Profit First Principles
FAQs
Profit First Principles
Why do I still run out of money in my OpEx account before all my bills are paid? I thought Profit First was supposed to fix that.
Running out of money in your operating expenses (OpEx) account before paying all
your bills can happen if your expense allocations are not aligned with your revenue
or if there are unexpected expenses. Profit First is designed to help you manage
your cash flow more effectively by prioritizing profit, but it’s essential to regularly
review and adjust your allocations based on your business’s financial performance. If you’re consistently experiencing cash flow shortages in your OpEx account, you may need to revisit your profit allocations, reassess your expenses, and potentially increase your revenue streams. Regularly monitoring your finances and making proactive adjustments in line with your income can help mitigate cash flow challenges and ensure you have sufficient funds to cover all your expenses. Remember, the Profit First methodology is a system that requires ongoing monitoring and adjustments to ensure its effectiveness in helping you achieve financial stability and profitability.
I collect a lot of retainers from customers. What should I do with those?
When collecting retainers from customers, it’s essential to handle those funds wisely to ensure financial stability and growth for your business. In the Profit First methodology, retainers are housed in a separate Retainers, or Drip, account until you have earned that revenue. Once the revenue has been earned, follow this sequence to allocate the funds appropriately:
- Income account: Transfer the amount of the retainer that has been earned from your Retainer or Drip account into the Income account.
- Profit account: Allocate a percentage of the retainer to the Profit account. This ensures that you prioritize profit and set it aside before covering expenses.
- Owner’s Compensation account: Set aside a portion of the retainer for the Owner’s Compensation account. This is your salary as the business owner.
- Taxes account: Allocate a percentage of the retainer to the Taxes account. This helps you save for tax obligations so that you don’t face a hefty tax bill later.
- Operating Expenses account: The remaining amount after allocating for Income, Profit, Owner’s Compensation, and Taxes goes into the Operating Expenses account. This is used to cover the day-to-day expenses of running your business.
By allocating the retainer accordingly, you ensure that you’re effectively managing the funds, prioritizing profit, and securing the financial health of your business.
I'm having a hard time following the 10/25 rhythm. What are some other allocation schedules I can use?
If you’re finding it challenging to follow the traditional 10/25 allocation rhythm recommended in the Profit First methodology, there are alternative allocation schedules you can consider to better suit your business’s financial needs. Here are a few examples:
- Weekly Allocation: Choose one day a week to be your “money day” and allocate funds in the Income Account to your Profit First accounts on that day. You will also make your vendor payments on the same day of the week.
- Biweekly Allocation: This schedule operates the same as the Weekly Allocation, but on a biweekly basis instead of a weekly basis.
- Align with your payroll schedule: Aligning your allocation rhythm with your payroll schedule ensures you handle all of your money tasks at the same time.
- Monthly Allocation: If you run a subscription-based business where all of your income arrives on or around the same day of the month, then you might find a Monthly Allocation schedule works best for you.
- Commission-Based Allocations: If you only make a few large sales a year (software, real estate, etc.) then you might find that making allocations as sales are closed works the best for you. We also suggest implementing a Drip Account in this situation.
The key to a successful Profit First implementation is to establish a routine rhythm that not only removes your tendency to react to your bank account balance daily, but also enables you to monitor the cash flow cycles in your business over time.
What account should my credit card payments come from?
In the Profit First system, credit card payments should ideally come from your Operating Expenses account. Here’s why:
- Operating Expenses: Credit card payments are typically considered part of your day-to-day operational expenses. Therefore, it makes sense for these payments to be covered by the funds allocated to your Operating Expenses account.
- Cash Flow Management: By using funds from your Operating Expenses account to make credit card payments, you ensure that your business is covering its regular expenses in a structured and organized manner.
- Separation of Funds: Keeping credit card payments separate from other allocations like Profit, Taxes, and Owner’s Compensation helps maintain clarity and transparency in your financial management. It allows you to track and manage expenses effectively.
- Tracking Expenses: When credit card payments are linked to your Operating Expenses account, it becomes easier to monitor and analyze your spending patterns, helping you make informed decisions about budgeting and expense control.
- Consistency: Following a consistent approach where credit card payments come from the Operating Expenses account aligns with the Profit First methodology’s principle of allocating funds based on specific purposes and priorities.
By ensuring that credit card payments are covered by the funds allocated to your Operating Expenses account, you are practicing sound cash flow management within the Profit First framework. This approach helps maintain financial stability, supports effective expense tracking, and contributes to the overall financial health of your business.
Will Profit First hurt my business's growth?
Implementing the Profit First methodology in your business is designed to enhance your growth rather than hinder it. By allocating funds for profit first, you ensure that your business remains financially healthy and sustainable in the long term. Profit First helps you prioritize profitability alongside growth, making your business more resilient and less susceptible to financial risks. It encourages you to operate more efficiently and thoughtfully, leading to increased profits that can support your business’s growth initiatives. When profit is a core focus from the start, it can actually fuel your expansion by providing the financial stability needed to invest in growth opportunities strategically.
When might my business want to implement a drip account?
A drip account can be beneficial for your business when you accept retainers or prepayments for services or if you want to build a cash cushion for seasonal fluctuations in revenue. Implementing a drip account as part of the Profit First methodology allows you to regulate your cash flow and helps you avoid the temptation of tapping into these funds for everyday expenses. It can serve as a strategic tool for reserving funds to cover expenses for work not yet done or to make sure you can cover your expenses during slower seasons in your business.
Why is my Owner's Comp account higher than the paycheck I take home?
If your Owner’s Comp account balance is higher than the paycheck you take home, it could be due to the way you’re structuring your funds allocation within the Profit First methodology. The Owner’s Comp account is intended to accumulate funds for the owner’s compensation, including taxes, bonuses, and distributions. This account acts as a reservoir from which you can pay yourself consistently and cover any additional owner-related expenses or distributions, like bonuses, when needed. The balance in your Owner’s Comp account might exceed your regular paycheck if you’re accumulating funds over time or building a buffer for future distributions. It’s important to regularly review and adjust your Owner’s Comp allocations to align with your compensation goals and cash flow needs. By maintaining a balance in this account, you ensure that you have the necessary funds available for owner compensation purposes and can adapt to fluctuations or unexpected expenses related to your role in the business.
Can I use my Owner's Comp account to decide whether or not to give myself a raise?
Your Owner’s Comp account within the Profit First methodology serves as a reserve for your owner’s compensation, including salaries bonuses, and distributions. While the balance in your Owner’s Comp account can provide insights into the funds available for owner compensation, it should not be the sole factor in determining whether to give yourself a raise. When considering a raise, it’s essential to assess various aspects of your business, such as overall profitability, cash flow, market conditions, and the value you provide to the company. Instead of solely relying on the balance in your Owner’s Comp account, take a holistic approach to evaluate your business’s financial health and performance. Analyze your revenue streams, expenses, profit margins, and growth trajectory to make informed decisions about adjusting your compensation. By considering the broader financial picture of your business in conjunction with the funds available in your Owner’s Comp account, you can determine whether a raise is sustainable and aligns with your business’s overall profitability and growth objectives.
Which account do I put Sales Taxes in?
Sales taxes collected from your customers should be allocated to a separate Sales Tax account. This account is specifically designated to hold funds that are earmarked for tax obligations, including sales tax, VAT, or any similar taxes relevant to your business. By segregating sales tax funds into a Sales Tax account, you can ensure that these funds are set aside, excluded from your Real Revenue, and not commingled with your operating expenses or other financial obligations. This practice helps you stay compliant with tax regulations and prevents you from inadvertently spending funds that are required for tax payments. When you collect sales taxes from customers, remember to transfer those funds regularly into your Sales Tax account to build up a reserve for upcoming tax payments. Properly managing your tax obligations within the Profit First framework ensures that you have the necessary funds available to fulfill your tax responsibilities on time and avoid cash flow disruptions.
What account do I pay my subcontractors from?
If your subcontractor or material expenses exceed 20% of your total revenue, then we recommend opening a separate Materials and Subcontractors account and allocating to that account prior to making allocations to your other Profit First accounts.This ensures you can pay your contractors and purchase the materials necessary to deliver your product or service. It also gives you a better handle on your Real Revenue (the amount your business actually earns from providing its product or service.
I have too much money in my Tax account. What should I do with it?
If you find that you have accumulated too much money in your Tax account, there are a few steps you can take to reallocate those funds effectively within the Profit First system:
- Assess your tax situation: Review your current and projected tax liabilities. If you have overfunded your Tax account due to overestimating your tax obligations, you may have an opportunity to adjust your allocations.
- Adjust your percentages: If you consistently find your Tax account accumulating excess funds, you may need to reassess the percentage you allocate to your Tax account. Consider adjusting the percentage downwards to ensure you are setting aside an appropriate amount for taxes.
- Allocate excess funds: Once you have recalculated your tax percentages, you can either take the excess funds as an additional Profit distribution, or move them into a Vault account to further build your cash reserves for strategic purposes.
- Consider your Profit account: If you have adequately funded your Tax account and other essential accounts, consider allocating some of the excess funds to your Profit account. This allows you to increase your profit distributions, rewarding yourself for the hard work you’ve put into your business.
- Use funds strategically: If your Profit and Owner’s Compensation accounts are already well-funded, you can consider using the excess funds to invest in growth opportunities for your business, such as marketing initiatives, additional resources, or product development.
By reassessing your allocations, adjusting percentages as needed, and strategically reallocating excess funds, you can optimize your cash flow within the Profit First framework and ensure that your business finances are well-balanced and aligned with your goals.
My bookkeeper HATES the Profit First system. Any tips on winning her over?
Introducing a new financial system like Profit First can sometimes be met with resistance, especially from those who are used to traditional accounting methods. Here are some tips on how to win over your bookkeeper and help them embrace the Profit First system:
- Education and Communication: Take the time to explain the principles and benefits of Profit First to your bookkeeper. Help them understand how this system can improve financial management, cash flow, and profitability for the business.
- Collaboration: Involve your bookkeeper in the implementation process. Seek their input on how to adapt the Profit First system to work seamlessly with your existing accounting processes. Collaborating with them can help address any concerns or challenges they may have.
- Training and Resources: Provide your bookkeeper with resources and training materials related to Profit First. This can help them familiarize themselves with the methodology and feel more confident in implementing it effectively.
- Show Results: Demonstrate the positive impact of Profit First on your business finances. Share how the system has helped increase profitability, manage cash flow better, and ensure financial stability. Real-world results can be compelling.
- Address Concerns: Listen to your bookkeeper’s concerns and address any specific issues they may have with the Profit First system. Work together to find solutions or modifications that make it easier for them to work within this framework.
- Incentives: Consider offering incentives or bonuses tied to the successful adoption of Profit First. This can motivate your bookkeeper to embrace the system and actively contribute to its success.
- Patience and Support: Change takes time, so be patient with your bookkeeper as they adjust to the new system. Provide ongoing support, guidance, and feedback to help them navigate the transition smoothly.
By educating, involving, training, and supporting your bookkeeper through the implementation process, you can help them see the value of the Profit First system and work towards a common goal of improving your business’s financial health.
My accountant wants me to spend down my Profit account to save money on taxes. What do you think?
While spending down your Profit account to reduce taxable income might seem like a strategy to save money on taxes in the short term, it goes against the core principles of the Profit First methodology and may not be the most beneficial approach for your business in the long run. Here’s why:
- Priority of Profit: Profit First emphasizes the importance of prioritizing profit by setting aside a percentage of your revenue for profit distributions. This ensures that you are rewarding yourself as the business owner and building a financially sustainable business.
- Financial Stability: By consistently allocating funds to your Profit account, you create a buffer for economic downturns, unexpected expenses, or periods of low revenue. This financial stability can safeguard your business and provide a safety net for future growth.
- Tax Planning: While reducing taxable income is a common tax strategy, it should not come at the expense of neglecting profit distributions. Working with your accountant to explore tax planning strategies that align with the Profit First framework can help you optimize your tax situation without compromising your financial health.
- Retirement and Investments: The Profit account can also serve as a source for building your retirement savings or making strategic investments in your business. Depleting this account solely for tax benefits may limit your ability to secure your financial future or fuel business growth.
- Profit First Principles: It’s essential to adhere to the Profit First principles consistently to reap the full benefits of the system. Deviating from these principles may disrupt the balance of your cash management and hinder your progress towards achieving financial stability and profitability.
Instead of spending down your Profit account for short-term tax savings, consider working with your accountant to develop a tax strategy that integrates with the Profit First system, maximizes tax efficiency, and supports your long-term financial goals. Prioritizing profit and following the Profit First principles will ultimately lead to a healthier and more prosperous business in the long term.
I have too much debt. How do I pay it off using the Profit First approach?
When dealing with high levels of debt, using the Profit First approach can help you systematically pay off your debts while managing your cash flow effectively. Here’s how you can approach debt repayment within the Profit First framework:
- Assess Your Debt: Start by taking stock of all your debts, including amounts owed, interest rates, and minimum monthly payments. This will give you a clear picture of your overall debt situation.
- Allocate Debt Repayment Percentage: Create a separate Debt Repayment account and allocate a percentage of your revenue towards paying off your debts. This ensures that debt repayment becomes a priority in your cash flow management.
- Increase Revenue Streams: Explore ways to increase your revenue streams to allocate more funds towards debt repayment. This could involve increasing sales, launching new products/services, or diversifying your income sources.
- Reduce Expenses: Review your expenses and identify areas where you can cut costs to free up more money for debt repayment. Trim unnecessary expenses and prioritize essential spending to accelerate debt payoff.
- Snowball or Avalanche Method: Consider using popular debt repayment methods like the debt snowball (paying off smallest debts first) or debt avalanche (paying off debts with the highest interest rates first) within the Profit First framework. Choose the method that aligns best with your financial goals.
- Stay Committed: Consistency is key when it comes to debt repayment. Stick to your allocated Debt Repayment percentage and make timely payments towards reducing your debt balances.
- Celebrate Milestones: Celebrate small victories along the way as you pay off individual debts. Recognizing your progress can boost motivation and keep you focused on your goal of becoming debt-free.
By incorporating debt repayment as a priority within your Profit First allocations, you can create a structured approach to tackling your debts while maintaining financial stability and working towards a debt-free future for your business.
Do I have to take a profit distribution every quarter?
Taking a quarterly Profit distribution is a behavioral keystone of the Profit First methodology. By rewarding yourself intermittently and regularly, you reinforce the habit of always putting your Profit first, which will encourage you to stick with it.
Avoid the temptation to not take your Profit distribution or to “plow back” the Profit into your business.
Can I take my Profit distribution monthly instead of quarterly?
Taking a quarterly Profit distribution is a behavioral keystone of the Profit First methodology. By rewarding yourself intermittently and regularly, you reinforce the habit of always putting your Profit first, which will encourage you to stick with it.
Taking your Profit distribution monthly instead of quarterly is not recommended. More frequent distributions can lead to you viewing Profit as part of your regular compensation and not the reward for running a profitable business.
My accountant says I can't take Owner's Pay and that I must take all compensation through distributions. How does that work with the Profit First system?
If your accountant suggests that you cannot take Owner’s Pay and must receive all compensation through distributions, it can still be compatible with the Profit First system. While Profit First recommends setting aside a portion of your revenue for Owner’s Pay as a regular salary, adapting to receive all compensation through distributions is possible with some adjustments:
- Distribution Structure: If all compensation is received through distributions, you can allocate a specific percentage of your revenue to a “Owner’s Compensation” or “Owner’s Distribution” account in the Profit First system instead of a separate Owner’s Pay account.
- Labeling: Ensure that the distributions meant for your compensation are clearly labeled to distinguish them from other Profit distributions. This helps maintain clarity in tracking your compensation and profit allocations.
- Consistent Allocation: Allocate a fixed percentage of your revenue to the Owner’s Compensation account for your compensation each period to ensure consistency in your personal income.
- Tax Considerations: Confirm with your accountant how receiving compensation solely through distributions impacts your tax liabilities. They can advise you on the tax implications and help you plan accordingly.
- Financial Planning: While receiving compensation through distributions can be effective, it’s crucial to develop a clear understanding of your personal financial requirements and ensure that you are setting aside enough for both your compensation and profit according to your business needs.
Remember that Profit First is a cash management system and not an accounting system. Follow your accountant’s advice about how to record your transactions for tax purposes, and use Profit First as your system for managing your business’s cash flow.
By aligning the Profit First methodology with your accountant’s advice on receiving compensation through distributions, you can still effectively manage your business finances, prioritize profit, and ensure that you are adequately compensating yourself as the business owner. Open communication with your accountant and implementing clear financial practices will help you navigate this approach within the Profit First framework.
How much money to I take out of the Profit account for my Profit distribution?
Determining how much money to take out of the Profit account for your Profit distribution within the Profit First system involves considering several factors. Here’s a general guideline to help you calculate your Profit distribution:
- Profit Percentage: Start by establishing the percentage of your revenue that you allocate to the Profit account. In the Profit First system, this is typically set as a specific percentage (e.g., 5%, 10%) of your total revenue.
- Calculate Profit Amount: Multiply your total revenue by the Profit percentage to determine the amount that should be allocated to the Profit account. For example, if your revenue is $10,000 and your Profit percentage is 5%, your Profit allocation would be $500 ($10,000 x 5%).
- Distribute 50% of your Profit Account balance: At the end of each quarter, take 50% of your Profit Account balance as a Profit distribution. The remaining 50% will remain in the Profit account, so your Profit Account will grow each quarter. This reinforces the behavioral reward system of the Profit First methodology.
- Tracking and Monitoring: Regularly monitor your Profit account balance, Profit distributions, and overall financial performance to ensure that you are achieving your profit goals and maintaining financial stability.
By following these steps and customizing your Profit distribution amount based on your revenue, Profit percentage, personal financial requirements, and business objectives, you can effectively manage your Profit account within the Profit First system. Remember that the Profit distribution amount should support your financial goals while maintaining the financial health and growth of your business.
The App
How do I connect my bank accounts?
To connect your bank accounts to the Profit First App, follow these
steps:
- Log in to your Profit First App account.
- Select the “More Actions” button at the top right of the App, then select “Settings” button.
- Select “Bank Accounts” option on the left under the settings submenus.
- Select the add Bank Account button, denoted by the building with 3 pillars and a plus sign, at the top right corner of the main screen.
- Once the Plaid window opens, select the “Continue” button.
- If you have an existing Plaid account enter your phone number then select “Continue” or select “Continue as guest” if you prefer.
- Complete dual factor authentication if required
- Search for your bank by typing its name in the search bar.
- Select your bank from the list of options.
- Enter your online banking credentials (username and password) for that
bank. - Follow the prompts to authorize the connection between your bank and the Profit First App.
- Once connected, your bank account balances and transactions will be
securely imported into the app.
Does Profit First App work for smart phones?
How much does the Profit First App cost?
Will the software integrate with bank accounts outside of the US?
How do I add/remove/modify bank accounts and their associated properties?
steps:
- Log in to your Profit First App account.
- Select the “More Actions” button at the top right of the App, then select
“Settings” button. - Select “Bank Accounts” option on the left under the settings submenus.
- To change the properties of the bank account, select the pencil icon at the top right corner of the page to edit. This will allow you to modify the following properties:
1. Name
2. Allocation (A) versus Pre-Allocation account (PA)
3. Amount currently in the account
4. Allocation versus Pre-Allocation account
5. Minimum balance
6. CAP and TAP %’s - To Add a new bank account simply select the “+” at the top right corner of
the Bank Accounts page - To remove a bank account, select the bank account and then select the red “x” to remove that bank account. NOTE: The five foundational Profit First bank accounts (Income, Profit, Owners Comp, Tax and Op Ex) cannot be removed. They can be modified but the Profit First App requires you have a minimum of 5 bank accounts as per the Profit First methodology.
If I am a Profit First Professional, how do I add my clients to the Profit First App?
as follows:
- Sign up to be an affiliate by sending email
to affiliate@profitproapp.com and include your name and company name that is registered with the Profit First Professionals. - You will receive your unique affiliate link that you can then provide your clients or anyone you want to refer to the Profit First App.
- Email your affiliate link to your client and ask them to register their company
- Ask your client to add you as an additional user either during the onboarding wizard process or after they have completed their setup. NOTE: Be sure to tell them to select your role as being a Profit First Professional so that adding you doesn’t count towards their number of licenses.
- Once your client has registered in the software and added you to their company, then login into the software with your login credentials
- Click on the “Select Company” button at the top of the Dashboard and if your client has added you then their company should be one of the options you can select.
How do I cancel my subscription?
- Login to the Profit First App.
- Click on the blue question mark at the bottom right side of the software
bring up the Help window. - Select the “Send email inquiry.
- Select the “Billing/Account” topic from the drop-down list.
- Click the “Create Email” button
- Add “Please cancel my subscription” to the body of the email and send
request to customerservice@profitfirstapp.com
