One of the 4 core principles of the Profit First cash flow management system is called smaller plates. Those smaller plates are multiple bank accounts all for your one business. The Profit First accounts are for things like owner’s pay, profit, operating expenses, etc. The idea is it keeps you from overspending on things and gives you a way to save for certain things as well.
If you’re not familiar with the system, it might seem overwhelming at first. Even if you’ve read about it, it’s a lot to take in and process. Managing multiple bank accounts, let alone the details of what type of Profit First accounts to have and how much to put in each one, stops a lot of business owners before they even get started.
To simplify the process and hopefully get you started, at the bare minimum I suggest setting up just one account… a Tax Account.
When we’re faced with a large expense that we didn’t plan for, we tend to make bad decisions. (Not speaking from personal experience, of course.)
That large tax bill sucks every time. It might be the largest annual bill you pay. Saving for your tax obligation throughout the year will significantly lower your stress levels, PLUS any extra you have in your account is a bonus for you. So many benefits from just one other account.
Knowing how much money is allocated to which purpose gives you a clearer picture than a traditional budget and ultimately effects the financial health of your business.
So, while it may seem overwhelming at first, a little planning ahead goes a long way when those taxes are due.
To simplify the process for you as much as possible, here are a few tips.
How much should you set aside for taxes?
Take a look at your Income Tax Return from last year and see how much you owed in taxes. Divide that number by your total Revenue from last year and that will give you a good idea on a percentage amount to set aside.
For example, if you made $500,000 in Revenue, and paid $15,000 in taxes, then divide $15,000 by $500,000, and you’ll know to allocate 3% monthly into the Tax Account.
Wouldn’t that be nice if we only paid 3% in taxes!! Unfortunately, the IRS sucks and real life is much different than this simple example. But you get the idea.
This way you won’t be scrambling for money when it’s time to file, and you owe $15,000 to the IRS. There’s no reason to stress because you’ve been allocating tax money to your Tax Account all year.
How much are you going to have to pay come tax time?
Another tip is to do a year end estimate. December is a great time to look over your Revenue for the year and do an estimate for how much you think you’ll owe in April.
You can do an estimate based on the formula above and if you’re a little short you can make the adjustment and you’ll still have 4 months to catch up. Or, if you’re a little ahead, you might have a little extra cash which you can use to put back into your business.
Which is why you’re doing this in the first place, to help grow your business.
Grow your business. Grow your wealth.
When are you going to do all this?
Another core principle of Profit First is called rhythm days. You set a rhythm for allocating cash to your multiple Profit First accounts consistently throughout the year. These are the days you take care of your finances. Putting money in your tax account, doing all your bookkeeping since that last rhythm day, look at your expenses, all things money.
This way you aren’t constantly worrying about bills and bookkeeping. You know you’ll get to it soon enough. We recommend doing your allocations twice a month, but once a week will work, too.
Whatever you decide to do, at the very least, open a Tax Account and start setting aside income tax dollars. It will save you headaches at tax time.
We have 3 more cash management tips for you in a simple one-page PDF.
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