Profit First Pt 5: 7 Problems with Profit First That Drain Law Firm Cash Flow and Growth
Profit First, a cash management system popularized by Mike Michalowicz, has garnered a lot of attention among law firm owners seeking to optimize their financial health. However, while it may seem like a panacea for financial woes, it can also lead to serious misconceptions about profitability. On this episode, I explore seven critical ways that the Profit First system can go wrong in law firms and how to address these pitfalls effectively.
1. Profit First Optimizes Behavior, Not Strategy:
One of the most significant drawbacks of the Profit First approach is that it focuses primarily on budgeting rather than on strategic financial planning. While it encourages discipline in spending, it doesn’t guide law firm owners on where to allocate their funds effectively. For instance, a firm could be meticulously managing its budget but still be investing in ineffective marketing channels or outdated technology. To remedy this, law firm owners should layer strategic planning on top of Profit First. Understand your business’s economics and ask critical questions about profitability, pricing, and marketing effectiveness before implementing the system.
2. Profit First Can Mask Broken Economics:
Many law firm owners mistakenly believe they are profitable because they see money in their profit account. However, if they are relying on credit cards to cover operating expenses, that perceived profit is misleading. Real profit occurs only when true revenue exceeds actual expenses, including credit card debt. To address this issue, implement monthly reality checks by reviewing your balance sheet. If debt is increasing, it’s time to pause profit distributions and redirect funds towards paying off debt or fixing underlying business issues.
3. Complexity Increases with Firm Size:
Profit First is generally effective for small firms or solo practitioners, but its limitations become apparent as firms grow in size and complexity. Multiple partners, practice areas, and varying compensation structures can complicate the application of Profit First. For example, how do firms manage distributions when partners have different salaries and contributions? In larger firms, a more sophisticated account structure may be necessary to ensure fairness and clarity in financial management.
4. It Can Lead to Short-Term Thinking:
The Profit First method encourages immediate cash flow management, but this can lead to a focus on short-term gains at the expense of long-term growth. A law firm may prioritize immediate profit distributions over investing in essential resources, such as staff training or technology upgrades, that can generate greater returns in the future. To mitigate this, firms should balance short-term cash flow management with long-term strategic investments that contribute to sustainable growth.
5. Neglecting Cash Flow Variability:
Law firms often experience cash flow fluctuations due to the nature of their business. Profit First does not account for these variances, which can lead to cash shortages during lean months. It’s essential for firms to incorporate cash flow forecasting and budgeting that considers seasonal trends and potential revenue dips. This proactive approach will help maintain financial stability and prevent crises.
6. Having a Separate Emergency Fund is Essential:
The rigid structure of Profit First can hinder a firm’s ability to adapt to changing circumstances. For instance, if unexpected expenses arise, the system may not provide the flexibility needed to reallocate funds effectively. Law firm owners should remain adaptable and willing to adjust their financial strategies as conditions change, ensuring they can respond to both challenges and opportunities.
7. Overreliance on the System:
While Profit First can provide a framework for financial management, overreliance on it can lead to complacency. Law firm owners might assume that simply following the Profit First methodology will guarantee success without critically assessing their unique business needs and market conditions. It is crucial to continuously evaluate and refine financial strategies rather than solely relying on a single system.
Conclusion:
While the Profit First system offers valuable tools for law firm cash flow management, it is essential to approach it with a critical mindset. By understanding its limitations and implementing strategic planning, law firm owners can avoid common pitfalls and ensure that they are genuinely profitable. Key takeaways include the need for a balanced approach that combines budgeting discipline with strategic financial planning, regular assessment of business health, and adaptability to change.
Resources:
Book: Profit First - Transform Your Business from a Cash-Eating Monster to a Money-Making Machine by Mike Michalowicz
Connect with Darren Wurz:
Transcript:
Darren Wurz [00:00:00]:
Profit First might actually be sabotaging your law firm's growth, all while making you feel like a financial genius. And here's how to tell. What if I told you that the profit sitting in your so-called profit account right now might be completely fake? Profit First is the cash management system created by Mike Michalowicz that we've been talking about. In this series on Profit First. The system allocates every dollar you receive into different bank accounts: profit, owner's pay, taxes, and operating expenses. It's brilliant for creating spending discipline, but here's what most law firm owners miss: it's a behavioral tool, not necessarily a business strategy. So, here's what I want you to learn today, friend. Profit First can optimize how you manage your money without actually making your firm more profitable.
Darren Wurz [00:01:01]:
And a lot of that has to do with us as human beings and how we like to work around our own systems. And if you're not careful, it can hide serious problems until it's too late. Thank you so much for being here, friend. And this is part 5 of this series on Profit First that we're doing this quarter because it ties directly to our theme for the year, Profit on Purpose. And in the first quarter here, we're reading Profit First inside the Lawyer Millionaire Community and talking about it here on the show. So today I'm going to show you the 7 ways that Profit First goes wrong. And give you the exact fix for each one of them so that you can properly use the system or avoid it altogether if it's not the right fit for you. I want us to think critically about these things.
Darren Wurz [00:02:00]:
You know, I'm the kind of person who reads a book and thinks, oh, that's brilliant, let's go do it. But hold up, let's push the brakes here and let's actually think critically about this before we dive right into putting it into practice. Look, if you're a law firm owner listening to this podcast, I'm guessing that you're interested in building wealth, right? That's why you're here. And you might have read Profit First or you've heard me talk about it on this series. Maybe you've even started implementing it. So here's the problem that I want to talk about. I've seen too many lawyer friends who think they're profitable because they have profit in their profit account, or so-called profit in their profit account. But meanwhile, their credit cards are maxed out and their firm is one bad month away from a cash crisis.
Darren Wurz [00:02:51]:
Sound familiar? I hope not. But if that is the case for you, you're in the right spot. So let me tell you a quick story. There once was a law firm owner named Sarah who implemented Profit First religiously. She had her 5 accounts set up. She transferred her money every 2 weeks like clockwork and took her quarterly profit distributions. She felt like she'd finally figured out money. However, her operating expense account kept running dry.
Darren Wurz [00:03:24]:
So, she started using her firm credit card to pay for payroll, software, case management systems, even expert witness fees. Within a few months, she had $50,000 in credit card debt, but hey, she had $10,000 in her profit account. So things are going great, or so she thought. This is what happens when you treat cash management or a cash management tool like it's a complete financial strategy, and it's not. Okay. So let's dive in. What are the 7 ways that Profit First goes wrong? What are the 7 problems with Profit First? Well, here they are. The first one is that Profit First optimizes behavior, not strategy.
Darren Wurz [00:04:11]:
Profit First is fundamentally a budgeting system. And it works really well for a lot of folks because it's designed to force you to live within your operating expense budget or your operating expense percentage. And that creates discipline. It forces you to run your business on a smaller amount than your total revenue, which is a big mistake that many law firm owners, many business owners fall into. And Profit First helps us get out of that problem. But here's the bigger— the next problem. It doesn't tell you where to spend that money or whether you're spending it on the right things. Think about it.
Darren Wurz [00:04:47]:
You could be spending your entire operating expense account on the wrong stuff, the wrong marketing channels, inefficient staff, outdated technology, too much technology. Okay. And Profit First won't tell you a damn thing about it. It just makes sure you spend exactly that much and no more. It's like getting really good at driving the speed limit without ever checking to see if you're going in the right direction. We need a strategy, friend. We need a good strategy. First.
Darren Wurz [00:05:22]:
So what's the fix for this? Layer strategic planning on top of Profit First. Before you implement the allocation percentages, do the hard work of understanding your economics and asking yourself some tough questions. Number 1, is your business viable? Is it profitable? Are you charging enough? Where are you losing money? Is your marketing focused on what actually works? Are you wasting money on software you don't need? What's your highest ROI marketing channel? Are you just swiping your business card at every opportunity that comes your way? Hmm. Once you know these things, then you can implement Profit First to enforce discipline around the strategy you've developed. Think of it this way. Strategy determines where the car goes. Profit First determines how fast you can drive. You need both.
Darren Wurz [00:06:23]:
That's number one. Okay, the second problem with Profit First is that it can mask broken economics. And this is a big one. Don't miss it. If your operating expense account keeps running out and you're covering the gap with credit cards or lines of credit, Congratulations, your profit is fake. I've unfortunately seen this play out many times, and I may have even made this mistake myself. Don't tell anyone. You look at your profit account and you think, look, I'm making money.
Darren Wurz [00:06:58]:
Meanwhile, you're actually accumulating debt to keep operations running. That's not profit. That is borrowing from your future self. And calling it success. Real profit happens when your real revenue exceeds all your real expenses, including the ones you've put on your credit card. If you're using profit-first percentages but supplementing with debt, you haven't learned the lesson, friend. You've just created a more sophisticated way to lie to yourself. And boy, oh boy, Do we love to lie for ourselves, right? We set up these systems and then we find little ways to work around them.
Darren Wurz [00:07:41]:
But remember, the goal is to actually be profitable. The goal isn't just to set up the system and look at me, woohoo, I have my cash management system set up. It's to actually move the goalposts. It's to actually increase the profits over time. And if we're not doing that, we're missing the lesson. So what's the fix? Well, you know, first of all, I get it, it's hard. In reality, we don't use our OpEx account to pay for things usually. We use our credit cards, that's what we do.
Darren Wurz [00:08:16]:
But here's the thing, if you're not able to pay off the full balance each credit card cycle, you have a spending problem in your business. That's okay. Maybe you have some outstanding debt and you're trying to get rid of it, so you're implementing Profit First. Here's what to do. Instead of just continuing this cycle, institute a monthly reality check where you actually are going to look at your balance sheet and compare it to last month. Is your debt increasing? Then you are not profitable regardless of what's in your profit account. Period. When you catch this happening, immediately pause your profit distributions and redirect that money to either A, paying down the debt, or B, fixing the underlying problem, which might mean raising prices, cutting costs, or changing your business model entirely.
Darren Wurz [00:09:09]:
Don't take another dollar from your profit account until your debt is stable or decreasing. And allow Profit First to be kind of a diagnostic tool for you. Instead of just moving money all around, if you're running short in your OpEx account, right, instead of, you know, taking money from your tax account to cover operating expenses or what have you, figure out why you're running short. Profit First will let you know. You'll see, oh crap, I'm running short in this account. But then do the hard work of asking yourself, Why is this and how can we fix this? And no, it's not just about let's go out and get some more clients, although that can help. It's about fixing what's not working in the business. Something isn't working.
Darren Wurz [00:09:57]:
Okay. We've got to be honest with ourselves. Okay. Problem number 3. Profit First is easy when you're small, but it gets difficult when you're large and complex. What if you have multiple partners? What if you have multiple practice areas? What if you're a 20-person law firm, right? Profit First works beautifully for solo practitioners and simple startups, but the moment you have multiple owners, lots of employees, or complex operations, the cracks start showing. How do you handle profit distributions when partner A takes $100,000 salary and partner B takes $200,000? One owns 60% and works 40 hours. The other owns 40% and works 60 hours.
Darren Wurz [00:10:41]:
What about partners who brought in clients versus partners who brought in cash? What about payroll, case expenses, firms with multiple practice areas, et cetera? You can see the complications add up quickly. And the system doesn't really have a framework for this. It assumes a simple ownership structure that many successful firms will outgrow quickly, or maybe you already have outgrown it and you need something a little bit more sophisticated. Well, you may just need a more complex account structure, maybe 8 to 12 accounts instead of the traditional 5. One that you might need to add right away is a payroll or team account, right? That is a recurring expense that you want to make sure that you're going to have money to cover. Okay, separating payroll ensures that you're never going to accidentally spend salary money on marketing or something else. And with multiple owners, you need to make sure that you're handling your owner's pay and profit accounts with precision and with care. Owner's pay is for sweat equity, working in the business.
Darren Wurz [00:11:53]:
Profit is for investor return and should be distributed based on ownership percentage. You could also use the profit account to pay bonuses to the team or to pay origination bonuses or to pay other types of incentives, but it needs to be in writing and you need to have an operating agreement. Do you have an operating agreement, friend? So many law firms don't have them. And even, even multi, multi-million dollar law firms I've seen that don't have operating agreements. You need to have an operating agreement. So it's your attorney that you use for your business needs and get your operating agreement put together. Finally, your tax account could be used. How do we use our tax account? Well, the tax account is to pay your taxes as the owner, and you can use the tax account to distribute money to cover the partners' personal tax liabilities and quarterly estimated tax payments.
Darren Wurz [00:12:54]:
It's a great way to use that. For firms with multiple practice areas, you might consider running separate P&Ls for each area and using different percentages based on the economics of each practice. You know, a personal injury practice is going to be very different from an estate planning practice. They're going to have different margin structures. So they should probably have different percentages. So that's a big problem, but it's fixable. There are ways to fix that. Okay.
Darren Wurz [00:13:22]:
Problem number 4, it can lead to cash hoarding instead of smart deployment. Here's a small problem. Profit First tells you to take regular profit distributions, and that's good. We advocate for owners paying themselves. You need to be paying yourself. But what if your firm would be better served by investing that cash in a rainmaker associate or a marketing campaign that has a really strong ROI or paying off a high-interest loan. The system prioritizes getting money out of the business and into the owner's pocket. Sometimes that's exactly right, but sometimes a high investment return in the business makes a lot of sense.
Darren Wurz [00:14:05]:
I've watched lawyers and law firm owners turn down great growth opportunities because the money's already allocated, and that may not be financial wisdom. How do you fix this? Well, let's create a decision framework to help us. An investment opportunity decision framework. Come up with some clear criteria for yourself, or for when it's appropriate to deviate from your, you know, normal standard profit distributions. What type of ROI needs to happen? Maybe 30% or more? How are you going to measure it to make sure that it worked? Make sure you also have a specific timeline. For example, we'll invest $20,000 from this quarter's profit in Google Ads because our current ROI is 4:1. We can track it daily and we'll know in 90 days if it's working. Document these decisions.
Darren Wurz [00:14:59]:
You know, don't allow yourself to go completely off track. Document these decisions and review them quarterly. If your investments keep beating, keep delivering consistently great returns and beating the returns you would get from taking those profit distributions and investing them, great, keep doing it. If not, go back to your standard distributions. The key is being intentional rather than haphazard. And what about that cash that you're building up in your business, which is great? You want to make sure that it's invested in some kind of high-yield savings account. Now, here's the problem. There are not a lot of great high-yield savings options available to businesses.
Darren Wurz [00:15:43]:
Relay Bank, which is the preferred bank for Profit First, does have a high-yield savings account, which yields somewhere around 2.5%. Not bad. What we actually advocate and do for clients is that we will set up a business brokerage account and invest it in a money market mutual fund that can be bought by institutions. Okay. And these types of money market mutual funds currently, as of February 8th, 2026, are yielding somewhere around 3.5%. Not bad. So make sure you're getting some return on your cash. Okay.
Darren Wurz [00:16:19]:
Problem number 5. Profit First is not a replacement for real financial reporting. This might be the most dangerous misconception. It might be easy to implement Profit First and then think, oh great, I'm done with financial management. We can stop looking at the P&L. We don't have to forecast anymore. We'll just spend what's in the operating expense account and everything will be fine, right? You still need to understand your financial statements. You still need to forecast cash flow.
Darren Wurz [00:16:50]:
You still need to know your numbers, revenue per lawyer, your cost per case, your client acquisition cost. Profit First doesn't give you any of that. It's just a cash allocation system, not a financial intelligence system. So we need to build in some financial reviews, implement a layered system. You know, layer 1 is Profit First. You need that. Layer 2 is a monthly review. We need to look back every month, at least every quarter, but monthly might be better, right? Review the actual P&L, compare it to the budget, analyze the key metrics, revenue per lawyer, profit per case, marketing ROI, etc.
Darren Wurz [00:17:33]:
Make sure you're reviewing these things. Did we actually have a real profit, right? Are we actually moving up? In profitability. And then layer 3 is forecasting. And we advocate forecasting cash flow weekly. Get yourself in a rhythm of every week sitting down and forecasting your cash flow over the next 1 week, 2 weeks, 3 weeks, 4 weeks. And then allowing, and then making strategic decisions based on that. You need discipline. You need to be close to the numbers.
Darren Wurz [00:18:07]:
As a business owner. Monthly reviews give you intelligence on what happened. Weekly forecasting helps you know where things are going. If you're only doing Profit First and not doing any kind of actual financial reviewing or forecasting, you are flying blind. This isn't optional. You need to be close to the numbers. Okay. Problem number 6.
Darren Wurz [00:18:33]:
You need a separate emergency fund. Pure Profit First uses the profit account as a rainy day fund, but your profit account is for distributions. It's money you're planning to take out of the business. What happens when you have a genuine emergency? A lawsuit, a bar complaint, a key employee leaves and you need to pay a recruiter, a recession hits and revenue plummets? You need actual cash reserves or COVID happens, right? And the courts are closed. And this is real. I know real law firms that had to shut down because they ran out of money, period. And I know other law firms that had 6 months in reserves and were able to weather COVID just fine. You need actual cash reserves that are separate from your profit account.
Darren Wurz [00:19:23]:
And yes, this is a business emergency fund. Separate from your personal emergency fund. You need both as a business owner. And we recommend a similar number, 3 to 6 months of operating expenses in reserve. If you're treating your profit account as reserve, it gets confusing. You need to add— here's the fix— you need to add a 6th account to your profit system, the emergency reserves account, or Mike Michalowicz calls it the vault account. Before you start taking profit distributions, build this account to 3 months of operating expenses minimum, 6 months ideally. And that could vary a lot depending on your type of practice and the volatility of your practice, right? Some firms will need a larger reserve.
Darren Wurz [00:20:11]:
When it's time to take your profit distributions, only distribute half. Move the other half into your emergency fund until you've built it up. Okay. Problem number 7 with Profit First is that, and this is the culminating issue, it's not a silver bullet, my friend. Here's the unfortunate truth. You can follow Profit First perfectly and still have a failing business. If your revenue is declining, if your margins are terrible, you are not doing something right. I've seen lawyers implement Profit First with religious devotion.
Darren Wurz [00:20:52]:
While their firms slowly bleed to death. They feel productive because they're managing money, but they're rearranging the deck chairs on the Titanic. And that is a very apt metaphor for this situation. Profit doesn't come from shifting money around. Profit comes from delivering value more efficiently than it costs you to deliver it. And that requires strategic thinking, not just system following. Start with a business model audit before you implement Profit First. Ask yourself these hard questions: Is my revenue growing, flat, or declining over the past 12 months? What's my gross profit margin? My revenue minus my direct costs like time and case costs.
Darren Wurz [00:21:42]:
Am I in a practice area with a future? Or am I riding a dying business model? Is my marketing actually working? That's a very, very important question. Am I actually getting results? Can I trace clients back to specific sources? Or am I just blowing money on Google Ads and flying to conferences all year long? Do I have product-market fit? Are clients actually willing to pay what I need to charge? Am I getting good clients? If the answers to these questions are bad, implementing Profit First is— here's another car metaphor— like putting premium gas in a car that has a blown engine. Fix the model first. Fix the engine first. This might mean changing up your practice area, firing unprofitable clients, restructuring your pricing, investing in marketing that actually works. Or developing a new service offering. Only once you fundamentally have a fundamentally sound business model should you layer Profit First on top of it. Otherwise, you're just organizing your decline more efficiently.
Darren Wurz [00:22:53]:
You've got to have a good business model first, and Profit First is not going to fix a bad business model. It's just not. So, there's the 7 problems and 7 ways to fix those problems. I hope this was helpful for you. And here's one thing I want you to do right now. Audit yourself and your money honestly. Next time you're at your computer, pull up your credit card statements. Actually, put this on your calendar as a to-do, as an appointment with yourself.
Darren Wurz [00:23:27]:
You're going to set aside a time to do this financial audit. Pull up your credit card statements and your line of credit. If you're using Profit First and accumulating debt, stop lying to yourself. Either your percentages are wrong or your business model is broken. Fix the real problem. Now, friend, let me tell you why I know about this. Because I've made these mistakes. I've used Profit First in my business but took on expenses too fast trying to grow.
Darren Wurz [00:23:58]:
And then wound up breaking the whole system and taking on credit card debt. And I don't want you to make these same mistakes. Don't allow Profit First to hide problems in your business. Be brutally honest with yourself. Allow Profit First to show you where the problems are and fix them. Here at The Lawyer Millionaire, we help law firm owners build wealth and freedom through their practices. That means sometimes we have to challenge popular advice like Profit First, even when it comes from books we've recommended, and instead give you solutions that really work. If you're struggling to figure out whether Profit First is right for your firm, or if you're using it and something feels very off, we can help you sort through this.
Darren Wurz [00:24:47]:
We can look at your actual numbers, your growth trajectory, your goals, and help you build a financial system that actually works for you, not for Mike Michalowicz or somebody else. We can help you implement all 7 of these fixes, identify if you have any of these 7 problems, and implement the fixes together. Book a call with me and we'll spend a few minutes going through your financial setup, and I'll tell you honestly whether Profit First makes sense for where you are right now, what fixes you need, or whether you need something different entirely. The link to my calendar is in the show notes. And PS, don't wait until you've got $50,000 of credit card debt and a fake profit account to figure this out. Finally, this is only the tip of the iceberg. If you want to dig deeper into this topic, you need to join us inside the Lawyer Millionaire Community. Monthly masterclasses, a community of lawyers, free resources.
Darren Wurz [00:25:52]:
What are you waiting for? Just go to community.lawyermillionaire.com. Well, that's it for today, my friend. And remember, if your law firm isn't creating more wealth and freedom in your life, what the hell are you doing? Can I get an amen? I'll see you next time.