Master Your Biz Money By Paying Yourself First
Profit First, a cash management system created by Mike Michalowicz, flips the traditional accounting formula on its head. Instead of focusing on income minus expenses equaling profit, Profit First ensures your business prioritizes profit from the outset. This fun and practical system involves allocating your income into specific accounts with predetermined percentages. Let’s dive into how you can set it up and start seeing results!
Why Profit First?
Most small businesses operate with the “leftover” mentality: revenue comes in, expenses go out, and whatever is left (if anything) is profit. The Profit First method forces you to intentionally prioritize profit and run your business within its means. Think of it as paying yourself first—because you deserve it!
Setting Up Your Profit First Accounts
To implement this system, you’ll need to set up 4-5 bank accounts. Here’s a breakdown of each account and its purpose:
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Income Account
- Purpose: This is where all revenue is deposited. Think of it as a holding account that distributes funds to your other accounts.
- Action: At regular intervals (1x or 2x a month), allocate the total income to the other accounts based on your percentages.
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Operating Expenses Account
- Purpose: To cover day-to-day business expenses like rent, utilities, inventory, and marketing.
- Suggested Percentage: 30% of total income. To streamline things, I keep these funds in the Income Account, but that means I stay on top of distributing the funds to my other accounts in a timely manor.
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Profit Account
- Purpose: Your reward for owning and running the business. This account builds financial stability and reserves for the future.
- Suggested Percentage: 5% of total income.
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Owner’s Pay Account
- Purpose: To pay yourself a consistent salary for your hard work. This ensures your personal financial needs are met.
- Suggested Percentage: 50% of total income for a small business.
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Tax Account
- Purpose: To cover business taxes without stress. By setting aside funds proactively, tax season becomes much less daunting.
- Suggested Percentage: 15% of total income.
How to Allocate Funds
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Deposit All Revenue into the Income Account
- As customers pay invoices or revenue rolls in, deposit all funds into the Income Account.
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Schedule Regular Allocations
- Once or twice a month (on the 10th and 25th or on the last day of the month), transfer percentages to the Profit, Owner’s Pay, Tax, and Operating Expenses accounts.
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Stick to Your Percentages
- The key to success is discipline. Resist the temptation to dip into the Profit or Tax accounts for other expenses.
Adjusting Percentages Over Time
Your business might not start with the ideal percentages. That’s okay! Begin with realistic numbers and gradually adjust. For example:
- Year 1: Profit (5%), Owner’s Pay (40%), Taxes (15%), Operating Expenses (40%).
- Year 2: Profit (5%), Owner’s Pay (45%), Taxes (15%), Operating Expenses (35%).
- Year 3: Profit (5%), Owner’s Pay (50%), Taxes (15%), Operating Expenses (30%).
The goal is to increase your Owner’s Pay percentage (and eventually Profit percentage) and reduce Operating Expenses as you grow.
Benefits of Profit First
- Financial Clarity: You’ll always know where your money is going.
- Stress Reduction: Tax season and unexpected expenses become less overwhelming.
- Motivation: Seeing your Profit account grow is incredibly rewarding.
- Business Discipline: This system forces you to operate lean and prioritize what truly matters. Plus now I look forward to paying myself every month and tangibly see the pay add up instead automatically having it absorbed in my business.
By implementing the Profit First system, you’re setting your small business up for financial health and long-term success. It’s a simple yet transformative way to take control of your finances, pay yourself consistently, and prioritize profit without compromising growth. Ready to take the plunge? Start setting up your accounts today and watch your business thrive! And hit me up if you have any questions! I've been doing this for 6 years and it's been a game changer in my business!