We’ve talked about Profit First before, but it’s worth bringing up again. Profit First is a book by Mike Michalowicz. The teaching in the book is a unique system to manage business finances. Essentially all money that flows into the company as revenue goes into one account called Income. From there the money is dispersed twice a month to various other accounts that have been set up for different purposes. For instance we have an account called License and Insurance. The money that gets dispersed to this account is saved up all year to pay for the business license tax bill and liability insurance bill that we get every year around March. Another important account is the Operating Expenses account. This is where most of our monthly operating expenses are paid from. We also have separate accounts for Profit, Owner’s Tax, and a few others.
The idea is to pay yourself a certain percentage of profit with each disbursement and the rest goes to the other accounts based on set percentages too. The money in these accounts should be enough to pay for their intended purposes. If you ever find yourself borrowing money from one account to pay expenses for another account it indicates a problem and you should re-evaluate your expenses. It’s been so helpful that a few of us in the company now use the same tactics for our own personal finances.