As I’m savoring, ever so quickly and with little discipline, a chocolate egg, I’m reminded of the soundness of the diet and financial principle: Eat veggies first.
At the dinner table, by eating your vegetables first, you fill up on the healthy food, leaving you less room to pig out on the bad carbs or desserts. Or chocolate eggs.
So, what are the financial “veggies” you should be eating first?
Having enough money to live off of as the business owner every month is the “healthiest” thing your business can do for you.
You work hard and deserve it, and you cannot fulfill your noble purpose if you can’t sustain your life. And that takes cash. So paying yourself, getting cash for your benefit, that is a cash veggie. And it tastes as sweet as a dessert, if you are into that type of thing.
The veggies we are going to talk about are the accounts that benefit you as the owner. Because that is a better definition of profit – cash for the benefit of the owner.
In the Profit First system, we have you set up several different bank accounts to compartmentalize your finances. Some are for operating expenses, team member expense, equipment and so on.
So which accounts are for your benefit?
The OWNER’S PAY account benefits you because that is compensation for working in the day-to-day, nitty-gritty of the business. You need to be compensated for this work. And the intention is that you will be able to afford your lifestyle on this amount.
The PROFIT account benefits you because this represents the return on investment you get from owning your business. The more profitable the business, the bigger the “dividend” payment. Profit distributions are done at the end of each quarter, and profit distributions go to all owners, even those who are not involved in the daily tasks and operations.
The TAX account benefits you because with a profitable business, you will have a tax burden that needs to be covered. We believe that because the business is creating this tax burden for you, it’s only fair that it also pays for the taxes. You should not have to take money out of your take-home pay or profit distributions to cover that income tax. Most owners save for their taxes out of their take-home pay. Well, not anymore. And because of that, this TAX account is giving you a raise because the business is now going to cover it for you.
That makes three accounts that benefit you directly. OWNER’S PAY, TAX and PROFIT.
When you sit down twice a month to allocate the INCOME deposits into your multiple bank accounts, you will allocate in the order of OWNER’S PAY, TAX and PROFIT. Then you’ll allocate to EQUIPMENT and OPEX (operating expenses).
The order of allocation is important because it will get you in the right habit of focusing on the most important things first.
In “Profit First,” Mike Michalowicz says to allocate first to the PROFIT account. I am asking you to allocate to your OWNER’S PAY account first. Why? I want to make sure you are paying yourself first because one of the first steps to knowing you deserve to be profitable is paying yourself a livable wage. Many business owners aren’t even doing that. If you are in the category of not paying yourself a bare-minimum livable wage, this is where you draw the line in the sand. That’s why you need to first allocate to OWNER’S PAY.
Remember, the book could be called “Cash for the Benefit of the Owner First.”
Of these “cash veggie” accounts, we have also found that when you are able to pay yourself consistently each month, you don’t reach burnout. If you really had to choose between getting paid consistently each month or receiving a quarterly profit distribution, you are going to choose the consistent paycheck. That’s why OWNER’S PAY is the first account on your allocation list.
I have the TAX account next. Not PROFIT. One of the biggest problems we see with business owners is that nasty combination of owing taxes but not having any cash available to cover them. Putting money in your TAX account avoids this problem. Because not paying yourself enough to live and not having any cash for the income-tax collector are two of the largest cash-flow issues, we put a higher priority on these two accounts.
The OWNER’S PAY, TAX and PROFIT accounts are the cash veggies that benefit you.
Allocate to these three accounts first.
However, it is possible that you can have too many cash veggies. The health of your business determines that. At some point, you will need to compare what your business can afford to pay you versus how much you need to take home.
But that deeper analysis comes second.
To start, develop the habit: Eat your veggies first.
For personalized help implementing the Profit First system for your business Schedule a Session and watch your money grow.
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