This week Ethan and Darby review the book Profit First
Two software engineers exploring the facets of developing SaaS businesses while working their day jobs. Hosted by Darby Frey, co-founder of Lead Honestly, and Ethan Gunderson, founder of Glean.
Ethan: And we're recording.
Ethan: Good afternoon.
So, I read this book.
Ethan: Yeah, sure.
We get into our topic for the day.
Darby: Yeah, I like it.
Ethan: so we both read through profit
first over the last week or so.
Ethan: that profit first is, a book
that comes pretty highly recommended
from, or at least highly mentioned.
And one of the slack channels
that we're part of like groups
or whatever they're called.
So the full title is profit first,
transform your business from a cash
eating monster to a money-making machine.
Darby: It's got
Ethan: lot, there's a lot for a
Darby: in there.
Like, I didn't know much about this
book, when I got into it, but, looked
around and this author has several
kinds of like business efficiency.
You know, strategy type books.
And, but I think this is probably like his
sort of breakout one from what I can tell.
and I, like, I kind of thought, you know,
not to spend too much time, like on a book
report or anything, but like for folks
that haven't read this, maybe it's worth
it to go over the sort of like key idea
Yeah, I think so.
Darby: and like, you know, I mean, I
hope that we, we read this and got the
same thing out of it, but really the
main, like thesis of what he's trying
to get at is like, generally, like
the way you think about a business is
income minus expenses equals profit.
but what if you switch that around reset
income minus profit equals expenses.
and that's like the simplest
way to think about it.
And I think like, you know, just
that, like, I think that was probably.
2% into the book I'm going to use.
Like, it's kind of explaining that.
And it was like, oh yeah, like
this is just kind of like the way
that I've always thought about it.
And I think the way most people
think about it is, you know,
like profits, what is what's left
over after you pay everything.
Darby: instead of thinking about it as a,
as expenses being a constraint, you think
of like profit as being a constraint.
And I think that's, that's
an interesting point.
the books checks a lot of boxes for me,
a lot of what he talks about, you'll find
in personal finance literature as well.
Ethan: so he touches on a little bit,
but like this idea of in personal finance
of paying yourself first, and that's
applicable to like 401k deductions and.
Like automatic savings withdrawals.
So that, that money's already out
of your accounts before you look
at it, and then you gear your
spending towards what's left, right.
that really helps fight lifestyle
inflation and those types of things.
and then like a lot of what
he talks about is essentially,
expanded on, Parkinson's law.
Which like at work, the phrase of work
expands to fill the time allotted.
In this case, it's like
expenses will fill the, uh,
Darby: available bank account.
Ethan: will grow it to consume
the money available to it.
And then using traditional.
Ways of thinking after that, you
know, thing has done that, then it's
your profit instead of in this way,
it's your intentionally limiting the
amount of money you have for business
expenses, at a letting it fill that.
So you're limiting the
downside of Parkinson's law.
The, the analogy that I think you threw
up kind of early on is like the, the
dieting trick of like getting smaller
Ethan: It's not the place.
So instead of like, cause you're always
just going to fill up the plate with, you
know, it's going to be full of food and,
but if you have a smaller plate, then.
It's still going to be, you know, full
of food, but it will be less food.
And that's like a trick that
a lot of people use to diet.
and that totally makes sense in this
context to, you know, the, and so I guess
like maybe to kind of further expand
on that, the strategy that he uses and
like the actual, like mechanics of it
is like, I always forget about this, but
like multiple bank accounts as a great.
and you know, like, I think this
is a really smart way to do it.
And so the way that he kind of
outlines it, is to create what
is it like five bank accounts.
So you have one.
Ethan: a seven.
Darby: So, oh yeah.
Five, five at one bank and
then two at another bank.
So like, why not have more banks, I guess?
but yeah, like.
an income account, a profit account and
a tax account and owner's comp account
and then operational expenses account.
And like, basically that op ex
account, just kind of like the last
one in the list is like your expenses.
So you kind of take everything out first.
And I like that he focuses on tax too.
Cause that's such a, like
something that bites everyone.
Ethan: I had a lot of questions on
the tax part of this that I didn't.
So one of the clarification,
I'm not a tax professional.
I am not licensed in any way.
Uh, one of the things he
mentions is having that tax
account pay your personal taxes.
And I don't understand how
that works mechanically.
Like isn't in my mind, like that
would just be additional income
that the business is giving you.
That, again, also be taxed then
I don't get how that works.
Darby: let me think about this.
So I think the way that I had sort
of interpreted it, and I was looking
at this through the lens of one of
my previous businesses, which was
like a sole proprietorship center.
So like the business tax and
the personal tax where the same
thing, at the end of the day.
And so what you're doing is you're taking
some percentage out putting it in a tax
account and like where that goes to,
if you're, if that's paying like your
personal tax based on the money that you
generate in a business, or you're, if you
file a business tax return, because it's
a partnership or something like that, then
that would go out of that account as well,
but like that money doesn't go to you.
That money goes straight to the IRS.
Ethan: So like the fact that it's
used to pay like a bill that's
effectively personal, right.
Cause it's like my personal tax burden,
Ethan: pain that doesn't
count as like more income.
Darby: I think in certain
like business structures,
I mean, obviously it works because like
it's, it's in the, in the, oh, I assume
it works because it's in the book, but,
Darby: yeah, I suppose that
might be something to like
revisit, the details on that.
But I guess like, like in the context
of like, like an LLC business, which
is the ones that I've operated,
like the taxes, all sort of like
personal tax and so whether you're.
Whether that money is coming from this
tax account or from your own personal
account, like you, you could sort of
adjust the percentages the other way.
And if you're like in a state where
that, like all the tax just flows
through to you as the owner, then you
would, you actually wouldn't have a
tax account and this, in this situation
then, cause there would be no business.
There'd be no corporate tax, really.
Darby: So, but I think like, What is
smart about this setup is that like,
so the way that he describes it as
like you get a check from a client,
let's say it's a thousand dollars and
you take, and you put, you know, 40%
into operational expenses, 10% of the
owner's comp 20%, it attacks, you know,
whatever the other percent remainder
in the profit, whatever you sort of
set your targets on these accounts and
like that tax money comes out right.
It's like, if you don't do that,
it's so easy to just forget about it.
Or like, like let it fall through.
Ah, I'll get to that later.
Like no one wants to pay tax.
So, so like first thing you gotta
do is take those things out.
And then, and then like the secondary
bank account that he talks about,
like, this is actually just to make
it harder to get to that money.
So you take it and you put it in another.
That maybe is, you know, slower to
transfer money or it's in some way
detached from your primary account.
And then you basically just
offload all of those, all of the
money from the profit account and
from the tax account over there.
when you process all of that and
so it kind of immediately leaves
your, realm of actionable money.
and then you just, it's always kind
of set aside automatically for you.
I think it's, I think it was a super
interesting approach and like, I wish
I would've known this in the past
when I had more, like more complicated
and more complicated business to run.
I don't have a business right now
to apply this to, but, working
on it and I'm ex I'm excited.
Like, I think it's a cool concept.
I like that it comes with a somewhat
rigid framework for applying it as well.
It even has, like the 30 says like the
15th and the 30th of every month is
when you do the, when you reconcile
income can sell the accounts and
trigger transfers, and you take, owner,
district or profit distributions, every
quarter pay taxes every quarter, like.
and that even gives like rough
guidelines for what the percentages
into the four categories should
be, depending on the revenue of the
business, which I actually really liked.
Ethan: So like up to a quarter million,
it was like a 5% profit, 15% tax, 50%,
owner's compensation and then 30% OPEX.
should I be like that?
Like, that's a cool guideline.
it's obviously like you're gonna have to
apply it to like your specific, business.
but thinking in terms of like
a SAS business, those numbers,
I think are actually, they
seem really easy to pull off.
Ethan: It doesn't take
a lot of, customer Mr.
MRR to get operational expenses.
Good enough that you can run a
website like it's, w it works.
It seems to work.
Darby: I think, you know, and
I think what, well, she thinks,
I'll say like, to kind of going
back to that rigid framework.
one of the thing that I thought was
really useful is like this isn't a,
you have to throw out everything you're
doing today and switch over to this.
Like, he talks about a way
to sort of like ease into it.
If you're a business that's already
operating and you're doing it the old way.
here's how you can move into this and
not totally like disrupt everything.
So he says like, first thing you
do is create a profit account
and just put 1% in there.
And like, then you're doing it.
even if you're still kind of scraping by,
you can at least carve out 1% for that.
and then that puts the framework
in place and that you can start
building on it from there.
the thing that I like, I'm not sure about.
And I think this is like thinking
through, you know, the way
that lead honestly operates.
Cause our operational
expenses are super low.
but we've not made the leap to like,
all right, what is the next thing?
Like, like if we took these percentages,
like we'd have a bunch of unused op ex.
Darby: Like, how do we like transition
from not using that money then to like
tactically figuring out how to use it.
and I think that's like, it's
like a different problem to solve.
Cause I think, most, most, businesses are
pretty good at spending money and we've
sort of historically been the opposite.
Ethan: I hate that.
I'm about to say this, is it that this
is like a good problem to have, Right.
It's like you're taking profit off.
As owners of lead, honestly, but
you have enough, you'd have enough
money that you would accumulate
cash in your Amex account.
And so then you can figure out like,
where could we funnel, I guess,
like, this is like where you would
intentionally grow the expenses,
Like potentially to generate more leads
and more customers to grow your top
line by then, the way that I think the
cool part about the way this is set up
is as you grow that top of line, your
profits automatically grow with it.
It doesn't like flywheel
directly back into more expenses.
I think that's interesting.
in like with this sort of framework
in place, as you start to do
that, as you start to say, like,
I'm going to intentionally grow,
you have sort of engaged already.
Ethan: Exactly right.
you have the plate, right?
Like your plate is only
as big as that account.
And so You could fill that whole plate,
but still know that you're going to have
enough to pay yourself and take your
distributions at the quarter and payer,
Darby: yeah, yeah, yeah.
That's really interesting.
Ethan: I'm curious, did you
do the initial assessment?
That's in the book for lead, honestly,
Darby: I didn't, I mean, I mean, I
think I sort of did it in my head
cause like the numbers are so.
Like our expenses are just so small.
but really, I mean, like, I, I
guess I can kind of walk through
like what we've been doing.
So, basically like we set up,
owner distributions, monthly,
that we do, at like 50%.
So we basically take out 50% and
then leave the rest in there.
and then our expenses ended up being.
I don't know, like less than 10%,
I'll be like seven or eight today.
we don't do, we don't
do like a profit thing.
and we don't do tax either.
which like, if, I guess if I were like
gonna roll this out, I think that would
probably be the biggest advantage to doing
this really honestly, is because all we
do right now is like, Look at what happens
throughout the year and then figure out
what the tax should be based on that.
But we have enough historical data and
everything else to like, determine what a
good percentage allocation would be there.
And then kind of go from there.
So like this would actually
be pretty easy to back into,
The fact that you were already
profitable, have assuming has little
to no debt because a big portion
of the book talks about, businesses
that have extended lines of credit
that they needed to start paying down
Ethan: how you could, you can pivot to
a profit first mentality while still,
chipping away at business debt, which
Darby: think that, yeah, like I think
that was, it was a really kind of,
there's two things in that section
that I thought were really cool.
so like the first thing he talked
about is like, well, to really
like aggressively pay down your
debt, you take the profit, right?
So let's see your profit is 10%.
I like accumulate that over
whatever period of time.
And then you basically
take, what did he say?
Like 95% or something?
Basically some very large amount of
that goes towards paying down your debt,
but still keep a little bit of it to
reward yourself for like doing it right.
And I thought that was like, an
interesting approach because I don't
know, you could get like, depending
on like the type of debt you have,
you can really get buried in.
Paying it down and like the sort of, I
don't know, emotional effects that has.
but, there was another thing that
he said that I also thought was
really interesting, which is not
necessarily specific to business,
but, it's like, there is, there's
kind of like this implied, like
happiness that people get from buying.
and I think, you know, like buying
things or spending money, and I think
this happens in, you know, people's
personal lives and in business, right?
Like, oh, we got a new office or we got
a new computer or something like that.
and I think like the, he
contrasted that with like, getting
that same sort of happiness or
satisfaction from like saving money.
So like watching your savings account
grow, it's not quite as like in your face.
but I think that like, it's like a mindset
shift that I think is interesting and a
good thing for like people to think about.
You know, if, if, I don't know if you
find yourself in debt often, right?
Ethan: Right, the right.
Ethan: So applying that
to like a SAS business.
I think a lot of people in our
position, like would resonate with that,
Ethan: optimizing some code, so
you can turn off a web server or,
you know, fixing up databases.
So you can scale that down and like
all that money you can save like that.
definitely think a lot of people would
really enjoy that process of just
optimizing codes, reduce expenses.
Darby: It's so easy to throw
money at a problem too, right?
Like, oh, this thing's not scaling.
Let's just throw some more servers
at it or throw whatever at it.
And like, I think that it's maybe not
the same kind of mindset, but, it's
like buying your way out of a problem,
Ethan: It's the other side
of the same coin, right?
Like sometimes that's
probably the right solution.
Like we're going to spend a little bit
of money now to solve this problem.
And then like, as we, as you.
Hit the, I don't know how far
I could carry this metaphor.
As you hit the rim of the plate of
expenses you have, like, then you
have to start potentially innovating
a little bit of how you can scale
it back so that you could reallocate
that money to something else.
Like I like the forcing function that
causes, it reminds me a lot of SLO
development, service level objectives.
it's a way like you can monitor a system.
Say I want, from the business
perspective, I want 90% of my web
requests to take less than one.
That means I have a 10% air
budget and I can monitor that.
I can look for events that fall
outside of that one second.
And then I can monitor how
close I'm writing the 10% line.
And then I know like, oh, I have to go
invest in stability and performance.
Or if it's under that, like I
said, this is the acceptable
level that I'm willing to take.
So now I can spend my time somewhere else.
It's the same thing applied to you.
I think that kind of maybe leads into
the, I don't know, maybe the next
thing that I had written down here
is he talks about like efficiency
and how like, trying to focus on
efficiency can lead to innovation.
and like the quote that I wrote
down is like, he asks a question,
how can I do, how can I get two
times the results with half.
like that it reminded me of
a project that we worked on.
it was the, the big email
thing at the one company.
But like, I remember this because
our boss basically said, you know,
like what, I think it was like 40 X
and he threw out a goal like 40 X,
the current capacity, the system.
and I don't know.
I dunno if we both laughed at that or if
it's just me, but there was some laughing
happening, but then it was like, but if
you really focus on, if you really like
put in the effort, like, I mean, I think
we worked on that for like two weeks.
It was maybe, I dunno, it wasn't that
long and like the system, and I think
we even beat the beat, the target.
and I think like a lot of people, like, I
think that's like an under valued thing.
A lot of business context, like, it's
just, it just can't be done or this
is the way it's always been done or,
you know, it's just not possible.
Ethan: I think for us to like, in
that scenario, it was like, I think
we can, when we, on the surface level,
we could see the incremental gains,
but not the, you know, literally
a 40 X improvement in runtime.
those are just, Yeah.
until you get into it, those
are really hard to find.
Although I think in this case it was
like, I think 20 X of that came out of it.
Index rate, like we had a
misapplied, my SQL index.
I, yeah, but I mean, there was some other,
like, you know, bigger things that I
Oh, for sure.
Darby: on to, to get there.
And I don't know.
I mean, I think that like, There's
just some, there's probably so much
room for efficiency in anything.
So, I think that from our background,
like we've focused on performance
and like, you know, making the
software as fast as possible.
But, even this week I
messaged you about something.
I learned about Postgres efficiency.
Like I've been doing Postgres for
a long time and I didn't know that
thing, that I learned in like,
wow, that like, that's just the.
Well, the thing that squeezes out more
performance, and then at a certain scale,
like you really see some big results, so
There's a bunch of things like that.
So this was the ordering of columns
can impact, disc size because
of how the pages were, can disc.
a lot of stuff like that by
themselves, won't matter.
Unless if you're like in this case, if
you're in like super big data, but in
totality, like I bunch of best practices
put together, it can be material.
Ethan: No, like it's not like over
engineering, it's just, I'm going to put,
I'm going to put the bigger column before
the small column and then that's it.
Like, it's not something big.
I think so.
I don't know.
I don't know if this, like, maybe
we're getting like too specific.
the example that you talked about in the.
Which is like more of like a
traditional business example was,
some guy who was running a business
where he was delivering oil.
Something like that.
and he had two trucks and it was
basically two times the expenses
to deliver to different places.
and the innovation that he came up with
was like, well, how can I do this with
a single truck and a single driver?
Like that was really interesting to
me because like, you have to invent
something to make that happen.
You have to invent the special
truck that does, does the
thing that you needed to do.
and maybe in a, in the context of
like a not profitable bootstrap
business, like, you know, inventing
new things is maybe not the fastest
way to, you know, product market.
but if you're like scaling, I think
that becomes really important.
and like really valuable,
So it's in businesses like that too.
When so much comes down to process,
like it feels like there's gotta be
a lot of room for innovation in how
you actually deliver a physical good,
um, very sarcastic.
maybe for some, maybe I'm selling
at short, but if it definitely
feels like there's not a figure out
a way to ship two forms of oil on
one truck level innovation, Elliot.
Darby: Yeah, I remember, so this is like,
this might, make me seem really old.
but there was a conference that I went
to and it was like a tech conference
and the company that was presenting,
they had this like to-do list.
I want to say this was like
2003 or something like that.
And they were talking about
how, like, and I think at the
time it was pretty innovative.
cause this, like, if you think of the
state of front end development back
then it was like jQuery, I guess.
I guess that was the only thing, even,
I don't even know if jQuery was a thing
at that point, but basically they talked
about how like, They built this thing.
And they were like getting quite a bit
attraction and they were like, their
server bills were just out of control.
And this is before AWS.
This is before like all the
great things that we have today.
And so like, what they did was they
rewrote their app to push as much of
the, computation to the client side.
Darby: and so basically their server
just became like the super lightweight.
They persist the data and that's it.
And like everything
happens on the front end.
So they were like inventing this
whole thing to basically improve their
efficiency and like decrease their
infrastructure costs substantially.
Ethan: That's fair.
So the advent of the,
thick client application.
Ethan: Maybe I'm selling yourself short.
Maybe there is more room.
I mean, as soon as I said.
my my previous statement, I just thought
of, you could just run your database and
your web server on the same instance.
And you cut your structure.
Darby: Yeah, there you
Ethan: you're willing to throw a safety
and redundancy at the window, there's
some innovation, left on the table.
Darby: and maybe the innovation is how do
you create safety and redundancy in that
And anyway, that, that
story just came to mind.
And I remember like sitting in that.
That's how I'm thinking like,
wow, this is incredible.
Like, I wonder what the world will be
like when, when everything is just done in
the browser, because, you know, whatever.
And then the world changed a
few years later when servers
became, you know, pennies cheap.
and then it didn't really matter after
What else would we be?
Ethan: I'm not sure.
what I was reading through the book
and reading through like the accounts
to set up and when to flow money
through them, I had kind of a hard time
conceptualizing what that looks like.
don't do much for me.
it's not, it's too abstract for
me to realize like how much money
15% is of a potential business.
So I used a tool called summit to So
summit is a, white boarding canvas,
Excel like tool, for financial modeling.
It's actually really it's awesome.
I really enjoyed playing around with it.
but so I modeled.
All five account, all seven accounts.
And then I set up what I think is a
pretty typical SAS apps, are, so I
had, an account at $9 and account at
$29 and a third account at 59, modeled
some users into it with a little bit
of growth, and then like funneled that
through the system to see like, okay.
at 20 customers, this
is the OPEX that we get.
This is the profit that we get.
For an entire year.
I think if this sounds interesting
to you, I think using summit
is a great way to visualize
Ethan: more concrete numbers,
what it means for your business.
Darby: So you shared a
screenshot of this with me.
I think this is super cool.
the, the way that you can kind of
visualize all the buckets breaking
down, you can, presumably you can
sort of, project user growth in here.
Darby: yeah, I think, I don't know.
I think that's super interesting.
Is it, like, can you, I see there's
a link that says published template.
Can you like share these?
Ethan: I think so.
I'm not totally sure if I can I'll, drop
a link to the template in the show notes.
Darby: Yeah, you should do the
screenshot at least, if nothing
else, just to show people what
this is, because I think you could.
You could do this with any business.
Like right now, like I could take, I had
plugged in all data, honestly, things
Darby: and like, the, you know, the
limited sort of, expenses like, well,
you know, there's obviously Heroku and
AWS and then like the three other things
that we pay for or whatever, it'd be easy
for me to like model out a whole year
Darby: to see like how that would
look and like what the results.
Ethan: and to be fair, I used
maybe 10% of what someone has
Ethan: can do all sorts of stuff
with estimated growth and even
have like support for, like funding
events, like fundraising, all sorts
of really cool stuff to model out
It's a cool.
That's really neat.
Darby: don't know.
Ethan: any other takeaways
you want to talk about?
Darby: so, so there's this other thing
that you talked about a little bit,
that I also thought was interesting.
So he was telling the story about this
lawn guy who is, who like, you know,
mow the lawn, whatever regularly.
And, and this guy, he was like,
oh, I can clean your gutters too.
And so he went and did that.
And then when he was up on the roof,
he found, some bad shingles and he's
like, oh, I can fix your shingles too.
And so like the, like basically the way
that it was described as like, all right,
this guy is a lawn guy, but then now
he's a gutter guy and he's a roofing guy.
You need all these
different tools for that.
There's a other sort of like
overhead and involved in doing that.
Like, the, you can charge more
money for that, because you're
doing more different things.
but if you compare that to the guy who
just sticks to doing the lawns like
that guy can, do far more business.
In the same period of time, because he's
just doing one thing over and over again.
And there's no additional like expenses
on top of that to buy the tools or
whatever, you know, perishable items that
are used in the, in doing those jobs.
and I think I've seen this a lot
of times in different companies
I've been at and startups, where
you see here's the thing we do.
There's a customer over here that
says, if we do this other thing,
they'll pay us a lot of money.
So we should do that too.
and then, you know, so on and so on.
And then like, you know, you really end
up costing yourself more in the long run.
I think the quote from the book was,
selling more as the most difficult way
to increase profits, expenses generated
increased faster than the resulting.
And I thought that was, oh,
that was really interesting.
Cause I've just seen that whole
thing play out so many times.
Ethan: As much for that
example that he gave to.
Cause it's like the four things
that he could fix for the guy,
like roles, special skillsets.
So it was like, you're gonna
have to grow employees.
You have to grow your
leader, your labor pool.
And then Yeah.
Like the equipment specialized
you're didn't have that expense.
the way that you even
sell, those are different.
So like you don't have to learn how
to sell roofing versus lawnmowing
verse chimney repair or whatever.
It was like, it's all so different.
and then in the context of like
software businesses, Always remember
every line of code is technical that,
so like, like not only do you have
to spend the money to buy that tool,
but now you have to like, support
that tool and it's uptime for ever.
Darby: and like, and so that's
like the, yeah, maybe the other big
downside for software businesses.
Yeah, for sure.
Is there like a really well-known tweet
from some guy who's like, I run my half
a million dollar business off a one page.
I like one Linode server.
I should try to find that
like your customer doesn't your
customer probably could not care
less about how much code you have
your stack, how it's deployed.
They care that you're
solving a recurring problem.
at least somewhat reliably.
Darby: Well, you know, like I think when
I look at a lot of people that are out
there doing kind of like these indie
SAS products, they're very focused.
You know, it's like my
product does this one thing.
It's not going to expand
to do these other things.
and like, you know, that, I feel
like that optimizes that efficient.
that, it'd be so easy to expand to other
things I lead honestly, is a good example.
You know, like there have been so many
times people have asked us to like expand
beyond one-on-ones to HR type things.
Ours is a big one.
Like, you know, like, oh, sure.
we could add that functionality, but like
now it's Now it's harder to sell out.
It's harder to maintain.
There's just more to it.
Ethan: Do they want okay.
Ours, because they want to be
able to track employee goals
and roll them up to okay.
Darby: I think a lot of like the
expanded feature set comes from like
someone looking at it and saying, well,
like we have our org chart in here.
Like we have our managers and their
employees already mapped out in here.
And well, if we wanted
to get this other okay.
Our tool, we're going to
have to do that again.
Can we just do it in there, you know?
and that's why a lot of these tools
turn into like Vic HR platforms,
because you don't want to like duplicate
the org chart a bunch of times.
I got nothing else outside of.
I recommend the book.
if you're not currently
running a business, but you
aspire to, I would read it.
It's a quick read.
It's a good book.
And it's yeah.
Easy to read.
Anything else this week?
Ethan: No, I think that's it.
Darby: All right, cool.
We'll see ya.
Ethan: Talk to you next week.