The Profit First system does not replace the need for accounting. It does not help you understand financial performance and the levers you can pull to improve your business or make better business decisions.
It helps with cashflow management.
Side note- I’ve been advising my clients to do this forever! This is what it and my advice is –
Setup at least two bank accounts – one for Tax, GST, PAYGW and Super and one for Funds. Or Setup a few different bank accounts – label them Rent, Tax, Daily Spending, CCard Payments – whatever helps you separate the money into categories. Use a spreadsheet based on your history of spending to allocate funds to each as the money arrives in the Funding account.
Ever since the GST was introduced, banks have given every business a free GST Bank Account – it helps if you use it. I’ve seen it in action. Every time you pay staff, transfer the amount of PAYGW Tax and Super into the Tax account.
I advise clients to transfer 10% of the money received from Sales into the Tax account when they receive the money – doesn’t have to be exact. Let me give you an example –
You receive a payment from 5 clients of $5250 in a week. Put $525 in that account on Friday. Use a spreadsheet if you find it helps to keep it a bit more exact. When you do a pay-run the report will tell you how much PAYGW and super are owed, transfer those amounts into that account too. If you do this, you will always have more than you need in that account, to pay your Taxes.
The idea is to take Tax money out of the Spending account (this is tax money that you’ll owe within 3 months) so you are more frugal with the cash left in there.
If you’re a Sole Trader, it’s easy to take money out of the Spending account as much as you wish to do so. Profit First would have you put a certain percentage into Account B for you to spend, Account C for let’s say Rent and Electricity, and Account D for CC payments.
It’s a good idea and anything that helps small business manage their Cash Assets is a good thing.
It’s all about how you think about cash and how you manage to avoid spending it OR spend only that percentage of it that you can afford. Or think of it this way – it allows you to see the Profit first – get it? This is your money, its your profit – spend it if you want, without fear of it belonging to the business. It acts as a mechanism to reward yourself with some certainty around your obligations.
What can I say, I’m an accountant, I use Credit Cards!!
If you can’t be bothered reading the book – do this:
- The first account is for transactions — revenue and day-to-day spending.
- The second account is to put money aside for Superannuation and taxes — GST and PAYG. Each month transfer the current period liabilities to this account — AND DON’T TOUCH IT.
Budgeting for this will save you a tonne of stress come BAS time.
And if you’re too lazy to even do that – Contact me, we’ll sort you out.