Hey there, it’s Abby Johnson from Matterhorn Business Development, and I’m here to tackle some of the most frequently asked questions about the Profit First system. As a certified Profit First professional, I’ve helped numerous businesses implement this game-changing financial strategy. Today, I’ll be diving into the nitty-gritty details of Profit First accounts and providing you with valuable insights. So, let’s get started on this journey to financial empowerment!
The Income Account: Allocating Your Earnings
First up, we have the Income Account, and it’s pretty straightforward, right? This is where your revenue flows in, including merchant deposits. However, there’s a common pitfall to avoid here. If your merchant provider deducts fees from this account, it can disrupt your Profit First system. To prevent this, you can either transfer funds from your Operating Expenses account to cover these fees when they occur or, even better, instruct your merchant provider to deduct fees from a different account. By doing this, you ensure that every penny in your Income Account is available for allocation to other crucial categories.
The Profit Account: Making Profit a Priority
Now, let’s address a common misconception about the Profit Account. Some business owners think they can’t set aside profits when they’re in debt. That’s not entirely true. Even if you have debt, it’s essential to start allocating funds to your Profit Account. At the end of each quarter, you’d typically take half of the accumulated amount as a distribution. However, if you’re in debt, you can use up to 95% (or even 100%) of this distribution to tackle that debt head-on. It’s a clever approach that gives you the ability to pay off debt while still treating yourself. Imagine having $1,000 in your Profit Account – you’d take $500 as a distribution and put the remaining $495 toward debt repayment. This consistent approach helps you make substantial progress throughout the quarter, setting you up for financial success.
Owner’s Pay Account: Ensuring Your Worth is Recognized
The Owner’s Pay Account is where you pay yourself as a business owner. Think of this as your salary – it should align with the value you bring to your company. If you were to hire someone to replace you, their salary should match what you pay yourself from this account. It’s crucial to treat yourself as a valuable employee because, well, you are! You’re actively involved in managing your business, and your pay should reflect your contribution. Whether you take W-2 pay, draws, or a combination of both, it all stems from this account. Just remember to transfer the necessary funds to your Operating Expenses account when running payroll to cover your portion.
The Tax Account: Handling Taxes the Right Way
Now, the Tax Account can be a bit confusing for some. No, you shouldn’t use it to pay your sales tax – that’s not your money to begin with. Instead, consider opening a separate account for sales tax. When it’s time to allocate your funds, set aside the sales tax amount right at the start, ensuring you never fall behind on your obligations to the government. The Tax Account covers both your personal income tax from your draws and distributions and your business’s tax liability as a whole. By separating sales tax, you keep your finances tidy and ensure you’re always ready to meet your tax obligations.
Operating Expenses: Managing Day-to-Day Costs
Lastly, we have the Operating Expenses Account, which is pretty self-explanatory. This account serves as the hub for managing your day-to-day business expenses. To keep your bookkeeping clean and efficient, it’s wise to transfer funds into this account before making any payments. Whether it’s for taxes or paying yourself, funnel the money into your Operating Expenses account first. This approach simplifies tracking and minimizes the chances of getting lost in a sea of transactions.
So, there you have it – an in-depth examination of Profit First accounts, straight from a certified Profit First professional. Remember, implementing the Profit First system is a powerful way to take control of your finances and work towards lasting profitability. Don’t let common questions and misconceptions hold you back. Instead, use this knowledge to your advantage and start allocating your income strategically. Your financial future will thank you for it.
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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.