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Bank Balance Accounting

Most entrepreneurs use their bank account to determine the financial health of their company, when they should be using the Income Statement, Balance Sheet, and Cash Flow Statement. The issue is that they do not know how to interpret those statements so they end up looking at their bank accounts. Bank balance accounting means that you use your bank account balance to make financial decisions. If the balance is low, they try to sell more stuff and collect on overdue accounts. If the balance is high they will spend money, an example would be purchasing new equipment or expanding their office. The problem is that the individual does not see the true financial health of the organization and might not have enough money left over to pay themselves, taxes, or to produce a profit.

Profit First uses the "bank-balance" idea by creating separate accounts for everything. Twice a month a percentage of the revenue that is deposited in the operating account will be distributed to the other accounts, that are not touched. This will help the entrepreneur ensure that they have enough money for taxes, to pay themselves, and to produce a profit. The individual then has to control their expenses to ensure that the company will survive on the "left overs" in the operating account.

Don't Change Habits, Leverage Them

Many entrepreneurs try to force themselves to become better at accounting and to become more disciplined in their fiscal management by pure willpower. But just like a muscle, willpower can be drained. And in a moment of financial stress or bigger than expected expenses the entrepreneur will break their own fiscal rules and spend the money they have.

The Profit First principle does not try to change your habits (that is nearly impossible to do). Profit First works with your existing habits. By first allocating money to different accounts, and then removing the temptation to "borrow" from yourself, your business will become fiscally strong and you will benefit from regular profit distributions.

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