When you use the Profit First method to run your business,you not only sock away profit every tenth and twenty-fifth, you gain insight into the financial ebb and flow of your business. This is why owner’s pay,profit, and tax accounts can’t be one account. Even though all of these are for the owner’s benefit, they serve different purposes. When you commit to using Profit First you commit to discipline yourself to follow the rules as set up by you and your Profit First Professional.
Understanding and Managing Cash Flow
One of the basic reasons for the tenth and twenty-fifth allocations in Profit First is that it allows you to see the waves of cash moving into and out of your various accounts. This is not possible if all of the important accounts are all lumped together. One goes up and one goes down and the result is that the balance does not change. But, there may be lots of activity in individual accounts that you want to see. When you keep accounts like owner’s pay, tax, and profit separate from one another you see the important changes, spot opportunities to exploit or spot problems to deal with before they get out of hand. This is not to say that you should not use tools like QuickBooks Custom Reports, but rather that keeping the accounts separate helps you better understand and manage cash flow. And that will lead to a more efficient business and higher profits.
How Can These Separate Accounts Be Used?
Ideally, you would like to let your profit accumulate and perhaps put some into long-term investments for retirement. But, with a growing business, you may choose to reinvest part of your profits from time to time. A common use of a profit account is as a rainy day fund or, in the case of paying off debts, a lump sum to eradicate your debts!
Your tax account is for paying corporate and personal taxes and for reimbursing you for taxes paid, thus easing the pain at tax time.
Aside from these uses, the Profit First business person needs to be careful to only use accounts for their stated purpose. Profit First organizes your finances so that you can see what is doing on and take action as needed. By taking money for profit every tenth and twenty-fifth the business owner is often forced to make the tough decisions that he has been putting off.Do not be tempted to raid one or another of your Profit First accounts to deal with problems in another area. Learn to use Profit First correctly and ask for help from your Profit First Professional. Don’t mix accounts. Don’t raid accounts. Follow the Profit First path to success!
If you still have questions or are interested in implementing Profit First in your business schedule a meeting with a Certified Profit First Professional today!