Profit First in Your Business

Many entrepreneurs are bank balance money managers. They look at their bank balance online to determine how successful they are and to make business decisions. Have a large balance? Must mean I’m successful and can spend as much as I want. Is the balance getting low? Time to scramble to find new clients and definitely don’t hire that new VA to help out. But there is a problem with thinking like this: not all the money in your bank account is for expenses.

Instead the book Profit First recommends opening five checking accounts to operate your business. I personally like a modified approach using four accounts. Those four bank accounts are:

• Income: All income is deposited into this account later to be distributed into the other accounts. 
• Profit: This acts as a savings account for two purposes. First, 50% of the money should be distributed to you each quarter as a bonus. Second, the other 50% acts as a savings account for emergencies.
• Tax: For tax savings and payments only. 
• Operating Expenses: To pay all expenses for your business. 

Set these up at your bank and give the accounts nicknames so you know exactly how each account should be used. 

How do I use these accounts? Some tips for you:
First, how much to transfer? Start with sending 15% of income to the Tax account, 5% to the Profit account, and 30% to the Operating Expense account. For example, if $1,000 is deposited into the Income account you’ll distribute it as follows:
$150 to Tax
$50 to Profit
$300 to Operating Expense

You’ll also want to pay yourself 40% (so, $400 in our example) by transferring it to your personal bank account.
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Second, when should you make the transfers? Twice a month is plenty. Pick two days a month to make all your transfers. The second and fourth Friday of the month will work or you can do the 10th and 25th of the month like Profit First recommends. 

Finally, always allocate the money before spending any of it. Don’t pay your bills from the Income account then transfer the remaining money to the other accounts. You must get in the habit of making transfers first then paying bills from the money in the Operating Expense account and no where else.
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Note: these percentages are only estimates. If you find yourself not having enough money each month either reevaluate your spending or increase/decrease the transfer percentages as needed.

Yep, it’s true. If you operate out of one checking account some of the money is for taxes, some is to pay yourself… and the remainder is to pay expenses. If you think that all of it is available to pay business expenses you’ll never pay yourself and have a real problem come tax time.