Anyone who reads my material on a regular basis knows that I like to keep everything as simple as possible. This is especially the case when it comes to Profit First. The more accounts we add the more difficult the process becomes to manage.
Having said that, a number of other accounts are being used by Profit First business owners to quite effectively management particular situations. In this week’s tip I wanted to run through a few of those accounts.
This account is very common in businesses that have employees. While you could simply pay your employees from your Operating Expenses account many business owners prefer a specific payroll account.
The account is used as follows:
1. Do your Profit First allocations as normal;
2. Immediately transfer the cash to make this week’s/fortnight’s payroll to your payroll account. This should include amounts required to pay their superannuation.
3. The money remaining in your opex account is for the remaining bills.
One reason I like this account and/or method is that it guarantees payroll is on-time, every-time. I’m not one of these business mentors that preaches about you ‘eating first’. Your employees come to work everyday in good faith and their only expectation is that you pay them. Failing to meet payroll obligations, even by a few days can have detrimental effects on team morale, effectiveness and retention.
Donations & Tithe Accounts
Some business owners feel passionate enough about particular causes that they make donations directly from their business. Personally, I donate funds directly from Panic Atax to Beyond Blue.
The easiest way to stop your business consuming the cash you wish to donate is to set it aside in another account. In practice I have seen business owner’s approach the amount to put aside as either a fix dollar amount each week/fortnight or as a percentage of Real Revenue.
This account works the same as the donations account except it’s specifically for accumulating funds for tithing to a church or other religious organisation. Often there is an unwritten expectation that members of particular congregations will tithe a certain percentage of their income. This account ensures the funds are available.
Debt Destroyer Account
In the early stages of most business’ Profit First journey the first goal is debt reduction. Given that business owners have a habit of spending more than they can afford that shouldn’t come as a shock to anyone.
A debt destroyer account can help here. How do you use a debt destroyer account? Right before you do your next round of Profit First transfers you may have a residual amount still sitting in your Opex account from the previous transfer period. Some Profit First businesses transfer this amount into the debt destroyer account and start the next Profit First cycle period with the Opex account at $0.
Why not just transfer the amount directly onto the debt? I guess, in a way, it’s a safety system. The Opex account may have had money left in it just because a major bill is a few days late this month. If you go and put the cash directly onto the debt you may not be able to get it back once you realise what the problem was!
It is important to remember that Profit First is a Cash Flow system. We have set aside funds in these accounts to spend in the future. However, because the amounts have not been spent yet we can’t claim a tax deduction for the amounts. You should work with your accountant or Profit First Professional to determine whether or not the cash sitting in this account is subject to Income Tax or GST.
A Quick Warning
I will include this brief warning/comment in each article regarding the use of accounts beyond the core five. It is very easy to over complicate the Profit First system by adding too many accounts. In fact, it is one of the most common reasons entrepreneurs fail to stick with the system. Please keep this in mind when considering whether the account(s) discussed in this article are right for your business.
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