One of the Profit First approaches to your taxes is reserving high percentages for the tax account even when taxes are already taken out. Why is this? Your company deducts taxes from your pay throughout the year. So, when your Profit First Professional has you deduct for taxes on the tenth and twenty-fifth, monthly, quarterly, or annually, the tax account will reimburse you for taxes paid.
Profit First may seem like a jazzed up bookkeeping system that helps you make a profit up front, clean up your budgeting and cash flow management, and maximize your profits along the way. But, the procedures in Profit First are tied into human psychology and human behavior.
When we have taxes taken out of our pay it feels like a loss. But when the business pays your taxes directly or reimburses you from the tax account, this reduces those feelings of loss and makes a loss aversion response less likely.
Loss aversion is a term taken from decision theory and cognitive psychology. Psychologists have found that the amount of pain from a set amount of monetary loss is more than the pleasure experienced from an equal amount of monetary gain. And, with multiple experiences of loss comes an expectation of loss that worsens the experience. The psychology of the theory can seem quite complicated but the bottom line in a small business is that it is better to feel good about what you are doing than to feel bad. When we feel good about how things are going we continue on the same course.
The issue with reserving high percentages for the tax account even when taxes are already taken out is this. You are using the Profit First system and making money. You are maximizing profits and doing better than ever before. It would be a really good idea to continue to follow the Profit First path toward a more effective business and more profits. But, the negative feelings that come from having your taxes taken out of your pay can play tricks on your mind and make you see the Profit First approach as not being as useful and effective as it really is.
So, Profit First builds into the system positive and reinforcing experiences to help us feel good about what we are doing and to keep us on the path to maximum profits.
Why do we want to make a profit in our business? More money is always good and being in charge of our own life is even better. A successful business leads to financial security. But, what is any of that worth if we are not happy, dread things like paying taxes, or never have positive feelings about the work experience? Luckily, Profit First is designed with lots of positive experiences that give us good feelings and encourage us to stay on the Profit First path.
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!