Profit First

Recently, I read a book called “Profit First” by Mike Michalowicz and it’s changed the way I think about my businesses. 

When I started my first business back in 2015, every single expense felt like I was personally spending my own money, and it made it hard for me to invest in things that I knew would ultimately help me grow. 

And every dollar the business earned felt like, “holy cow, I’m rich!” 

But, it takes a certain amount of money to actually run your business and this mindset was majorly holding me back. Don’t even get me started on paying taxes . . . every quarter felt like Uncle Sam was robbing me blind. 

Not anymore. 

Almost 6 months ago I switched to a “profit first” mindset and system of accounting. It’s not a perfect science, but it’s helped me better understand my finances so that I don’t overestimate how much of my businesses’ money is actually my own. 

Here’s how it works (in a nutshell) . . . 

You start by opening up 3 checking account and 2 savings accounts for your business, and they’re broken down as follows: 

• Checking: Income Account (where all your income flows into)
• Checking: Operations (where you pay your operating expenses from)
• Checking: Owner’s Pay (where you put the money you’ll use to pay yourself, like a salary)
• Savings: Profit (where you stash your profits)
• Savings: Taxes (where you squirrel away a % of your income to pay taxes)

In his book, Mike breaks down the percentages you should put into each account on a bi-weekly basis, but I’ve done my own calculations based on my P&L statements (profit and loss) for the last few years and set aside a certain percentage of my income into each account. 

So, every 2 weeks, I have a reminder on my calendar for 30 minutes to spend divvying up the money in my “Income” account for each business into the proper accounts. 

The money that’s left in my Owner’s Pay account is what I use to pay myself, and the Profits account I keep untouched until the end of the year when I allow myself to take those profits as an “Owner’s Distribution.”

So now, when I look at my bank account, I don’t see one giant lump sum in one account and think, “Holy crap, I’m rich! Let’s go on vacation!” I have a much more realistic view of my business finances and how that affects my personal finances.

If you’re interested in learning more about this Profit First accounting method, click here to get the book on Amazon. It’s a must read for any business owner.