New Profit First users commonly wonder which of the specific Profit First accounts should be savings accounts and which should be checking accounts.
First of all, it is important to understand the difference between a savings and a checking account.
A savings account pays interest but there is commonly a limit to the number of withdrawals you can make each month. Six a month is common. This is where you will put money that you will not be using right away and on which you wish to make a little money in the form of interest payments.
A checking account is what you will use to write checks,transfer money in and out, and essentially use to move funds for any reason. A checking account should not have any limit on withdrawals per month, but the account will not pay any interest.
So, which Profit First accounts should be savings and which should be checking? There are two basic approaches depending on the specifics of your business.
Option One: Profit First uses a 10/25 rule in which bills are paid and funds allocated on the tenth and twenty-fifth of each month. The account that does this will be the operating account which should be a checking account. All other accounts such as the savings account, owner’s pay, profit, and others will not write and will be savings accounts that bear interest.
Option Two: As you follow the 10/25 rule, your Income account will accumulate all deposits before they are allocated to the Tax, Profit,Operating Expense, Owner’s Pay, and the other accounts on the 10th and 25th.On those dates, the funds will be used for the specific purpose of the account.So, incoming funds remain in your Income account for about 28 days each month. Knowing this, your Income account should be set up to be a savings account (to gather interest). All the other accounts will be checking accounts. This approach allows the most flexibility for doing withdrawals and for writing checks but at the same time accumulating the maximum interest.
Getting this right is important. What you basically want is to retain flexibility and avoid penalties for exceeding account limits while at the same time earning interest on funds that are just sitting around. To learn how to do this, and to learn how to implement the Profit First system, learn from the Profit First Professionals in the Kansas City area.
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!