Setting Up Your Profit First Accounts

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In last week’s blog post I likened typical Bank Balance Accounting to a financial gumbo, where all the key ingredients of a business are swirling around in one pot. Then, I introduced Profit First and explained why it’s SO needed in our businesses. I said:

Profit First teaches us that we should take those ingredients out and individually assess them, even going to the extent of setting up separate bank accounts for each of the key ingredients. Then, we work a plan to allocate pre-set percentages to each key area. When we follow the Profit First plan, we can continue with our old ways of Bank Balance Accounting, but we are truly only spending what is AVAILABLE to spend.

Now, let’s dive in!

Profit First teaches us that we must separate those five key ingredients to successfully manage them:

  • Income
  • Profits
  • Owners Pay
  • Taxes
  • Operating Expenses

I am a Certified Profit First Professional and want to run a Profit Assessment on your business! When you come in for a Profit Assessment of your business, we will show you how you are currently spending your money in each of these 5 areas. Also, we will show you what your Target Allocation Percentages, or TAPs should be for your own business. (Each business is different, but businesses of the same size (annual gross revenue after cost of goods sold) should have about the same TAPs.) Don’t panic if your business’ allocations are currently WAY OFF. That’s normal, and perfectly ok. For now. What matters is that you start taking baby steps toward your TAPS. How will you do that, you ask?

Setting up your Profit First accounts looks like this:

  • Income Account– This could be your existing bank account. It’s where all the money comes in, and it’s the place from which you make transfers each month. We will be having discussions about your income streams, your product offerings and your customers.
  • Operating Expense Account– This bank account is strictly for operating expenses. You transfer money to this account two days each month- the 10th and the 25th. You can spend every last dime in this account, but know that these funds are only for operating expenses. While your greatest allocation percentages will be directed here, it may be less than what you are currently spending on operating expenses. We will begin having direct conversations about your operating expenses and ways to trim them.
  • Owners Pay Account– This account is only for your paycheck. Haven’t been taking a paycheck? Now, you will! Even if it’s only 1% of your gross receipts this month, it’s a start, and we WILL get you to where you need to be.
  • Profit Account– This account is important and very special. It’s what I like to think of as the Rainy Day or Opportunities Account. Profit First strongly suggests that you put this account at a different bank from your Income and Operating Expense Account so you aren’t tempted to easily transfer money. The amount that we have you allocate to this account may be small at first, but it will add up over time. And each quarter, you must take a profit celebration from this account (half of what’s in there at the time). This celebration can be used in many ways- to benefit your family, to pamper yourself, to treat your employees- but YOU get to decide.
  • Tax Account– This is what I think of as the Peace Account. When you start putting the correct allocations in this account, and it’s time to pay your tax bill, you won’t even notice. No more stress every March when the IRS was previously draining your account. It’s just taken care of, and you don’t have to worry!

Does this sound a bit daunting to you? That’s ok. I understand. I want you to remember these two words:

As your Certified Profit First Professional, I will:

  • Create your Profit Assessment and work with you to determine your TAPS.
  • Help you set up your new bank accounts in QuickBooks and establish an allocation/transfer rhythm.
  • Remind you of the transfers you need to make and even tell you the amounts every 10th and 25th.
  • Coach you on your progress as you move toward your TAPS.
  • Help you really move the needle toward profitability.

Want more information? Contact my office to schedule your complimentary How Healthy Is Your Business consultation!

Next week we will discuss two ways to really impact your profits!

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