Michael Port (00:05):
Hello and welcome to Steal the Show with Michael Port, a podcast from Heroic Public Speaking. I’m your host, Michael Port. This season’s theme is Speakers with Money. I’m joined by my very good friend, Matt Rzepka the Owner and Chief Wealth Strategist at Valley Oak, a specialized financial services firm. Together we’re exploring some of the most common and daunting challenges facing speakers, entrepreneurs, and small business owners. when it comes to finance. Now to be crystal clear, I have no conflicts of interest here. I don’t stand to make any money at all from you following any of the advice you hear on this podcast. My company is Heroic Public Speaking, which I co-founded with my much better half Amy Port. We’re a public speaking institution based in Lambertville, New Jersey and we provide world class training to aspiring and working professional speakers around the world. I don’t sell anything related financial services. Matt, however does, and you are welcome to hire him. I however, will not be compensated in any way at all if you do. I’m doing this purely because I love this topic and I think everyone in our industry can benefit from learning more about business and personal finance. That’s it. And today we’re discussing how you can set up your business operations, personal operations and bookkeeping for financial success, AKA budgeting. So let’s get right to it.
[CASH REGISTER SOUND]
Michael Port (01:35):
I know that you might be feeling a little freaked out right now ’cause I just used the word budgeting. Budget. Budgeting. Ah, that word! It sends shivers down some people’s spines. People fear budgeting because they think it means restriction that if you have a budget, you’re saying no to the things you want. And while that might be true in the very, very short term, in reality, budgeting is actually the way you obtain the things you want. And to obtain them in a way that’s healthy and sustainable for you and your business. Budgeting does not restrict us, it frees us. And if that sounds a little over the top, I have to tell you, I am extremely, extremely passionate about this topic. In your personal life and for your business budget is one of the single most important things you can do. In fact, I’d even go so far as to say that you need a budget, which coincidentally is the name of a really great software program we’ll be talking about in a minute, but first Matt, help us understand why do we need a budget?
Matt Rzekpa (02:43):
Yes. A budget. It’s such an important tool, both for your business and personal finances, because without a budget, you don’t really have a roadmap and things can happen to you instead of having things happen the way that you want. And that budget again is meant to be a guide it’s meant to get you where you want to go and be able to make good decisions around money when you’re trying to figure out how to get from point A to point B.
Michael Port (03:08):
I feel like sometimes when people think about budgeting, they often do it after the fact meaning, you know, they’ll spend all their money throughout the month and then they’ll go back and budget. What did I spend? So it’s kind of in the reverse order rather than budgeting and then spending according to what you’ve budgeted. Do you see the same thing?
Matt Rzekpa (03:27):
Yeah. I see that a lot. You’re always looking in the rear view mirror and unfortunately it just really makes you feel bad when you look back and “oh, I didn’t realize I spent that there. Wow, we should really make a change.” And, and then you’ve already lost that money and not had a plan. Where if you have a way to manage that fluently, as things are happening, at least it gives you some better clarity to make a decision or a change and improve something before it just happens to you.
Michael Port (03:53):
Now, before we go any further, let me ask, should business budgeting and personal budgeting be handled in the same way?
Matt Rzekpa (04:00):
You can do personal budgeting and business budgeting together. You can do it separate. Some of it depends on your organization type, how big you are, how many members are on your team. If you’re a smaller organization from a speaker perspective, you can integrate it into one because it might have a huge impact on your personal finances, what business decisions you’re making. Or if you’ve got a bigger team, you probably wanna separate the two to say, “alright, let’s focus on the business items and business decisions.” And then personally, you can sit with your family or whomever you’re budgeting with personally to figure out how that works for you.
Michael Port (04:33):
Now, hold up a second. If you do your business and personal budgeting together, like in one budget, don’t you run the risk of potentially commingling funds in a way that isn’t appropriate from a tax perspective or compliance perspective, or does it get messy in some way?
Matt Rzekpa (04:50):
It can get a little messy. If you’re not clear on how you’re tracking or accomplishing things or what tools you’re using, but a budget is again, it’s an overlay guide. So what actually happens if you have separate entities from your personal business, you’re still gonna track those things. And we’re gonna talk about accounting of those things later to help bring some clarity. But your budget, the point I would drive home, there is if your business is budgeting a certain profit and that profit isn’t covering your personal income needs, then you’ve got a problem. And if you don’t identify that early on to say, “okay, well, what do we have to change? So that the business is fluently providing enough for my personal financial budget.” You’re gonna end up in credit card debt or some other bad situation in a short amount of time.
Michael Port (05:36):
Okay. So we’re gonna get deeper into that as we progress into the episode, but I just wanna share a personal anecdote about how Amy and I approach our budgeting in our household and in our business. You know, I’ve been in business for 20 years. And when I started, I knew less than nothing about nothing. I mean, I really had no idea how a small business or an individual business owner handled any kind of budgeting or accounting or any of that stuff. I didn’t even really understand what quarterly taxes were. Like my first year in business, I didn’t pay any quarterly taxes. I just got to the end of the year. And I thought I was supposed to do taxes the way you do taxes when you’re a W2 employee. And I was in for rude awakening at the end of that year. Now you were not my accountant at that time clearly, cuz I would’ve done it properly if you were, but we separate out our personal and business budgeting and accounting really almost as if there’s big wall between the two.
Michael Port (06:34):
We have a larger business now and so our accounting is a little bit more complex. It’s not a Google-size complex, but you know, for us it’s more complex than it was even, you know, 10 years ago. But Amy and I also take this budgeting process very seriously. You know how a lot of couples have date night? So like every Wednesday night they’ll go out on a date? We have budgeting mornings. So every weekend morning, sometimes it’s a Saturday. Sometimes it’s a Sunday, but we rarely miss them, we wake up, we have a cup of tea, stretch our legs a bit. And then we sit down and we reconcile our budget for that week. We set the budget at the beginning of the month, but then every week we reconcile and we make adjustments to make sure that going forward, we know exactly how we’re spending our money.
Michael Port (07:23):
And I really did think years ago that if you had a budget, it meant that you were poor. This is how screwed up my mind was. This is how little I knew. I thought that, “oh, if you’re wealthy, then you don’t have to have a budget because you’ve got tons of money.” I always thought the budget meant that you didn’t have a lot of money so that’s why you needed the budget to constrain yourself from spending. But what I discovered is that having a budget allows you to make such better choices with your money, to align your spending with what you value and where you want to go. Because I do think that the way that we express our values in our modern capitalist society is in large part based on what we buy. If you look at somebody’s credit card statements or bank statements, you can get a pretty good sense of what that person values. You don’t know everything about them, of course, but for us, for me, that was a huge mind shift. And now I feel like, “oh, I see I’m gonna be able to get wealthier and wealthier because I do this kind of budgeting.” And it’s really just changed our life and we don’t need date nights because we’ve got budgeting mornings.
Matt Rzekpa (08:34):
That’s so awesome. Most people will be scared of that outta their mind, like “budget mornings, what?” And that’s the other thing with a budget, the fear that you even mentioned, a lot of times people are afraid to lift up the hood and look at the finances because they don’t know what they’re gonna find.
Michael Port (08:48):
Yeah.
Matt Rzekpa (08:48):
And once you get some clarity around that, it just helps you be in more control. You know, the other thing a budget can do from that perspective is help avoid lifestyle creep because you know the wealthy comment, if, well, if I’m wealthy, I don’t need a budget. Well, if you’re wealthy, you can get UNwealthy pretty quickly if all of a sudden you’re just spending, spending, spending, and you wake up with this new lifestyle that now you can’t sustain.
Michael Port (09:09):
Yeah.
Matt Rzekpa (09:09):
And that’s the last thing you want to do.
Michael Port (09:11):
And you know, I think I gotta address the shame associated with money. One of the reasons we often don’t pay attention to it is because we feel shame around the choices that we’ve made in the past. And I think a lot of people experience that. I’ve experienced that, certainly, you know, either bad choices or just selfish choices. I would develop some shame around it. And so Amy and I have this expression that when we’re working on anything related to money, we always say, “no shame, no blame.”
Matt Rzekpa (09:44):
Ah, I love that.
Michael Port (09:45):
So for example, let’s say I went a little over in one of my categories. Amy could see I’m starting to, “well, I really, you know,” I start to sort of babble about it or she goes, “no shame, no blame.” And I go, “right. Okay, good. So here’s what I did. Let’s address it and you know, let’s fix it and just try to keep getting better at it.” And once you get over that feeling of shame and you don’t blame yourself for any mistakes that you may have made and you realize that A it’s a very complicated finance. It’s not a simple thing. Most people are not taught anything about personal finance, certainly not business finance, unless you went to business school, maybe even in business school, I’m not sure they always do a great job of teaching business finance. But you may not have grown up in a household that was focused on this. And so if you never learned it, you can’t blame yourself for not knowing it. If you know, you need to learn it, but aren’t well it may be time to start learning. And that’s really what I did is I said, it’s time to start learning. And you were a big part of that learning. So let’s talk about zero based budgeting Matt, because that’s the philosophy that we ascribe to. So what’s zero based budgeting?
Matt Rzekpa (10:51):
Zero based budgeting is making sure every dollar of income or cash flow that’s running into our business or our personal household has a home- is going somewhere. So it has a job to say. And that way you don’t have any unaccounted for dollars. And this often again happens in the lifestyle creep scenario or like the bank account. If your bank account has extra money in it and the, in that bank account don’t have a home, they often find a way to disappear. So we wanna make sure that we have money going a hundred percent somewhere when we’re done thinking about how to set up our budget.
Michael Port (11:29):
Yeah. And sometimes if you’re not budgeting and you’re not doing zero based budgeting, you may just look at your bank account to evaluate whether or not you can afford something. So you may look at your account and go, “oh, okay. I have X number of dollars in my account. Oh, it’s pretty flush.” However much of that money may already be accounted for. Somebody may be waiting for that. It may be your mortgage. It may be utility bills. It may be, you know, something else that you’ve gotta pay for. But if you just look at a lump sum, you really have no idea how much is available to you. And so that’s usually when people get in trouble because they think they have more available to them than they do because they’re looking at that big number. So when you do zero based budgeting, you actually rarely look at the total amount of money in the account, except to make sure that it’s reconciled with the budgeting tool that you’re using. But you are instead looking at your budget and where you have put that money and what job you’ve given that money. So let’s talk a little bit about budgeting software because I think that it’s very, very difficult to do budgeting without a tool. Now you can just use an Excel spreadsheet, right?
Matt Rzekpa (12:40):
Yeah.
Michael Port (12:41):
You don’t have to use some kind of fancy software.
Matt Rzekpa (12:44):
Excel’s a good start. It’s something. So again, if you’re not doing anything around budgeting right now, I would encourage you to at least jump into Excel and start tracking.
Michael Port (12:53):
And I bet people could probably find budgeting templates that they could get in Excel that are probably free online.
Matt Rzekpa (13:00):
A lot of resources out there.
Michael Port (13:02):
Yeah. There’s a lot of resources out there. So before we get into the more common pieces of software that are used, what do you think people should look for in a budgeting software?
Matt Rzekpa (13:12):
Yeah, I would look for things that maybe are already complementary to other things you’re doing around your finances. Maybe your bank might offer some sort of budgeting tool that would link up with your existing bank accounts? The number one reason I see why people don’t engage the budgeting process is it’s too much work and people already are lacking time. The no shame, no blame is just fantastic. The shame of what am I gonna discover if I go through this budgeting process. So there’s all these things that get them frozen from taking action. So if you’re not taking action yet, try to find a software tool, a free resource or something that’s gonna be complimentary to how you’re already set up. And then if you need to make a major change, you can figure that out once you dig a little bit into the weeds.
Michael Port (14:00):
If you haven’t done this process, you will find things that you didn’t know were there. You know, you may find a recurring subscription of some kind that you’ve been paying for for seven years, but don’t use and don’t even remember signing up for it. But once you do zero based budgeting, that will never happen again.
Matt Rzekpa (14:17):
That’s probably the number one thing that you’re gonna uncover. It’s just free money that you can put back in your bank account so quickly.
Michael Port (14:23):
Yeah. Uh, what are some of the programs that you recommend people use? Which ones are good for business budgeting and which ones are better for personal budgeting?
Matt Rzekpa (14:34):
Yeah, our go-to program for both business and personal now is QuickBooks Online. A lot of our clients are business owners, entrepreneurs so they’re familiar with QuickBooks itself for their businesses. And then the number one thing we run into headway on is, you know, for long range planning, we have to make sure the personal budget, how much money you’re spending to live each month, is accurate. And so we can easily tie in the template of what we’ve done at the business level, with something like QuickBooks and create a personal QuickBooks, that again is more for tracking and budgeting, not necessarily to create P&Ls, other standard accounting type reports. But QuickBooks as our go-to. There are some other great tools out there. A lot of people also just do Excel or a Google Sheet. And so it lives in the cloud and it can be shared cuz again, a lot of times that budget, if you’re not sharing it with either other members of your household or other people on your team, it might not be providing the value that it really could be once you get more input and eyes on the scenario.
Michael Port (15:35):
Earlier in the introduction, I said, “you need a budget,” which is also the name of a software that we’re gonna talk about. And this is a program that Amy and I use for our personal budgeting. We also use it in the business for some of our cash based budgeting. And it’s called YNAB. You need a budget. So YNAB.com. It’s cute. Now here’s the thing. This is a program that was really initially created for personal use because it is only a cash based budgeting system. It doesn’t do any accrual based budgeting. So it’s perfect for personal budgeting. But in our business, we use QuickBooks for our budgeting, our accrual budgeting and our cash based budgeting. But we also use YNAB as a secondary tool to do our budgeting because we find that we are able to look farther out into the future with a clearer picture through YNAB than we do through QuickBooks.
Michael Port (16:32):
It’s not that QuickBooks doesn’t do it, but we just feel more comfortable with the YNAB software,. Julianne, who does all of our business accounting and business finance management, she uses QuickBooks, everything lives in there, but then she’ll also give all of our dollars a job through YNAB and we really love this. It’s been transformational for us. It does take a little while to get up to speed on, I think like many of these programs. It took us I’d say maybe three months or so to feel like we had a good handle on it. And then six months to feel like we were completely proficient. And you might think that’s a long time, and that’s to no fault of YNAB, I think it’s just that we have a lot of moving pieces in our personal lives. And so there’s a lot to do in the program.
Michael Port (17:19):
And I think that if it’s gonna be a tool you might use for 10, 20, 30, 40, 50 years, if it takes you six months to become proficient, that’s actually a drop in the bucket- just a little bit of time. You just need to make the commitment to it. In fact, our budgeting, I think, was the reason that we were able to move through the pandemic so well, because we knew exactly how many months we were set for. We knew exactly “we can go out ’til this day, at this month, if we sold nothing else from here to then.” And if we weren’t as focused on our budgeting, we wouldn’t have been able to do that. And it would’ve caused so much stress. We would’ve run around just trying to sell anything we could possibly, you know, think of, which would take us potentially off of our mission and our focus and I think would ultimately hurt the brand.
Michael Port (18:07):
So we were able to stay true to our brand and what we believe because of the work we’ve done around the personal financing. So you tend to use QuickBooks more because obviously you’re an accounting firm. So most of your clients are gonna be working in there. Do you have any other preferences around these platforms? I mean, there’s also Mint. I can’t stand Mint personally. I’ve tried it many times in the past, but when I go into Mint I realize, oh, I’m not the customer on the product. They just feed you ads throughout.
Matt Rzekpa (18:37):
Yeah.
Michael Port (18:38):
And anytime a platform is filled with ads, you’re the product, not the customer. So I wanna be the customer if I’m gonna be using a platform like that. You have any other preferences?
Matt Rzekpa (18:48):
I do, you know, data is power in this world and that’s what a lot of these companies, they’re just trying to get your data to do that. Just sell you ads. There’s a lot of great budget platforms out there. And again, if you’re not budgeting, now, one of the great places to start was your own software. So, or your own tools that maybe you’re using for your business accounting, they may have some budgeting tools in there that you can use for both your business or your personal. YNAB is a great program. YNAB is a little bit more, if you get excited about budgeting like Michael and Amy had, YNAB is a great program. You wanna learn how to use the tool. And then I think it’ll really be up and running and off to the races after that. Your timeline on how quickly you got that up and running is probably pretty average.
Matt Rzekpa (19:30):
You know, most people who aren’t accountants or aren’t deep in the weeds on numbers are gonna take some time to learn how to do this stuff. But it’s super powerful. If you’re willing to commit to getting it done and getting it in place, it can teach you so much. That pandemic comment, whenever you run into trouble in the world of business or finance, you need information to figure out how to solve the problem. And that budget data is just so critical and can save you so much stress from figuring out, okay, what do we do next? Where do we go? And how do we get back on the right path? Because we know our numbers.
Michael Port (20:03):
Yeah. You mean like when a hurricane puts five feet of water into your headquarters totally destroys it.
Matt Rzekpa (20:10):
Ugh.
Michael Port (20:11):
It knocks down the walls, rips up the floors and worse. Yeah. Yes. That is when you are really happy that you are on top of your books. Now there’s two other things I wanna mention. First of all, you gave that a great new name, the budgeting breakfast. I don’t know if other people use that too, but the budgeting breakfast is great. And what’s really meaningful about it is that we do it together as a couple.
Matt Rzekpa (20:32):
Yes.
Michael Port (20:33):
I can’t speak to anyone else’s relationships or have no expertise in what makes somebody else’s relationship work. But I know for us, what really makes our relationship work is that we are partners in every sense of the word. Now I may handle the investment accounts, but Amy knows everything that I’m doing every step along the way. And when we’re doing the budgeting, there’s nothing that we are uncomfortable about because if something comes up, we get to talk through it. It just makes for a deeper relationship. And so I’m just gonna recommend and encourage people. They may be the one who’s more inclined to do this and like got my partner doesn’t like, it won’t do it. I just think that if they would come on board, they may find that it makes the relationship even deeper and more meaningful. How do you handle that with your clients?
Matt Rzekpa (21:24):
I strongly recommend that open level of communication. You know, I’m not a licensed therapist in any way. I have no degrees around emotional or human connection, but I can tell you the amount of stress and anxiety I can see often between couples because they’re not talking about money and they’re not communicating and they’re not clear on what’s happening and who’s doing what. When can get that on par and on the same page, moving forward, who knows where you could take your relationship from there because that communication channel is open and flowing. So I highly recommend ,again, no shame, no blame. I’m gonna definitely take that. I love that. It’s how do we start somewhere clean? How do we make sure we’re making good decisions moving forward and that we’re sharing what’s going on so that we continue to learn as we unpack some of these directions.
Michael Port (22:15):
Yeah. And when, you know, when you get pushback from your partner, just love them more.
Matt Rzekpa (22:18):
Yes.
Michael Port (22:19):
Right? Just love them more. Every time you get pushback and eventually, hopefully that love will soften their resistance and you can find connection and common ground to work on these things. Now there’s something else that we do with budgeting. We have our kids use YNAB as well. If they want allowance, if they want any money from us, they need to do YNAB with us. So each one of them has a budget in YNAB and we don’t do every week with them because that would kill them. They would hate us if we did that. So we do it once a month with them. And not only do they get their allowance, their allowance weekly is a dollar per year of life. So, you know, if they’re 13, they get $13 a week.
Michael Port (23:05):
That’s how we do their allowance. But we also budget monthly for them in their YNAB for their clothing, for their activities, for their camp. So we’re actually putting a fair amount of money into their budgets each month that they are responsible for managing. And we’ve been doing this for a number of years now. And it really, really makes a difference because they’ve gotta make decisions about what clothes they buy or what activities they do, because you know, if they spend all their clothing money and it comes to the winter and they don’t have a winter jacket, they’re gonna go cold. We’re not gonna, yeah, we’re gonna give you more money for the winter jacket. Now there’s a lot of old jackets around the house. They could probably find one and put it on, but you get my point. They don’t just randomly go and buy stuff because they know that they’re working within this budget. They’ve given every dollar a job in advance and they’re very conscientious about it. And uh, so far so good, it’s been working pretty well. And I hope it continues for them and that it establishes good financial habits going forward. Do you have a particular perspective on how to bring kids into this process?
Matt Rzekpa (24:12):
I love bringing kids into the process. You know, one of the tax planning strategies we talk about with clients is how to hire your kids and how to get them involved at an early age, because you want them to learn a lot of these principles because they’re are not learning it anywhere else, or they might be learning the wrong principles. So the more clarity you can get around that you can help them be more prepared for a lot of the decisions they’re gonna make as to become adults. And even too, your comment about the winter jacket. I have done this with my kids where one kid is a good saver and they don’t overspend. The other one just wants to buy video games at every opportunity. And if you don’t have money for something they need, well, then you gotta talk about how do I get a loan? And it lets you educates them around loans and how loans work and who’s loaning the money. So there’s a really good fun component that can come from getting your kids involved. But also the educational component they gain is gonna put them way head of the pack. For sure.
Michael Port (25:07):
Yeah. Jake was doing some hard money lending to Ruby at one time.
Matt Rzekpa (25:11):
Love it.
Michael Port (25:13):
It was pretty funny. Then Ruby caught on she’s like, this is not a good deal for me. And so she stopped that pretty quickly.
Matt Rzekpa (25:20):
Yeah. When that light bulb goes off, like, wait a second, I gotta rethink what I’m doing here because you start to realize how much pressure that can put on what money you have available.
Michael Port (25:27):
Yeah. This is something that you taught me. So the kids work for the business and they get paid just about a thousand dollars a month. That puts their total income for the year under $12,000, which is the individual exemption. So they don’t have any kind of big tax burden on that. And we have to pay a payroll taxes on it of course- the business does. But then you taught me it allows them to invest in a Roth IRA because they have earned income. Yes. And as a result, they’re able to each year max out that Roth IRA and starting that at a very young age, if that money stay in there until they’re in their sixties, it’s gonna be a substantial amount of money by that time. Additionally, we can choose to use that for college because you can use earnings and principle earnings from a Roth IRA for qualified education. So rather than stocking it all away in a 529, which has some more limitations, we are able to do that as well. So the business is paying them, but they’re not paying income tax on it because it’s below the earned income exemption. Then they’re putting it into a Roth and the gains are not taxed on the Roth because it’s post-tax money that’s going in. So it’s a really extraordinary strategy that we’ve seen yield incredible results in a pretty short period of time.
Matt Rzekpa (26:53):
Yeah. And again, to your comment about allowance versus income and how you’re allocating expenses and why they’re in YNAB, one of the questions we get a lot is well, if I’m paying the child that much money, I don’t want them just spending that money on their own. They’re minors so you still have control over what that money’s going towards. It has to go towards them, but that’s easy to accomplish. And then if you get into the budgeting conversation so they can see, alright, I’m getting paid, but really I’m getting paid for my work, but it’s supporting the household expenses in these ways, they get some real good visibility about how money works and what it costs to live and what it costs to do some of the things they want to do. And that education is just invaluable.
Michael Port (27:33):
Yes. And for example, Ruby went to sleepaway camp last year for the first time she loved it. She wants to go back this year and instead of four weeks, she wants to do six weeks. Well, that’s an additional expense.
Matt Rzekpa (27:43):
Yep.
Michael Port (27:44):
And camp is not cheap. So she then saves in her budget each month for camp. So she’s been saving since camp ended and the money that she earns through the business gets saved and allocated- the zero base budgeting, give every dollar a job. She’s giving a job to those dollars to save for her camp, which you know, will then and be paid for from that money. So it’s a great opportunity for us. It’s a great learning opportunity for the kids. Well, I would not know how to do that if it wasn’t for you. That’s for sure.
Matt Rzekpa (28:14):
Super cool stuff. Love it.
Michael Port (28:15):
Yeah. Alright. So let’s talk about bank account structures because bank account structures influence how you budget. It influences how money flows and it also influences how you save. Most people have a checking account. They might have a savings account. They might have business checking accounts and personal checking accounts. So what are my options when it comes to setting up a bank account for the business and what are my options when it comes to setting up bank accounts for my personal money?
Matt Rzekpa (28:46):
You actually have a lot of different options. Your bank might be the one dictating where you start. So this is the only tricky part when it comes to bank accounts and bank fees and how many different fees a bank may charge based on a number of accounts. I’m a huge, huge fan of multiple bank accounts, both in the business and personal structure. Again, the budgeting concept of giving every dollar a home, again, based on profit first mentality, I want to have bank accounts that have specific jobs and I’m transferring money to those accounts with direct intention of where those monies are gonna go. Because then your money is moving and working for you behind the based on a budget you set up at the beginning of the year. And it’s easy to see if you’re on or off track if you have some of that automation in play. Additionally, the banks often have automatic transfer features for multiple accounts so that you can easily move money to the various accounts that you might need your money to be in. When it comes time to pay, say your taxes.
Michael Port (29:48):
You mentioned Profit First. I just wanna highlight that. So Profit First is a book that’s written by our good friend and great friend of HPS, Mike Michalowicz. He is a dear, dear, dear human. And I think that’s one of the best books I’ve ever seen on accounting. And it’s really quite simple. And his co-author is AJ Harper. Then AJ Harper is our Head Writing Coach. So we’re all very intimately connected here. Tell me a little bit more about the Profit First methodology, as far as you understand it.
Matt Rzekpa (30:20):
Yes. Huge fan. Love what it offers, love, what it teaches. It relates so closely to a lot of business owners who don’t have any background in finance or money and can allow you a system to track things without having to get deep in the weeds as an accountant. And that’s, again, information is power. Whether it’s your information or, or information that others are trying to get from you. If you understand how your flow of funds are working in your business, then you can start to make decisions on how to change something. You know, a common theme for someone who’s starting a business is maybe they’re in a corporate job and they want to go start this company because they don’t want to be in a corporate job anymore. And then they get into this new venture as a small business owner, or sometimes referred to as a self-employed business owner, and it’s not working or functioning how they thought.
Matt Rzekpa (31:10):
And they kind of get lost in where to go next, because business is happening. Duties are there. Responsibilities are there. And the money’s not. And the whole reason for going out on your own and starting a business or taking that leap is to have the extra money and have the freedom. And don’t let that new venture control you. You have to control it. In Profit First, if you’re struggling with any of those things is just such a great roadmap on how to start that process. And then from a budgeting perspective, once you do something like Profit First, you can really put it into overdrive because you’re gonna have visibility on how all of that will work.
Michael Port (31:46):
I’m glad you said that because what it makes me think of is that the Profit First methodology to me is a kind of a macro approach to budgeting for your business. And then when you use a program like QuickBooks or YNAB, then you’re getting into a more micro approach. So for example, in your, your business, you could have one business checking account and then use a program like YNAB to give every dollar a job that’s in that account. But most business owners aren’t doing that kind of micro budgeting. And so what Profit First does is it helps people get really a leg up or a handle on where the money is flowing. So we do both of these things in fact. For example, we have what we call an operating account. That’s where our money flows in. Now you might have a separate account where all the money flows in, then you have money flow into your operating account.
Michael Port (32:36):
That’s not how we do it. Again, there isn’t one way to do it. People can do it different ways, but we call that the operating account. But then immediately money flows out of there into the payroll account because I’ve never missed a payroll in my entire career. I would never make a payroll a day late. There’s one thing you cannot ever do as a business owner is miss payments to the people that are working for you. Full stop. This is just it.
Matt Rzekpa (32:59):
Correct.
Michael Port (32:59):
So we know exactly what our payroll is, each pay period. So that money automatically is siphon out of the operating account, into the payroll account. Then we know how much we’re saving for taxes each month to pay quarterly. So that amount of money is siphon out of the operating account into a tax account. We then also a profit account. So we’re siphon a percentage of money out of that operating account into the profit account. Although profit has been lower since the hurricane took our business and we have to spend so much money to rebuild again. And same thing during COVID. This is why Mike says “profit first.” You gotta make sure that you are first putting money into the profit account, because if you’ve got all this money left over in the operating account, well, you just might use it.
Matt Rzekpa (33:45):
Yeah.
Michael Port (33:45):
But if you take it out, you go, okay, well now this smaller amount is what I have to work with to operate the company. So do I have money to invest in this new initiative or not? And if you don’t know, if you do or not, you might get yourself into trouble. And we have a number of other accounts as well that we use for sort of segregating those funds. I think it’s just a great, simple way to start because you can do it pretty quickly, even before you start setting up any other of these really micro type of budgeting software processes.
Matt Rzekpa (34:14):
Yeah. Taking action is the biggest component of a lot of what we’re talking about here today. Mike does an a amazing job of sharing some of what he has gone through as an entrepreneur and business owner and where he’s been, the highs and lows. And it’s so easy to relate cuz you kind of get stuck in this low and then you don’t take action and Profit First gives you the power and the confidence to do something and do it easily. So it’s not gonna be a long drawn out accounting class and figuring out out how to do this stuff. It’s simple percentages, simple bank accounts. You can pick your structure as to the number of accounts and then some automation starts happening and you have some accountability to see if your profit account actually has profit in it still. And if profit’s the goal, we want money in our profit account.
AD BREAK (34:59):
Fantastic. I think this is a perfect time for a break. This episode of Steal the Show with Michael Port is brought to you by HPS CORE, one of our signature programs at my company, Heroic Public Speaking. My wife, Amy and I have spoken at conferences and events around the world. Even before we started HPS, we’d meet hundreds of speakers and we’d realized that most of them, even the truly great ones, were to a large degree winging it. So we developed HPS CORE to introduce speakers to a dependable, repeatable creative process so that they don’t have to wing it anymore. HPS CORE is a completely free training that we host once a month or so for speakers at our headquarters in Lambertville, New Jersey. We spend two full days with students introducing them to our curriculum and teaching them about performance, stagecraft, storytelling, and content development in a way that they’ve likely never experienced before. Typically HPS CORE is by nomination only, meaning that we only host students who’ve been nominated by HPS Alumni or friends of HPS, but we do allocate 5% of spots in HPS CORE to people who haven’t been nominated, but still deserve to get access to our training for free. Listeners of this podcast can learn more about HPS CORE and apply directly by going to HeroicPublicSpeaking.com/CORE. HeroicPublicSpeaking.com/CORE.
Michael Port (36:33):
Now let’s talk about accounting because accounting and budgeting are not exactly the same things. Are they, Matt?
Matt Rzekpa (36:41):
They are not. The accounting component is then tracking all the stuff that we were hoping was gonna happen. We actually have to see, okay, what actually happened. It used to be a traditional historic look. Okay, it’s now November or October, whatever month it is, we need to look back at the previous month. Accounting is now happening in a more realtime component. And if it’s not, that’s probably the first thing you should look at because data and software and technology today allows accounting to happen realtime. And that’s, what’s gonna help you make better decisions as a business owner if you’ve got relevant data. A lot of the old school of approaches with accounting was alright, well, I just got my financial statements here this month for two months ago. Well, yeah, that’s good information to have, but it’s two months ago and now I’m onto something new. So you wanna get into the more realtime accounting world, if you can, and then your budget is gonna overlay and show you, alright. Our actual performance was X, our budget was Y and how did we do.
Michael Port (37:41):
So do we need to go through accounting software again? I mean, you mentioned QuickBooks earlier as the gold standard for business accounting, at least for small businesses. Is there anything else you wanna add on that before we go into how to do your accounting?
Matt Rzekpa (37:55):
Real quick, add, QuickBooks, isn’t the only option. So again, depending on your size and your budget for accounting software, as we talked about budgeting, you want to know what it’s gonna cost and how much you’re gonna spend. There are other great options out there. My thing would be to focus on something cloud based because that’s where you’re gonna gain efficiencies with the technologies that exist today, for how all the different cloud based companies communicate. That data can be shared and you can gain and save time, which is a big factor of how you keep track of all your accounting.
Michael Port (38:27):
Okay. So let’s talk about cash basis versus accrual basis accounting. There are important differences between the two and I think it’s critical that everybody understands what they are. So can you address both cash basis and accrual basis accounting?
Matt Rzekpa (38:41):
Yes. It is two sets of books. It’s the joke about, oh, I don’t have two sets of books because the government’s gonna come after me. But there are many areas of accounting that you actually track what we call book basis and tax basis. For accrual and cash, it’s really the methodology around what’s happening in your business. Accrual basis is tracking what’s happening month to month based on when something occurred, not when something was paid or received. Accrual basis is very concerned with, alright, I went out and I signed a gig this month for a hundred grand. Well in the accrual basis world that occurred this month, but I haven’t gotten paid yet. I want to track that because that can then go into my budget for all of the gig expenses related to that contract. And that comes into the whole budgeting component and it’s income in the year that I signed the gig or the month that I signed the gig.
Matt Rzekpa (39:36):
On the cash basis though, let’s say I signed that gig in October, but I don’t get paid until February, that’s an extremely important thing to understand and know when working around tax planning because on the cash basis, when I get paid in February, then it is reportable in income. Where when I sign the gig in October, it was reportable on those financial statements then, and there’s a major difference cuz you don’t want to pay taxes on money you haven’t yet received unless you have to. There are a few structures for other outside organizations where accrual basis is required. We won’t get into that here, but do know there’s a lot of complexity between the two. But a basic understanding is accrual is when something occurs, cash is when something is actually paid or actually received.
Michael Port (40:20):
For example, you might have a loss on, say a cash basis, a P&L for a month, but you actually may be in the black on your accrual accounting for that month.
Matt Rzekpa (40:32):
Correct. And that brings up a separate cash flow component to say, okay, we lost money on a cash basis. This is why the budget is so important. You want to know, alright, how much shortfall? Let’s say we had a loss of $20,000. Well, we may have expenses that still need to get paid, but on the accrual basis, we’re waiting on clients to pay us. So we have to figure out, okay, how do we structure and pay our bills? It’s not that we’re not profitable. We’re just waiting for cash to come in the door so we can pay the rest of those bills.
Michael Port (41:03):
So let me see if I can re-articulate what you said. Tell me if this is accurate and if it’s not fix it. So a cash basis, Profit and Loss statement tells me what cash came in and what cash went out. Accurate?
Matt Rzekpa (41:18):
Accurate.
Michael Port (41:19):
Okay. On an accrual basis, Profit and Loss statement, it tells me what revenue I’ve booked and what expenses I have paid that month?
Matt Rzekpa (41:30):
Or what expenses I owe still.
Michael Port (41:33):
Right? Yes.
Matt Rzekpa (41:33):
Could have been paid. So a lot of times the focus is on P&L only, profit loss. Did we make money when you start talking about accrual accounting, it’s irrelevant to look at a P&L without looking at the balance sheet because the balance sheet is gonna tell you a lot of information because you’re reporting it when it’s booked, not necessarily when it’s paid. You may also have booked a bunch of expenses that haven’t been paid, saying, alright, if this gig happens, we know we’re gonna have to have all this money going out the door. And our net profit from that gig is gonna be X. So the P&L and the balance sheet become extremely important tools to each other when we’re talking accrual basis.
Michael Port (42:14):
So for example, one of the things that our students get when they do HPS GRAD with us is a highly produced trailer of their keynote that we shoot with them at the end of their training. And we have to pay our filmmakers for that. But when somebody enrolls in HPS GRAD, it will be about seven or eight months before they actually do those video., You know, before they shoot them.
Matt Rzekpa (42:41):
Yep.
Michael Port (42:42):
So if we are not carving out of each sale, that we’re making a certain amount of money to pay for the making of that video, and saving it, then we’re gonna end up over a rock. When we get there, be like, wait, we need $90,000 right now to pay for this set of Done-for-You videos. But all of those expenses that are to be paid out will get tracked on an accrual basis, correct?
Matt Rzekpa (43:07):
Correct. You’re gonna have an accounts payable listing that shows any bills that aren’t yet paid. And then you’re gonna have an accounts receivable listing that shows any customers who haven’t yet paid. In understanding that relationship for when your customers are gonna pay you and how you turn around and pay those expenses. Hopefully your receivables are always tracking higher than your payables. If they’re not, then there might be a core problem in your pricing for whatever it is that you’re selling or your speaking gigs. So your receivables and payables are gonna give you a lot of information on the accrual basis.
Michael Port (43:39):
Okay. So we mentioned P&L we mentioned balance sheet and we even mentioned cash flow. So I think we should probably dive into those just a little bit more just to make sure that everybody’s clear on what a P&L is, a profit and loss statement, what a balance sheet is and what it’s for, and then of course, what cashflow actually means. So could you go through those three for us?
Matt Rzekpa (43:59):
Absolutely. P&L also referred to as income statement, P&L stands for profit and loss. The main thing to remember for a P&L is it’s for a specific period of time. It can be for a week. It can be for a month. It can be for a quarter. It’s typically not longer than a calendar year or 12 month period. So you’re gonna track what income came in for that period of time. What expenses went out for that period of time and whether or not you had income or loss after those revenues and expenses. That is significantly different than the balance sheet. The balance sheet and P&L interact, however, the balance sheet is only as of a specific date in time. So if you ran a balance sheet as of December 31st, what it’s gonna do is it’s gonna tell you the values in the relative balance sheet accounts, as of that date. Then you could also run a balance sheet for September 30th or June 30th, but you’re never gonna run a balance sheet from June 30th to December 31st, because it’s only a snapshot in time.
Matt Rzekpa (45:03):
And if you think about that from a checking account perspective, if you ran the balance sheet today and your checking account had $10,000 in it, and then you ran a balance sheet three months ago, and your checking account had a hundred thousand dollars in it, the only thing it’s gonna tell you is you have $90,000 less. If you want to track what happened, you’ve gotta look over to the P&L and get into a little bit of the cash flow of what’s going on in the company. But a balance sheet is a snapshot in time. P&L is for a period of time that you select usually not longer in 12 months at a time. And then cash flow is really the secret sauce, so to speak, for where all your cash went. It can get really complicated in the accounting world for a true traditional financial statement.
Matt Rzekpa (45:45):
You’re typically gonna start with your income and then there’s gonna be all of these adjustments that get you down to your net cash that’s left over. In an accrual basis world it’s very possible to have a high amount of profit and not a lot of cash. That’s something business owners that are accrual basis deal with on a regular basis because of timing and how everything gets paid. You just don’t always know where your cash is. So having good accrual procedures is critical, because you need to make sure you’re still profitable. And then cash flow also gets thrown around a lot in terms of the industry. Cash flow from a general perspective is how much actual cash do I have flowing into my accounts. The cash flow statement is a formal report that breaks down all the details and differences between your net profit and your actual cash produced by that profit.
Michael Port (46:34):
I mentioned earlier that Amy and I do our budget breakfasts weekly, which is not necessary. We could do them monthly. We just like doing it weekly for a variety of reasons. And then in the business, our Director of Finance presents me with profit and loss statements, balance sheets, etc, monthly. So what frequency do you generally recommend people report on P&L, review them, report on the balance sheet, review them? What do you think works best?
Matt Rzekpa (47:05):
I’m a fan of monthly. Again, everything will always depend on size and complexity of the organization and consistency for that matter. The more consistent your organization is from its results- how much revenue is coming in each month and what we have in related expenses. If those all stay pretty consistent, you might be able to do a quarterly review because you just wanna make sure nothing has changed substantially. If you have a lot of variability going on in your business, I think the more frequent you can meet to review those reports and your cash and your cash flow, it helps you stay on top of managing that variability successfully.
Michael Port (47:42):
We’re gonna wrap up shortly, but I just wanna get off at the rest stop and try something a little different before we do. I remember at one point you told me that I needed to keep receipts under a certain amount of money. So if we went out to a meal to meet and to write on it, what it was for who was there, etc. And I remember saying, well, yeah, but I got credit card statements. Why do I need to keep this silly piece of paper? Can’t I just use my credit card if I ever get audited? And you said, no!
Matt Rzekpa (48:12):
No.
Michael Port (48:12):
So let’s just take a quick tour down, like, what documents do you need to keep and then how to keep them.
Matt Rzekpa (48:19):
Yes.
Michael Port (48:19):
What receipts do business owners actually need to save? And for how long, etc.
Matt Rzekpa (48:24):
In the world of meals and entertainment, it is extremely critical that you have a receipt that shows what was the activity, what were the details of the activity. So the credit card statement only shows the amount and the vendor name. And some of this has changed. So entertainment a couple years ago, got disallowed for deduction. Meals are still deductible and then meals now because of the pandemic, there’s some special rules where you can get a hundred percent of meals as a deduction to help support restaurants opening back up and all that good stuff. But you always have to have a transaction receipt from the original sale that shows what you bought, not just the amount of what you bought. And then you need to keep track of who it was and why it was business. They wanna make sure you’re not just siphoning personal expenses or personal preferences through a business.
Matt Rzekpa (49:11):
You want to make sure you say, okay, well, this person’s important to me for this reason. And how could it impact my business by buying them dinner or whatever it was that you were there. In general documentation you always want to have a vendor receipt from paying a business expense because there’s a couple auditors out there we’ve encountered their standard rule of operation in an audit, no documentation, no deduction. And it’s that simple for them. They don’t think about anything else. If you don’t have a receipt of what you spent or why you spent it, they’re gonna disallow your deduction. So it’s critical. And digital is okay. So the old shoebox world, I can tell you myself and many other accountants and CPAs I know they don’t like the shoebox.
Michael Port (49:53):
Oh really? I wonder why. Yeah. Right. I love when people gimme a box of a bunch of random pieces of paper and say, you figure it out.
Matt Rzekpa (50:00):
I can count like 10 movies where they make that like the norm. Like, oh, well I have to go see my accountant. So here’s my box of receipts. And like, here, go. It’s not optimal for anybody cuz you’re playing the lottery there. What is result? We don’t even know what our result is there. But yeah, documentation’s extremely important from an auditing perspective. So if you’re in question in today’s world, you can save everything digitally. So just save it. If you determine later, you don’t need it, you can get rid of it.
Michael Port (50:25):
Yeah. It’s great. Are there any apps that you recommend for people to use?
Matt Rzekpa (50:30):
Lots of great apps out there, some that intertwine directly with the financial institutions. American Express is one of those that you can put receipts right in there. We use a great software package called DEXT now. D-E-X-T. It used to be called Receipt Bank. I like that name a lot better, but of course they got bought out. So then they change names. But it interacts directly with QuickBooks. So we can do some cool things to save some time on how to keep track of all the accounting. Again, lots of different apps out there. If you have an online based software, go to their app store and you’ll probably find some great options.
Michael Port (51:02):
Okay. So here’s what I want listeners to do in the review section of the podcast, wherever you’re listening to the podcast. Just go ahead and put, what are your key takeaways from this episode? Like what was helpful for you? What did you like? What did you learn? What did you discover? What was revealed? What do you find valuable? Just go ahead and put it into the review section. Then it helps build some reviews and it enables people to see the value that you’ve been getting from the episodes.
Michael Port (51:27):
So Matt, what are we covering next week?
Matt Rzekpa (51:30):
Next week, we’re gonna be talking about increasing your cash flow through savings and efficiency, also known as keeping more of your money.
Michael Port (51:40):
And that sounds very good to me. Let’s see, we gotta give everybody one thing to do going outta this episode, you know, everybody’s in a different place. Not everybody’s in the exact same place, but what I would recommend is just think about what is the right next step for you? Is it reorganizing your bank accounts? Is it setting up one of these budgeting softwares? Is it learning a little bit more about how to read a P&L? Is it hiring a bookkeeper to help you with these business functions that you’ve been doing, but not doing well? What is the right next step for you? Because if you leave each one of these episodes with the right next step, it’s gonna keep moving you forward on your journey. So thanks for listening and we’ll see you next week.
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