Why is the tax allocation at 15%? Doesn't that feel kind of high?

The Reasoning Behind the 15% Tax Allocation in the Profit First Method

All too often when the time rolls around to pay taxes, we can find ourselves scrambling to pay both our business taxes and personal taxes as well. And, if there are no other sources of revenue, we may end being delinquent, paying penalties, or getting nasty letters from the IRS. We may end up borrowing money and adding to our debts. The reasoning behind the 15% tax allocation in the Profit First method is to have enough money available for both business and personal taxes when tax time rolls around.

Better Budgeting with Profit First

Although Profit First is a system that turns traditional bank balance bookkeeping upside down, it is also a method to improve budgeting.Too many business problems occur because a company is short of cash. Businesses end up trying to decide which debts to pay off first because they were perpetually short of cash and had to borrow. When you use the advanced method of Profit First, you will set up at least 5 separate bank accounts.

  • Operating expenses: checking account
  • Profit: savings account
  • Owner’s Pay: savings account
  • Income: savings account
  • Tax: Savings account

When you follow this course of action, you will set aside money for profit on a regular basis. You will set up a plan for paying off debts. And, you will put aside money both for business taxes and for your own taxes. This is the beauty of Profit First. You execute the most important aspect of cash flow management off the top. Then you deal with business inefficiencies in order to reduce expenses and make sure that the business runs in the black.

Protection Against the Effects of Parkinson’s Law

Parkinson’s “Law” is the observation made by Mr. Parkinson that the amount of time used to complete a task expands until all time is used.Its corollary is that the amount of money spend on any project expands until all money is used up. These simple facts of human nature operate all of the time in every business and the job of the owner is to identify the resulting inefficiencies and correct them, or, ideally, to prevent them from occurring.

At Exigo Business Solutions we not only teach you how to use the Profit First method, but we also introduce you to the most effective small business bookkeeping system, QuickBooks. With QuickBooks custom reports you can see the important details and the big picture. Once you have started allocating money for the purposes or profit,taxes, and more, you will identify and address the problems that have been eating up time and capital and making our business less efficient. This process is useful in businesses that are having trouble and in businesses that are already profitable. The point is that in both situations the business owner can take steps to maximize profits using the Profit First method.

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!