August 7, 2019

Profit, Owner's Compensation, & Tax Allocation

Profit First Methodology
Ronald B. Allen

Profit, Owner's Compensation, & Tax Allocation Accounts and why you need all three.

Today's question about the use of the Profit First cash management system: Since the Profit, Owner's Comp, and Tax accounts are all for the benefit of me, the owner of the business, can't they just be one account instead of three?

The answer is no. While the money allocated to these accounts does
benefit the owner(s), the use of the money in each account is distinct. Owner’s
Comp is for the owner’s salary or regular recurring distribution. The Profit
account is used as a quarterly bonus (and can also function as a rainy day fund
or be used for a “Death to Debt” quarterly distribution.) The Tax account
is used to pay the owner’s taxes and any corporate taxes on profits. So
while the money does all benefit the owner, the accounts need to be kept
separate so you can instantly tell just by looking at your bank
balance what money is allocated for which purpose.

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