31 May Profit First Implementation-Can So Many Bank Accounts Serve You?
One of the mainstays of Profit First Implementation is to open multiple bank accounts and by doing so, one has the ability to know the exact purpose for each dollar brought into a business. This thought has been met with resistance at every turn, often from people who are in a position of leadership-the accountant, the banker, the client themselves, the spouse of the business owner who “knows business” and knows that so many bank accounts won’t work.
Can So Many Bank Accounts Serve You?
The basic concept of Profit First, if you are unfamiliar with it, is as follows, as developed by Mike Michalowicz: One must open multiple bank accounts for your business for the following purposes:
- An Income Account-All revenue streams from your business comes into the Income account and the income is dispersed into the other accounts as follows.
- First, money goes from the Income account to the Materials and Contractors account. Revenue less Materials and Contractors equals Real Revenue. This is a very important term in understanding the success of Profit First as a mindset tool-there is not one dollar of value in your business until Materials and Contractors have been paid. It can be equated to Cost of Goods Sold, but the important thing to remember is that if you sell one million dollars of T-shirts and $999,999 of the revenue is spent on the T-shirt material and the production of those T-shirts, then only $1 remains to pay everything else the company experiences in terms of cost. That $1 remaining needs to cover the cost of what the owner needs to earn, re-investments back into the company, the tax on the profit of the business, and finally, what is left over should be used toward operating expenses. That $1 remaining is what is referred to as Real Revenue in the world of Profit First.
- Once an owner has Real Revenue, the next three accounts can be used to support themselves, putting-gasp-profit first in their own business. The owner does so by paying themselves next-this is money in their lives that should be putting food on the table, gas in the car, and a roof over one’s head. Owner’s Pay is the proceeds of real revenue that can be used to support oneself.
- Next, the tax man cometh! You may see business owners who try to show little profit in their business by spending more on operations, memberships, collecting slowly from clients, extravagant purchases all in the name of paying less taxes. However, paying tax is a healthy thing for a healthy business to do. This means that as a business owner, your business is making a profit. Profit is a good thing! Never overlook the power of profit! If the business makes a good profit, good things happen, such as being able to afford investments back into the business, being able to take more income as owner’s pay, having options to borrow money, and even, selling to business for a handsome price! Many don’t consider tax to be a part of the Owner’s Pay, but it is because if you can afford to make money, then you can afford to pay the taxes on it and the tax account will support you in efforts to bring home the bacon.
- The owner also gets to pay themselves with a Profit Account. This is my favorite account because it is fun and discretionary. When coaching business owners to build their businesses, we encourage those with debt to use the Profit Account to buy off debt. I, myself, have been enjoying fun distributions from my business with the Profit Account…being a woman who loves travel, we have used this money to fund our gypsy adventures. It can also be used to reinvest back into the business. Need new equipment? More office space? An additional employee? Use your profit account in advance of these purchases to gauge how your company will afford the extra cha-ching.
- Last, and I am listing it last for a reason-is your Operations Expense. Operating expenses for a business have been known to increase proportionately to the money available. That said, to keep operating expenses streamlined and in-tact, make Operating expenses the LAST thing you spend with your Real Revenue.
Running Your Most Profitable Company
As a Profit First Professional, I must tell you that the secret ingredient to running your most profitable company comes in serving it up in these small plates-the bank accounts are the secret sauce to the gourmet pasta. It is because of these multiple bank accounts that business owners can run Profit First on a glance at the smart phone bank balance. Profit First, over anything, is a mindset shift, teaching ourselves that portion control is the key to profitability. What better way to understand your portions than to have it in plain sight, as soon as you log into your bank’s website? Over the years, most of business owners I have met choose to make business decisions by looking at their bank balance. By implementing so many bank accounts as suggested by Profit First, the business owner gets to use the power of bank balance accounting habits in their favor. They can quickly and easily assess, with the glance of the smartphone bank balances if something is affordable for the business or not. By using multiple accounts to separate their money, they have isolated the purposes for the spending and the result is that they are spending with deliberate intention. If there is not enough money in the account to cover the cost of the purchase that they are considering, then, boom, they are hit with another decision. Should I rob Peter to pay Paul? Every time a business owner steals from their Profit Account or Tax Account or Owners Pay Account, they are actually stealing from themselves. Those are the very accounts for which the business owner puts food on the table and a roof over their heads. No gourmet pasta sauce for you! Stick to the plan!
There is more than just the ability to know your financial status at a glace that happens inside those bank accounts. Another powerful thing that happens when there is a purpose for every dollar in the business is that there is not an opportunity to overspend. In my business and in my personal life, I may have perhaps been guilty of overspending on certain things…with the multiple bank accounts I don’t have this problem because I am only working with the cash that is available to me, cash receipts. Isn’t it genius to limit yourself to buy something because there is not enough cash available? Because I am falling into a rhythm of dividing the cash I have received in my Income Account on only a twice/month basis, I can limit my spending based on the revenue that has been collected. For that delicious nugget, I think this may entitle the business owner to the decadent pasta sauce that they gave up eating once they hit 25 years old…mmmm, yum! If I want to rob Peter to pay Paul, then I know that I am hurting myself in some other area to do it. The reward must be greater than the risk, otherwise, I am depriving myself of the very lifeblood of the business, its profit.
By using those multiple bank accounts, you may find yourself no longer dreading the few times per month that you must pay the bills but instead, finding joy in it. There is joy to be found in feeling that your bank accounts have enough money to pay yourself first AND cover the expenses! It serves me well, to know an understand at a glance how much money I can expect to pay myself on payday. It serves me well to know that I am saving for taxes and for fun stuff to do with my family. It serves me well, to understand that my operating expenses are covered. Bank balance accounting via the Profit First method has brought me confidence. I hope it can for you too.