When a business starts using the Profit First method, the first thing is to open a new set of bank accounts. The decisions are which banks are best for Profit First and which Profit First Accounts are for Savings and which are for checking. Using these new accounts the business will allocate money on the tenth and twenty-fifth toward profit, owner’s pay, debt repayment, taxes, and other aspects of business operations. But, what about the existing bank accounts? Should Profit First be done retroactively by including the old bank accounts in the new Profit First system?
When your new bank accounts are open you will begin Profit First with your first deposit. However, no not connect any of the new Profit First accounts to your existing or “old” accounts. Leave the existing monies in your checking and savings accounts and do not “connect” these accounts to the new ones.
Going forward you will not make any deposits to these accounts but will use the monies in these accounts as you have been doing until the balances are zero. At that point, you can close the accounts or you can convert them to new Profit First accounts.
Since Profit First is a forward-looking process, you will totally rework how you do your banking in order to improve budgeting and cash flow management. The allocation of money for the profit account every tenth and twenty-fifth is only the start of the benefits of the Profit First system. So, don’t look back. Use up the money in your old bank accounts as you normally would and do not replenish them. Of course, because you will be using the money in these accounts for business purposes, you will need to use these monies in your calculations of Profit First allocation percentages for as long as the money lasts.
Profit First stands several business ideas on their heads. For example, a business with debts can still make a profit and pay off debts as well. If you think of it, you have to be making a profit in order to pay off debts! Using the Profit First method, you will pay minimums on all old debts and use available money each month from the operating account to pay down the principle on the smallest debt.
Standard bank balance accounting says that your profit is what is left over after all the bills have been paid. But, the Profit First approach allocates money toward profit every tenth and twenty-fifth. Then the Profit First approach requires that the business owner fully understand the financials of the business using tools like QuickBooks custom reports and use the results of your bookkeeping to drive your business decisions to cut budgets or increase financing of promising new projects.
When you commit to the Profit First approach and gain insights from working with Profit First Professionals, you leave your old ideas about doing business behind. You will learn ways to control the incessant creep of hours spend on varies types of work and the seemingly inevitable eating up of every cent of available cash on budgeted projects. When you take your profit off the top you will need to guard that profit by paying better attention to the details and also the big picture of your business. Using QuickBooks for reports is an excellent approach or you can use various business intelligence solutions as well to more fully understand your business and derive actionable information from your reports.
Tools like Receipt Bank help you digitalize paper receipts and reduce time and money spend in paying bills.
So, look to the future with Profit First and let those old bank accounts run dry. Profit First is never done retroactively.
If you still have questions or are interested in implementing Profit First in your business, visit our website, ExigoBusiness.com, or contact us at (816) 394-6818.
Click here to watch the YouTube video about whether Profit First should be done retroactively.