Updated: Sep 7, 2020
The truth is, being a business owner does not mean you automatically have a degree in accounting or are a finance genius, and sometimes just the logistics and work of getting a business off the ground can be overwhelming, so much so that you forget to focus on the financial side of your business. But I have to warn you, not focusing on where you allocate your profit can be quite disastrous for your business. If I could go back in time and change one decision I made in my business it would be that from day one I would have set up five bank accounts; 1) Income 2) Profit 3) Owners Comp 4) Tax 5) OPEX. However, it took the first two years of thinking “I’ll just grow this location while the other location pays for it” to realize that nothing about that method was sustainable. Or when my Sales Tax was due (you know the tax that was taken from the sales) and my bank account was going to go into overdraft if I paid it, I borrowed money from myself to cover the debt. That also was a sign that what I was doing was not working. It didn’t matter how hard I worked or how much money I brought in, my expenses were always more so I was working, essentially for free and I couldn’t even call it “sweat equity”. This is part of why 90% of startups fail because they scale too quickly and forget about the liabilities part. Don’t be a statistic - be the 10% and implement the Profit First method from Day One...not One Day.
So, how does the Profit First method work? Route all incoming money into your Income account. From there try to work towards a starting goal of setting aside 10% for Profit, 20% for Owners Comp, 15% for State and Income Taxes, and then the remaining 55% to pay your OPEX (Operating Expenses). Just to give you an idea, when I started I laughed at the idea of setting aside 1% profit and felt guilty every time I did it, thinking “I overcharged, I shouldn’t have this much leftover.” However, I didn’t overcharge and you should have a profit in your business. Your business has to be profitable in order to be sustainable and who wants to build a non-sustainable business?!
Each industry is different so your ratios, in the end, may be different. You can use these percentages as a benchmark if you want or refer to the book itself, you can buy it here. I’ll never forget that time when it came to paying taxes my first year of business and I didn’t have the money. At the time I only had one account, all the sales were dumped into so when it came time to make a hiring decision, order more uniforms, etc. I was looking at the wrong account because not all that money was technically mine to spend on those items. If you separate your accounts from day one, you will always pay yourself and your debts as well as sticking money aside for your future growth. Yes, we learn from our mistakes and those mistakes help us grow and evolve. But one of the biggest pieces of advice that I can offer new business owners is to practice Profit First in your business! Don't make this same mistake I did thinking that I would sort everything out later. Trust me on this one... Franceska x
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