Once a Profit First user sets up separate bank accounts for profit, owner’s pay, operating expenses, taxes, and more as needed. Then the business owner allocates money to these accounts from the income account on the tenth and twenty-fifth of each month. What is the reasoning behind the tenth and twenty-fifth allocations?
Profit First is an organized system for sequestering and tracking the various aspects of your business and finances. The point of Profit First is, you guessed it, to maximize profits! The task of allocating money from the income account to the multiple Profit First accounts is done more efficiently in batches twice a month rather than doing the job daily or haphazardly. By setting up the tenth and twenty-fifth as days for this task you develop a habit that breeds efficiency in your business operations. The point is to develop this same efficiency in all business operations as time goes on.
When you allocate to the various accounts on the tenth and twenty-fifth, you will see how the income account rises and falls with each round of allocations. Likewise, you will see firsthand how the profit account grows and how the other accounts rise and fall according to their use.
We always suggest that our clients use the best small business bookkeeping software, QuickBooks in order to track business finances and gain actionable insights. With the excellent reports that this accounting tool offers you can see problems and success in your business and take action as needed. However, when you simply do the Profit First allocations on the tenth and twenty-fifth, you also gain insight and see your success or spot problems before they get out of hand.
We have written about subjects like taking a profit while paying off debt. Of course, in order to pay off your debts, you need to be making more money than you are otherwise spending. But, once you have budgeted and adjusted business operations so that there is money coming in, paying off debts is a matter of setting up which debts to pay first (smallest to largest) and managing cash flow. And, you can most effectively do this when you have a clear view of money coming in and then being allocated to the multiple bank accounts.
When we do a task routinely the various aspects of that task become intuitive. We become the canary in the coal mine, the most sensitive to the development of problems, when we routinely allocate to the various Profit First accounts on the tenth and the twenty-fifth.
If for some valid business reason you would like to do allocations on the first and fifteenth, fifteenth and thirtieth, or any other pair of days, go for it. But, do not move the days around the calendar. Set up a routine, a habit, and stick to it. The results will be greater efficiency and better insight into the ebb and flow of cash within your business.
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 the reasoning behind the tenth and twenty-fifth allocations.