First of all, congratulations on taking the first step to taking your profit first!
Open Your Bank Accounts
The first thing you want to do is decide which two banks you want to open your bank accounts at.
If you are happy with your current bank, then keep that as your primary bank. One thing to consider is if the bank charges any fees for balances under a certain amount. If they do, try to negotiate no fees for a collective balance. Many people have also had success with opening accounts at credit unions without fees.
Now for your second bank, you want to pick one that is not convenient; this is to remove the temptation of “borrowing” from these accounts.
I promise, getting the accounts setup is the hardest part.
Once you decide which two banks you’re going to use, you’ll open the following accounts:
Primary Bank:
- Income
- OpEx
- Profit
- Tax
- Owner’s Pay
Secondary Bank:
- Profit Hold
- Tax Hold
I know what you’re thinking –
- Hold up – I have to open HOW MANY bank accounts?????
- Wait – there is a Profit and Tax account at each bank? Can’t I just pick one or the other?
Remember, you only have to do this once (unless you want to add more accounts later).
So, what are all these accounts for?
Income – this will be for all incoming funds (credit card deposits, electronic payments, etc.) and check deposits.
OpEx – this account will be for all your outgoing payments (vendor payments, etc.). A lot of people will use an existing bank account as the designated OpEx since auto payments may already be setup.
Profit – This is your PROFIT!! And this is how we ensure profitability.
Tax – this is used to pay your quarterly tax estimates or tax liability. We want the business to pay this, not you personally.
Owner’s Pay – Your Pay! Too often, business owners are not taking a paycheck (whether salary or distribution) or are only taking enough to pay the household bills. Allocating a set percentage sets the business up to pay you, the owner – that is why you went into business for yourself, isn’t it?
Now the Profit and Tax accounts at your primary bank are a temporary placeholder for these funds until the transfer is complete to your secondary bank.
I know, I know – but why can’t I just transfer straight from the Income account to the accounts at the second bank? That’s because it can take a few days to process the transfer, and we want to remove that temptation.
Daily Basis
Daily, funds are deposited (physically or electronically) into the Income Account at your primary bank. This Income Account builds up until the next allocation date.
Why let the funds build up instead of allocating them every day? Let’s be real – who has time to be moving money every single day? Remember, this system isn’t meant to bring more work; it’s intended to bring more clarity.
Letting the funds build up serves a couple of purposes:
Efficiency
a. On predetermined days you will move funds from the Income Account into the other accounts – 5 transfers on one day, instead of 5 transfers each day.
b. On predetermined days, you will pay bills from the OpEx Account.
Clarity
a. Knowing when you have higher inflows of cash during the month allows for better planning and cash flow strategy.
b. Bring insight into your collection cycle (if you invoice your clients instead of paying at the time of service).
Establish your Rhythm
The most crucial part of establishing your rhythm is deciding what frequency works best for you and your business. The frequency is typically twice a month, on the 10th and 25th. What I found for myself
was that it was easier for me to set my rhythm as every other Friday. I’m the type that needs a structured routine.
When working with a new client, I often recommend starting with weekly allocations to get into the habit. After a couple of months, we reassess and either keep the weekly allocations or move to bi-weekly allocations. The key is designating the same day each week to complete your allocations.
Not only are incoming funds allocated regularly, but bills are also paid regularly. Now there is a method to the bills that are paid. You will start with the bills that are coming due between this allocation date and the next allocation date.
Example – Allocation days are 10th and 25th
On the 10th, you have $5,000 in your Income account. You allocate those funds based on your current allocation percentages (the percentages below are just as an example only):
Profit 1% = $50
Owner’s Pay 30% = $1,500
Tax 4% = $200
OpEx 65% = 3,250
Next, you transfer the Profit and Tax balances to your secondary bank.
For the bills, you will see which ones are coming due between the 10th and the 25th. Those are the bills that will get paid from the $3,250. Let’s say that those bills total $3,000. Great! Now you have $250 that will be available for the next round of bills on the 25th.
On the 25th you have $2,000 in your Income account. You allocate those based on your current allocation percentages (the percentages below are just as an example only):
Profit 1% = $20
Owner’s Pay 30% = $600
Tax 4%=$80
OpEx 65% = $1,300
Next, you transfer the Profit and Tax balances to your secondary bank.
For the bills, you will see which ones are coming due between the 25th and the 10th. Those are the bills that will get paid from the $1,550 ($1,300 + $250). Let’s say that those bills total $1,800. Yikes! The OpEx account is short $250. What this shows is that the business cannot afford the bills.
Quarterly Basis
Time to celebrate! Every quarter, you get to reap your reward of running a financially healthy company.
So how does that look?
You will take 50% of your profit account as a distribution. Think of this as a dividend that a company pays out to shareholders, except you are the only shareholder.
If you have any debt, 95-99% of your distribution will go towards debt reduction. However, if you don’t have any debt (congratulations!), then you can use the money for what you want, except for being put back into the business.
In addition to taking your profit distribution, you will adjust your current allocations percentages to work towards your target allocation percentages every quarter.
Recap
To recap, here are the steps to get started:
- Open your bank accounts
a. Income
b. Profit
c. Owner’s Pay
d. Tax
e. OpEx
f. Profit – Secondary Bank
g. Tax – Secondary Bank - Find your rhythm – make your allocations and pay your bills
- Start small on your allocations – the key is just to start
- Quarterly – take your profit distribution
- Quarterly – adjust your allocation percentages
The biggest thing is to just get started!
Turning business chaos into your profit.
No responses yet