The mechanic walked around my red 1995 Toyota Corolla, tapping on each one of my tires.
“Did you ever think of selling it?” He stood up and rubbed his greasy hand together.
“I can’t afford to buy a new car right now,” I said. “Can you fix it up so I can drive to work?”
“Oh, this car will run forever,” he said. “The old Corolla’s are built to last.”
“That’s good news.”
“It needs four new tires. They’re completely bald.”
“How much will that cost?”
He wrote down a figure of a piece of greasy paper and handed it to me.
Usually, this unexpected bill would have meant dipping into my dwindling savings.
But not this time!
I’d started earning a nice side-income from affiliate marketing. This extra money was like unexpected manna from heaven (around tax return time, my accountant thought otherwise).
I used it to fix up my old car and keep it on the road for a few more months.
Too many content creators work for the word’s most stingy boss and plough all their profits back into their business before paying themselves.
If you’re earning money from creating content, pay yourself first.
Then, invest what’s left back into your content business.
Over the years, I used affiliate income to improve the quality of content on a site I run. I also paid for faster web hosting, hired a designer and an editor.
I also commissioned other freelance writers to create content about topics I know little about. And I invested in self-publishing books.
Along the way, my monthly outgoings exceeded my affiliate earnings. These days some of my monthly bills include: web hosting, an email marketing service subscription, stock images, a budget for taking online courses, outsourcing to a virtual assistant, a bookkeeper, various WordPress plug-ins, a proofreader and editor.
None of these expenses are substantial, but together they add to a tidy sum.
Running a content business is a little like keeping tabs on a cash eating monster. It will gobble up all of your financial resources unless you impose limits.
My tire story aside, for years I struggled to get the balance right between figuring out how to pay myself versus what to invest back into the business. And all that was before investing in new expensive content projects like starting a content website in a different niche.
Enter The Profit First Model
Mike Michalowicz told me over Skype that he’s an advocate of Parkinson’s Law. This 1955 economic adage states:
Work expands to fill all the hours available to it.
Give a new content creator a day, a week or a month to create a course, and they’ll need all of that time.
The same principle applies to your business’s income.
Just as work expands to fill the day, your business’s expenses expand to consume everything in your bank account.
A content creator who puts paying themselves last spends almost all of their revenue on marketing, advertising, working with freelancers. When payday comes, they end up taking a reduced drawing from their business, even though they worked extra hard.
So their content business turns into a cash-eating monster, consuming everything in sight, and that’s an unhealthy way of operating.
When I interviewed Michalowicz, he explained what’s wrong with this approach:
“I would never say, ‘Oh, I’m going to start putting my health last.’ That means it’s insignificant. If we really care about our health, we’ll say we put our health first.”
The same mindset applies to business, he continued. “[For] every transaction we have in our business, we immediately take a predetermined percentage of money — profit — allocated and hide it away.”
A Financial Formula for Content Creators
An accountant or bookkeeper says: Sales minus equals Profits.
But Michalowicz proposes an alternative formula: Sales minus profit equals expenses.
Putting expenses instead of profits last forces you to exercise discipline about what you’re spending money on each month.
According to Michalowicz, more than 100,000 businesses have applied this formula. He started by explaining how he uses this formula as an author,
In the past, that royalty check would come in, and I’d say, ‘Okay, I have X number of dollars to support my business.’ And I would spend it all away in marketing, in hiring a support team to help me writing my book.
Now…I take my compensation first. I made sure my taxes are reserved. I do those elements first. Then I see what’s truly left to run my business.”
How to Put Profit First
Start by setting up a bank account for your business income.
Next, set up a separate bank account for your business profits, compensation, tax, and operating expenses.
Ideally, set up the profits and tax accounts with a different bank, so you can’t immediately access them.
Twice a month, review how much cash is coming in and going out. Then, pay yourself. Allocate a percentage of what’s in the income account toward the other accounts. Finally, allocate what’s left towards expenses.
If the expenses account lacks enough money, this is a red flag that you need to cut costs, increase sales or roll up your sleeves and get to work.
Michalowicz told me, “With less money, I say, ‘How do I get the same results I’ve always had, if not better, with less money?’ And I start thinking outside the box.”
The twice a month Cadence works because it forces you to keep the temperature check on your business and cultivates a habit of financial discipline.
When I first applied the profit first formula, it took time to master using so many bank accounts and to determine my ideal allocation for each account. I also had to adjust this set-up to comply with some tax laws in Ireland.
According to Michalowicz, content creators need to tweak their allocations for each category for several months until they find out what they and their business need to survive. (He provides guidelines in his book Profit First.)
After a few months of applying this formula, I found I didn’t miss the extra money for expenses. Much like with creative work, this constraint forced me to explore new ideas for generating additional income.
I’m not alone.
“Consistently, businesses that take their profit first find ways to run more efficiently, more effectively … and grow profits like never before.”
This model works because it forces content creators to take money off the table and then get the best use of the remaining limited resources. Remember: creativity thrives under constraints.
“I take profit, and I take my compensation first. I made sure my taxes are reserved. I do those elements first. Then I see what’s truly left to run my business,” says Michalowicz
“I operate within the confines of what’s there. It’s forced frugality. More importantly, it’s also innovative thinking because with less money I say, “How do I get the same results I’ve always had, if not better, with less money?” And I start thinking outside the box.
Later on, if you’ve money left after paying yourself and covering expenses, that’s a sign you can afford to expand your business or invest in building out a platform.
You could, for example, set up a second content website, hire a video or podcast editor or double down on outsourcing.
When you start earning money from content, pay yourself first and then invest what’s left back into the business. If you run out of cash, that’s a sign of costs running too high, or you need to roll up your entrepreneurial sleeves and get to work.