I’m learning so much as a business owner and one of my favorite (and most challenged) area to learn about is money.
How do I spend it? Where do I invest? What is a reasonable amount to pay myself? How much do I keep in the bank?
All the questions.
Why I Love Profit First
I’ve done a fair amount of reading and to date, my favorite book has been Profit First, recommended by so many of my favorite business friends.
Profit First is a model that helps you break out your money in a way that ensures you always get a profit. First.
The author, Michael, suggests to use two different banks to separate out taxes and profit (so you don’t touch it no matter what temptations you have). While this approach makes sense to me, I found the whole opening two bank accounts thing and funneling money to a different bank a little much, so I created my own version of Profit First that I’m loving.
I felt compelled to share this because I have dozens and dozens of conversations regularly with fellow business owners and friends who are constantly figuring this out and refining.
This is something I’m currently doing with my own LLC and we’re also transitioning to create in our Brand Launch business.
How I Use Profit First to Efficiently Organize Business Finances
Here’s how I organize my business finances and it has worked really well the last few months. I have four different accounts within my business bank account:
- Checking: this is what everything flows into and out of. Profit First would encourage an “expenses” type of account to pay myself from and pay expenses, but I prefer to keep checking as the main location where $ is divvied out for myself and everything that helps my business run.
- Taxes: every single paycheck, I move 30% into taxes. Then I pay these quarterly.
- Profit: every single paycheck I move 5% into this account. Every quarter, I pay myself with it.
- Vault: this is where money goes that is not touched unless I have a big project (website revamp, conferences, whatever I don’t consider a day-to-day expense). I put about 5% of every paycheck in there.
So every 15th and 30th, I hop into my business bank account and divvy everything out. When every quarter ends, I take out that 5% profit and pay myself, which is really fun because it’s like a bonus.
I’m finding that right now in business, I pay myself about 50% of what I bring in, which gives me a ton of predictability in day-to-day transaction, invoicing, and doing business in general.
This model is not incredibly robust or all that fancy, but it has put structure in a place that really lacked it before.
I’ve also integrated this into our personal finances as well, something I find so fascinating to manage with another person (#marriage). Similar to my business account, we have a checking, savings, vault, and taxes. Z is a contract employee so we also have to manage the flow of tax dollars in our personal life as well.
What tools do you use to keep your finances in check in business?