"Profit First": Getting into a Rhythm
Profit First has you depositing a percentage of funds into different accounts. This helps you to not overspend and to ensure that you have a profit, owner’s compensation and tax money at the end of the year. What if your funds come in sporadically over the course of the month? Are you supposed to make a division of those funds each day? Of course, not – that would be way to labor intensive and would drive your bookkeeper crazy.
Rather Mike and I are both advocating doing things in a rhythm. He says the 10th and 25th work nicely, I say that you should pick 2 days a month that make sense to you. Many of you do payroll on the 5th and 20th of the month – that may be the best days of the month for you because you are already focused on cash flow. Perhaps you will choose the 15th and 30th because that’s when the bulk of your funds are deposited. It really doesn’t matter if you find 2 days a month that can be designated as your accounting days.
In addition to your monthly rhythm, you will find that there are a few quarterly and annual items that require a rhythm as well. For example, now that you have a TAX HOLD account, you have the funds to do those quarterly payments to the government. This is where Mike also advocates you taking a profit distribution. You have the cash flow, so why not. He warns us not to confuse this with owner’s compensation. Owner’s compensation is the pay we receive for working in the business. Profit distribution is an award to the equity owners of the company… mainly you. You will not empty the account rather you will distribute 50% of what’s in the account to the owners of the company. This way you still have a cash reserve for the business.
At the end of the quarter, you also need to evaluate your CAP and your TAP. It’s time to raise the stakes and up the percentages of your CAP to move closer towards your TAP (Current allotment percentage and Target allotment percentage). You have now just seen that the system will work, and you can have a profit in the business. It comes with a lot of work on reducing your expenses. Move each of your percentage account up by at least 1% and decrease your expense account by that same number. Remember it’s about reducing your expenses not about getting more sales; although, that will happen. It’s about learning what is absolutely needed in your business and what are the “nice” to haves. The “nice” to have can come back into the business as you grow and learn to have a profit, tax and owner’s compensation account.
At year end, you are going to pay income taxes on the profit of the business. You have been growing in your percentage allotment and will likely be short in the first year. This is the only time you can take from your profit account and put it in your tax account. The idea is that as you move closer and closer to your TAP you will not have to raid the profit account.