Saving money &/or diverting money is not a new concept. A recent book I read helped me understand some principles I could have used in my own pool business. While reading this book I felt as if the Author was talking directly to me. Some of these concepts I had to put in to place to save my own business but not to the extent that Michael Michalowicz writes about in his book, “Profit First”.
Back in 2006, I had gotten into some trouble with back taxes. I ran my business using what Michael calls the, “Bank Balance Accounting Method”. Until I read the book, Profit First I didn’t know what it was called. Like Michael explains in his book, I would log in my bank account and I would see money available to spend.. After many years of using this method, I learned all that money didn’t belong to me.. I needed help. I went looking for an accountant that could help me figure out my business and take over certain aspects of my business finances. I finally found one that taught me how to divert funds that came in to different accounts. Not to the extent that Michael writes about but I was able to finally see some progress in getting caught up with my taxes and start growing my business. I also learned along the way how to pay myself first and how to restructure my business to help save both time and money.
Working with my accountant we came up with a plan to do the following:
- Set up a payment plan with the IRS to pay down my back taxes.
- We diverted $500/wk into a (TAX ONLY) savings account
- We paid sales tax and payroll taxes out of my business checking as we incurred them.
Michael writes, every business should have five foundational accounts. All the income of your business will be carved up and diverted into one of these five foundational accounts. The percentages will be slightly different with any business. The percentages I have used are suggestions. Work with your accountant to come up with a plan that suits you and your company. The bank accounts are as follows:
- In-Bound Depository Business Checking Account: This is the income account where all the money goes waiting to be carved up. Remember, all the money in this account does not belong to you. Once money is deposited in this account you will carve it up into the following accounts…
- Profit Account(10%): As the owner of your business, you should be rewarded through the profits of your company. This profit account will be used to reward you in the form of an annual bonus. You can choose to take that bonus or let it ride.
- Owners Compensation Account (10%): Pay yourself first. You are sacrificing time and hard work to run your business. You should pay yourself a wage based on how much you would make in the same position working for someone else. Your business should pay you a normalized salary as the best employee. You are the hardest working employee in your business, you should have consistent pay to maintain a certain lifestyle like all the rest of your employees. If the business grows by a certain amount each year and you are the sole reason for that growth, your pay should also increase.
- Tax Account(15%): Back when I got in trouble with the IRS, I remember seeing what I owed and thinking, there is no way I can pull that money together. Well, turns out Michael experienced the same anxiety when tax time came in his businesses. Let the business worry about paying taxes by allocating money immediately as it comes in to account for taxes that always come due..
- Operating Expense Account(65%): This money runs the business operating expenses.
Here is how this works out. If $1000 came in today you will divert $100 to the profit account, $100 to pay yourself, $150.00 to pay your taxes leaving $650.00 to run your business. The mistake I made was, I have $1000 in my checking account I have $1000 to spend. I learned the hard way this was not how to run a successful business. I wish I would have read this book much earlier in life.
In my own pool business, after just setting up a tax payment plan and taking money out to pay existing taxes as we incurred them I remember thinking I would have no money left to pay my bills. I’m sure many of you are thinking the same thing. Michael explains, that is your business talking to you. Your business is telling you – you can’t afford those bills.. You need to cut your expenses, change your buying habits, sell at better margins, raise your prices… You need to make some modifications so that the Profit First Plan works.
Here is what you need to do to implement this plan –
Go to your bank: Ask them to open up four more accounts. I hope you already have a Business Checking Account. Michael takes this a step further by opening two accounts at a different bank. This makes it harder to gain access to your profit hold account and your tax account removing the temptation to borrow money from either of those accounts to operate your business.
Work with a good Accountant: Your accountant can help hold you accountable to your plan.
I highly recommend reading “Profit First”. You will find a link at the bottom of this post. I also recommend listening to the podcast, Self Made Man” with Mike Dillard. Mike Dillard interviews Michael Michalowicz in the episode called, “How to always Profit First” Dated February 7th.
I also recommend listening to Michael’s Podcast, “Entrepreneurship Elevated”.
I hope you find this information useful. Please comment below any struggles you are currently facing or share how you maintain success in your business. We would love to hear from you.