We small business owners rely a lot on what we accountants call “bank balance accounting,” which means you log into your online bank account(s), look at your balance(s), and make decisions based on the numbers. I am not exempt, I do it too (I know it sounds ironic coming from an accounting professional). When our balance is low, we make collection calls and sell hard. When our balance is high, we make new investments.
In theory, this approach makes sense. In practice, it can lead to trouble. We should be running the numbers, not vice versa. Profit First is an accounting method that has helped me, and many other business owners, to course-correct by distributing business income into different yet equally important categories. This requires setting up five foundational business bank accounts for the following purposes:
Income: All income from sales is received in this account and from here distributed twice a month to the other four accounts. It’s crucial that you follow the order of distribution as it appears below (our Profit First-certified team of experts can elaborate in a free consultation).
Profit (hence, Profit First): Rewarding yourself for your hard work before allocating funds elsewhere may seem counterintuitive, but it’s crucial. Enjoy the fruits of your labor!
Owner’s pay: You are the most important employee at your company. Make sure you pay yourself what you deserve!
Taxes: As they say, two things in life are certain: death and taxes. If you’re making a profit, you won’t get away without paying your fair share.
Operations: Whatever money is left in your “Income” account will be used to operate your business.
These five foundational accounts will help keep your business healthy. Profit First also recommends having two “no temptation” accounts for profit and taxes. These accounts should be set up in a way where the funds are hard to get (for example, there may be a penalty charge for withdrawing money or a limit on the number of monthly or annual draws you can make). As a Profit First-certified accountant I urge you to avoid any conveniences your bank offers for withdrawing money. Make funds difficult to access – it makes “transfer days” that much more exciting and rewarding!
Here are some action steps you can take immediately:
Book a two-hour appointment with yourself so that you can go to your bank. Personally, this was the hardest part for me. Online banking makes this less of a hassle.
Open your business’ five foundational bank accounts. Did you know there is one online bank that’s Profit First friendly? Relay Bank! Tell them I sent you 🙂
Enjoy entrepreneurial success!
Start your Profit First journey by scheduling a free 30-min clarity call with our experts!