What Should You Do When Allocating Cash to Different Bank Accounts?

We Want You to have Clarity in Your Cash Flow.

You want to have clarity in your cash flow so whether you’re allocating cash, wanting to reward your employees, or creating an expansion plan, you can make smarter more focused money decisions.

Often times when running the Profit First for Microgym’s system (the best way to manage your cash flow each month), we get asked the same specific questions a lot. So, we’ve put together a simple FAQ resource to make sure when you’re running through a day of allocating cash around into different bank accounts that you’re feeling confident in all the details.

Some FAQ:

What exactly is allocation day?
How much time does it take to allocate?
How do I know where or how much to allocate?

Let’s answer the most important question first.

What is Allocation Day?

Allocation Day is basically the first step in the Profit First system. It’s the day for allocating cash from your Income Account to the other seven essential accounts (or however many accounts you have set up based on your situation). These are the Small Plate accounts from The 4 Core Principles of Profit First.

If you have an eidetic memory and remember everything you read, great! If you’re like the rest of us who struggle to remember your kids’ names, those principles are:

Small Plates
Eat Veggies First
Remove Temptation
Eat Smaller Meals More Frequently (The 10/25 Rhythm)

Since it’s our human nature to eat everything on our plate, if we switch to a smaller plate we eat less, and still feel full. When we look at our bank account and see a large amount of cash, our human nature wants to spend 90% of it. If we allocate our cash into several smaller bank accounts, we feel like we have less cash to spend and we find a way to make it work. We still feel full.

Allocation Day is the “Eat Smaller Meals More Frequently” principle. We call it the 10/25 Rhythm because we suggest designating the 10^th and 25^th of each month as Allocation Day. You can choose whatever days work best for you, just make sure they’re about 15 days apart and they’re the same days every month. The idea here is to create a rhythm, or habit, and commit to it.

How Much Time Does It Take for me to Allocate?

It sounds too complicated. I’m trying to run a business and I don’t have time to sit there and move my money around every 2 weeks. Excuses, excuses.

It’s actually not that complicated. It’s as easy as 1-2-3 if you use our free spreadsheet that does the calculations for you.

Log in to your Income Account. Whatever that balance is in your Income Account, you’ll enter that dollar amount into the spreadsheet, and it will calculate how much to allocate to each of your accounts based on the percentages you have set up. (If you want more information on the 7 essential accounts for Profit First you can read this blog that goes into more details about the 4 Core Principles or even better, you can get the book on Amazon.)

Transfer those calculated dollar amounts into each of your accounts. When your done your Income Account should be at $0. Please Note – There may be exceptions to completely zeroing out your income account based on your specific situation. Ask your accountant if you have any concerns about that.

Pay your bills. If your allocation days are the 10^th and 25^th of each month and today is the 10^th, only pay the bills for anything that is due before the 25^th. Set the rest of them aside and don’t give them another thought until your next allocation day.

How Do I Know Where or How Much to Allocate?

If you’ve already implemented Profit First, and you’ve decided what percentage of your Income will be allocated to each of the other accounts, and you’re using the spreadsheet then you won’t even have to think about it. The spreadsheet has answered that for you.

If, for some reason, and it does happen from time to time, you don’t have enough cash in your Operating Expense Account to pay all the bills, then you’ll need to figure out what is a productive expense, and what is not a productive expense. This is where the Eat Your Veggies First principle comes in.

I would prefer to call it the Eat Your Dessert First principle but as we all know vegetables are healthy and dessert is nonproductive.

This is a great exercise to see if you have too many expenses. If something is nonproductive then you will need to trim the fat. It might feel painful, but you’ll need to strongly consider cutting the nonproductive expenses. Pay your most critical expenses now, dessert will have to wait.

Do not pull from your tax account to pay for a new coffee maker for your team members. The coffee maker is not a productive operating expense. They’ll have to buy their own lattes for a while. This is an obvious example, but you get the idea.

Veggies – Meat & Potatoes – Dessert

Critical – Productive – Nonproductive

After cutting all your nonproductive expenses and even skimming some of your productive expenses and you still don’t have enough cash to pay the critical expenses, then something else may be going on here.

We offer a few courses that may shed a bigger light on your current cash flow situation. Depending on where you’re at with implementing and running the Profit First system, the courses can get you access to videos, templates, walkthroughs, and many resources to help remove the stress from managing your cash.

Profit First is a commitment but just like starting a new exercise program once you create the habit, you’ll start seeing the results.

If you’re having issues allocating cash or questions about how the Profit First system can fit into your specific business, please reach out to us and schedule a time with one of our Profit First Professionals. We want to help you grow.