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In the beginning of Profit First, Mike Michalowicz suggests that you set up these 5 accounts:
Income
Profit
Owner’s Compensation
Taxes
Operating Expenses
These accounts are meant to help you manage your business’ finances at a glance without the need for an up to date budget or a meeting with your accountant. At the beginning of your Profit First journey you may find these accounts to be confusing. If you didn’t know, even as a Profit First professional I struggled with these accounts. Specifically, I struggled with the owner’s compensation account because I am a corporation and pay myself a bi-weekly salary. For me, owner’s compensation was an operating expense. But the beauty of such a simple and effective system is that Profit First is an easily customizable system that works across thousands of industries.
For my inventory clients, it’s a great idea to have a “stocking” account. This is where you stockpile away the money to purchase your inventory. The purchase of inventory can be a cash drain. So, from every sale, you should be putting away a portion of the funds to replenish the inventory. This will ensure that you have the funds to cover the next inventory purchase.
Reserve account – this is an account that every business owner should have. Saving 3 months of reserve will help you get through the lean times.
You should have an account where your payroll and payroll taxes are paid through. If you are a corporation, you can add your wages to this account.
Sales Taxes – if you are a company required to collect sales taxes, it would be good for you to remember the funds collected are NOT yours and should not be stored in your operating account. Creating a separate account for funds to collect prior to processing your sales tax return will ensure you have the funds that didn’t belong to you.
Is there a capital expense coming your way? Then how about creating an account just to collect that money. This will ensure that it doesn’t mix with your operating expense and will allow you to purchase that item with ease.
I think you get the idea. If there is something that you struggle with OR want to ensure you have the money for it – then separate it. That is the basis of Profit First, dividing money onto smaller plates so you can conceptualize it. Think of yourself as a ten year old walking into a candy store. If you only have 5 dollars you have to get the best candy. But if you had 100 dollars you would probably be buying terrible candies, like coffee flavored jelly beans, yuck!
Our Profit First coaching helps you to assess how you need to divide your money and keeps you accountable to the Profit First system. As a coach, we don’t just educate you, we drill you through the knowledge to help you master the system for yourself. If you’re interested in how to develop a system that works for you, consider reaching out for a discovery call today!
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