Why does running everything through one account cause problems?
When every dollar sits in one account, the balance tells you nothing useful. Part of it belongs to the IRS, part of it is next month's payroll, and part of it should be yours, but it all looks like money you can spend. So owners spend it, then scramble when the tax bill or a slow month arrives.
Separate accounts fix that by giving every dollar one job the moment it comes in.
What are the five Profit First accounts?
Each account does one thing:
| Account | What it is for |
|---|---|
| Income | Every deposit lands here first. Nothing is paid from it; it is a holding pen until you divide the money up. |
| Profit | A percentage of every deposit, set aside as the owner's reward. It is not for covering expenses. |
| Owner's Pay | Your regular paycheck, so you are paid on a schedule instead of from whatever is left over. |
| Tax | Money set aside for taxes before the bill shows up, so tax time stops being a surprise. |
| Operating Expenses | What is left runs the business. If it is not enough, that tells you something about costs or pricing, early. |
How often should I move money between the accounts?
On a set rhythm rather than whenever you remember. The point of the rhythm is that allocating becomes routine, so profit and tax money are taken every time, not only in good months. A Profit First coach helps you pick the rhythm and the percentages that fit your real numbers.
When do I actually get the profit?
Every quarter. You take a real profit distribution out of the business and into your pocket, separate from your regular owner's pay. It is the part of the system owners tend to notice first, because many have never taken one before.
Do I need clean books before I start?
It helps a lot. Percentages set from wrong numbers will be wrong, so if your books are behind, get them current first. That is why bookkeeping is often the first step before Profit First, and why clean books come before any CFO advice.
Frequently asked questions
How many bank accounts does Profit First use?
Five core accounts: Income, Profit, Owner's Pay, Tax and Operating Expenses.
Can I keep all my money in one account and track it in a spreadsheet?
You can, but Profit First uses separate accounts on purpose: when the money is physically apart, it is much harder to spend the tax or profit money by accident.
Who created Profit First?
Mike Michalowicz, in his book Profit First. Coaches are trained and certified by Profit First Professionals.
Related help
- Fractional CFO: I take the CFO seat part time: a forecast, a plan you run the business on, and straight answers on pricing, hiring and big purchases before you commit.
- Profit First: I set up and run Profit First with you, so profit, your paycheck and your tax money come off the top every time cash comes in.
- Bookkeeping: My team keeps your QuickBooks Online books current every week, and I review and sign off on every monthly close.
- How to Pay Yourself a Regular Paycheck From a Service Business
- Why Clean Books Come Before Any CFO Advice
- Bookkeeper vs accountant vs fractional CFO
Written by Debbie DeKnight of Right Way Profits. General information, not tax or legal advice for your situation.