Setting up a system for your business is a lot of work. The Profit First cash flow management system is no different. It’s a lot of work up front but pays off in the long run. However, every once in a while the system needs some maintenance. Things change, your business grows, or your personal circumstances change, so naturally your cash flow system will need to adjust with any changes affecting your business. Here are our top 3 best practices for maintaining the Profit First system.
#1: Essential 5 Bank Accounts
Human nature is to fill our plates, and on average, we eat about 92% of it. But studies have shown that if you use a smaller plate, we will still feel satisfied at the end of the meal.
With Profit First, you have 5 essential bank accounts that you allocate your funds to. Each bank account is essentially a smaller plate. You can have more, but at minimum you want these 5.
- Income
- Profit
- Tax
- Owner’s Pay
- Operating Expenses
The system is so simple that even one more account can make a huge difference.
Per Mike Michalowics, author of the original Profit First, “The method is simple. Every time you get a deposit from sales, take a predetermined percentage of that money as profit. Of course, there are a few more steps than just that. But even with the simple first step of taking your profit first, you will become permanently profitable.”
Be sure the accounts you open are working for you. Consider future plans for growth and open more accounts if necessary to use for investing in that growth.
#2: Allocation Days
Following the rhythm days is the heart of maintaining the Profit First system. Rhythm days are also called allocation days, because that’s what you do on those days. You need to actually allocate the funds on a consistent bases to make the system work.
Consistency is where the rhythm days comes in. Create a rhythm for yourself by scheduling your allocation days for twice a month on the same days each month.
We call it the 10/25 rhythm because we suggest doing your allocations on the 10th and 25th of each month. Sitting down twice a month allows you to identify trends. You’ll see monthly and yearly cycles and be able to plan for your larger expenses by making necessary adjustments.
You don’t want to look at your accounts just once every 3 months. That’s too much to deal with all at once, and it may be too late to catch mistakes or make adjustments.
Twice a month is the ideal time for allocation days. If you feel it’s necessary, then once a week is fine. Those are the only two frequencies we suggest.
#3: Quarterly Check-In
This last main best practice is crucial for maintaining the Profit First system in a way that allows your business to grow even more. During your allocation days, you’ll probably notice things from time to time that require the system to be tweaked. That’s what the quarterly check-in is for.
When you first implemented the Profit First system, you did the math based on how much income you were bringing in at the time. Maybe 20% went to your profit account and 15% to your tax account, 15% to your team account, and so on. But as you grow, those percentages may need to be adjusted so the system still works for you. The better it works for you, the easier it is to maintain.
When John first started out, he was allocating 22% to owner’s pay, but as he grew, his team got larger, so he needed to adjust the percentages. The company could no longer afford to pay him 22% so he lowered it to 5% and increased the percentage going to the team account.
At first glance, this may sound like he was paying himself less, but as the business grows, the revenue increases. Which means taking a smaller percentage as the owner might still be a higher dollar amount than when the company was smaller.
Every quarter, look at your accounts and allocation percentages. Adjust them as needed. Taking a little time twice a month and once a quarter to give your cash flow system some attention makes a huge difference in maintaining it for the life of your business.
More tools and resources for maintaining the Profit First system can be accessed for FREE on our Wealth Resource Page.
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