When Your Accountant Doesn’t Use Profit First
Accountants can sometimes get hung up on the principles of Profit First. They balk at the idea of taking profit first because they operate under the antiquated system of set a budget and stick with it.
Sure, it’s important to have a budget, but it doesn’t need to look like what accountants learned in accounting school. (Trust me, I know. I’m a trained accountant and Profit First bookkeeper.)
Here’s the thing though: Your accountant doesn’t actually have to be on board with you using Profit First. Because your accountant doesn’t actually balance your books for you and they aren’t creating your profit and loss statement or balance sheet–that’s your bookkeeper’s job.
Sometimes one person fills both these roles, but that’s not always ideal. (Though that’s a story for another blog post.)
Your accountant, on the other hand, is preparing your taxes based on what your bookkeeper provides. It shouldn’t matter to the accountant how you get there.
Old Accounting Doesn’t Work
Most accountants operate under the old generally accepted accounting principles (GAAP). Essentially, this means that you subtract your expenses from your sales to arrive at your profit.
Sales – Expenses = Profit
You take all the expenses required to run your business first (insurance, admin costs, rent, supplies, etc.), then pay your taxes and finally give yourself a salary and set aside profit.
The challenge is that, based on Parkinson’s Law, you’ll burn through all your sales revenue with expenses–simply because it’s there and available to you. It’s human nature. And that means that there’s nothing left for profit, and chances are that there’s little left for your salary either.
Not only that, but when you use GAAP accounting, you focus on sales and expenses. You try to increase your sales revenue, which fundamentally drives up expenses. And you become blind to what comes last: the profit.
This is what many accountants just don’t understand or don’t know how to fix. And it’s why taking your profit first is the answer.
There are so many other reasons why GAAP accounting doesn’t work but we’ll let you read the book for more!
Profit First is Two Transactions More Work
When you focus on profit first, you need to change your mindset around how you’re allocating your revenue. It’s a question of bookkeeping, not necessarily accounting. Profit is a mindset and a habit that we’d wager you’re not thinking about correctly.
In Profit First, you’re setting up a few additional bank accounts and making transfers into those accounts twice a month. All revenue flows into your income account and twice a month you allocate a set percentage to profits (first), then owner’s pay, taxes, and, finally, operating expenses. All expenses come out of that last account–after you’ve allocated all the other funds.
Your operating expenses account is that budget I mentioned earlier. Advanced accounts like a payroll account for employees or a marketing account take this system to another level, creating even more protection from spending than what the operating expenses account alone offers.
And with your profit, owner’s pay and taxes safely set aside, you’ll always be profitable. So long as you leave the allocations where they are until it’s time to take distributions.
Everything else in your bookkeeping and accounting system remains the same. Your bookkeeper balances the books; your accountant prepares the taxes. It’s not rocket science and it’s not a complicated, convoluted process–not like it may look as you’re trying to scrape up enough cash to pay the IRS each April.
If you have an accountant or bookkeeper whose eyes go wide every time you bring up Profit First, we encourage you to send them a copy of the book. We’ve heard of people who have done that and converted their accountants fully! In fact, this is how I first found Profit First!
And if you’re looking for a bookkeeper you don’t have to convince, let’s talk!