Does the term “GAAP Financials” send your heart into a flutter, or on the flip side, make it so you literally want to take a snooze? For those innocents who may not know at first glance, “GAAP” stands for “Generally Accepted Accounting Principals.” Or, as I like to think of them, a black-and-white retrospective review on what happened in your business. Not what’s happening, and definitely not what’s going to happen…which of course, would be the most useful information of all.
Now, GAAP financials, such as your P&L, Income Statement, etc. are very useful. You can learn quite a bit from them, your accounting professionals need/want them, as do your bankers and lenders. However, the frustration I seemed to always have was finding how to use these tools to help me NOW. I seemed to forever be asking my bookkeeper “Where did the money go?” So, when three years ago, I came across the book “Profit First” by Mike Michalowicz, I realized I had happened upon a system that would satisfy my practice needs. I first mentioned this book in my “Business Lit” Tip of the Week, but only briefly went through it. Here is a deeper dive and how it can help you, as well:
Simply put, the GAAP financial system relies on the premise that Income – Expenses = Profit. In Profit First, you are simply setting aside profit right away and using all that is leftover to manage your business. Don’t have enough? Well, that could be a sign you need to reduce expenses or increase revenues. But, you never sacrifice profit.
The system is simply set up by creating a series of bank accounts. The first is your deposits, where all revenue flows. The genius here is that it’s ONLY for deposits. This is where I used to get so frustrated, as all of my deposits as well as expenses, were flowing into and out of the same account. It was difficult to have a handle on what my average per month deposit versus expenses/bills was. I know you GAAP loyalists are thinking, “Well just look at your financial statements!” but that isn’t something I could look at right at the present moment when I needed to know if I had enough cash flow to pay my next set of bills.
The plan is that twice per month, you are taking the amount of deposits and setting aside a certain percentage of that for profit, taxes, owner’s compensation, and operating expenses. The profit and taxes are set aside in accounts that are easy to transfer into, but not as easy to access to withdraw. This is purposeful so you aren’t tempted to dip into your profits and the money needed to pay quarterly taxes. Usually, these accounts are at a separate bank from your usual bank. You adjust percentages as you get better control of revenues and expenses. This forward-budgeting system has brought so much clarity for me, and it literally has set me up to become my own bank. By setting aside funds in a different investment account (advanced Profit First system), I essentially have my own line of credit at no additional cost. The beauty/irony of this system? My GAAP financials have never looked better.
Now, I have only scratched the surface of this system in this brief article. And, if you bring this to your bookkeeper/CPA, chances are they will look at you like you’re crazy as they are well entrenched in the GAAP world. Fortunately, there are a wealth of Profit First Professionals you can access to help you implement this system. (www.profitfirstprofessionals.com). Also, there are optometrists who have become Profit First Professionals, such as Dr. Mick Kling. He’s discussed this system in an online forum (via Facebook group “Profit First For Eye Care Professionals”) and will be presenting this system at Vision Expo West in the coming weeks. Additionally, the Facebook Group “ODs on Finance” discusses this system in various posts and is another great reference for managing your practice and personal finances.
I have no consulting agreement or personal gain by discussing this system. I just want to share the positive impact this has had for my practice and me and hope it can bring the same clarity for you and yours.
Gina M. Wesley OD, MS, FAAO owns and practices at Complete Eye Care in Medina, MN. Accolades include Minnesota's Young Optometrist of the Year in 2011 and the Early Professional Achievement Award from The Ohio State University College of Optometry in 2013. She is a member of the American Optometric Association, a fellow in the American Academy of Optometry and enjoys practicing, writing and lecturing in the industry. For questions or comments about this article, please contact firstname.lastname@example.org.