Step 3: Go to the bank!
It may seem like overkill, but in this step, you set up multiple bank accounts — one for each category: Revenue, Owners Pay, Taxes, Operating Expenses, Employee Salaries, and Profit.
- Revenue (Checking Account)
- Owners Pay (Savings Account)
- Taxes (Savings Account)
- Operating Expenses (Savings Account)
- Employee Salaries (Savings Account)
- Profit (Savings Account)
Step 4: Transfer the cash!
Every time you receive income, it should be deposited directly into your revenue account and divided among the other accounts based on your predetermined TAPs.
Pro Tip: You don’t have to do this every day; do it once a week or so (unless you need the cash).
When we had enough cash reserves, I would do it twice a month before we ran payroll.
Example of $1,000 coming into your revenue account:
- Revenue (100%): $1,000
- Owners Pay (35%): $350
- PayTaxes (20%): $200
- Operating Expenses (20%): $200
- Employee Salaries (20%): $200
- Profit (5%): $50
Step 5: Reduce expenses
If your operating expenses exceed the money you’ve allocated for that purpose, you’ll need to cut costs.
The original profit-first system doesn’t call to split up employee salary and OPEX (operating expenses).
I always liked doing that to understand better where I could cut costs or when I needed to cut headcount.
Trust me, I would say that 90% of you reading this can cut costs somewhere. Most small business owners don’t need a lease, new equipment, or expensive software. Most of those are nice to have, not a gotta have.
Step 6: Review and adjust
Every quarter, you should review your current allocations and adjust your TAP (even if it’s just by a few percentage points).
The goal would be to run your business SO efficiently that every quarter you’re increasing the amount you’re paying yourself.
Remember, Profit First is a flexible system that should adapt to your changing business needs.
Pro Tip: When in doubt, add an account. Over time, we added accounts for Marketing Expenses and set a TAP of 5% of gross revenue. Make the system your own!
Step 7: Celebrate Profit Distributions
You should have some cash in your profit account at the end of each quarter.
Take 50% of it as a distribution. You earned it!
The profit account should serve two purposes.
- Motivation and a reminder of why you started your business in the first place.
- An emergency fund in case shi* hits the fan.
Step 8 BONUS: Let your cash work for you.
This is an advanced step, but why leave your money in a savings account when you could collect some cash?
I ONLY recommend doing this once you’ve mastered the system, but at a point, you should be socking cash in a high-yield savings account OR if you’re super advanced, a T-Bill ETF.
Note: I am not a financial planner; the above isn’t financial advice. Just what I do.
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