In the Profit First world we have this generalized concept: Tie your revenue goals to your personal goals. Go into your personal books and calculate the cost of your lifestyle. That number becomes your revenue goal. This concept is useful for any business owner that struggles to find the motivation to build their business.
For Profit First, this number becomes your owner’s compensation. This is one of the many bridges between your business and your personal life. However, there are two sides of that scale. Profit First handles the business side, and The Money Habit handles the personal side. The Money Habit uses a similar system to Profit First: Multiple accounts with an individual purpose. The accounts you set up are called: Income, Needs, Wants, Dreams, Fix/Future, and Emergency.
Using these accounts gives you the clarity you need to balance both sides of the scale.
The above is a diagram of how Profit First relates to your personal finance using The Money Habit. As part of Profit First, we urge you to always pay yourself a regular paycheck in order to create friction between “business money” and “personal money.” On the personal side, it’s on you to determine what percentages go into which account every time you pay yourself. A Money Habit professional can help you determine what is appropriate. The goal is to balance both sides of the scale. When your revenue increases, your “money map” should reflect the increased funds. If your business shrinks, your money map should shrink proportionally.
I recently spoke with a business owner who told me, “I’m an impulse and emotional buyer.” Because if you’re an emotional spender in your personal life, those habits often find their way into your business. The business credit card becomes a safety net. The operating account starts looking like a personal checking account. Before long, no one really knows where the money is going. My new policy is, if someone admits that they are an impulse buyer, they need to get help from someone certified in The Money Habit. Both sides of the scale must balance with each other.
The most important part of understanding your money habits is employment of Parkinson’s Law. If you are a longtime reader– or viewer– of our content then you know the importance of Parkinson’s Law. The law states: If you have it, you will spend it. We know that sticking to a spreadsheet is difficult. Don’t allow it to be difficult, physically separate yourself from the money. This way, we can limit how much of our Profit First plan is dictated on frivolous desires. Nobody really wants a business that is run by an addiction to Taco Bell, afterall.
However, we can’t ignore that those wants will happen, and it is up to us to determine how much we will spend on wants every month. And, this informs us of what our sales goals are. Instead of “oh I want to make 1 million in revenue” we’re instead saying “if I make 1 million in revenue, my dreams account will be able to pay for a new house in 8 months.” Talk about a Profit Celebration.
If you’re ready to take the next step in your business. Consider reaching out for a discovery call. If you need Profit First help, we can implement that system in your business. If you need personal finance help, we can connect you with a trusted professional to help you balance that side of the scale.
Take back control of your finances.