11d • HELP (Profitably)
WITHOUT YOU Wednesday #5: Where Your $ Should Really Go
Here’s something I found in my digging into ways of dealing with cash flow issues: (and a little infographic to make it easy to remember.)
When you separate your cash into different buckets, it forces discipline. I pulled this from Profit First by Mike Michalowicz and other resources. They teach that when money comes in, you allocate portions to different accounts before you spend it: profit, taxes, owner pay, operating.
What the research says:
The Profit First system flips the normal formula (Sales − Expenses = Profit) to Sales − Profit = Expenses. That means you take profit first, then run your business with what’s left.
They recommend using multiple bank accounts (buckets) so you always know what portion of your cash is profit, what’s for taxes, what’s for you, what’s for bills.
Typical starting allocation: maybe 5-10% of revenue goes into profit first, then a chunk for taxes, then your owner pay, the rest is operating expenses. As you grow, you adjust those percentages.
Here’s what you can start doing today in your business to make sure you’re not bleeding money and so it can run WITHOUT YOU:
1. Set up three separate accounts at minimum:
Operating (for bills, supplies, day-to-day)
Profit (set aside a % of every deposit)
Tax (to cover your quarterly or annual tax bills)
2. Decide your percentages (even rough ones): e.g. 5-10% to profit, 10-20% or more to tax depending on your situation, rest to operating and owner pay. Doesn’t have to be perfect at first.
3. Each time money comes in, immediately split it into those accounts before spending. Get in the habit like clockwork.
4. Over time, track your numbers. If you find profit account is empty or tax account is short, you’ll see exactly where you priced too low or spent too much.
If you don’t separate the money, it’s too easy to spend what you think you have. You end up working crazy hours, worrying about bills, and you don’t build reserves. When you do this splitting, you build breathing room, reserves, and the ability to step away (for a day, for a week) without everything falling apart. That’s part of building your business without you.
A little Disclaimer...
I’m not an accountant this system works well for many small businesses under $25k a month and helps them think differently about cash. But every business is different. Talk with your accountant or financial advisor to dial in the exact percentages and account structure for your business so you're doing this safely.
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WITHOUT YOU Wednesday #5: Where Your $ Should Really Go
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