The Profit First system starts with opening a series of bank accounts. An endless number of bank accounts to manage is certainly not a great approach so it’s important that we open the right accounts. Failing to get this step right will result in the system being overly complex.

Lets take a look at the core accounts that all businesses should open before beginning.


The Core Five Accounts

We strongly recommend that all businesses start implementing the system using just the five “Core” accounts. We can bolt other accounts on once the system has settled into your business but at this stage please avoid making things so complex that you just give up.

To help you combat Parkinson’s law we recommend that the core five accounts are spread between two different Banks.

When deciding what type of account to use you need to consider how much inconvenience you are willing to accept. Most Banks will charge a fee for transactions accounts but no fee on savings accounts. The downside of savings accounts is that you can’t pay bills or transfer funds externally from the account. You need to send the funds to a transaction account first.

So, what Accounts should you open? What type of accounts should they be? Should each account be with Bank 1 or Bank2? Lets look at them one by one.

Note: you will notice that, unlike the book, we have not recommended opening tax and profit accounts at Bank 1. The North American banking system doesn’t clear funds as quickly as the Australian system. As such, the american market use these extra profit and tax accounts to ensure the funds are protected while waiting for the transactions to clear. In Australia we don’t have that problem. The moment we process a transfer from Bank 1 to Bank 2 the funds are immediately unavailable at Bank 1.


Income Account

This is the account that all your customers will deposit money in to. Normally when you make the decision to implement the Profit First system you will already have an existing bank account. This account is the one your customers already know about and it will have you merchant facilities attached to it.

To make your life easier we recommend using your existing account as the income account to avoid all the hassle of reapplying for electronic payment systems. Make sure you cancel any direct debits on this account immediately. If your expenses start chipping away at your income before you have done your Profit First transfers, it’s all going to get very confusing in a hurry.

Note: this recommendation deviates from the Profit First book. Our advice is based on the fact that the Australian banking system is far more electronic than the system in North America. You can, of course, follow the recommendation in the book and make your existing account the operating expenses account and open a new income account. If you do it that way you will need to update the income account details with all your existing customers and make the necessary updates to your merchant accounts (which may require reapplying).

Recommended Bank: Bank 1

Recommended account type: Transaction Account


Operating Expenses Account

This account will likely get the most work of all the accounts you establish for Profit First. This account will also be the biggest headache you have. Why? Because this account contains ALL the funds you have available to spend on business expenses. If you can’t afford to pay a bill from this account then something needs to change, immediately.

Recommended Bank: Bank 1

Recommended account type: Transaction Account


Owners Pay Account

This is the account that will pay your personal salary. As a business owner this likely represents a significant change. Most business owners just pull money out of the business as and when required. The problem with that system is they’re often spending money that should have been used to pay suppliers or set aside to pay tax.

In Profit First you draw a regular payment from the business, just like you would if you were an employee. This gives you a regular income to use for personal expenses. Once the system is up and running well you will notice several weeks (or even months) worth of buffer built up in the Owners Pay account. That is a good thing, it means even if the business has a bad month or two you can still draw your salary as usual.

It’s worth preparing a household budget to ensure you can live off the salary the business is going to pay you. If you can’t you have two options – cut personal expenses or rapidly grow your business income.

Recommended Bank: Bank 1

Recommended account type: Transaction Account


Tax Account

As the name suggests this account holds money we need to pay to the ATO . The amount you transfer to the tax account should be sufficient to cover all of the following:

• Any business income tax payable on your profits;
• Any personal income tax payable on the amounts you have drawn from the business; and
• Your GST bill – if you are registered for GST.

The allocations to your tax account will not cover PAYG on your staff’s wages.

Recommended Bank: Bank 2

Recommended account type: Transaction or Savings Account (up to you)


Profit Account

This account takes a small percentage of your real revenue each period. It is your reward for the risk associated with owning a business.

The contents of this account will be used to pay down debt (if any exists), to build your cash vault and to give you a cash reward each quarter.

Recommended Bank: Bank 2

Recommended account type: Transaction or Savings Account (up to you)


Materials and Subcontractors

If you have Materials and Subcontractors in your business you will need a sixth account to handle these amounts. Not sure if you need the account? See our article here.

Before transferring your real revenue for the period you first need to transfer out sufficient funds to cover the materials and subcontractor costs relating to the income you have earned. This sort of information can be found in a number of ways:

1. Your job management system or Inventory systems;
2. Your accounting system (e.g Xero);
3. An estimate based on the average Materials and Subcontractors you have per job/item. This is a less precise way of doing it but in some businesses it’s just easier than the alternatives.

Recommended Bank: Bank 1

Recommended account type: Transaction Account


My own experience – when it goes wrong

At the end of the day we want to establish a combination of accounts that will work best for you. If the system is set up in a way that seems logical to you then you are far more likely to stick to it long term. Having said that, the key mistakes I’ve seen when business owners implement the system are:

Opening too many accounts

I have seen businesses trying to operate with more than 30 bank accounts. I like to think I understand numbers fairly well (its what I do for a living) but I doubt I could have managed the system in that format. Of all the businesses I’ve worked with one-on-one to implement the system nobody has exceeded 10 accounts in total.

Only using one bank

Now, this is only a mistake for particular business owners and certain banks. If you are comfortable that you can struggle through the tight periods when your operating expenses account is drained without spending your tax money then great! In reality most business owners can’t and for those people having the tax account right there with the other accounts is a disaster waiting to happen.

Some banks allow you to add extra layers of security to particular accounts. For example, withdrawals can only be made from a particular account by visiting the branch. If you have your heart set on using one bank for everything consider whether or not you can use security levels to help remove temptation!

Worrying too much about bank fees

The Profit First system certainly doesn’t encourage unnecessary spending but don’t get too hung up on an extra $10 for bank fees here and there. The benefits of the system are well worth it. In the grand scheme of things if the system makes you spend $40-$50 extra a month on bank fees i’m fine with that. By all means shop around and see if you can get the account combination you want from different banks with lower fees though!

Trying to ‘track it all in Excel’ instead of opening bank accounts

Again, the excel approach may work for some business owners but in my experience it has been a universal failure. Why? Because it’s a step back to the more traditional accounting way of doing things. It ignores the psychological benefits we are trying to achieve. Parkinson’s law isn’t going anyway, if the cash is available we will consume it! We want the physical cash in your business separated for that reason. We want your tax money hidden and/or difficult to get to. We want your cash vault protected from all but dire emergencies. Having all the money in one account and tracking how much of it belongs to each account in excel may sound ok, but when trouble hits the system will usually break down.


Further Information

Read our comprehensive review of Profit First here

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