If you want to maintain good business relationships you need to pay your vendors on time. Let’s say that you pay all vendors on the tenth of every month. How does this work when you are allocating to your operating account on the tenth and the twenty-fifth? What you will do is allocate money to your operating account on the twenty-fifth. This is for paying vendors and the money will simply remain in the account. Then, on the tenth, you will allocate more money for paying vendors, adding to what is already there. And,you will pay vendors on time, each and every month.
When a business owner commits to using the Profit First method, he or she sets up multiple bank accounts to which money is allocated for various purposes. Depending on the business there may be five or more accounts. In order to manage cash flow and do effective budgeting, the business owner needs to decide on how much to allocate to each account. In Profit First,we use a percentage approach. Using total money available, percentages are assigned to profit, owner’s pay, tax, and all other accounts.
Because we do not always know how good sales will, how fast payments will arrive, or exactly how much money a foreign trip will eat up,allocations are set up as target percentages and then adjusted month by month.When we first allocate to a category, we use past data as a guide. But, a basic part of Profit First is controlling costs along the way to maximizing profit.Thus, the cost of foreign travel and associated expenses may start out as an educated guess and then evolve into a set target allocation percentage.
As with all things, practice makes perfect and with time your target allocation percentages will need less and less monthly adjustment.
The most visible features of Profit First are the bank account balances that show us the state of our finances at glance. But, in practice, setting up allocation percentages to these accounts is budgeting.That is how Profit First works. You start by allocating a profit each and every tenth and twenty-fifth. You likewise allocate for taxes, owner’s pay, and the rest. But, with tools like QuickBooks custom reports, you will be able to spot problems and make adjustments to spending and staffing. This is how Profit First stops the steady expansion of work hours on projects and steady upward creep of expenses across the board. When you or someone in the business needs to travel offshore, you will try to get the best deals on airfare, hotels, car rental, and the rest.And, with experience, you will find the best deals and most efficient methods for accomplishing the task that took you to a foreign land.
And, when you have met the foreign client face to face, you can start using Skype for Meetings, and do all of your business from your office and spend a lot less money doing it!
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!