The key to making the Profit First method work for your business is discipline. You set up bank accounts for profit and owner’s pay as well as taxes and operating expenses. Then you follow the routine of always allocating first to the profit account, owner’s pay and so forth. You do this twice a month and you are absolutely jealous about guarding the money that you have put into these accounts, above all the profit account. And, we have another suggestion. You add a vault account to your Profit First routine.
You do this because stuff happens.
And when that “stuff” happens before you have had enough time to build up a decent cash reserve, the expenses need to be paid from somewhere and you really don’t want to take on any more debt. What can you do about this? You would rather not start “borrowing” from your profit account because you don’t know when you will be able to stop!
An excellent idea to help create a rainy day fund within your Profit First profit account is to use the Vault. This is an online account to which you can send part of your profit allocation twice a month.
Let’s say that you already have a $17,500 balance in your profit account. Your next profit allocation is $1,250. What you can do is allocate $750 of that to your profit bank account and $500 to your Vault account.
When you allocate money to the Vault account (in this case 40% of your profit allocation) you are still putting aside profit every two weeks. And, the sum total of what you are allocating for profit is the same.However, you can also consider the money in the Vault account to be your “rainy day” fund in case “stuff” happens.
Now, when unexpected expenses show up and you do not want to borrow to cover them, the Vault account is there to come to the rescue.
Now you are asking yourself, what happened to the Profit First principle of jealously guarding the money you put into your profit account and routinely adding to it? At Exigo Business Solutions we encourage our Profit First Clients to stick with the plan. And, also we remind them that a benefit of routinely enforcing financial discipline in their business is that when “stuff happens” they will, in fact, have the resources to cover expenses without adding to their debt. This is something to be happy about and proud of!
Think of a Vault account as an extra level of savings protection as well as the last resort rainy day fund. When our clients are just getting started and when they are busy paying off their debts, we urge them to limit their debt serving to minimum payments. Then the “extra” goes into are serve fund equal to the expenses of two months operation.
There are a couple of key points here. You want to avoid sliding further into debt but more importantly, you need to avoid the mindset that you will never get out of debt! Here is where that reserve fund and later on a Vault account are so important.
For help in how to add a Vault account to your Profit First routine, contact us at Exigo Business Solutions.