When a client tells me they’re finding “extra” money in their Profit First accounts, I get excited for them, but also a little concerned.
Excited because more money in their accounts usually means their revenue has increased. Business is probably going well.
Concerned because—well, remember when we explained Parkinson’s Law? The demand for something expands to match its supply. It’s a phenomenon of human behavior that proves itself time and time again. As it applies to money, here’s what happens: The more money you have, the more money you will spend.
So, for example, when you have “extra” money in your OPEX account after you pay the bills, your natural tendency is to think that’s money that can—or even should—be spent. You may drum up reasons for ongoing expense spending without thinking through if it’s feasible in the long term.
You’ll spend it, and then you’ll form habits of spending.
Money Without a Plan
When you accumulate more funds than you’d anticipated having thus far in your Profit First accounts, please don’t think of that money as disposable cash. It’s really just Money Without a Plan, which is a bad thing. You should always have a plan for what to do when your revenue shifts.
The beauty of Profit First is that you can build and tweak your plans through your allocation percentages. You already know you should review them on a quarterly basis, which is fine for the most part, but sometimes revenue has grown so much that you need to make an intermediate adjustment. Here’s what to do whenever your business has more money in its accounts than you planned for. (It might be time to make some new plans.)
Got extra money in the OPEX account?
The most dangerous place to have extra money is in OPEX. There are many options and ways to spend money on things that fall under operating expenses—it can be tempting.
But remember that Profit First is based on circumventing Parkinson’s Law. Your OPEX allocation should be set up to just cover your current operating expenses so there’s no extra money hanging out in there.
You can give yourself a little buffer though. What’s the minimum OPEX balance for your comfort level? It might be $100 or $500 or $1000, or one month of expenses. Consider that figure your “zero.” At the end of the month when all the bills are paid, if you have substantially more than your zero in OPEX, then you need a plan for that “extra” money.
What would best serve your business? It might be time to adjust your Profit First allocations to reduce the percentage going into OPEX and to drive them closer to your target percentages for the Owner’s Pay or Tax accounts.
Or, maybe it’s time to create an advanced account or two within your system. Reallocate some OPEX funds into its own separate bucket for an Annual Expense account, or a Marketing account… It all depends on your business needs.
Extra money in OPEX almost always means that overall revenue has increased. But it can also mean you’ve cut your operating expenses. Usually that’s part of a plan too, so your allocations should be adjusted accordingly.
Got extra money in the Tax account?
Let this money accumulate until you’ve paid the taxes for the current period. Repeat: don’t do anything with this money until you’ve paid your taxes!
Once that’s done, you can transfer the extra funds to your Profit account and withdraw them as a profit distribution when the time comes. Or you could add the funds to an advanced account you’re working to build up.
If you’re finding extra money in the Tax account even though your revenue hasn’t substantially increased (or nothing else has dramatically changed), this could indicate that you may have been a little off in calculating your Profit First targets the last go around. The percentage allocated for taxes should result in the right amount of reserves you’ll actually need, because it’s based on your total revenue.
If it’s not making sense to you, seek the guidance of your Profit First coach or tax professional before adjusting your target allocations.
Got extra money in Owner’s Pay?
Good. This is one time when you need a little “extra” in there, or else freaking out may ensue. The pandemic has taught us that it’s so important to still be able to pay yourself when revenue dries up in turbulent times.
As with OPEX, you can decide on a comfort buffer. For some owners, it’s one month’s pay. But we recommend saving a cushion of three months. It really depends on your personal financial needs. Talk to your Profit First coach for guidance on the buffer and how long to keep it in your account—it’ll be different for every owner based on your overall financial health.
If you’ve accumulated more than three months in Owner’s Pay, think about increasing your monthly pay disbursement, or adjust your allocations to put more money in Profit and use it to work toward building a rainy day fund or retirement plan. Realize that anything in Profit is still owner’s pay, but sometimes it’s how you label the funds that can determine how wisely you spend them.
Got extra money in the Profit account?
No one has ever complained that having extra money in their Profit account was a problem—go figure. But let’s say you’ve taken your regular profit distributions, you’ve paid off all your debt, you’re jetlagged from enough vacations… and you’ve still got extra profit that you don’t know what to do with. This is the moment to put your profits to work for you, by venturing into investments and retirement planning, if you haven’t already.
However, this is assuming you’ve already got three to six months of revenue sitting in a VAULT account. This is the ultimate disaster preparedness plan for your business, and if you’ve got more Profit than you know what to do with, then you’re surely in good enough shape to be amassing a VAULT.
Now that you have some ideas about what to do with that “extra” money, we’re feeling relieved.
Don’t hesitate to ask us for help in designing a plan at any stage of your business journey. This is exactly what we do.