Using Advanced Accounts to Up Your Profit First Game
The big benefit of using the Profit First system is that you pay yourself first. You never have to forego paying yourself because that, and your profit, comes first.
At the same time, there are sometimes other parts of the business that demand your attention. Things like new equipment, large one-time or yearly fees, future investments that you may not even know you need yet.
No two businesses are alike, and each will have its own complexity. So while having the basic five accounts (Income, Profit, Owner’s Compensation, Taxes, and Operating Expenses) is important, sometimes we have other needs too. Thankfully, it’s easy to customize the system to meet the needs of your unique business, by opening additional, “advanced” or “drip” accounts.
A note to readers: Advanced accounts are not something that every business needs, and we don’t recommend opening an advanced account when you’re new to the Profit First system. These are something you can add after you’ve gone through a few cycles of distributions first.
When Advanced Accounts are Needed
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 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.
Reasons for an Advanced Account
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.
Some businesses offer specials for payment in full, meaning that the customer pays a large amount up-front and the business delivers over the course of a quarter or a year. It doesn’t make sense to put all the money in your pocket now because you’ll incur expenses later for it. Putting the revenue into a drip account and pulling it out over the course of the contract with the customer makes more sense. A use case for this might be a Black Friday sale.
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). This will also help you prevent going into debt through financing when it’s time to buy equipment, and you may be able to negotiate a nice discount with a vendor if you can pay cash.
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. Even if you and your team haven’t identified exactly what those courses will be, you’ll have the funds ready when you do.
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 the next 8 months? 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 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 advanced accounts all the time. You can start one this quarter for a big purchase, then stop adding to it when you’ve saved enough for that purchase.
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.