The Profit First methodology is all about the bank accounts. There are several that you need to set up in order to disperse your cash effectively and increase your awareness of your spending. To do it right, you need to make sure you have the right accounts to help you structure your business to grow.
In the ecommerce version of Profit First, the first account you set up should be inventory. Once you have that done and sorted out, you’re ready to think about the other important accounts. These are Profit, Owner’s Comp, and Taxes.
There’s a reason that the first account we’re going to talk about is the Profit Account. In Profit First by Mike Michalowicz, Mike talks about how what comes first is what attracts attention and gets results. This is called the Primacy Effect, and is explained in psychology as meaning “additional significance is placed on things we encounter first”. This is also how we think about our profitability.
In the normal formula for profits, Sales – Expenses = Profit, which means profit is whatever you have left over. With Parkinson’s Law, we also know that we use what we have, so there really won’t be anything left that can be called profit.
By changing the formula to Sales – Profits = Expenses, profit is put in a more prominent position. In this equation, profit isn’t an afterthought and isn’t restricted to just whatever is left over. Like Mike mentions, “When Profit comes first, it is the focus, and it is never forgotten.”
Owner’s Comp Account
After Profit, it’s time to set up the Owner’s Comp Account. Do you know who your most important employee is? This isn’t a trick question, the answer is you! If your goal is to build a sustainable and eventually saleable business, it’s crucial that you are paying yourself.
If you choose to put yourself last in the formula, you and your profit will both be left out. Putting all your money back into buying inventory isn’t helping you grow or strengthen your business. You’re actually creating a business that can’t support itself in the long run.
Many clients aim to quit their day jobs and work full time on their ecommerce businesses. By setting up the Owner’s Comp account and using Profit First, they can comfortably leave their jobs.
I once spoke to a client who faced family challenges and needed to travel across the country due to loss and surgery. Having the flexibility and financial means to prioritize his family meant the world to him.
Clients often overlook the importance of an Owner’s Comp account when they have control over payroll. However, we strongly recommend having this account as it grows with your business based on a percentage of your revenue.
The account balance can support you during slower sales months, and you’ll know when you can give yourself a raise. Businesses don’t operate like personal budgets that rely on consistent paychecks, so funding a 3-to-6-month cushion in this account ensures a stable income and reduces stress during slow business periods.
Paying taxes may not be enjoyable, but it signifies a profitable business. To ensure proper tax management, create a dedicated bank account and fund it with a percentage of each payout. Start small if needed, but aim to contribute 15% of real revenue to the account.
I take delight in annual conversations with clients who can easily cover their taxes. Many clients express relief when they can confidently inform their accountants that the funds are already set aside.
Are you actively growing your business or mindlessly reinvesting money into it? Begin your journey to profitability by opening primary Profit First bank accounts: savings accounts for Profit and Taxes, and a checking account for Owner’s Comp. This will prepare you for the next steps in your business.
If you want to get started with Profit First or have already started and just need some help, the bookskeep team is ready to talk with you! Reach out and take your Profit First today!