Who is on Your Business Money Team?

There can be a lot of confusion around who should be on your business money team and their roles (including your role as the business owner). But without a solid team, you may feel confused about your finances–which is never a good feeling.

No matter how long you’ve been in business, it’s time to pull together your team now or revisit the individuals who are supporting you.

Your “Accountant’s” Role

The term “accountant” is broad and is mostly misused by business professionals. For this article, we’ll limit it to the role of tracking your business’s finances and producing accurate financial statements with them. Think P&Ls, balance sheets, reconciliations, and all of that good stuff. 

At a basic level, a bookkeeper will focus more strictly on recording your financial transactions. An “accountant,” however, can give you insight into your financials to help you make strategic decisions. Newer or smaller businesses may suffice with a bookkeeper initially but may have to hire an accountant as the business grows and becomes more complex.

Oftentimes, it’s not the best use of the owner’s time to keep the books. However, you still must understand how to read your financial statements and conduct your financial affairs in such a way that it’s easy for your accountant to track everything (i.e. no commingling of funds between personal and business accounts). Also, if you don’t understand your financial statements and don’t review them regularly, you may put yourself at risk of being stolen from. You want to find an accountant with the heart of a teacher, who will help you understand your financial statements.

Your Tax Pro’s Role

Business owners often think that all accountants prepare taxes. This is not true. Tax and accounting (bookkeeping) are two processes. The accounting needs to be complete before the taxes can be prepared. When seeking out a tax pro, find someone with the heart of a teacher (see a recurring theme there?) who will explain to you how to minimize your taxes and stay in compliance with the IRS and state. If you really want to save on taxes, you’ll meet with your tax pro on a quarterly basis, but definitely at the end of third quarter as you near year-end. Proactive tax planning is the best way to keep taxes low and to ensure there aren’t any surprises come tax time.

You can make your tax pro’s job easier by having accurate and complete P&Ls and balance sheets. Your accountant actually does the heavy lifting in this regard. Be sure to ask your tax pro about any tax savings opportunities or recent changes in tax law that might affect you (a great tax pro will tell you before you ask). Last, make sure you pay your quarterly estimated taxes to the IRS and the state.

NOTE: If your tax pro encourages you to spend off your profit to reduce taxes, seek a different tax pro.

Your Cash Flow Management Coach

We can’t talk about money teams and neglect to mention Profit First Professionals! While accounting tells you where your money came from and when (via financial reports), cash flow management directs where your money goes. We use the Profit First cash flow management system to help business owners become permanently profitable, pay themselves regularly, reserve for taxes, and know exactly how much they need to budget for their business’s expenses. A Profit First Professional can help you design a system that works for your business and your goals.

Contact a Profit First Professional Firm (that’s us!) to do an assessment of your finances and build out a customized cash flow strategy for you. If you contact us, we’ll give you step-by-step instructions.

Last Thoughts

Accounting, taxes, and cash flow management are different disciplines, although closely related. There are some professionals who can do all three, but it’s probably best if you separate some of it out to protect yourself and your money. But all the members of your business money team should be in some type of communication with each other. Just make sure that they are familiar with your business, your industry, or goals, and have the heart of a teacher.

How Profit First Can Help You Talk About Money

As a bookkeeper, I’m always taking the pulse of a business to help assess and improve its financial health—ultimately, so that the humans behind it can have all they want out of life. I talk about money a lot because it’s—no pun intended—the currency I deal in. But it never fails to surprise me how uncomfortable most people are to discuss money, be it their desire for it, their lack of it, or their fear of losing it. Why are we so afraid to talk about it honestly and openly?

Money itself isn’t good or bad. Money is just a thing we use to transfer energy back and forth between people. It’s a medium of exchange to get what we need to live—and then, hopefully, to experience our best lives.

It drives me crazy that money is such a taboo subject, but I get it. I see people ashamed that they’re not providing enough for their family, or that they’re in too much debt, or that they can’t afford what other people can afford. There’s also the hesitation to be proud of financial successes. You’re seen as bragging if you’re doing well.

The truth is, we usually don’t know the whole story behind everyone else’s finances, and we get everything out of whack when we set up comparisons. It’s not apples to apples, because the other guy may be dealing with oranges.

If you can talk about it, you can change it

One of the things I love about Profit First is that in encouraging us to pay ourselves first for our hard work, it essentially encourages us to believe that we deserve that money. It puts money at the forefront of the conversation of why we’re in business in the first place. Sure, you have a great service, product, or skill that you want to offer to the world, but let’s face it, you’re also here to make a profit.

Here’s my two cents on how to talk about money with the people closest to the backend of your business, with the goal of eliminating secrets, banishing anxiety, and making smart decisions that will help you to sustain and grow your business.

Talking about money with your bookkeeper

Your personal financial health and your business financial health are intertwined. Be honest with us about both. We can’t help you with your money if we don’t know what’s going on with your money. Are you in a jam with your finances at home? Are you not making a living wage? Maybe we can make a suggestion on the business end of things that will help to lead you out the hole you might be digging.

Bookkeepers are experts at reviewing your financial data, so we don’t give money advice without having facts to back it up. In other words, we got receipts. Even if your bookkeeper isn’t privy to your personal bank statements, it’ll likely all get fleshed out for her when she reviews your business statements and

And we all have our dirty little money secrets. The things we like to splurge on that no one else thinks worth a dime. Or the occasions we got ripped off and felt we should have known better. As bookkeepers, we’ve seen it all—maybe we’ve even been there ourselves—so nothing is too taboo to share. Tell us so we can help.

Talking about money with your team

What’s appropriate to share with your employees and contractors? This one may surprise you.

I’m a fan of having an open-book policy with your staff and sharing how things are going with your business. I share my P&L figures with my team on a regular basis—they know my allocation percentages. Employees are your boots on the ground. The more they know, the more likely they are to be invested in increasing revenue for your business. Their success is tied to your success, especially when you’re doling out bonuses based on your profits at the end of the year. Isn’t it great when your employees point out how you can eliminate an expense because they’re no longer needing the service you’ve been paying for?

Most business owners don’t want their team to know how much they’re making. But what I’ve seen is that most of the time, your team thinks you’re making more money than you actually are. Sharing your business finances with them can dispel the myth that you’re swimming in cash, and that it would be easy for them to leave and become your competitor—one of the biggest fears that business owners have.

I’ve started to gently encourage my team members to open up a bit about their personal finances, if I have their permission to do so. I can see that it affects their work when they’re struggling at home—we all have money anxiety at some point. If you have staff meetings, you’re probably already providing some kind of business education to them on a regular basis, so consider adding financial literacy webinars and other tools and learning to the mix.

Talking about money with your business partner

Profit First is beautiful for business partnerships because it puts percentages in place from the starting block that both (or all) partners agree to ahead of time. Sure, there will be issues from time to time, but they’re much easier to mitigate when you’re working from an established framework.

It’s also important to know your money personality. Is one of you a spender and the other a hoarder? For example, you could have differing views on what constitutes a necessary operating expense, but at least with Profit First in place, you share a basic understanding of how money will be handled in the business.

Talking about money with your life partner

It’s common for business owners to discuss major decisions about their business (such as big-ticket purchases) with their life partner, even if that partner doesn’t have a legal interest in the business. They’re vested in its success because they’re vested in you.

We advocate for some regular conversation about your business with your life partner. I know a couple that talks about it every Sunday morning, but if that’s too much taboo for you (!), I recommend doing it at least quarterly. Make them privy to the details of your Profit First strategy. I often see conflict where the partner doesn’t understand the difference between your revenue and your profits. You can show them your Profit First allocations to help them understand that you have a plan in place for when and how often money will be flowing out of the business and into your pockets—and how you’re avoiding the need to invest future household income into the business, because you’re saving in advance for things like taxes.

It gets easier

Take it from a bookkeeper—the more you talk about money, the easier it gets. Don’t let a lack of practice hold you back from making progress. Practice!

Customize Your Profit First System with Advanced Accounts

The Profit First system is simple enough that most people can see the immediate rewards of paying yourself first. But no two businesses are alike, and each will have its own complexity. We love that it’s so easy to customize the system to meet the needs of your unique business, by opening additional, “advanced” accounts.

Every business following Profit First sets up the five foundational bank accounts—the buckets, if you will—to distribute income. Then you make your fixed allocation percentages twice a month without deviation. But you’re the owner and you know your business best. After a while, you might notice that something in your system needs tweaking.

Maybe you didn’t foresee having to pay a large invoice that ended up draining your OPEX bucket. Now you’re aware that it’ll be an annual expense for your business—same time, next year—and you want to plan ahead. For example, CrossFit gyms have an annual affiliate fee of $3000, and sometimes owners forget about that until it’s right on top of them.

Take some pressure off yourself. If it will help you to create a new bucket, or account, to meet a specific expense, we encourage it. In fact, there’s a saying that gets kicked around amongst Profit First professionals…

When in doubt, create an account.

By the way, we’re calling these “advanced accounts,” because this is technically an advanced Profit First technique. (That’s right, young Jedi, you’re advancing.) But really, it’s quite simple. These are just extra accounts (or separate accounts, new accounts, sub accounts—whatever you want to call them) beyond the foundational five. Name your accounts in whatever way makes sense to you.

There are lots of reasons why you might want to open up an advanced account and flow some cash into it on a scheduled basis.

A payroll account is an advanced account that we think every business owner should have (unless you’re a solo operation). This ensures that you protect employee and contractor wages so you don’t accidentally run out of money to pay them.

Or, let’s say you know you’ll need to make a big purchase down the road, such as new exercise equipment for your gym. You could open an equipment account and start accumulating those funds now (rather than potentially facing the sudden expense when a machine breaks down).

Or maybe you want to invest in continuing education courses for your staff. If it’s important enough to be a goal, create an account for professional development and start saving for it.

Maybe you want to embark on a marketing push for your business, which will involve hiring multiple vendors. Having a separate marketing account might encourage you to determine a budget in advance and stay true to it, without comingling those expenses with all the other things in OPEX.

Creating more accounts ensures that money is there when you need it to be. It’s really all about preparation and peace of mind.

How to put money in advanced accounts

So you’ve determined you need to create some extra accounts. How are you going to make this work within your Profit First system? Where will the money come from?

Like the examples we’ve been talking about here, most of the advanced accounts that our clients set up are to isolate and cover specific business expenses. In the absence of a new account, you’d be paying these bills out of OPEX. So you’re almost always looking at reallocating money from OPEX when you create an advanced account.

Your allocation target is quite simply how much money you want to invest into the thing you’re creating the account for, and in how much time you want to achieve it. That affiliate fee is $3000 per year? Divide it by 12, and figure out the percentage of your income that equates to. (You want to accumulate $10,000 in an equipment account in 8 months time? Divide $10,000 by 8 and figure out the percentage of your income that equates to.)

You’ll then subtract that percentage from your current OPEX allocation percentage. Your OPEX funds aren’t really being reduced per se, they’re just being redistributed into new accounts so you can very clearly target money toward specific expenses.

Advanced accounts can come and go

You don’t have to use them all the time.

For example, when I’m thinking about growing our team, I start transferring money into my new hire account. I won’t actually bring them on board until I’ve got at least one month of their salary in there (and provided I was able to comfortably accumulate that pay within one month’s time. Check out our important guidance on this in How to Profit First Your Way to Team Growth.) Once I’ve actually hired them, I’ll transfer the funds to the payroll account, and let the new hire account remain dormant for a while—until I’m thinking about hiring again.Occasionally there are times when the creation of an extra account won’t be for an expense, or when it might make more sense to assign dollar amount allocations rather than percentages. Let us help you navigate these trickier cases.

How to Profit First Your Way to Team Growth

Bringing on new employees is an exciting part of business growth. But if you haven’t done it before, or even if you have, it may be daunting to think about taking on the added responsibility. Can you afford the expense of a new hire? How do you navigate the administrative aspect of paying them? Maybe you’re only paying yourself thus far, and that’s simple enough—you just transfer fixed percentage allocations into your Profit and Owners accounts twice a month. That all changes when you have a team.

As you know, the Profit First system involves setting up five separate bank accounts for the distribution of funds. But there are smart reasons to create additional accounts, or subaccounts, to earmark and protect funds that need to be reserved for a certain purpose. Paying employees might be one of those reasons. 

Split Payroll from OPEX?

That is why we often suggest that if you have any employees besides you as the owner, you should create a separate payroll account, as a subaccount of OPEX. 

Why do you need a separate payroll account? Why can’t you just take from OPEX to pay your employees? Two big reasons. 

A separate account makes sure the money you’ve allocated for employee wages can’t accidentally get intertwined with all your other expenses, and then accidentally spent. For example, if your rent and your payroll are both paid out of OPEX and one of these expenses would happen to place you in overdraft this month, the bank will decide what to pay. The bank might choose your rent over your payroll. They’re both important, but which is easier to rectify?

Having separate accounts ensures that your team members get paid no matter what. Bouncing a payroll check is really the absolute worst for employee morale. 

Having the payroll account split from OPEX also ensures that you meet your obligation to set aside the taxes you owe to the federal government on behalf of your employees as soon as you pay their wages. These funds can’t get accidentally spent either. This is another big one. You don’t want to get in trouble with the IRS for failure to pay your payroll taxes.

A payroll service can help you calculate your employee wages and payroll taxes. Check out a few services here. We recommend OnPay and you can check them out at our affiliate link here.

And don’t let us scare you too much. Read our blog post on some common payroll mistakes and how to avoid them.

Can You Afford to Hire Help?

Theoretically, a new hire should help to generate revenue in some way, or free up the owner to do so, but in reality things can take a while to get off the ground—or things might not go according to plan. You need to onboard the new employee, which takes time. Time where they may be costing you time and money. 

And according to Profit First principles, hiring an employee is a business expense that you must be able to meet without increasing your current total OPEX allocation. This means, for example, that if your current OPEX target allocation percentage is 50%, and your payroll subaccount target is determined to be 25%, then your OPEX becomes 25%.

So how do you determine what percentage to allocate toward the payroll subaccount?

If you’ve already got employees on the books, take a look at last year’s figures to see what you paid for employees in total. Determine what percent of your revenue that figure was, and use it as a basis for your payroll target allocation percentage.

If you’re considering your first hire, you will want to have one month’s worth of employee salary as a buffer in your payroll account before you bring them on board. Determine what that figure is, and then try to transfer 2-3% from OPEX into the payroll account each month until you’ve reached that figure. 

The length of this process will enlighten you as to whether hiring someone now is feasible. Did it take just a month or two to accumulate that one-month salary buffer? Then you can probably afford to add that employee. On the other hand, did you struggle to make available 2% from OPEX each month to transfer to the payroll account? If that’s the case, you need to rethink your decision.

Independent Contractors… on Payroll?

Your business might depend on independent contractors, rather than employees. In terms of cash flow management, we recommend that you compensate them from your payroll banking account if they are providing your clients substantially the same service that is provided by your business as a whole (for example, personal trainers who are contractors at a fitness studio). If, however, the independent contractor is providing a service FOR your business, such as janitorial or marketing services, you should include this expense as part of OPEX.Here’s more on leveraging team members in your wellness business.

Analyze Your Expenses and Increase Your Profits

Who doesn’t want a more profitable business? We’re in business to help people, sure, but we’re also here to make a living. And if we want to make a good living with a business, we need to be profitable.

Generally, there are two ways to increase your profit:

1. Increase revenue (while keeping expenses in check), or
2. Reducing expenses (while keeping revenue the same)

This article will focus on the latter—reducing expenses to increase your profitability. Because while increasing revenue is important, most businesses forget that increased revenue is not an excuse to lose sight of expenses. The beautiful thing about this strategy is that it simply involves cutting some expenses to increase what you keep. Expenses that you probably don’t need anyway.

To reduce your expenses, simply conduct an Expense Analysis. There are many ways to conduct one, but here’s a simple method that anyone can use:

Make a list of your common and recurring business expenses.

• Go through your bank and accounting records, and be on a special lookout for those small monthly subscription services that you no longer really use or don’t use fully.

Trash or Trim your list.

• Write TRASH (or strike through) any expense that you can eliminate without negatively affecting your business (think about services that you no longer really use, but are still paying for)

• Write TRIM next to expenses that can be negotiated down to a lower rate, replaced with a competitor at similar quality but lower price, or downgraded without issue to the business. 

Contact the vendors to cut/trim expenses.

• Do your research ahead of time if you plan to ask for a reduced rate.

• If you’re switching software, set up a free trial of the new service first before cutting out the old one. If needed, hire a professional to help with the transition.

Any business can do this in a couple of hours. The more your cut, the more profitable your business becomes–as long as you’re not cutting out vital services in an effort to save a few dollars. It’s worth weighing whether cutting out a service will mean less fluidity of workflows or more time investment for you. 

We recommend going through this process on a quarterly basis at a minimum. This practice will keep you financial efficient and profitable.

Not sure if you can eliminate a particular expense? Try this test…

Eliminate the expense for a month, but be prepared to regain if needed. How do your customers react? Does your team notice its absence? Are you having to spend any additional time connecting dots that are no longer connected? If no one is negatively affected, then you could probably eliminate the expense.

Remember the old saying, “It’s not what you make, it’s what you keep.” Doing a quarterly expense analysis will help you keep more of your money, and help you earn higher profits. If you need help implementing Profit First in your business, let’s connect. Schedule a call with us today.

When and How to Reassess Your Profit First Distributions

So you’ve implemented Profit First in your business and are on your way to establishing smarter expense spending habits, financial security, and peace of mind. You’ve determined the target allocation percentages for your five bank accounts—and you’re maintaining the discipline to distribute your revenue into those accounts consistently according to those percentages. What’s next? Should you sit back and relax?

Not exactly! The Profit First method is designed to help you not only become immediately profitable, but to set you up for continued success in the long term. The goal is to have distributions that are not only achievable and adequately meeting the needs of your business and personal priorities today, but that are also optimal for business growth, efficiency, and sustained profitability going forward. Making sure that you’re dividing your revenue into the optimal percentages, in turn, enables your business to be fully optimized and, ideally, one step closer to an optimized quality of life.

You see, your target allocations can and should evolve over time depending on your revenue and your needs. The Profit First assessment graph serves as the fundamental guidance for how to allocate funds based on revenue range, and it’s largely appropriate for most businesses, but your specific business and your priorities will dictate if, when, and how your percentages will fluctuate.

When to Reassess

You should review your target percentages every quarter. Quarterly reassessment allows you a few months to see if your current allocation percentages are working fully in your favor, and if not, where you can make improvements.

(Actually, a quarterly review makes sense in every area of your business, but it’s particularly important for your finances, and we have some ideas here on where to start.)

How to Reassess

There are a couple of ways you can do this.

You could start the assessment process from scratch and determine target percentages based on your revenue range using the Profit First assessment graph. But what if you haven’t yet made the leap into the next revenue range? It may look as if no changes are necessary to your strategy, but you probably know better. You’ve come so far already, and you likely have a clearer picture of your desired and attainable goals.

When your revenue changes, it’s definitely a good time to reevaluate your target percentages, but you might need a professional to help you make sense of the numbers and set new quarterly goals. We can help with this.

Look at OPEX

For starters, you can look at your OPEX account for guidance. Are you accumulating more money in your OPEX account than you’re actually needing to spend? If so, you know you can safely reduce the distribution.

Let’s say you’ve got a $5000 surplus sitting in OPEX that’s built up over the last quarter. You can figure out what percentage led to the accumulation of that surplus, and you can safely reduce the OPEX distribution, in increments of 2% to 3% per month.

This would be the time to consider how you could better make use of those funds by reallocating them to another account or by creating a special account for another use that also falls under OPEX, like a payroll account.

Let’s say your OPEX is at the target allocation of 50% and you want to take some continuing education classes which will improve the services you provide in your business. You know you’ve got some wiggle room in OPEX (that $5000 cash surplus as proof) so you decide to create a separate account for, say, Personal Development and mark its target allocation percentage at 5%. You then reduce your OPEX target to 45%. Soon enough you’ll have the funds for that class, while still being able to cover your other business expenses.

Or you could create a separate account for large annual expenses or emergency maintenance. It really all depends on what you need.

Owner’s Pay

Having too much revenue to distribute is a nice problem to have, but what if your revenue is down? Should you cut your own pay to compensate? We don’t ever recommend reducing your Owner’s Pay percentage when revenue is down, though it may seem like an easy solution. Check out this blog post for guidance on determining your Owner’s Pay percentage according to Profit First principles (hint: you’d only ever reduce it when revenue is UP).

When to Talk to Your Accountant

Any time you have a big change in revenue—certainly if your business moves into another revenue range on the Profit First assessment chart—it’s wise to talk to your tax professional. That’s because beyond any changes you make to your cash management system, there may be changes to your tax liabilities. A good accountant will recommend ways to reduce your tax burden, such as investments or deductions, that are specific to your overall finances and priorities.

And come September (aka the financial third quarter), you should ask your accountant to estimate your tax rate for the current year. You’ll have eight months worth of real revenue data, so there’s no need to make a guess based on last year’s figures. However, if you’re following Profit First principles, you should have enough funds in your Tax Account based on the performance of your business to pay your taxes. But your accountant can and should work with you to reduce that tax liability as much as possible. (If not, get a new accountant!)

You Have a Personal Savings; Why Not a Business Savings?

Many of us have a rainy day fund for when (not IF) things go south. Your car needs a new transmission, your roof has a leak, a child gets ill. These things happen, and our personal emergency fund is there waiting to save us, or at least minimize the impact.

But very few business owners seem to have an emergency fund for their business. And knowing your personal emergency fund is there to bail you out if needed is not what it means to have an emergency fund for your business. Business and personal funds should always remain separate.

There’s a lot of unexpected expenses that could come up in a business, from losing a big account to needing a new HVAC system to a water leak that needs to be fixed ASAP, attorney fees to help with a disgruntled employee or former client. We hope that none of these happen, but the reality is that they can and they will at some point.

The beautiful thing about the Profit First cash flow management system is that your business will start building an emergency fund for itself if you run the system correctly.

Here’s how Profit First helps your business establish its own emergency fund:

Twice a month, you’ll transfer a percentage of revenue to your Profit bank account. (How much depends on your own profit allocation percentages.) Over time, your Profit account grows.

Then, each quarter, you’ll transfer half of the funds in the Profit account to your own personal account to do with as you wish. It’s your reward as the business owner. Use it to pay down personal debt, buy something fun, take a trip, you name it.

The other half will stay in the Profit account as an emergency fund, and you can let that fund grow. Now, when (not IF) things go south, the business has its own support.

Ideally, you’ll want to reserve three to six months for business expenses in your Profit account or another emergency account. It’s generally not a good idea to have too much cash due to liability, so once you have a fully-funded emergency fund you can use 100% of the funds in the PROFIT account.

And no matter what the size of your current emergency fund, know that every dollar will help you rest a little bit easier.

Need help getting your accounts set up or determining your distribution amount? Let’s talk!

How to Remove the Temptation to Spend Your Revenue

You’re tired of not having a handle on your money. As an entrepreneur, you know all too well the consequences of poor money management—on you and your business. So you took a leap and set up Profit First, which is a step in the right direction. But you’re still overspending. You still have your hands in the proverbial cookie jar, and it’s time to stop.

But how do you remove the temptation of spending your revenue, in particular your growing profit and tax account? They look so tempting and full of money, but their whole purpose is to accumulate money. So let them do their job. Set up smaller plates, and limit your spending to your operating expense account. 

Are you not completely sold yet? Then, let’s take a look at some other ways to remove the temptation of spending your sweet, sweet revenue early and (possibly) on the wrong things.

Okay, but I want to take a class.

That’s great! You’re a person who cares about personal and professional development. You’re constantly investing in yourself because you love to learn and know that the more you learn, the stronger your business will become. 

You don’t have to sacrifice that important part of yourself because you use Profit First, but you need to plan for it. If you know you want to incorporate personal development into your business, set up an additional account for it. 

Once you have all of your other accounts on target, start your personal development account. You don’t have to save much, but as you continue to put a small percentage away, you’ll be ready when you’re ready to pull the trigger on that course you’ve been eyeing—and you didn’t have to compromise your other accounts to participate. Score!

Okay, but it just looks like SO much money is just sitting there.

Well stocked profit and tax accounts can look pretty tempting. They are the glistening oasis when you’ve been walking the financial desert for weeks on end. Andrew Jackson and Benjamin Franklin are waving at you as they sip frozen cocktails by the pool, and there you are, begging for water, dragging yourself through the hot sand. But I have four words for you: Snap. Out. Of. It.

Those accounts aren’t just sitting there trying to tempt you. They serve a purpose. A very important purpose that you know you need. If the temptation is too great to ignore, try moving your profit account and your tax account into different banks. Restrict your access and temptation. Trick yourself into honoring your desire and need for financial security if that’s what it takes.

Okay, but I’m not sure I can do it alone.

If you’re having a hard time holding yourself accountable, that’s okay. But did you know it takes more than two months to create a new habit? And not to mention the new behavior patterns needed to overcome decades of money mindset habits.

But old habits or impulsive spending don’t mean that your Profit First journey is a total loss. Find an accountability partner. If you are struggling to create accountability within yourself, find a friend or biz bestie who you can call with you are a step away from clearing your account and heading to the sale on the gym equipment. 

Make sure your accountability partner understands your financial goals. In addition, this person should be supportive of the place you’re in emotionally and the challenges you’re facing. 

Creating new behavior patterns is challenging, even on a good day, so be compassionate with yourself. If you are struggling to keep your financial promises to yourself, think of new ways to make it really inconvenient for you to access your accounts. Maybe you don’t sign up for online banking or have an obnoxious password you hate typing in.

The important part is to keep your commitments to yourself and realize you committed to spending out of certain accounts when you set up Profit First, so you need to keep it that way. Future you will thank you for it.

How to Pay Off Debt in Profit First

Debt feels suffocating. Your financial walls are closing in on you, and you’re ready to get rid of your personal or business debt once and for all. But how exactly? We can and will help you with this. But before we get into our recommendations for conquering debt, we need to lay some ground rules. 

What does Profit First say?

First things first, you cannot pay off debt unless you are profitable. So how do you get profitable? By setting up Profit First, of course. Before you create your plan to pay off debt, you need to make sure all your Profit First pieces are in order. This way, your business will continue to run smoothly while you achieve your financial goals.

What pieces do you need? Take our Profit First Assessment and get a list of what accounts to set up!

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Getting started with your debt

Step one to taking control of your finances is to control spending. By running and analyzing an expense report, you will fully acquaint yourself with every financial transaction in your business. You’ll gain a deeper understanding of where the money in your business is going and how you can control your spending.

The next step to paying off debt with Profit First is to understand the intention behind your accounts and allow yourself some grace. This is true whether your debt is in your business or personal finances.

The minimum payment of your credit cards, loan payments, or whatever type of debt you find yourself in comes from your operating expenses. Your bill is covered at its minimum each month. Any additional payments to the principal come from quarterly profit distribution. 

Here comes the “grace” part. Just because you are laser-focused on paying off your debt, don’t forget to take some of your quarterly profit and have a little fun. You work hard. By allowing yourself some wiggle room to have fun once in a while, you’ll stave off burnout, so you’ll stay strong for the long haul.

Now that you have the Profit First debt-busting basics down let’s look at a couple more “must-dos” when managing your money.

Why would I save to a savings account if I’m trying to pay off debt?

Let’s get real for a second. Debt comes from spending too much before you have it. So make sure you don’t make a similar mistake by aggressively paying your debt down before you have other financial safeguards in place, i.e., an emergency savings account.

For many clients, the tendency is to put all of their profit toward debt as quickly as possible. We like where your head’s at, but what’s the point of paying off your debt if you are one big emergency away from creating more? 

What happens when you’ve paid off all your debt (without emergency savings in place) and your HVAC breaks? You’re right back where you started, except this time, you’re more frustrated and in debt than you were previously. 

Creating an emergency savings plan does prolong your journey to becoming debt-free, but it’s the only way to ensure you stay that way once you get there. Unfortunately, emergencies do happen—and usually when you least expect them.

What can you do in the meantime?

Your small plates are in place, you’re paying minimum payments from operating expenses, and you’re building your emergency savings account. Here are four debt management basics you can implement while you’re saving. (These aren’t Profit First principles, just good old-fashioned best practices.)

1. Call your lenders. Ask if there is the option to refinance credit card debt to lower your payments or ask about the possibility of getting a better interest rate. There is no harm in asking.
2. Transfer balances. In the short term, you will have transfer fees, but in the long term, you’ll save because you’ll lower your interest rate.
3. Explore the possibility of your business getting a bank loan to pay off credit card balances or other debt.
4. This is the big one: You need to have the discipline not to use your credit cards again. You are doing all this work. Don’t let yourself end up in the same position in the future.

Managing debt is a beast. But the struggle toward financial freedom is underway. You’ve set up Profit First and created emergency savings. Now all that’s left to do is stop blaming yourself for being in your current financial position. 

No matter how much you might hate your debt, realize that it gave you experiences that have brought you to where you are today. Your debt afforded you opportunities, but now that you are making a profit, you don’t need it anymore. So leverage the income you have, say thank you to debt, and show it the door.

Planning for Taxes if Revenue Increases

Planning your tax liability can be tricky when done right. To do it accurately, you need accurate records and a tax pro. And even then, it’s not precise.

One of the things that make projecting your taxes difficult is the fact that your tax liability is affected by multiple factors, like income from other sources, marital status, family size, medical expenses, homeownership, etc. And since the end of the year has not arrived yet, you have to forecast (or guess) what your profit will be at the end of the year.

To simplify knowing how much to pay in quarterly estimated taxes, the IRS wants you to pay the tax balance for the previous year in quarterly installments (or 110% of the previous year’s tax balance if your adjusted gross income is greater than $150,000 if married filing jointly).

But what happens if you have a revenue spike? While the IRS’s method is designed to be simple, it doesn’t account for drastic changes in income or profit. Its method will help you to avoid a penalty, but you still must have the remaining tax balance paid by April 15.

As stated earlier, the way to get the most accurate estimates for your tax liability if your income spikes is to have a tax planning session with a tax professional who can give you estimates based on accurate and up-to-date financials. 

But here’s a simpler way to stash away extra dollars for taxes in the event your income increases so you don’t have to worry if your tax estimations are a bit off: Use the Profit First system.

Generally, we set aside 15% of revenue for tax reserves. Being that this system is based on percentages, the amount in your Tax bank account will vary in proportion to the income that you generate. If you make a little money, you’ll have a small amount in the Tax account. If you make a lot, then you’ll have more in your reserves. Which is exactly what you need.

This is by far, the simplest system to making sure you always have enough in reserves to cover your income tax liability, no matter how much or how little you earn. Continue to make your quarterly estimated taxes based on the tax liability from the previous year, and you should have ample cash in reserves to make up the difference if needed.

To get the most accurate percentages to set for your Tax account (and any of the other core accounts), we’d be happy to help. Just reach out for a consultation.