Entrepreneurship has a super high failure rate. Even if entrepreneurs and business owners are doing what they love, very few of them make it. The problem lies in their lack of focus on the end game or how they’re going to retire. In short, they’re not running profitable businesses. On today’s podcast, Rondi Lambeth brings on Susanne Mariga, a CPA and certified Profit First professional, to dissect the principles from the book Profit First by Mike Michalowicz. Susanne also talks about how you can utilize your credit right and use it to expand your personal life. At the end of the day, as entrepreneurs, you should take your profit first and remember your why.
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Running Profitable Businesses With Susanne Mariga
I have a special guest for you, someone that I’ve been wanting on the show for quite a while and she’s going to talk about something that I talk about a lot. It is on my list of recommended books. I think personally, it’s the number one business book ever written. It’s my honor. I’m super excited for this interview with Susanne Mariga. Susanne, thanks for being on the show.
Rondi, thanks for having me. I’m excited to be here.
It’s good to have you. Susanne, you are in Houston, Texas. What do you think’s going to happen with Texas with threatening to leave the United States? We’ll start that out with that controversial subject.
I think it’s just talk. I don’t think we can survive on our own without you guys. I don’t think we’re going anywhere.
What’s interesting about that is Texas is the only state in the union that has in their Constitution that they can vote out. They don’t have to get permission from Congress. It’s also the only state that is 100% self-sufficient and the only state in the United States that does not sync and link their energy system with the rest of the United States. They are 100% self-sufficient. My girlfriend is in the energy business and she told me that. She’s like, “None of their power comes from other states. They don’t rely on anything from any other states.” Let’s leave that alone. Susanne, you are a CPA with decades of experience with this and you even worked for Arthur Andersen at some point.
I did. I was there until the end. I always tell people I wasn’t not involved with what happened in Houston. I was at the Chicago office with Andersen at a time. It was an interesting point because it’s what happens when we have a few people that make decisions that are not in line with the values of the company. Unfortunately, as entrepreneurs, it can cost you everything. That’s exactly the example that happened with Andersen. It was a great company and great values, ahead of many of the accounting firms. When I went to join them, it was the number one accounting firm in the world. It’s because of a few bad apples and a few bad decisions that were made, unfortunately I remembered it was 2,000 accountants in Chicago looking for a job.
I want to bring this up. You are a CPA, but you’re also a business owner. It’s your firm. What’s your firm’s name?
Our firm’s name is Mariga CPA. My firm is the same age as my daughter. I always tell everybody that I remember being on the airplane in my last corporate job was an audit manager. There are people that had their bellies that are straight out like a watermelon. I was wide pregnant. I remember being on an airplane. I was responsible for our Canadian operations for the company I was with. I remember having to fly there every other week. I remember one day I was in 7th or 8th month of pregnancy. I’m sitting on this plane. I can barely fit in this propeller jet because I’m wide pregnant. I was like, “My life is about to change.” That was what started me in our business because I knew that I couldn’t no longer travel the way I used to travel. I wanted to be a mom that raised my daughter. Hence, our company was formed, Mariga CPA.
With that, I always associate your business as your baby. I look at my business as my baby. It’s interesting that your daughter and your business are the same age. Tell me, did you grow up an entrepreneurial home? Is that something that you always wanted to do or was it because of the pregnancy that you left the W-2 lifestyle and went out on your own?
My father was a CPA. I always tell the joke that he balanced balance sheets while balancing me in his hand because we didn’t have fancy computers. Everything was done by ten-key calculator with a tape attached to it and those big ledgers that you have to draw in back then. I remember he hired me when I was fourteen years old to be his bookkeeper. I remember answering the phone in his business like, “Thank you for calling Ricky Chan Corporation.” I wouldn’t tell anybody that he was my father. I wasn’t allowed. I had to refer to him as Mr. Chan. That man got a great tax write off by hiring his daughter, I tell you. I always knew that was possible out there. I didn’t know at the time that I started my career that I was going to become an entrepreneur, but I always knew that it was a possibility from having started that young.
I had referred to that you are associated with a company that helps entrepreneurs. It’s my favorite business book. I’m very good friends with Michael Gerber who wrote The E Myth. He hates it when I say that Profit First is the best business book ever written. Michael doesn’t like that I say that about Mike Michalowicz. Michael Gerber wrote The E-Myth, Mike Michalowicz wrote Profit First. Gerber doesn’t like it when I say the Profit First is the best book. In my opinion why Profit First is the best book ever written for business is because you got to get the money right. You got to be profitable. The fact that over 90% of all businesses will fail in that ten-year period is because the profit is not right.
What good is having all the systems set up the way Michael teaches you if you don’t have the profit right? I’ve read this book. I brought it to one of my friends that also owns a credit repair company like me and they’re doing about $10 million a year in business. We started at the same time, same year. Their name is extremely similar to mine. I wonder if that was done on purpose because I started first. It’s with a couple letters off of my name, but we’re good friends.
I said, “You got to read this book. You got to start doing it.” He says, “We don’t make enough money to do that. We’re not like you that we’re that profitable.” I’m like, “You make $10 million a year.” He’s like, “Yes, but we’re not that profitable.” I said, “You need to read the book,” because their salary is $100,000 or something out of a $10 million gross. It was interesting. Tell us what does a certified Profit First person at the mastery level mean? That’s what you are. You’re a certified Profit First at the mastery level.
It is intense. First of all, it means that I’ve been a business owner myself for many years. I’ve worked with a lot of business owners. It also means that I went through the school of hard knocks personally for Profit First, in order to be able to help my clients and learn it and to be able to teach it and relate to them. I’ll tell you guys my story. I’ll tell you my story with Profit First. I was like a lot of entrepreneurs. I loved what I did. I love taxation. I love tax accounting. I love tax strategy and I loved it so much, I would have done it for free like a whole lot of entrepreneurs do. They love what they do. We go in business because we know we can make a difference in the world.
We know that we’re good at what we do. We know that we love what we do and we love it so much. You’re a plumber, carpenter or an accountant. That is our gift to the world. We want to share our gifts to the world. That’s exactly what I did. When I first started my business, I was so excited about getting my first client through the door. I’m excited about doing great work in the world that if I discount my price a little bit, I figured out I had to make it up the margin. If you keep adding clients, even if the margins are small, you think to yourself, “It’s going to make a nice profit.”
What happened was I started my business because I wanted to spend time with my daughter because I wanted to be a mom that was there. What I found was when I started my business, I found out that because of it was my passion, because I love what I did was I worked harder being self-employed than being employed by somebody else. What happened was instead of working 40 hours, I work 60, 80 hours a week. I remember like one Sunday night after working many hours not taking a vacation that my husband told me, he goes, “Susanne, we need to have a talk.” Rondi, when your spouse says we need to talk, it’s a big deal. Something bad is coming.
It was about three years into the business at that point. I remember my husband’s going, “I know you love what you do, but the reality is we hardly get to see you. You’re always working and we never get to see you. You made more at your corporate job.” He goes, “I think you’ll be better off if you get a job.” For you guys that are entrepreneurs out there, that’s like our worst nightmare, having to go back and leave our company. It’s your baby. Here, my husband was telling me, “You have to go get a job.” I remember one night I was working late and doing taxes. I was doing a tax return for free. It was a friend of mine. That’s what happens when you are good.
Your friends started to go, “Can you do this for me for free?” I was sitting there and filling out this tax return. Suddenly, my back went snap. As I was sitting on my bed that following Monday and high on muscle relaxers from my doctor, I was thinking to myself, “My life is going to change.” I remember putting out this SOS to a group of Facebook friends. Things have got to change. I remember getting all these responses back because all my friends were entrepreneurs. They were like, “Fire this employee,” and all this entrepreneur advice.
I remember the big advice I got was “You got to read this book called Profit First.” For some strange reason, that resonated with me. You got to read this book called Profit First. I got this book. I got the audible because entrepreneurs we don’t have no time to read. Everything comes on Audible as you’re driving to your next client. As Mike was reading this book, the audible, he kept referring to these charts. I’m like, “I’m listening on Audible. I can’t read charts when I’m on Audible.” I ended up buying the Kindle version, but if you get on a Kindle version, you can’t find the charts easy. I ended up ordering like a paperback book for it.
Mike made lots of money for me, three books. As I was reading Profit First, I was like, “This is my life.” What it talks about in Profit First was we go to school and you being a finance expert, Rondi, we’re taught revenue minus expenses equals profit. That is knew as GAAP, Generally Accepted Accounting Principles. The problem is when we teach our entrepreneurs that revenue minus expenses equals profit. We teach them, “Focus on your revenue, focus on sale, sell to anybody, discount your prices, get those sales out the door, be responsible, pay your bills, pay your expenses, and then naturally profit will follow.”
What happened was when we teach them that usually at the end of the year, that profit is almost like a random act right now. Most entrepreneurs, when I meet them don’t even know what that bottom line is until tax time. When you tell them how much they made on our taxes and how much due, they’re like, “Where’s the cash?” What Profit First does is we teach our business owners revenue minus profit equals expenses, take your profit first, revenue minus profit equals expenses.
What happens is we tell them that Profit First has done many studies where a certain allocation for a healthy company based upon percentage of revenue goes to profit. A certain percentage goes to owners pay. A certain percentage is reserved for tax. Whatever’s left over is operating expenses. We tell them on the 10th and 25th, all your money is going to be collected in this income account. We’re going to slowly transfer money, first to our profit account and then to our owner’s pay account then to our tax scout, and then whatever’s left over, goes to operating expenses. We invert the accounting equation in Profit First.
I know when I hired a new tax professional and I believe this is my philosophy is you have a tax professional and you have a CPA that does your taxes. Just because they’re CPA does not mean that they’re a tax professional. There’s a huge difference. You would be a tax professional that’s also a CPA. When I hired my tax professional, he’s like, “Why do you have all these different bank accounts?” I said, “That’s how I pull my profit out of my company.” He’s like, “I’ve never seen this before.” I’m like, “This is how it is.” That’s what I do. I don’t pull it out on the 10th. I do everything on the 25th. All my affiliates are paid on the 25th.
My payroll’s run on the 25th. Everything’s usually around that 24, 25. On the 26th, the 27th of the month, I pull out 35% of what’s left over in there. Whatever’s leftover is for expenses. I did something that I didn’t do before the book. That was, I purchased/leased about $180,000 worth of business equipment, copy machines, folder, inserters, postage machines, envelope, printers, like high tech stuff. I was like, “I’m going to offer them less money.” I offered them $95,000. There’s $180,000 for this stuff. You know what they did, they took it. That’s how much profit margin is in that.
I saved that much money. I was like, “That’s pretty cool.” Now I’ve started doing that. I purchased a trailer. It was already on sale and he broke it up. I said, “Is that the best you can do? If it’s as best you can do, I’m going to go check out some other places. If you can go to your management, shave a little bit off, I’ll write a check.” He’s like, “This is the best we can do.” Sure enough, guess what he did. He left come back. He’s like, “Yes, I can knock this off this.” I paid the sales tax on it. I started implementing that in there. If you take your profit out, you don’t have as much leftover for expenses. You then work on your expenses. I liked that part of it. That’s how I’ve implemented it in my business.
It works out with something called Parkinson’s Law. What Parkinson’s tells us is that we humans are efficient. If you give us two weeks to do a project, we will take two weeks to finish that project. You give us two days to finish a project, it’s going to take two days to finish the project. We consume everything that’s available for us. I love exactly what you said by taking your profit first, having that amount that you can spend. They can’t meet your price. They can’t meet your budget because that’s all you have in your operating expense account. You’ve got to walk. You’ve got to make some different decisions. I love that, Rondi how you were able to turn that around and get more things at a better value because of holding your ground and going, “This is what I have and this is what I can put away for that.”
The other thing that I like on there is I like tax season now. If you haven’t read the book yet, part of it is Michael’s going to teach you how to pull a percentage of your gross profit out and put it in your tax fund and the pays your personal income tax. I pull out about 15% out of my gross profit. I put it in the tax fund and then my tax professional does his thing. I end up at around a 5% tax bracket, which means I get a huge bonus at the tax the year of the end of the tax year. Instead of me paying money, I have this large bonus that now I get to go spend and go on vacation and do other cool stuff with. I know that sounds crazy. I look forward to tax season.
You get to exhaust your tax savings account and give yourself a bonus. That’s exactly how Profit First works. One of the big things that happens for a lot of entrepreneurs or people in general are nervous. They’re like, “How much am I going to owe at the end of the year?” They’re like pins and needles waiting for the accountant to get back to them. When you have that tax reserve on where funding that small plate as you go, I’m going to call the small plate, which is the bank account. You’re not going to be worrying about, am I going to be able to pay my taxes? As Rondi says when you have a great accountant that’s able to get you a 5% effective rate, when you’ve been putting away 30% practically for an effective rate. This is a real big, “You’re going to Florida in a week or so.”
I’m taking my entire family and I want to talk about this. Every year for Christmas, what I do instead of getting my kids and their significant others and my grandson a bunch of presents that they never remember. We do a company retreat. We do our board meeting there. Both of my girls, run my company. My older daughter runs the affiliate program and the social media aspect/marketing. My middle daughter is my COO. Every year we go on a corporate retreat/board meeting. In 2020, we’re going to Costa Rica for ten days. Because it is a business meeting, what is it for me now as a business owner? My favorite word to say, “Tax deductible.” Explain that for people that are reading, how can I take my kids and their significant others to a foreign country, pay for the airfare, the food, the entertainment, everything and write that off through my business.
You’ve done a couple of things right. I’m not sure how old the daughters are, the kids are. There’s a lot of different strategies that you can do with that. If they were younger, if they were children, there’s a standard deduction. In 2020, it’s like $12,400. If you would hire your children and give them great work to do, one of the things that can happen is that, one, besides giving them great work experience, my dad hired me at fourteen to be his receptionist/bookkeeper. It’s a tax deduction for you. Now, it allows the child, depending on how your taxable entity to receive income that’s below their standard deduction.
If it’s below their standard deduction, then they don’t have to file a year in return. That means that they can now pay for their own sports. They can now pay for their own activities because their employees are earning their own keep with that. You can even get more sophisticated, put it in a Roth which is after tax by the way. They can start accumulating for retirement. If they go to college, they can use that Roth money to pay for college. It’s a tax-free transaction or if they get a scholarship because they happen to be awesome in basketball and they end up being these NBA stars, then they can use that money later in to buy their first home, use that as a down payment for their first home. If they ended up being millionaires as NBA stars, they can retire on that money that daddy’s put away from hiring them. They work with Rondi. When you go and travel for business, they can come too. If it’s a reasonable expense that’s necessary for the work that they’re going to do and have that board meeting, they need to be there, that is deductible expense.
We do it the right way. We spend more than half of the day during the week work, working on the business, which means 4 hours and 15 minutes. One day, it’ll be strictly marketing. The next day will be operations and we’ll do our Level 10 meetings. We do that and I have it all documented. I put together a folder and we keep track of all of that. Including what you said earlier, my grandson who’s nine has been on payroll and been paid through his janitorial sole proprietorship business since he’s six years old. He has a contract with my company. It’s $500 a month.
Every day after school, his mom goes and picks him up, takes him to our 4,000 plus square foot office where all the employees work and he empties the trash up in every single desk. He wipes down the desks after they leave. He wipes down the computers with disinfected. This was all prior to COVID. We have this weird thing in Vegas. It’s called the Vegas flu. Someone was sick every single day. Every work day, somebody called in sick. We started disinfecting everything. What I found out, they would go out to the casinos and clubs and they were hung over. It’s the lifestyle of Vegas twenty-year-olds. Caden vacuums empties the trash. Because we’re financial services and we have Social Security numbers, credit cards, birth dates, credit reports and all that stuff, he runs the shredder. He has a real job and that allows me to write off through the company, $6,000 a year and give it to him.
My daughter uses that money to pay for karate, soccer and all the other stuff that he wanted, an Xbox. It’s a way to take money out. I talk a lot about that and a lot of people get confused. I’d like you to talk about that a little bit, Susanne with how is it okay to hire one of your children and pay them up to $12,400 a year and not have to pay tax? Explain why there’s no labor laws because that’s where everybody gets hung up. It is like, “How can you hire a six-year-old? There are labor laws.” Would you break that down?
It’s different. First of all, it’s based upon your state, the labor laws with that. You’ll have to definitely look at your state and what their laws are because every state is going to have different laws. You have gone into the Chinese restaurant where there’s obviously somebody’s kid working front desk or cashier. The great thing about working for your parents is it doesn’t matter what age you start working for your parents. You start working for your parents’ company. One of the things that you said was he’s working under a sole proprietor. He’s working on our DBA. If you’re working under a DBA, which is a small business, that’s not necessarily incorporator or an LLC and you’re working for mom’s or dad’s DBA.
You’re giving him meaningful work. He’s got a timecard. He’s being tracked on what he’s doing, and you do want to do a W-2. You’re going to report on your 941, which is your payroll tax return, your 940. He’s going to get a W-2. You’ll have an exemption that he’s not subject to Social Security and Medicare, because he’s working for mom’s DBA. He’s able to earn a salary and get a W-2. He’s able to invest that into the Roth IRA or that’s probably the better way to do it with our Roth IRA, maxing out and then being able to pay for karate and all the fun things that he likes to do at that point. It’s a great work experience is teaching him some critical thinking skills and maybe how to run his own business one day. At the same time, it’s a great tax write-off for mom and dad.
I did with him and I have a bunch of videos on social media of me covering this with him. I made him do the Profit First set up where we took out so much for taxes. We took out so much for savings, took out so much for investing. He got like whatever it was at the end of the day. He would do all of this. He started at six years old. He learned at six years old that he does not like Uncle Sam. He’s like, “What do you mean I have to pay taxes?” I explained that to him. He did not like that at all. At the end of the year, I said, “We’re going to sit down, do your tax returns now. I’m going to show you how to do this.” I gave him his refund back. It was a lot of fun.
I didn’t do that with the full $500 a month. I did that with his allowance. Whereas cash, it was like $10 a week. It was super easy for him. He would count out his money and put the little stacks and put in the envelope. It was fun to do that and teach him because as most people don’t know how taxes work. They don’t understand the rules. It’s like playing baseball. The batter comes up to home plate, hits a home run and runs to third base. He doesn’t want to go all the way around. He runs back to home and that’s, that’s how I look at how most people deal with their taxes. What do you see that most businesses prior to coming and working with you do wrong?
In terms of tax revenue and business, I’m going to ask you to clarify a little bit with that.
What do you see that most people are doing wrong in their business when they come to you?
Most business, there is a super high failure rate in entrepreneurship. Very few of them make it. A lot of it is like I told you with my story, we do what we love. The problem is we don’t focus on the end game. We don’t focus on what does winning look like at, in a year or the end of the day. One day, I’m going to need to retire one day. Whether by choice or by life, I’m going to have to step out of my business. I need to run my business with intentions. When I first started my business, I remember I got my first office space. I was so excited about my first client coming through the door.
I remember I’m excited to see him. He brings with him this proverbial shoebox filled with receipts. I remember he plops down at his table and he gives me the shoe box. It’s full of these crumpled up receipts that I’d swear the man went to Home Depot and every other store and the receipt put in his pocket and threw it into the shoe box. I remember he plopped down. He pushes the shoe box to me and he’s like, “Whatever you do, I don’t want pay any taxes.” I remember sitting down. I remember unraveling all of these receipts in front of them. I remember getting to this bottom piece of paper and he called this a P&L.
I don’t know if it was a QuickBooks P&L or what he called it, but he called the P&L. I remember looking at him and I was like, “Sir, don’t worry. You’re not going to pay any taxes.” He goes, “Why am I not paying taxes?” I said, “You didn’t make any money so you’re not going to pay any taxes.” I remember he leaves and he goes away. He comes back like two days later to sign his return. He’s excited because he’s getting a $2,000 refund. He’s getting his refund because he’s getting something called earned income credit. The next year he comes back again. He brings the back the same shoe box. He likes to recycle filled with more newly crumbled receipts that have stains on them.
He goes, “Whatever magic you did last year, do it again this year.” I get to the bottom, the box, I pull up the paper and again, it’s still rumbled and crumbled and yucky. I said, “Don’t worry, sir. You’re still not going to pay taxes because you didn’t make any money.” He goes away. He comes back again and gets his earned income credit of $2,000. The third year he comes back with same shoe box and new receipts. He pops down and I get to the receipts. I get to this piece of paper. He still manages to mumble the same thing. He doesn’t want to pay any taxes. I still managed to tell him back the same thing, “Don’t worry, sir. You didn’t make any money.” This time I can’t laugh because now I know him a little bit better.
I’ve seen him for three years. He’s emailed me 11:00 at night. That’s the only time that he has to email me. I see him not having anything to show for all his effort. I see he’s paying his employees way more than he gets paid. I see that although he’s got nice office equipment, he doesn’t even own his own car. He doesn’t own his own home. I’m starting to see him. He’s getting older. I’m concerned for him because one day I want to retire and I want him to retire. If he keeps going down this path, there’s no way that that he’s going to make it. What I saw with him was what I saw in a lot of entrepreneurs.
They were so focused on the whole passion of running a business, the whole, focus on sales that most of them have nothing to show for it. I would say the biggest thing that I see is that they’re not focusing on their end game. They’re not thinking long-term. They’re not thinking about how am I going to retire? They’re not running businesses the way that they should be. They’re not running profitable businesses. They’re getting leverage in debt. He was getting leveraged in debt. That’s how he was running and financing all these losses, all these years.
It’s getting more and more in debt because he’s using the debt to pay for the expenses, then pulling cash out of the business to pay for his personal life. He’s getting worse and worse. He’s acting like Congress, raising the credit limits. Can we talk about the five accounts with Profit First and how you set that up?
The way that Profit First works is I like to call the small plates theory. When you go to Golden Corral and there’s like tons and tons of plates. I’d probably confessing too much right now. There’s a never-ending plethora of choices. There’s a dessert plate, the salad plate, the main course plate and the second plate and the bread plate. You can go to Golden Corral and you can eat and eat. There’s no limit to it versus going to an Ardor Dinner where you’re all dressed up like Rondi. You got to network and you got to look good. The plates are like five inches at the most. That’s a big plate. You’re going to eat a whole lot differently.
You’re going to get maybe a few little choice sides, a lot of vegetables so you can look good and not have a full plate. You’re going to eat very differently. When you leave dinner, you’re going to probably feel full. You’re probably going to feel satisfied. In fact, you’re going to probably going to feel better about yourself leaving dinner than leaving the Golden Corral where you’re going to be like swearing that you’re never going to do this again and abuse your body again. That’s exactly how Profit First works is we create small plates. We create illusion of small plates so that you only consume what’s in your plate.
At Profit First, what happens is we create five main bank accounts. We can get more sophisticated and more bank accounts. We do have some clients that do that. One bank account is going to be called the income account and the income account, all your deposits, all your sales, all your revenue is going to go into this income account. At the end of the month, when you look at your deposit, that should equal your total cash sales if you’re a cash basis, taxpayer. All your revenue is going to go into this account here. That’s all that account is going to do is collect revenue, collect cash and collect sales.
The other account that you’re going to have is going to be called a Profit Account. The profit account is going to be most likely a savings account. This is where your money is going to go that you’re going to immediately fond based upon a percentage, based upon the size of your business. We’ve got some pre-allotted percentages. They’re going to have a profit account for that. They’re going to have a tax account where like Rondi talks about, you’re going to reserve for taxes.
That’s going to be a savings account where you’re going to be putting away usually about 15% for savings, for taxes at the end of the year. If you don’t use it all, you’ll get a bonus like Rondi said to go to Florida. You’re going to have another pay account for owner’s pay. This can be a savings account. The owner’s pay account is credible because as a business owner, I need you to get paid for the work that you’re doing. Many business owners, when you ask them, who’s your Most Valuable Player, who’s your MVP in your team? They’ll say Susie, Mike, Rachel, but they’ll never say themselves.
The truth is the moment you step away from your business. You have no more business. No matter how wonderful Rachel, Michael, Susie or Charlie is, if you step away, you are your MVP. There is no more business. I need you to get paid. That’s what the owner’s pay account is for so that for you to get paid. It’s like my back went out that day. I needed to hire somebody quickly to take my place. You need that not to compensate you for the work that you do, but to pay somebody else if you need to step out of your company. That’s why that account is there for you.
The last account is your operating expense account. That’s going to be a checking account. After you’ve done your profit, your tax, your own pay, everything else goes back into the operating expense account. That is the small plate that you have to make business decisions. When that plate runs dry, when that bank account runs dry, you’re going to have to make some hard and difficult decisions. On the 10th and 25th of the month, you are going to fund each of these bank accounts based upon the pre-determined percentages.
If you’re a small company, let’s say a revenue under $250,000, 5% is going to go to profit of your total revenue, 50% of your collection are going to go to owners pay, 15% is going to go to tax. Whatever’s left, which is 30% is going to go to operating expenses. What happens is with Profit First, in the table that I’m going to share with Rondi is, as your company grows, your percentage of owner’s pay is going to go down and compare it to total revenue, or we call real revenue in Profit First.
The reason why it goes down is because as you scale, you become more dependent on your team. As you become more of dependent on your team, by the time you make it to $10 million or $50 million, you’re no longer relevant to the payroll of your company. You have scaled to the point that it’s all about the power of your team. Operating expenses naturally goes up and you become more of the name behind the brand.
That’s exactly where I’m at with the business. I got divorced in 2019. I took ten months off. I didn’t work for ten months. What’s crazy is my business continued to grow. We’re doing more in 2020 than we did in 2019. That’s because I implemented The E-Myth, Profit First and other things and I have a true business. That’s what people need to do is they need to transfer that money around. What’s left over is what’s left over. It makes you a lot more frugal and resourceful. Talking about resourceful, let’s talk about credit because this is something that I see where most business owners that I coach and I talk to want to finance their way into success. They finance their self into bankruptcy.
I did a podcast with a business owner where he sold himself into bankruptcy because he thought all I got to do and he’s focused on the revenue, next thing he knew he outsold his company. He bankrupted because he did too much in sales because the profit margins didn’t go up. Let’s talk about how business owners think that credit is their solution to making their business profitable. I’m sure you have stories like that. What have you seen with that?
With COVID, that’s all you’re hearing is about credit, EIDL, those disaster loans, PPP loans out there, which can work either way. There can be forgiven. Credit is the bloodline of America. As soon as you go to college, the first thing that you do is you trade your soul for a candy bar. You get a large supersize candy bar if you sign up for this credit card right now the day that you graduate from high school. You’re rewarded every time you get a credit card. You get a t-shirt, you get another candy bar, you might get like a Frisbee. There’s a reward for over for getting this credit.
It’s the same way with business, the first things that happens when you start your business, a lot of times you go to the Small Business Administration for training and they talk about getting SBA loans. The problem with credit is that if you don’t utilize it right, credit doesn’t go away. It’s the same as EIDL of $150,000. That’s a house payment. You could buy some houses for $150,000. People were thinking about, “I’m going to use this EIDL right now to keep my payroll and my rent expense even though my cells are down.” They’re not thinking, this is $150,000. You could have used that money to buy a home.
Instead, you’re getting this credit to finance your operations because your revenue is down. There’s no ROI for that. There’s no Return on Investment on that if you’re getting credit to keep afloat. A lot of times these business owners, when they’re looking at, I need credit, I need to get investors. They’re thinking I need it to produce inventory. They’re thinking I need to be able to pay my rent until I make it one day until I can scale at that level. There’s no ROI. If you’re getting debt that does not have a guaranteed return on investment, you’re not going to be able to pay off that debt.
That’s what I see as people will hire me for. They’ll come to me and say, “I want to do your business credit course. I want to learn how to get $500,000 of funding through my business and not use my personal Social Security Number.” Do you have a business? Most of them have an idea for a business. Are you profitable? No, they’re not profitable. What are you going to use the money for? I want to start real estate investing or I want to run some Facebook ads. I’m like, “That’s not a good idea because you’re going to go and you’re going to get yourself in trouble.” If you use the credit to expand the business and you know that you’re going to be able to make more money than it makes sense.
This equipment that I bought, I ended up paying around $100,000 with sales tax and everything. I leased it. The reason I leased it, even though I have the cash is because I don’t want to use my cash. I want to lease it even though the lease is extremely expensive. I wanted to get through the winter and see what happens with COVID before eliminate all that cash. Even though it’s a $100,000 and the lease payment is about $4,000, $4,300 a month, it is saving me, Susanne about $8,000 a month in labor cost.
If I mail letter through the credit repair company, it cost me about $0.57 to $0.65 a letter because we use big envelopes. I’m using a postage machine that automatically weighs and does it. It’s about $0.45. I’m saving $0.20 an envelope and we send out tens of thousands of envelopes a month. By using credit to lease this equipment, I’m saving $8,000 to $10,000 a month in labor cost, postage cost, printer cost. That is my example of using credit and not doing it the other where I’m going to go speculate on some Bitcoin. How have you personally used credit to expand your personal life?
We don’t use credit. My husband is the most frugal man you’ll ever meet. He has something called a stray coin collection. When he’s walking through the parking lot, if it’s a penny, he will pick it up and save it. I hate to say this, coin collection makes more than an interest that most people are interest from a bank. You need to find a dime and you’re ahead of the game on a day. I learned the hard way. I learned the hard way. I was the eighteen-year-old. I got out of college. I was tempted with these supersized Kit-Kat bars for like signing up for her credit card.
I found that when I got my first job, when I graduated at Andersen, I had to pay this credit off and it wasn’t that easy to pay it all. In my personal life, I stay away from it. There are very few things that’ll give me a return on investment on my personal life that you have in your credit will do for me. We did finance our house. Our house is completely paid off now. It has been paid off or years. I remember that feeling of when we paid off our house that relief, like, “We will never have a mortgage payment ever again.” Being so proud of having this house that we own free and clear and even being able to buy our car cash. I remember dropping $50,000 on our car, our Honda Pilot.
They were like, “Are you going to finance that?” I’m like, “No, we’re going to write a check. Can we write a check?” It was like nothing, but being able to pay outright and not have credit. We don’t use credit for anything. I do have a credit card that we pay off every single month because you don’t want me putting your debit card online. You can get in trouble with that. There are very few things that you’ll get an ROI by having credit in my personal life is what I find personally.
I want to talk about the car loan because paying cash is 180 degrees different than what I teach and hear me out on this. Instead of paying cash for the car and you paid $50,000 roughly for the car, if you would’ve finance that, you probably had only paid $45,000 for the car. Hear me out on this and this is what I teach is have the cash that you can pay cash for the car, finance it, because you will get on average 5% to 10% discount because they are receiving from the bank that they placed the loan with a 5% to 10% spread.
The way it works is that $50,000 car, if you have good credit, you can go to the credit union, get a 1.9% interest. My Jeep, for example. I bought an $80,000 Jeep and I financed it, 6.99% interest. That is insane amount of interest for somebody with an 800 plus credit score, putting 20% down. My credit union has already gotten the loan for $80,000 at 1.99%. I went to the dealership and I bought it and I paid $6.99, but it saved me about $10,000 to $12,000 off the sticker price because they are receiving from the bank a kickback or commission around $10,000 to $12,000.
I saved that money. What I do is then I go and I pay off that loan with my credit union loan and I saved the money on it. Let’s say that you already had the loan. If you went into the dealership and you financed the full $50,000, but because you finance it, you got it for $45,000 so now you’re financing $45,000. The following month, Susanne, you could write a check for the full amount minus $500. You finance the $500 over that 5 to 6-year term, paying a little tiny bit of interest, which then keeps your credit score higher.
If you don’t use your credit, it will drop off and then you’re starting over. By doing the strategy, one, you save a bunch of money on the purchase of the car. Two, it continues to build up your credit and you’re not paying that much interest because you only have a couple hundred dollars financed and you’re paying $2, $3 a month on bill pay. That’s my strategy with it and you’re still paying cash essentially.
That’s a pretty cool strategy. I’ll have to look into it. I do have 824 credits core, but that is a pretty cool strategy.
That’s history, but what’ll happen though is if you paid off your mortgage. If you have no car loans, all that stuff is going to fall off around the ten-year mark. Depending on when you paid off your car and when you paid off your mortgage, around ten years, it’s going to drop off and you’re going to be like an eighteen-year-old kid again. Things are going to get expensive and potentially these credit cards that you have, because they pull your credit every single month. If stuff starts dropping off and your credit score starts coming down because of that, credit card companies will go and close your account. Even though you’ve never been late, even though you don’t abuse it, but because your credit score drops below their minimum requirement, they close the account. That snowballs and now you’re down to a 500-credit score and you’ve never missed a payment.
It’s something to keep in mind. The other thing that you can do to make sure your scores stays higher is if you have cars that are paid off, you do the same strategy, go into your credit union, your local bank, get a loan on it. They give you $40,000. You take it. The following month, you give them back all of it but $200, $300. Now you financed your car again for the next five years. That’s another strategy to keep that score up. I’m assuming you probably never use business credit to fund anything in your business. Is that a good assumption?
I did get the PPP. Who could turn that down?
I sent an email to my bookkeeper and CFO and said, “Fill out this paperwork.” I got an email from my bank saying, “Apply for the forgiveness.” He responded with, “You got to wait until 2021 to do it. They don’t want these applications right now.” I got $125,000 PPP. I use 100% of it on payroll. I got a whole bunch of money in idle money. I used 100% of that on payroll as well. I took my operating expenses and I transferred them over to my Profit First accounts. I use the PPP and idle money to pay payroll. Hopefully, they’ll forgive the idle money too. We’ll see. Susanne, it has been incredible having you on the show. Is there anything you would like to leave us with?
This has been an absolute fun time and it’s been an honor to be on your show, Rondi and being able to speak to your audience. My last words are you guys that are entrepreneurs out there, take your profit first and remember your why.
Where can people find you? I’m assuming you are accepting clients throughout the United States that you would love to help some of my readers out with their business.
We have a free Profit First masterclass where I will teach you the ins and outs of profit first for free. It’s a five-day class that we have. We host it live on Facebook. If you go to Facebook and you go look for Profit First Masterclass with Susanne Mariga, you’ll find me there. You’ll be able to take our class and learn all about Profit First.
Do you have a social media link?
Thanks again, Susanne, for being on the show. I appreciate it.
Thank you for having me. It’s an honor.