasing efficiency, meaning achieving more results with less effort and cost.
“If you want to increase profitability (and you’d better friggin’ want to do that), you must first build efficiencies.”
This includes focusing on serving “great” clients with consistent needs using refined solutions, like McDonald’s focusing on a few core products.
“The fewest things you can do repetitively to serve a consistent core customer need—this spells efficiency.”
Firing Bad Clients: Unprofitable clients drain resources and dilute the profits generated by good clients. Eliminating them frees up time and money to clone ideal clients.
“The top quartile generated 150% of a company’s profit… the bottom quartile, the one that generated 1% of the total revenue, resulted in a profit loss of 50%!”
“Just One More Day” Game: A tactic to delay unnecessary spending, encouraging frugal behavior and fostering alternatives.
“He challenges himself to go just one more day without the item. Every time he passes up an opportunity to buy whatever he needs, he gets pumped. He gets a high from going without for one more day.”
F. Debt Destruction and Lifestyle Management
Debt Freeze and Snowball: Stop accumulating new debt immediately and systematically pay off existing debt, starting with the smallest, to build emotional momentum (following Dave Ramsey’s “Debt Snowball” principle).
“You need to get your Debt Freeze on. And then destroy debt, once and for all.”
“It is getting to tear up a statement—any statement, because it is fully paid off—that gives you a sense of momentum and gets you charged up to tackle the next one.”
Quarterly Profit Distributions: Regularly celebrating profit (e.g., taking 50% of the Profit Account balance as a personal distribution quarterly) reinforces the positive habit and shows the business is serving the owner.
“Your business is serving you, now. You are going to take a distribution check every quarter. Every ninety days, profit will be shared to you.”
“Lock In Your Lifestyle”: Resist the urge to increase personal spending as income grows. Create a significant gap between earnings and expenditures to build wealth and achieve financial freedom.
“You will not expand your lifestyle in response. You need to accumulate cash—lots of it—and that means no new cars, no brand-new furniture or crazy vacations. For the next five years, you will lock it in and live the lifestyle you are designing now so that all of your extra profit goes toward giving you that ultimate reward: financial freedom.”
Personal Application: The Profit First principles extend to personal finance, promoting financial freedom and teaching children sound money management.
G. The Role of Accountability and Continuous Improvement
Accountability Groups: Joining or forming “Profit Pods” or “Profit Accelerator Groups” is crucial for maintaining discipline and consistent implementation of the system.
“The worst enemy of Profit First is you… This is why it is imperative that we join (or start) an accountability group… immediately.”
These groups provide support, shared learning, and external pressure to stick to the plan.
“The action of enforcing a plan or system with someone else ensures that you are more likely to do your part. You are accountable to the group, and therefore integral to the group, which means you are less likely to drop the ball.”
Continuous Tweaking: The system is not static; entrepreneurs should constantly look for ways to improve efficiency, adjust allocation percentages (TAPs – Target Allocation Percentages), and refine their processes.
The Power of Small Actions: Big transformations are the result of consistently applied small, repetitive actions.
No-Temptation Accounts: Profit and Tax accounts should be at a separate bank.
Instant Assessment: A quick method to gauge financial health and identify “bleeds” (areas of overspending). Uses Target Allocation Percentages (TAPs) based on Real Revenue.
“The Real Revenue number is a simple, fast way to put all companies on equal footing.” (Real Revenue = Total Revenue – Materials & Subcontractor costs).
Expense Cuts: Aim to reduce operating expenses by at least 10% initially to cover initial profit allocations and build reserves.
Debt Freeze: Immediately stop incurring new debt and implement a Debt Snowball to pay off existing debt.
When paying down debt, 99% of quarterly profit distribution goes to debt, 1% to personal reward.
Efficiency Goal: Double results with half the effort.
Client Management: Focus on cloning “best clients” (those who pay on time, trust you, and buy profitable offerings) and firing “bad clients” (who drain resources and generate losses).
Owner’s Pay: Should reflect what it would cost to hire a replacement for the work the owner actually does, not just a CEO title.
“My business serves me; I do not serve my business. Paying yourself next to nothing for hard work is servitude.”
Tax Account Naming: Change the Tax Account name to “The Government’s Money” to mentally deter “borrowing.”
The Vault: A low-risk, interest-bearing account for short-term emergencies and eventually a source of income, with clear rules for withdrawal.
Drip Account: For managing large, upfront payments for services rendered over time, ensuring consistent monthly income recognition.
Employee Formula: Real Revenue should be $150,000 to $250,000 per full-time employee. For tech businesses, Real Revenue should be 2.5x total labor cost; for “cheap labor” fields, 4x total labor cost.
Financial Freedom: Achieved when accumulated money yields enough interest/returns to support one’s lifestyle.
Loss Aversion & Endowment Effect: Psychological principles explaining why people cling to things they possess and resist letting go, even when financially detrimental. The system encourages ripping off the “Band-Aid” quickly.
Accountability: Join or form Profit Accelerator Groups (PAGs) or Profit Pods to ensure consistent application of the system.
“The fastest way to screw up Profit First is to start sliding back into old belief systems that got you into trouble in the first place.”
Bring printed Profit Account statements to meetings to ensure honesty.
This study guide is designed to help you review and solidify your understanding of the “Profit First” system as presented in Mike Michalowicz’s book.
Quiz: Short Answer Questions
Answer each question in 2-3 sentences.
What is the core difference between the traditional accounting formula and the Profit First formula? The traditional formula is Sales – Expenses = Profit, making profit an afterthought. The Profit First formula, Sales – Profit = Expenses, prioritizes profit by allocating it first, forcing businesses to operate on the remaining funds.
Explain the “Recency Effect” and how it applies to an entrepreneur’s financial decisions. The Recency Effect is a psychological phenomenon where individuals place disproportionate significance on their most recent experiences. For entrepreneurs, this means making financial decisions based on their current bank balance, leading to cycles of overspending during good times and panic during lean times.
How does the author relate the concept of “small plates” in dieting to the Profit First system? The “small plates” concept suggests that using smaller plates leads to smaller portions and, consequently, less consumption, without requiring a change in the habit of cleaning one’s plate. In Profit First, this translates to immediately dispersing revenue into various smaller accounts, forcing the business to operate on a reduced “plate” of funds for expenses.
What is the “Survival Trap” and why is “just selling” a dangerous part of it? The Survival Trap is a cycle where businesses focus solely on generating revenue to escape immediate crises, often taking on any sale regardless of its long-term fit or profitability. “Just selling” is dangerous because it can lead to increased expenses, inefficient operations, and taking on bad clients, moving the business further from its vision rather than towards it.
Describe the author’s “piggy bank moment” and its significance in his development of the Profit First system. The author’s “piggy bank moment” occurred when his young daughter offered her savings to help him after he lost his fortune. This humbling experience taught him the importance of saving money and securing it from oneself, highlighting that cash is king and true financial security comes from disciplined saving, not just making money.
What are Target Allocation Percentages (TAPs) and why are they important in Profit First? TAPs are the predetermined percentages of income that are allocated to different accounts (Profit, Owner’s Pay, Tax, Operating Expenses) in the Profit First system. They are important because they provide a structured goal for how money should be distributed, helping businesses move towards financial health and efficiency over time.
Explain the “10/25 Rhythm” in Profit First and its benefits. The 10/25 Rhythm involves paying bills and allocating funds twice a month, specifically on the 10th and 25th. This rhythm helps entrepreneurs gain control over their cash flow, identify spending patterns, and manage bills on time, reducing reactive financial decisions and fostering a more controlled, predictable financial flow.
How does the Debt Freeze strategy combine with the Debt Snowball method to address business debt? The Debt Freeze involves aggressively cutting unnecessary expenses to operate at a leaner level, preventing new debt accumulation. This is combined with the Debt Snowball, which prioritizes paying off the smallest debt first to build emotional momentum, then using the freed-up funds to tackle the next smallest debt, systematically eradicating all debt.
What is the “Just One More Day” game and what psychological principle does it leverage? The “Just One More Day” game is a technique where an individual challenges themselves to delay a purchase for one more day, finding joy in saving money. It leverages the psychological principle of deriving pleasure from saving rather than spending, helping to foster frugality and uncover alternatives to unnecessary expenses.
According to the author, why is joining an accountability group (like a PAG or Profit Pod) crucial for sticking with Profit First? Accountability groups are crucial because human willpower can falter, and internal justifications for straying from the system are common. These groups provide external support, shared commitment, and a rhythm for consistent action, making it easier to maintain discipline, share best practices, and overcome challenges in implementing Profit First.
Answer Key
Core Difference: The traditional formula (Sales – Expenses = Profit) treats profit as what’s left over, often leading to an empty plate. The Profit First formula (Sales – Profit = Expenses) flips this, ensuring profit is taken first, forcing the business to operate efficiently on the remaining funds.
Recency Effect: The Recency Effect causes people to make decisions based on their most recent experiences, like a high bank balance. For entrepreneurs, this can lead to overspending when funds are plentiful, only to panic and scramble for sales when the balance drops, perpetuating a check-to-check cycle.
“Small Plates” Analogy: In dieting, small plates encourage smaller portions without changing the habit of cleaning the plate. In Profit First, this translates to immediately allocating portions of incoming revenue to different accounts, creating a “smaller plate” for operating expenses and forcing more efficient spending.
Survival Trap: The Survival Trap is a cycle where businesses prioritize “just selling” to escape immediate crises. This is dangerous because it often leads to taking on unprofitable clients, expanding services unsustainably, and incurring unchecked expenses, ultimately moving the business further from true profitability.
“Piggy Bank Moment”: The author’s “piggy bank moment” was when his daughter offered her savings to him after he lost his fortune. This experience was a humbling wake-up call, emphasizing that true financial security comes from saving and protecting money, leading him to develop a system that prioritized profit and disciplined allocation.
Target Allocation Percentages (TAPs): TAPs are the target percentages of Real Revenue allocated to different accounts (Profit, Owner’s Pay, Tax, Operating Expenses) in the Profit First system. They are essential as they provide a clear roadmap and measurable goals for how a business should distribute its income to achieve and maintain financial health.
10/25 Rhythm: The 10/25 Rhythm is the practice of allocating funds and paying bills twice a month, on the 10th and 25th. This routine fosters consistent cash flow management, reduces financial anxiety by providing regular check-ins, and helps identify spending patterns and unnecessary expenses.
Debt Freeze & Debt Snowball: The Debt Freeze involves aggressively cutting all non-essential expenses and stopping new debt accumulation. The Debt Snowball, then, focuses on paying off the smallest debt first to build emotional momentum, subsequently rolling those payments into the next smallest debt until all are eliminated.
“Just One More Day” Game: This game involves intentionally delaying a purchase for “just one more day” to cultivate a sense of pleasure from saving. It leverages the emotional satisfaction of frugality, often revealing that the item wasn’t truly necessary or leading to the discovery of cheaper alternatives.
Accountability Groups: Accountability groups are crucial for Profit First because human nature often leads to self-sabotage and backsliding on financial discipline. A group provides external motivation, shared commitment, and a platform for discussing challenges and celebrating wins, helping individuals consistently adhere to the system.
Essay Format Questions
Analyze the psychological underpinnings of the Profit First system, specifically discussing how it leverages human behavioral traits like the Recency Effect, Loss Aversion, and the desire for instant gratification, rather than relying solely on logical accounting principles.
Compare and contrast the author’s personal journey from being a “King Midas” with a focus on revenue to a proponent of “Profit First.” What key lessons did he learn, and how did these experiences shape the core principles and practical advice offered in the book?
Discuss the concept of “efficiency” as presented in “Profit First,” including its relationship to profitability and the author’s challenge to “get two times the results with half the effort.” Provide examples from the text to illustrate how businesses can achieve this, both by eliminating “bad clients” and “cloning good ones,” and by making operational changes.
Evaluate the role of debt in the entrepreneurial journey according to “Profit First.” Explain how the “Debt Freeze” and “Debt Snowball” strategies, combined with the continuous application of Profit First, offer a permanent solution to debt rather than a temporary fix.
Beyond business, how does the “Profit First Lifestyle” extend the system’s principles to personal finance and family life? Discuss the strategies for personal financial freedom, including managing income, savings, and teaching financial literacy to children, and consider the underlying philosophy that connects business and personal financial health.
Glossary of Key Terms
10/25 Rhythm: A key operating rhythm in Profit First where a business allocates funds and pays bills twice a month, on the 10th and 25th.
Accountability Group (PAG/Profit Pod): A group of entrepreneurs who meet regularly to provide mutual support, share best practices, and hold each other accountable to the Profit First system.
Analysis Paralysis: The state of over-analyzing a situation or problem so that a decision or action is never taken, crippling progress.
Angel of Death: A term used by the author to describe his failed investments, where he unknowingly caused the downfall of the businesses he invested in due to his arrogance and poor financial management.
Assets: In the context of “Profit First,” things that bring more efficiency to a business by allowing for more results at a lower cost per result.
Bank Balance Accounting: The common, yet flawed, practice of making financial decisions based solely on the current balance visible in a bank account.
Cash Cow: A term for a business that consistently generates a steady and reliable profit, often used to describe the ideal outcome of applying Profit First.
Cash Flow Statements: One of the three key financial reports in GAAP, providing a detailed breakdown of how cash is generated and used over a period.
Debt Freeze: A strategy in Profit First to immediately stop accumulating new debt by drastically cutting expenses and making a commitment to only pay for purchases with cash.
Debt Snowball: A debt reduction strategy where debts are paid off in order from smallest to largest, regardless of interest rate, to build psychological momentum.
Drip Account: An advanced Profit First account used to manage retainers, advance payments, or pre-payments for work that will be completed over a long period, releasing funds into the main income account incrementally.
Endowment Effect: A behavioral theory stating that individuals place a higher value on something they already possess compared to an identical item they do not own.
Employee Formula: A guideline in Profit First suggesting that for each full-time employee, a company should generate $150,000 to $250,000 in Real Revenue.
Frankenstein Formula (Sales – Expenses = Profit): The traditional accounting formula criticized in Profit First for making profit an afterthought and leading to inefficient spending.
GAAP (Generally Accepted Accounting Principles): The standard framework of guidelines for financial accounting, criticized in Profit First for being complex and working against human nature by focusing on sales first.
Gross Profit (Gross Income): Total Revenue minus the cost of materials and subcontractors directly used to create and deliver a product or service.
Hedgehog Leatherworks: The author’s one surviving investment from his earlier business ventures, which successfully implemented Profit First.
Income Account: An advanced Profit First account where all incoming deposits are collected, providing a clear picture of total revenue before allocation.
Income Statement: One of the three key financial reports in GAAP, summarizing a company’s revenues, expenses, and profits over a period.
Instant Assessment: A quick method provided in “Profit First” to gauge the real financial health of a business and identify areas of financial “bleed.”
Just One More Day Game: A psychological tactic to cultivate frugality by challenging oneself to delay a purchase for an additional day, finding joy in the saving.
King Kong: A metaphor used to describe the overwhelming, hidden financial problems that many businesses face, larger than a mere “elephant in the room.”
Labor Costs: The expenses associated with employing staff, including salaries, commissions, and bonuses.
Loss Aversion: A psychological tendency where the pain of losing something is felt more strongly than the pleasure of gaining an equivalent item.
Material & Subs: Costs associated with materials for manufacturing/retail or subcontractors for service delivery, subtracted from Top Line Revenue to calculate Real Revenue.
Materials Account: An advanced Profit First account specifically for funds allocated to the purchase of materials, distinct from general operating expenses.
Monthly Nut: A term for the total amount a business needs to cover its expenses each month, criticized in Profit First for focusing on expenses over profit.
Operating Expenses Account: The primary account in Profit First used for managing day-to-day business expenses after profit, owner’s pay, and tax allocations.
Owner’s Pay Account: A dedicated account in Profit First for the regular salary or distributions paid to the business owner(s) for their work.
Parkinson’s Law: A principle stating that work expands to fill the time available for its completion, or, in a financial context, expenses rise to meet available income.
Pass-Through Account: An advanced Profit First account for income received from customers that is not considered true revenue for profit allocation, such as reimbursements for travel costs.
Pareto Principle (80/20 Rule): An observation that roughly 80% of effects come from 20% of causes, applied in Profit First to clients and product profitability.
Petty Cash Account: A small bank account, often with a debit card, for minor day-to-day purchases like client lunches or office supplies.
PFP (Profit First Professional): A financial professional (accountant, bookkeeper, coach) trained and certified in the Profit First system, who helps clients implement it.
Profit First Formula (Sales – Profit = Expenses): The core accounting formula in the system, prioritizing profit allocation before expenses.
Profit Account: A dedicated account in Profit First for the allocated profit of the business, often held in a separate bank to remove temptation.
Profit Leader: An entrepreneur who starts and leads a voluntary Profit Pod, helping others with accountability and implementation of Profit First.
Profit First Lifestyle: The application of the Profit First principles to personal finances, aiming for financial freedom and a disciplined approach to spending and saving.
Plowback/Re-invest: Terms used to justify taking money from profit accounts to cover operating expenses, which Profit First identifies as “borrowing” or “stealing” from oneself.
Real Revenue: Total Revenue minus the cost of materials and subcontractors, representing the true income the company generates from its core services or products.
Recency Effect: See above in Quiz.
Recurring Payments Account (Personal): A personal finance account for fixed, varying, and short-term recurring household bills.
Required Income For Allocation (RIFA): A Profit First metric that calculates the minimum business income needed to cover desired owner’s pay, taxes, and operating expenses after allocations.
Sales Tax Account: A dedicated account in Profit First for collecting and holding sales tax, emphasizing that this money is not income but funds collected for the government.
Secretly Spoiled: Laurie Udy’s company, an example of a business successfully implementing Profit First.
Serving Sequentially: A Profit First principle from dieting, meaning to allocate money to accounts in a specific order (Profit first, then Owner’s Pay, then Tax, then Expenses).
Small Plates: See above in Quiz.
Stocking Account: An advanced Profit First account used to save for large, infrequent purchases or to stock inventory parts over time.
Survival Trap: See above in Quiz.
Tax Account: A dedicated account in Profit First for setting aside money to cover tax responsibilities, often held in a separate bank.
The Government’s Money: A renaming tactic for the Tax Account to psychologically deter “borrowing” from it, emphasizing it’s not the business’s funds.
The Vault (Business & Personal): An ultra-low-risk, interest-bearing account for short-term emergencies and long-term savings, with strict rules for its use to prevent cash crises.
Top Line Thinking: A revenue-focused approach to business management, prioritizing sales growth above all else, often leading to profitability issues.
Wedge Theory: A personal finance strategy to gradually upgrade one’s lifestyle as income increases, setting aside half of every income bump into savings to build wealth.
This podcast episode, hosted by Bob Shultz, publisher and co-founder of TCLM, and featuring Factoring Specialist, Chris Lehnes provides an in-depth exploration of factoring as a financing solution for businesses seeking improved liquidity.
Factoring is explained as the sale of a company’s accounts receivable to a third-party factor, which enables immediate cash flow without incurring debt. Lehnes outlines how the process works, from invoice verification to advancing 75 to 90 percent of its value and later releasing the balance upon customer payment, while also discussing the operational benefits, such as the factor handling collections. The conversation covers critical distinctions between recourse and non-recourse factoring, cost structures, and flexibility in factoring arrangements, including selective factoring by customer or invoice. The fees, typically 1.5 to 3 percent per month, are examined alongside aspects that influence pricing, such as credit risk, invoice volume, and payment timelines.
The discussion also offers practical guidance for businesses considering factoring, highlighting its applicability primarily for B2B and B2G companies with strong customers and urgent funding needs not being met by banks. Lehnnes addresses common concerns about customer perception, explaining that large enterprise clients are accustomed to factoring arrangements, and he emphasizes good receivables management practices to improve eligibility. The episode concludes with insights into Versant Funding’s unique position in the market, emphasizing its true non-recourse model, lack of reliance on traditional borrower qualifications, flexibility in factoring older receivables, and willingness to work with high customer concentration. This positions factoring not only as a cash flow solution but also as a strategic tool for growth, bridging financing gaps, and providing operational stability
Accounts Receivable Factoring $100,000 to $30 Million Quick AR Advances No Long-Term Commitment Non-recourse Funding in about a week
We are a great match for businesses with traits such as: Less than 2 years old Negative Net Worth Losses Customer Concentrations Weak Credit Character Issues
Chris Lehnes | Factoring Specialist | 203-664-1535 | chris@chrislehnes.com
Factoring is a valuable financial tool for businesses facing cash flow issues due to delayed customer payments. The core concept involves selling unpaid invoices (accounts receivable) to a third-party “factor” in exchange for immediate cash. The discussion highlights “non-recourse factoring,” where the factor assumes the risk of customer non-payment, and explores Versant’s unique approach, benefits, real-world applications, cost structure, and ideal use cases.
Definition: Factoring is the process of “essentially selling those unpaid invoices… your accounts receivable… to a third party company called a factor.” This allows businesses to receive “immediate cash” rather than waiting “weeks or even months to actually get paid.”
Core Problem Solved: The primary benefit of factoring is addressing “a very common problem, cash flow,” which can be a “killer if you have bills piling up or you see a new opportunity but don’t have cash on hand to jump on it.”
Simplified Responsibility: The business owner sells the invoice, and the factor “take[s] on the responsibility of collecting from your customers.” This allows the business owner to “focus on running my business.”
2. Non-Recourse Factoring: Risk Transfer
Definition: Non-recourse factoring is a specific type where “the factor takes on the risk… that your customer might not pay.” If the customer defaults, “the factor is out of luck and you’re not on the hook.”
Factor’s Selectivity: Due to this risk, factoring companies “super picky about who they work with” and “carefully evaluate the creditworthiness… of your customers, not just your business’s overall financial history.”
Ideal Customer Profile: This model is most suitable if “your customers are large, stable companies with a good track record of paying their bills.” Conversely, if “most my customers are small startups with… limited financial history,” factoring “might not be the best fit.”
3. Versant’s Approach and Benefits
Speed: Versant’s “biggest selling points is speed,” often getting “cash into their clients hands quickly, sometimes within a week,” significantly faster than “traditional bank loans, which can take months to process.” This speed is possible because “they’re primarily focused on the receivables themselves,” assessing “the creditworthiness of your customers, not necessarily your company’s entire financial history.”
No Personal Guarantees: A significant advantage is that Versant “doesn’t require personal guarantees,” meaning “business owners aren’t putting their personal assets on the line.”
Performance Guarantee: While no personal guarantee, Versant requires a “performance guarantee.” This means the business owner “is vouching for the quality of the goods or services you’ve provided.” If a customer disputes an invoice due to “faulty” product or service, “that’s ultimately your responsibility to sort out.”
Transparency & Control: Versant provides “online tools so you can track the status of your invoices and see exactly where your money is,” offering “a constant pulse on your cash flow.”
Personalized Service: Each client receives a “dedicated account executive who works with them directly,” providing “a much more personalized experience than dealing with a giant impersonal financial institution.”
Target Market: Chris describes Versant as occupying “a unique space in the market,” having “the resources of a larger factor… but maintain the personalized service and flexibility of a smaller one.” Their focus is “especially for businesses that might not qualify for traditional bank loans.”
4. Real-World Applications
Crisis Management: Factoring can be a “lifeline” for businesses in distress. Examples include a consumer electronics manufacturer that “shipped out a batch of defective products” and was “facing potential legal action,” where Versant provided “desperately needed” funding. Versant is even “willing to work with companies in Chapter 11 bankruptcy,” demonstrating a “level of commitment that you just don’t see from most financial institutions.”
Strategic Growth Initiatives: Factoring can facilitate strategic moves, such as a commercial printer using factored receivables to “buy out a difficult seller finance loan,” gaining “full control of their business.”
Recovery from Setbacks: A security software company, reeling from a “failed merger” that led to “a drop in revenue,” used Versant’s working capital “to get back on track.”
Unlocking Potential: Factoring is “not just about accessing capital. It’s about unlocking potential and creating new possibilities for growth and success,” allowing businesses to be proactive and “seize opportunities as they arise.”
5. Cost Structure and Customer Perception
Fee Model: Versant charges a fee that accrues based on how long it takes the customer to pay.”
Customer Perception: A common concern is that factoring makes a business “look financially unstable.” However, Chris argues that factoring is “way more commonplace than people realize, especially when you’re dealing with large companies,” who “are probably used to working with factors all the time.” It’s “just part of doing business” and “not going to raise any red flags.”
6. Ideal Industries for Factoring
Manufacturing, Distribution, Wholesale: These industries “frequently handle large orders… with extended payment terms,” making immediate cash flow “absolutely essential” to keep “production lines humming” and manage inventory.
Staffing Agencies: These businesses often pay employees “weekly or bi-weekly” but “may not receive payment from their clients for several weeks or even months,” and factoring “helps bridge that gap,” ensuring funds for payroll.
Transportation and Logistics: With “significant” fuel and operating expenses, factoring provides “working capital they need to keep those trucks rolling and goods moving.”
7. Factoring and Profitability
Leverage for Growth: Factoring “can actually boost profits, not just help maintain them.” By providing immediate cash, businesses can “seize that opportunity” to take on “a big new project” that they otherwise couldn’t afford. Even with fees, the “significant increase in revenue” from such projects can lead to “higher profits.”
Strategic Tool: Factoring “simply provides the financial flexibility to make the most of opportunities and reach their full earning potential.”
8. Finding the Right Factoring Partner
Relationship Building: Chris advises building relationships with “professionals who work closely with small businesses,” such as “accountants, lawyers, business brokers, even bankers,” as they are “in a position to identify businesses… that might benefit from factoring.”
Application Process: Factoring companies, unlike banks, are “not as obsessed with traditional financial statements.” They primarily require “a recent aging report” of outstanding invoices and “a list of your customers” to assess creditworthiness. Proposals can be turned around “incredibly fast, sometimes within 24 hours,” with funding possible “as quickly as a week.”
Beyond the Rate: It’s crucial to “find a factoring company… that truly aligns with your needs and values,” focusing not “just about getting the lowest rate… it’s about finding a partner… who understands your business, supports your goals and provides the level of service you expect.”
Conclusion
Factoring, particularly non-recourse factoring, offers a powerful and flexible financial solution for businesses, especially those struggling with cash flow, seeking quick capital, or facing challenges that preclude traditional loans. Companies like Versant provide rapid funding, personalized service, and transparency, taking on significant risk in the process. While it’s important to consider the costs and potential loss of collection control, the ability to unlock potential and accelerate growth by transforming receivables into immediate cash makes factoring a compelling option for many businesses across various industries.
Answer the following questions in 2-3 sentences each:
What is factoring, in simple terms?
What is the key difference between recourse and non-recourse factoring?
Why are factoring companies very selective about the clients they choose to work with?
What does the term “performance guarantee” mean in the context of factoring?
Besides the initial percentage fee, what other cost is associated with factoring?
According to the source, how does Versant differ from larger and smaller factoring companies?
Name two industries that commonly use factoring and explain why.
How does factoring help with the profitability of a business?
How does spot factoring differ from regular factoring agreements?
What is an aging report, and why is it important in factoring?
Answer Key
Factoring is when a business sells its unpaid invoices (accounts receivable) to a third-party company (the factor) for immediate cash. The factor then takes on the responsibility of collecting payments from the business’s customers, allowing the business to focus on operations instead of collections.
In recourse factoring, the business is responsible for unpaid invoices if the customer fails to pay, whereas in non-recourse factoring, the factor bears the risk of non-payment (unless there is a product or service issue).
Factoring companies are selective because they take on the risk of customer non-payment in non-recourse factoring; therefore, they carefully assess the creditworthiness of the business’s customers to minimize their potential losses.
A performance guarantee means the business owner is responsible for ensuring the quality of the goods or services provided to their customers. If a customer disputes an invoice due to quality issues, the business owner, not the factor, must resolve the issue.
In addition to an upfront percentage fee on each invoice, factoring companies often charge an additional fee based on how long it takes for the customer to pay the invoice, incentivizing customers to pay promptly.
Versant occupies a unique middle ground; it has the resources of a large factoring company but provides the personalized service and flexibility typically associated with smaller factoring companies and focuses on non-recourse factoring.
Manufacturing/wholesale companies often use factoring because they have large orders and long payment terms. Staffing agencies utilize factoring because they have to pay their employees before their clients pay the agency.
Factoring can lead to increased profitability by enabling businesses to access cash immediately to seize new opportunities or take on new projects, leading to more revenue which will then lead to more profits.
Spot factoring involves a one-time factoring deal for a specific high-value invoice, while regular factoring agreements typically involve an ongoing arrangement.
An aging report shows a business’s outstanding invoices and how long they have been due and it’s important in factoring because it helps the factoring company assess the quality of the receivables and the likelihood of getting paid by the business’s customers.
Essay Questions
Discuss the benefits and potential drawbacks of using non-recourse factoring for a small to medium-sized business. Consider factors such as cost, control, and customer relationships.
Compare and contrast how traditional bank loans and factoring address a business’s need for working capital. What are the advantages and disadvantages of each?
Analyze how the factoring process used by Versant, as described in the source, balances the risk and rewards for both the business and the factoring company.
In what ways can factoring be a strategic tool for businesses experiencing growth, and what steps should they take to ensure they use it effectively?
Evaluate the claim that factoring can be a solution for businesses in challenging situations, such as those facing bankruptcy, and under what conditions this is likely to be most successful.
Glossary
Factoring: A financial transaction where a business sells its accounts receivable (invoices) to a third party (the factor) at a discount to receive immediate cash.
Accounts Receivable: Money owed to a business by its customers for goods or services that have been delivered.
Factor: The third-party company that purchases accounts receivable from a business in a factoring transaction.
Recourse Factoring: A type of factoring where the business remains liable for unpaid invoices if the customer does not pay.
Non-Recourse Factoring: A type of factoring where the factor assumes the risk of customer non-payment (except for issues with product/service quality).
Creditworthiness: The assessment of a customer’s ability and willingness to repay their debts, which factoring companies use to decide whether to take on their invoices.
Performance Guarantee: A commitment from a business owner ensuring that the products or services provided to their customers are of the agreed-upon quality.
Aging Report: A document that lists a business’s outstanding invoices and how long they have been overdue.
Spot Factoring: A one-time factoring arrangement where a business sells a single large invoice for cash.
Upfront Fee: The initial percentage of an invoice that the factoring company takes as its fee for providing immediate cash.
Rebate: The remaining percentage of an invoice after the factor has deducted all fees, and they have collected full payment from the client’s customer.
Personal Guarantee: A promise by a business owner to be personally responsible for their company’s debts. Versant does not require this.
Within the last 24 hours, news developments concerning the US economy and businesses have been largely overshadowed by the ongoing impact of tariffs and a focus on corporate earnings reports.
Key Economic Indicators and General Business Environment
Tariffs and Uncertainty: The looming threat of new tariffs on various imports continues to be a major concern for businesses of all sizes. News reports highlight how this uncertainty is forcing small business owners to make difficult decisions, such as delaying hiring or stockpiling inventory. For larger corporations, tariffs are already impacting profitability, with companies like Apple and Edgewell Personal Care warning investors about the financial hit they are taking. The upcoming August 7th deadline for new tariffs has added to the market’s cautious mood.
Economic Outlook: A leading economist from Moody’s has warned that the US economy is on the “precipice of recession,” citing a flatlining of consumer spending, contracting manufacturing and construction sectors, and a projected fall in employment. This follows a weak jobs report from last week which has fueled concerns about a potential economic downturn.
Financial Services for Small Businesses: A recent survey indicates that small businesses are increasingly turning to financial advice and data-driven tools to navigate the current economic headwinds. Fintech companies and traditional banks are responding by expanding their services to help small and medium-sized businesses (SMBs) optimize cash flow and improve operational efficiency.
Federal Reserve and Interest Rates: The weak jobs report has increased expectations for a potential interest rate cut by the Federal Reserve at its next meeting in September. While a rate cut could stimulate the economy, it also raises concerns about fueling inflation, which remains above the Fed’s 2% target.
Corporate Earnings and Market Activity
Mixed Earnings Reports: The stock market saw modest gains on Wednesday as investors processed a flurry of corporate earnings reports. While some companies, like McDonald’s and Match Group (the parent company of Hinge), posted solid results and saw their shares climb, others, such as Super Micro Computer and Disney, fell short of revenue expectations.
AI’s Impact on Business: The power of AI continues to be a driving force in corporate success. Companies like Palantir and Axon Enterprise saw significant stock gains after reporting strong profits and citing growth in their AI offerings.
Sector-Specific News:
Fast Food: McDonald’s is focused on winning back lower-income diners who are cutting back on spending due to economic pressures.
Dating Apps: Match Group’s stock jumped after reporting better-than-expected revenue, driven by strong performance from its Hinge app, which cited an AI-powered algorithm as a key factor in increasing user engagement.
Airlines: Spirit Airlines was in the news after a pilot was arrested on child stalking charges.
Retail: Claire’s has filed for bankruptcy for the second time in seven years.
Accounts Receivable Factoring can quickly meet the working capital needs of a manufacturer.
Versant’s underwriting focus is solely on the quality of a company’s accounts receivable, which enables us to rapidly fund businesses which do not qualify for traditional lending.
Factoring Program Overview
$100,000 to $30 Million
Non-recourse
Flexible Term
Ideal for B2B or B2G
We fund challenging deals:
Start-ups
Losses
Highly Leveraged
Customer Concentrations
Weak Personal Credit
Character Issues
In about a week, we can advance against accounts receivable to qualified businesses which include Distributors as well as Service Providers.
Accounts receivable factoring is a financial strategy that allows businesses to convert their outstanding invoices into immediate cash. This comprehensive summary explores the significant benefits that accounts receivable factoring offers, particularly for small and medium-sized enterprises (SMEs) and businesses experiencing rapid growth or facing cash flow challenges.
At its core, accounts receivable factoring involves a business (the seller) selling its invoices to a third-party financial institution (the factor) at a discount. In return, the business receives a substantial portion of the invoice value upfront, typically between 70% and 95%. The remaining balance, minus the factor’s fee, is paid to the business once the customer settles the invoice with the factor. This mechanism effectively transforms a future payment into current working capital, bridging the gap between providing goods or services and receiving payment.
One of the most compelling benefits of accounts receivable factoring is its ability to improve cash flow instantly. Many businesses, especially those operating on credit terms (e.g., Net 30, Net 60), often face periods of tight cash flow due to delayed payments from customers. Factoring eliminates this waiting period, providing immediate access to funds that can be used to cover operational expenses, purchase inventory, meet payroll, or seize new opportunities. This rapid liquidity is a game-changer for businesses that cannot afford to wait weeks or months for their invoices to be paid.
Beyond immediate cash, factoring offers enhanced working capital. Unlike traditional loans, factoring is not a debt. It’s the sale of an asset (your invoices). This means it doesn’t add liabilities to your balance sheet, making your financial position appear stronger to potential lenders or investors. The funds obtained through factoring can be continuously reinvested into the business, supporting ongoing growth and stability without incurring new debt.
Another significant advantage is access to funding regardless of credit history. Traditional bank loans often require a strong credit score, substantial collateral, and a lengthy application process. Accounts receivable factoring, however, primarily focuses on the creditworthiness of your customers. If your customers have a good payment history, your business is likely to qualify for factoring, even if your own credit history is less than perfect or if you’re a new business with limited financial history. This makes it an accessible funding option for a wider range of businesses.
Factoring also provides protection against slow-paying customers, particularly with “non-recourse” factoring. In non-recourse factoring, the factor assumes the credit risk associated with the invoice. If the customer fails to pay due to bankruptcy or insolvency, the factor bears the loss, not your business. This offers a valuable layer of financial security, allowing businesses to extend credit terms with greater confidence. While non-recourse factoring typically comes with a slightly higher fee, the peace of mind it offers can be invaluable. Even in “recourse” factoring, where your business remains responsible for unpaid invoices, the immediate cash flow benefit is still substantial.
Furthermore, factoring can reduce administrative burden and collection costs. When you factor your invoices, the factor often takes over the responsibility of credit checking customers and collecting payments. This frees up your internal resources, allowing your team to focus on core business activities like sales, production, and customer service, rather than spending time on collections. For businesses without dedicated collections departments, this can be a significant cost and time saver.
For businesses experiencing rapid growth, accounts receivable factoring provides the necessary capital to scale operations. As sales increase, so does the need for working capital to fund production, acquire raw materials, and manage increased overheads. Factoring ensures that cash flow keeps pace with growth, preventing a cash crunch that could otherwise hinder expansion. It provides a flexible funding solution that grows with your sales volume – the more invoices you generate, the more funding you can access.
Lastly, factoring can offer improved financial predictability. By converting fluctuating customer payment cycles into a consistent influx of cash, businesses can better forecast their finances and plan for future expenditures. This stability allows for more strategic decision-making and reduces the stress associated with unpredictable cash flow.
While accounts receivable factoring offers numerous benefits, businesses should also consider the costs (the factoring fee), the relationship with the factor, and how the process might impact customer relations (as customers will be dealing with the factor for payments). However, for many businesses seeking immediate liquidity, flexible funding, and reduced financial risk, accounts receivable factoring stands out as a powerful and effective financial tool. It empowers businesses to unlock the value of their outstanding invoices, turning potential cash flow challenges into opportunities for growth and stability.
Accounts Receivable Factoring $100,000 to $30 Million Quick AR Advances No Long-Term Commitment Non-recourse Funding in about a week
We are a great match for businesses with traits such as: Less than 2 years old Negative Net Worth Losses Customer Concentrations Weak Credit Character Issues
Chris Lehnes | Factoring Specialist | 203-664-1535 | chris@chrislehnes.com
SaaS companies are often challenged to obtain the working capital needed to continue to innovate, increase revenue and expand their customer base, but raising equity prematurely can unnecessarily dilute founder’s equity.
By factoring, SaaS companies get quick access to the funds needed to leverage their technology for success without giving up equity.
Accounts Receivable Factoring
$100,000 to $30 Million
Quick AR Advances
No Long-Term Commitment
Non-recourse
Funding in about a week
We are a great match for businesses with traits such as:
Discover how accounts receivable factoring can transform your small business by providing the essential working capital you need to grow and thrive. In under 60 seconds, learn how selling your unpaid invoices to a factoring company can improve cash flow, reduce financial stress, and empower you to seize new opportunities. Featuring inspiring visuals of successful retail owners, this quick guide highlights why factoring is a smart solution for managing finances without taking on debt. Whether you’re looking to expand inventory, cover payroll, or invest in marketing, factoring offers a flexible and reliable cash flow boost. Don’t miss out on unlocking your business’s full potential today!
Accounts Receivable Factoring $100,000 to $30 Million Quick AR Advances No Long-Term Commitment Non-recourse Funding in about a week
We are a great match for businesses with traits such as: Less than 2 years old Negative Net Worth Losses Customer Concentrations Weak Credit Character Issues
Chris Lehnes | Factoring Specialist | 203-664-1535 | chris@chrislehnes.com
