Hey there, it’s Abby Johnson from Matterhorn Business Development.
Today, we’re diving into the vital topic of Profit First and the bank accounts your business should have to be financially successful.
Income Account: Managing Cash Inflows
The first essential account for financial success is the income account. Unlike the common practice of using a single account for all financial activities, the income account serves as a dedicated repository for incoming funds. All earnings funnel into this account, creating a clear separation between revenue and expenses. This division is crucial because it enables a planned allocation of finances to diverse business needs. By having a distinct income account, business owners gain a comprehensive overview of their earnings before distributing them across other accounts. This strategic approach sets the stage for better financial management and informed decision-making.
Profit Account: Prioritizing Profitability
The profit account is one of the pillars of the Profit First principle. This account focuses on allocating a portion of incoming revenue specifically for profit. Traditionally, profits are treated as a leftover, but this mindset is shifted through Profit First methodology. By immediately setting aside a percentage for profit, business owners cultivate a culture of profitability. This proactive approach encourages disciplined financial management, ensuring the company’s long-term stability. The profit account becomes the first allocation from the income account, demonstrating the commitment to prioritizing profits. Starting with even a small percentage, such as 1%, can gradually transform the financial health of the business.
Owner’s Pay Account: Valuing the Entrepreneur
The owner’s pay account emphasizes how important it is to view the owner’s salary as a crucial component of the company’s finances. Despite being on payroll, having a separate account for owner’s pay is crucial. This practice not only ensures a designated compensation for the owner but also instills a sense of financial responsibility. Just as the business pays employees from designated accounts, the owner’s pay replicates this process, reinforcing the business owner’s value to the company. I’ve personally seen scenarios where the owner is actually make less than some of their employees. This account ensure the owner is actually being compensated what they should be for their efforts, and risk, as the owner.
Tax Account: Planning for Obligations
The tax account serves as a preventative solution to cover income and company tax obligations. Business owners often find themselves taken by surprise due to substantial tax bills at year-end. By establishing a dedicated tax account, they can gradually accumulate funds to meet these obligations proactively. This approach not only eases financial stress but also enables a more accurate evaluation of the company’s financial health. The tax account highlights the necessity of preparing for tax liabilities throughout the year, aligning with the profit-first philosophy of proactively managing financial responsibilities.
Operating Expenses Account: Resourceful Business Operations
The operating expenses account represents the funds available for day-to-day business operations after setting aside profit, owner’s pay, and taxes. By reversing the conventional formula of “Income – Expenses = Profit,” the Profit methodology guarantees that businesses manage expenses efficiently to align with the allocated budget. This shift in perspective prompts creative problem-solving, efficient resource allocation, and the pursuit of cost-effective alternatives. The operating expenses account reinforces the idea that thriving within limited resources fosters sustainable growth and a resilient business model.
Conclusion and Expert Help:
There you have it – the five essential accounts that will revolutionize the way you handle your business finances. Shifting your mindset from chasing profit to prioritizing it sets you up for lasting success. And if you need a hand navigating this transformation, remember, we’re certified Profit First professionals trained by none other than Mike Michalowicz’s team. Reach out, and let’s work together to make your business more financially resilient and profitable.
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About Abby Johnson
Abby Johnson, is Matterhorn Business Development’s Chief Mentor, resident organizational genius and Certified Profit First Professional, helping our clients grow and organize their businesses. With a passion for empowering businesses to thrive and extensive experience in helping clients grow their revenue and manage their finances profitability, she’s committed to making a positive impact on your business.
About Greg Winteregg
Greg founded Matterhorn Business Development to assist small business owners in growing their business and increasing profitability at the same time.
He was an internationally recognized lecturer, sales trainer, and management consultant who spent close to 30 years working with professionals and small business owners across the US and Canada.
In 2019, he authored his book “Fun at Work.”
