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.
According to Mike Michalowicz, who literally wrote the book on Profit First, “The profit distribution is an award to the equity owners (you and anyone else who invested in the business with money or sweat) for having the courage and risk tolerance to start the business.”
Profit isn’t the same as owner’s compensation though. Your owner’s compensation is something you should take during every pay cycle. It’s pay for working in the business. Profit is a reward for owning the business.
Your Profit account serves a few purposes. Other than being a holding place for that equity reward, it can also be a metric for measuring growth and a cash reserve for emergencies.
At the end of each quarter (the last day of March, June, September, and December if you follow a traditional calendar), you’ll take 50 percent of the money in the Profit account as profit. The remaining 50 percent stays in the account as a reserve.
If there’s more than one owner or equity holder, it’s up to you to determine what percentage (of the 50 percent you’re distributing) each person gets. This is something that should be in your partnership agreement so there’s no uncertainty.
Side Note: If you have debt in your business, profits need to go toward paying that off first. Though it is okay to take a very small percentage to have some fun with too.
Once you’ve made your distributions, you’ll start reallocating funds to the Profit account each time you do your other allocations,on the 10th and 25th of the month if you’re following the system by the book.
What to Do with Your Distribution
You work a lot of hours as the CEO of your business and you deserve to have a little bit of fun with your profit distributions. But if you’re unsure of what to do with the money, you may feel like there’s no point in taking the distribution.
Take the distribution. You deserve it. But have a plan for how you’ll reward yourself for the hard work. Here are just a few ideas:
If your distribution is less than $250
- Treat yourself! It’s okay if your profit distribution is just enough for a celebratory dinner with your partner or a friend. Go somewhere you wouldn’t normally go and order something fancy.
- Visit the spa (or car spa). You deserve a nice massage or a facial, away from the office for the day. If that’s not your thing, treat your car to a detailing job that makes it feel brand new.
- Invest in learning. Here at Fit For Profit, we’re all about learning new things–personally and professionally. What’s something you’ve been dying to learn that you haven’t taken the time to do yet? Sign up for that gardening class or take that Rosetta Stone class so you’re prepared when we can travel again.
If your distribution is less than $2,000
- Beautify your home. There’s a lot you can do around your home for $2,000 and less, including some small remodeling projects or buying some new furniture or appliances. We’re spending a lot of time at home these days and we should enjoy it!
- Take a road trip. If you’re able, take a weekend away at a nearby destination. Sometimes getting out of our normal four walls for a few days is enough to rejuvenate us for months to come.
- Pay down debt. Personal debt can change how we think about money in our business too. We love the thought of using profit distributions to pay down (or off!) some personal debt so you can feel better all the way around.
If your distribution is more than $2,000
- Divide and conquer. Consider gifting part (or all) of your distribution to a favorite cause.
- Invest and save. If you’re not ready to spend the money, open a separate account and save it for a planned vacation or so you can pay cash for that new car. You may also want to invest it in a college fund for your kids.
I personally don’t always have a solid plan for my profit distribution. In fact, I really like to save it for a larger purchase. I’ve saved up for a car before, and I’m currently remodeling my kitchen with several quarters’ worth of distributions.
Whether you choose to spend it or save it, if you’re following Profit First you do need to remove it from your business accounts and put it elsewhere.
Other Quarterly Actions to Take
So what’s next? Taking a profit distribution isn’t the only action to take each quarter that’s related to your profits. Here are some other things to pay attention to:
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.
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 money mindset!