Profit First: Your Owner’s Pay Account isn’t an ATM.
The mechanics of Profit First weren’t new when I started. I had been using the envelope system in my personal life for years during the 2008 financial crisis. If money was meant for groceries, it stayed in the grocery envelope. Profit First simply brings that same philosophy into my business, and modernizes the process with bank accounts.
Remember this graphic?
It’s simply the envelope system, but far more sophisticated. It’s that sophistication that forced me into a realization: My business accounts couldn’t be used like a personal account.
Many business owners don’t realize they’re using their business accounts in this way, they just pay the expense because money is in the account. That is, until they enter a slow season and the business slows down.
Don’t add an unnecessary burden to your business.
Profit First is a Mindset Shift – That can be true for your personal finances as well.
One of the biggest mindset shifts Profit First gave me was understanding the purpose of owner’s compensation. Owner’s pay is only one bridge between your business and your personal life, and those bridges have rules.
You need to determine which bridge goes where. Does Owner’s Comp become personal income? Or, do you need it to go to a specific account? Do you need to open a new personal account to address a need, emergency, or want? How many ‘cars’ can move through the bridge every day?
Instead of siphoning money when life becomes expensive, we must create a predictable income that we can plan around. Even better, that routine stops us from attacking other business accounts. Because if our personal expenses are coming from the OPEX account we are not in a happy place.
This is where Profit First and good personal money habits come together. The Money Habit teaches us how to structure our personal finances, and builds on the habits you have already formed with Profit First. That doesn’t mean it’s the same system, these bridges move between different parts of your life. I encourage you to have an entirely insulated system to handle business and personal finances. However, that doesn’t mean those systems cannot compliment each other.
Here are some personal finance tips that harmonize with Profit First. In our Profit First educational series we have an episode on scaling Profit First. We use the motto: When in doubt, open an account. This account is used to save for large purchases. The same logic can be applied to your personal finances. Our writer Larissa is using that right now in her personal life with an account specifically set up to handle personal taxes. Instead of naming that account “Taxes” (a Profit First account), we use the term Need or “N”- Taxes to quickly distinguish this account as a “needs” account that handles personal taxes.
Just like Profit First, that account gets a percentage that comes from the personal “income” account. Or, if Larissa was a business owner, she might decide that the Owner’s Comp ‘bridge’ is directly connected to that account. After all, it’s only one of those bridges. Donna pays for all of her personal life with regular payroll that is factored into her OPEX budget.
Just like in Profit First, every account has a specific purpose. When you have both your personal and business accounts set up in similar ways then personal finance becomes harmonious.
And a harmonious relationship between business and personal finance is something incredible.