5 bank accounts???? Are you serious??? Well, actually, Mike (author of Profit First) wants you to open up 7 bank accounts. 5 accounts at one bank, and 2 other accounts at ANOTHER bank. I know that sounds crazy but bare with me.
Income Account – This account is where ALL your income is deposited into. Twice a month you will tranfer money into the other accounts, the amount will be based on your Roll Out Plan.
Owners Pay Account – No matter if you are self employed, in a partnership, or owner of a corporation, this account is for Owners Pay. Either your paycheck or owner distribution (depending on your tax enity).
OPEX Account – This account is for all your business expenses to be paid out of.
Profit Account – Your profit account is for your profit distribution (not owner distribution) these should be taken quarterly. Or you can pay down debt out of this account.
Tax Account - This tax account is for the owners personal tax liability, not payroll or sales tax.
This may seem like a lot to keep track of but once you get started it isn’t that bad.
So how do make sure I only tranfer twice a month?
“That is crazy, cash flow isn’t that good. I can’t possible only do twice a month.” Don’t worry, I hear you and totally understand, moving money to and from accounts is always tempting, especially if the money is there. When I first started with Profit First, I was doing my allocations daily. Then it was weekly, until I finaly was able to get it to twice a month. Give it time, don’t get discourage.
Other account information you need to know:
Owner Pay vs Profit distribution:
These are two different deductions. Owner’s Pay should match up your Personal budget. Your Profit distribution is your quarterly distribution as a bonus of the fruits of your labor. Please don’t combind these two together. They are separate for a reason!
Why get a Tax Account?
Tax Account is for your year end tax liability from your personal tax return. Not for payroll taxes, not for sales tax, or any other business tax, those should all be paid out of your OPEX account. I would suggest to have your tax person prepare quarterly tax planning so you know how your business will affect your personal tax return. Use the money in your tax account to make your quarterly tax payment.
At the end of each month, withdraw the money out you’ll need for the Profit account and the Tax account. Those will be at a bank, which we will talk about next week!!
If you want to learn more about Profit First, please schedule a Free consultation! I would love to share it with you and help you to make your goals into reality.