The Profit First method is a way to break free from a paycheck mentality and pay yourself first. It’s a simple accounting system that ensures you get paid while improving the profitability of your business. It’s a great way to manage your cash flow and ensure you and your company are earning the amount of money you deserve.
By making sure your variable expenses are covered first, you are always accumulating money to pay yourself.
How to Budget for Your Business
Accountants will normally tell you, “You need to budget for your business’s expenses.” Generally, it’s easier to plan for your expenses as you can decide exactly how much you need to cover your rent, utilities, and more. However, applying the Profit First method ensures profitability while giving you a good idea of where and how to spend money.
How the Profit First Method Works
Using the Profit First method, you account for profit before your expenses. You take the profit from cash deposits first and then handle expenses after. In turn, you become more mindful of your company’s expenditure while getting a better idea of what you can afford.
The system requires you to segregate your cash flow into different bank accounts. These accounts will cover taxes, operating costs, profits, revenue, and your payments. Target Allocation Percentages (TAPs) determine how much you should put in each account, while Current Allocation Percentages (CAPs) reflect the reality of how your current revenue is being spent.
Current Allocation Percentages (CAPs) – These percentages shine a light on your current financial allocation for profit, taxes, operating expenses, owner compensation, and income.
Target Allocation Percentages (TAPs) – Your goal percentage to increase profitability, growth, and cash flow. Ideally, you want to move from your CAPS to these percentages.
Where Should Your Cashflows be?
There are different accounts you should open to do the Profit First method. These five accounts will help you properly track your TAPs. As mentioned, the accounts you need to have are:
- Profit – savings account
- Tax – savings account
- Operating Expenses – checking account
- Owner’s Compensation – checking account
- Income – checking account
You’ll need to open two savings accounts for profit and tax. For owner’s compensation, operating expenses, and income, however, you’ll need three checking accounts. You will be depositing sales proceeds into your main income account and then transferring the rest to your other accounts according to the TAPs you’ve determined.
How Should You Choose the Right Bank
Of course, to do the Profit First method efficiently and conveniently, you’ll need to open accounts at a bank that supports it. Try finding one that has no minimum balance fees and allows multiple accounts at no cost. Make sure this bank will let you manage money across your five accounts free from any hassles, so you can take care of things smoothly.
Take advantage of the Profit First method to grow your business while finding ways to increase profitability. It’s time to take control of your company’s growth and profits. Try this method, and see how you can turn your business into a money-making machine!
Improve your business’ cash flow with our help. Our team of accountants have successfully implemented the Profit First method, and we offer bookkeeping services for small businesses in Bristol. Let us help you run the numbers and bring you closer to your goals.