If you’ve ever logged into your business account to double-check your balance before making a purchase, you’re like the majority of business owners. And you’re also suffering from Parkinson’s Law.
Parkinson’s Law says that we use all the resources we have available to us. So if we have a week to finish a project, it’s going to take us a week to get it done. Even if the actual project only takes us two hours. We’ll put off work on it until we only have two hours to get it done.
The same is true when we go out to eat. If the food is on the plate in front of us, chances are we’re going to eat it all. And if we don’t eat it all, we’re definitely going to eat beyond the point of feeling satiated.
When it comes to money, if the money is in your checking account, you’re going to spend it…probably unwisely.
But when we implement systems and guardrails around our money, we’re much more likely to have money on hand for the things we need. Not just the shiny objects.
Dave Ramsey’s Envelope System
Maybe you’ve heard about Dave Ramsey’s envelope system. His system essentially assigns every dollar a job, as soon as the money lands in your hands.
Way back in the 1980s, before I had ever heard of Dave Ramsey, my parents used an envelope system to handle their finances. In my family, there was rarely enough money to go around and my parents had to keep a tight handle on it to ensure we had enough to pay the bills.
It was a stressful house to grow up in and I quickly learned that there wasn’t enough money and that money caused arguments. I remember the box with the envelopes sitting on my parents’ desk and maybe some “borrowing” going on from envelope to envelope.
(The truth is that there is no borrowing from account to account because you’re never going to “pay back” to the account you borrowed from. It was true then, and it’s true now.)
Now I know that my parents did the best they could with the tools they had, and that they learned these tools from their own families of origin and experiences. But times have changed and using envelopes of cash just isn’t realistic in today’s digital age.
The New Envelope System
The envelope system works, so long as you maintain the integrity of the system. My parents only had one another for accountability, something that I think put strain on their relationship and our family dynamics.
The same idea is true for the new envelope system, but we’re going to apply it to your business. Every dollar has a role to play and needs to be assigned that role on a regular basis. Twice a month (or more, depending on your business), you take the revenue you’ve earned and assign a certain percentage to different roles:
- Owner’s Pay
- Operating Expenses
This happens twice a month, every month. Never skip a month and never skip an account.
I hear you saying, but I only have one bank account for my business.
It’s time to open some more accounts.
Let’s go back to the idea of Parkinson’s Law, where you use up all the resources you have available to you. If you see the money in your bank account, chances are you will spend it. Even if you keep a spreadsheet that shows you that some of that money is set aside for taxes.
When you allocate funds to different accounts, you’re naming your intention for that money and then leave it alone.
Of course a system will only work if you maintain the integrity of the system and use it. And sometimes that’s really difficult to do on your own.
If you’re a solopreneur or you’re the only person looking at your money before tax time, you might think that “borrowing” money from your tax account to cover your operating expenses is okay. But the reality is that you’re not borrowing, you’re stealing. And chances are slim that the money will ever make it back to the tax account.
Another challenge many business owners have is not knowing what percentage to transfer to which accounts. The book Profit First gives suggestions on how to figure this out, but businesses change and grow (or contract!) and unless you’re paying close attention, you might find a surplus or deficiency in one or more accounts over time.
This is where accountability comes in.
Maybe accountability looks like 1:1 profit coaching for you, because you want or need someone to give you really customized support.
Or maybe accountability looks like someone helping to walk you through starting to use Profit First, then being on-hand to answer questions from time to time in a small group setting, without the 1:1 investment. That’s what our Keep More Money Collective will do for you.
Either way, the first step is to get started. We have a free Keep More Money training that will walk you through how to set up the guardrails (accounts) in your business and get you on the road to success. You can sign up for free here: