Shannon Simmons
Shannon Simmons
Take Action With Quarterly Profit Distributions
Our favorite time of year happens four times: at the end of each quarter. If you’re following Profit First, this is when you, as the business owner, get to take half of what’s built up in your profit account as a distribution (a bonus, if you will) to yourself.
That’s right, every 90 days you get to share in the profits of your business.
Three Tasks to Include in Your Quarterly Financial Routine
Three months can fly by—especially in your business. It’s that time again for your Quarterly Financial Routine. You do have a quarterly financial routine, right? If you do, awesome! If you don’t, you’re in luck. We’ve compiled our top three tasks that should be a part of every business’s quarterly review.
In addition to the quarterly tasks, we strongly recommend using your quarterly quiet time to review the progress of your yearly goals. Revisiting the goals you set back in January every three months allows you to stay on track, reflect on your priorities, and hold yourself accountable.
Now let’s take a look at the top three quarterly tasks we recommend in your business.
Task #1: Profit distribution analysis
You know your business is making a profit, but do you have a clear understanding of your KPIs? Key performance indicators are built into the Profit First model. By creating a spreadsheet for profit distribution every quarter, you can more quickly and accurately track the performance of your key accounts and begin to compare any fluctuation quarter over quarter.
If your business is growing, take a close look at your distributions from each account, then consider any notes you have made in previous quarters and adjust your distributions accordingly. If you’re finding that your operations expenses have increased, determine why and whether you need to increase your allocations there. Ideally, you have a good handle on your expenses and can ultimately increase your owner’s pay and profits instead.
Spending time with your KPIs will help you develop a broader understanding of your business operations, which leads to a positive impact on your owner’s pay percentage.
Task #2: Owners pay adjustments
The goal of Profit First is to make sure you are paying yourself what you need. A quarterly analysis is a crucial step towards ensuring you allocate the proper owner’s pay percentage based on any account fluctuation.
Take time at the beginning and end of each quarter to analyze and record any changes to the buffer in your owner’s pay account. The cushion in your account should be increasing over the quarter, meaning you’re allocating more to that account than you ultimately need. If you have a steady increase, it’s time to raise the amount you actually pay yourself.
However, if your revenue is down, you might be eating into your buffer. It’s natural to think the easiest solution is to adjust your owner’s pay allocation down—don’t do it! If you notice the drop mid-quarter, stay the course, trust the buffer, and look at your financial standing as a whole at the end of the quarter.
As I mentioned, Profit First’s goal is to make you money. If you are at your minimum lifestyle lock number, do not adjust down without referring to Task #3 or reaching out!
Task #3: Expense analysis report
Whether you’re practicing Profit First or not, running a quarterly expense analysis report by vendor will tell you everything you need to know about who you’re paying, how much, and when.
This report offers a comprehensive reminder of every vendor you’ve paid throughout the quarter. This is the time to evaluate if you are still getting value from their services. Is there another vendor who does the same thing that you can go with instead? Or do you have the potential to eliminate an expense?
Doing this analysis can also bring to light duplicate charges, increased subscription prices, or subscriptions that you no longer use. Identifying these will help you to save money in the long-term.
Bonus tip: If you are thinking about decreasing your owner’s pay (like we talked about in Task #2), don’t do it! Decreasing expenses is the key to keeping your allocation intact.
By creating a regular quarterly analysis of your business, you empower yourself to make educated decisions based on experience and expertise. Without trust in the system, you might end up making impulsive financial decisions that end up hurting you or your business in the long term.
You don’t have to wait for a special day to analyze your financial health. Schedule a quarterly date with your spreadsheets and make the most out of your relationship. Getting up close and personal with your finances will help you feel more confident, prepared, and empowered to develop your business needs’ money mindset!
Managing Your Business Finances with Multiple Bank Accounts
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.
Managing Your Small Business to Success
If you’ve been in business for any amount of time, you know that there’s a lot to growing a sustainable business. Maybe a lot more than what you bargained for.
But without going back to get a business degree (because who has time for that!?), how do you gain the knowledge you need to be successful?
When Your Accountant Doesn’t Use Profit First
Profit First is a proven system that works. Just ask the thousands upon thousands of business owners who have implemented it in their businesses.
Unfortunately, some accountants and bookkeepers are reluctant to use Profit First or work with clients who want to implement it in their businesses. Maybe they shy away from having to reconcile multiple accounts or the transfer transactions we make a few times a month.
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.)
And we get it. If a business owner isn’t implementing Profit First in the manner it was meant to be used, then their books can get a little messy. But when following the system and creating habits around it, Profit First can actually simplify the bookkeeper’s and accountant’s jobs.
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.
Tips for Talking to Your Bookkeeper and Accountant
We recommend three things when talking to your accountant or bookkeeper about using Profit First.
First, Profit First is not a new bookkeeping system. It’s not going to fundamentally change how your bookkeeper is doing their job and it’s technically not going to change your books at all. We’ve had coaching clients who have sent a copy of the Profit First book to their accountant or bookkeeper and encouraged them to get on a coaching call with us. That’s been a game-changer in helping them understand the system.
Second, it’s incredibly important to use the system as it’s meant to be used. And keep in mind that some little changes might be necessary depending on your business and how you operate. But Profit First will still make everyone’s jobs easier. Even better, when your bookkeeper and accountant start to see your profit increase and when you no longer need to scramble to find the money to pay your taxes, they’ll be believers.
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 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!
Three Costly Accounting Mistakes to Avoid
Small business owners have a lot on their plates and accounting mistakes can happen. Time simply does not allow you to become an expert in all the areas required for running a business. Here are a couple of common accounting mistakes that we see all the time. Correcting them will help you be more productive and profitable in your business.
Mismanaging receipts
Maintaining receipts are challenging for everyone, but the IRS requires that you have proof of business expenditures. Periodically, we come across people who feel that keeping the credit card statements are enough; unfortunately, they’re not. You’ll want to create a process to keep your receipts all in one place so they don’t get lost.
Receipts printed on thermal paper (think gas station receipts and many more) will fade within a year or two, and the bad news is the IRS could audit several years back if they come calling. Correct this by scanning them in or taking a clear picture of them using your smartphone.
Some accounting systems and/or document management applications allow you to upload the receipt and attach it to the transaction in your accounting system. This is a great solution, and if you’re interested in this, please ask us about it.
Ignoring the accounting reports
There are gold nuggets in your accounting reports, but some business owners don’t take the time to review them or are uncertain about how to interpret them. This is when accounting mistakes can happen. We can help you understand the reports and find the gold nuggets that can help you take action toward profitability.
Some of the things you can do with your reports include:
- Identifying your highest selling services or products
- Projecting cash flow so you’re not caught short at payroll time
- Getting clear on your top customers or your demographic of top customers
- Evaluating your marketing or business development spend
- Pointing out trends compared to prior years, budget, or seasonality effects
- Checking up on profit margins per product or service to make sure you are priced correctly
- Managing aging receivables or speeding up collections
- Measuring employee profitability, if relevant
- And so much more
Being proactive with your accounting will help you spot opportunities in your business that you can act on, as well as spot and correct accounting mistakes long before they manifest into trouble.
Mixing business and pleasure
In your bank accounts and on your credit cards, mixing business and pleasure is to be avoided when possible. All businesses should have a separate bank account, and all business transactions should go through there. It takes an accountant much longer to correctly book a business deposit that was deposited into a personal account. Avoiding accounting mistakes in the first place saves everyone a lot of time and energy.
Taking out a separate credit card and putting all your business transactions on it will save your bookkeeper a ton of time. The credit card doesn’t even have to be a business credit card. It can just be a personal credit card that’s solely used for business. If you have employees making credit card charges, sometimes a separate card for them helps you control fraud.
The hardest area in which to separate business from pleasure is cash transactions. Be sure your accountant knows about these. The accountant can either set up a petty cash account or a reimbursement process so that you can get credit for cash expenditures that are for the business.
How did you rate on these three accounting mistakes? Avoid these three and your accounting department as well as your business will run a lot smoother.
While we’re not tax professionals, we can help you get ready for taxes by making sure your books are organized and up-to-date. Book a call today!
Get Your Taxes in Order & Don’t Ask for an Extension
The 2022 calendar year is officially over, which means that tax season is upon us. (Happy New Year, right?) It’s time to start getting organized so you don’t have to ask for an extension on your taxes.
If you’ve been following along recently, you’ll know that there’s a lot you can do to prepare. We’ve told you how to reduce your taxes without reducing your net profits, we’ve shared how to work ahead so you can minimize your tax season stress, and we’ve given you tips to prepare for taxes well in advance.
How a Profit Coach Can Change Your Business
There are a lot of different coaches out there. A sports coach, supporting athletic teams to bettering their game and winning championships. A personal coach, to guide you in creating a life you dream about. A business coach, to help you develop a strategy to keep your business growing.
Once your business is running and you’ve started bringing in regular revenue, have you considered the benefits of a profit coach?
3 Priorities for Your Best Year Yet
No matter what time of year it is, you can make it your best year yet. For many small business owners in the health and wellness space, that means bringing in more clients, developing new programs, and increasing revenue.
Yes, revenue is important, but not at the expense of prioritizing the things that can make that happen. And what can make that happen is you, your network, and the systems you have in place to simplify your business and your life.
Setting Your 2023 Financial Goals
Have you set big, lofty financial goals for 2023? And if so, how did you come up with those numbers?
Setting financial goals is incredibly helpful so you have something to strive for, but setting the right goals is vital. If they’re not realistic, you’re bound to feel frustrated mid-year, throw up your hands and give up.
Let’s avoid that by setting your goals with intention and research. Answer each of these questions and write down any numbers and calculations so you have them handy.