Profit First Book Review | Best Accounting Book for Small Business Owners
Updated: May 17, 2022
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I want to talk about how I set up my business to be in the profit first mentality and how you can do it for yourself as well. If you're a bookworm, I would definitely encourage picking this up, and I'll put this down in the description box below so you can read it and check it out there.
The big way this book helped me was to figure out and put a system in place for saving for taxes. Being a videographer with very little overhead, I don't have a studio. I don't constantly buy a bunch of new gear. I don't have any employees. There's not as much overhead as there would be with other types of businesses out there, because many businesses would make $100 in revenue.
They have to pay all their expenses, their employees. So then at the end of all that, they're only left with a small margin for profit of maybe 10% or even less than that. So this book really solidified for me, focusing more so on profit than top line revenue. So the book will go in much greater detail than I ever could in this video.
But I want to run you through how I took what Mike was talking about in the book and apply it to my business. So prior to reading the book in March of last year, I just had a simple checking account and savings account for my business. The checking account is how all of my invoices were coming in.
Anytime anybody paid me a check, I would just put it into the checking account and operate my business through that. Towards the last couple of years, I was using my savings account mainly for having kind of an emergency fund for the business just in case I needed to have emergency expenses or things come up to buy gear or things that I was trying to save up for over a longer period of time.
Need to read up on Profit First? Check out Mike's book
The big sticking point for me was taxes, though I always struggled with knowing how much to save for taxes, what my percentages should be, how to actually save for it over the months rather than getting a huge tax bill and not having any cash on hand to actually pay the tax bill. So I constantly had this stress and worry, and that's led me to read Mike's book and try and figure out a strategy to try to prevent that.
So tax savings was the biggest thing for me. And then also figuring out how to properly pay myself. So at the time, I would just take a small percentage and pay myself out, kind of like a salary profit cut every month just to have some money come into myself. But towards the end of my time, before switching over to the profit first mentality I really didn't have a structured plan.
And I was kind of just shooting from the hip every single month, which is not how I like to run my business. I'd rather have a system and a process and a method to the madness, so to speak, on how to actually do this properly. So an overview of the whole philosophy is setting up target allocation percentages or taps and building out separate individual accounts for each one of the things you're trying to do with your business.
So like I mentioned through my business bank account, I had two accounts, one for checking and one for savings. So what I ended up doing was switching over and having multiple accounts to try and have target allocation percentages for how the money's coming through the business. So now instead of just those two accounts, I have an income checking, an operating expense checking and an owner's compensation check.
Then I have profit savings and tax savings. So we'll break down all these details so you understand what they are. The income account is basically all the receivables are all the checks that are coming in or any way that people are paying me for services rendered all come into the income account. So for this income account, there is nothing that's getting paid out of it.
It's only collecting the money every month. Next is the operating expense account. This account is something that you'll use to pay all of your regular operating expenses to run your business. So when you buy new cameras, if you're paying for gas to get to shoot, if you're paying your software expenses for Adobe Creative Cloud or Final Cut, anything that can be considered a business expense or something that you would write off for the business will come out of that operating expense account.
Next is the owner's compensation account. So this is where you're going to allocate the money that you're going to pay yourself every month as payroll as the employee or the owner. Next, we'll move into the savings accounts. First is a tax savings account. And as I mentioned earlier, this was really huge for me and a huge game changer for me to actually plan for my tax savings.
So in the tax savings account is where are you going to save for your quarterly and annual taxes, both for state and federal? And then the last account is the profit account, hence the name profit first. This is where you're going to save a percentage of your income every single month and keep it as a nest egg emergency fund or a profit fund.
So then over the months, you're saving up a percentage of your income in this account. And then every quarter you're going to take half of what's in that profit account as an extra owner stroke or a profit distribution to you as the owner of the company. The other benefit of having this profit account that I found from my own personal experience is this is a built in emergency fund for your business if you need some extra cash on hand.
So you have a really slow month and you need to access some extra funds and you don't want to go to the bank or take out a line of credit or do anything that might put you in a bad financial situation. You can access that profit account and use that money to fund some of the other things, whether it's an operating expense or paying yourself or whatever other things come up throughout the months.
Okay. So that's an overview of all the accounts and how they work. Now in terms of how you actually do it every month. This is how I did. What Mike suggests doing is setting up target allocation percentages or taps for each account. And these are going to vary based on what industry you're in, but basically you're going to say every month when money comes in that income account, what percentage of that money is going to be allocated to the different fund groups?
So a good example of how this would work would be the 25, 25 40 and ten breakdown that I was using all of last year in 20, 21. So if all the money that comes into your income account every month, you're going to take 25% of that and put it into the operating expense account Another 25% of that's going to go into your tax savings account.
40% of that's going to go to your owner's stroke or your owner payment account. And the last ten is going to be put into your profits savings account. So as you can see, every dollar that's coming in that account is being allocated and earmarked for different purposes within the business. So if you use those exact same percentages in your business, for example, let's say the business top line revenue was $100,000 in a year.
25,000 of that would go into your operating expense account to run the business. 25,000 would be save for taxes. 40,000 would be paid out to you as the business owner, and 10% of that would be saved as well in the profit account then is the business owner. You're making $40,000 as an owner and yourself. So you have to remember also you're getting a little bonus from that profit account every quarter when you pay yourself out of half of whatever is in that account.
So in the example earlier when the business made $100,000 in a year, your profit account is taking 10% of that. See a ten grand in there and you were taking half of that throughout that time, you would give yourself another $5,000 bonus. So your take-home pay after that would be $45,000. Now this is just one example. Sometimes if you're in a higher tax bracket where you have to pay 33 or 40%, whatever it is, you need to kind of switch around your percentages to make sure that it fits with what your tax savings is as well as other expenses in the business.
This works really well for videographers with low overhead, but say you have a lot more overhead with employees or you have more expenses where you have to buy inventory or whatever it is. These things can kind of make things a little more difficult. Those different percentages are going to have to change based on your business model. Now, the way I actually executed this plan was twice a month on the 10th and the 25th, I would go into my income account and I would take those target allocation percentages and make some transfers.
So for a simple example, say from January 1st to January 10th, which would be the first day I would draw on that, say there was $10,000 in that income account. So we again apply the taps and we would take 2500 would go into your tax savings, another 2500 into your operating expenses. We would take 40% and put that into your owner stroke, and then the 10% would go into your profit savings And then when I made all those transfers, I would go into my owner stroke account and I would pay that out to my personal bank account as an owner of payment.
So you do that exact same practice, it takes maybe 5 minutes or less when you get really used to it, and then you do it again on the 25th in the 10th and the 25th of every month. So the beauty of this is that I took all the really big stress and worry that I had about my banking in my accounting, and I boiled it down to maybe ten to 15 minutes a month that was taking the money.
I was looking at what funds came in, where I was allocating money and making things much much easier for myself. There's a ton of benefits for me personally. One was just again saving for taxes. That was a big struggle for me. Another benefit is having built in profit savings on the off chance that you have a rainy day or you have some big expense that comes up.
And if you're constantly making, say, 10,000 a month and you pay yourself out 10,000 as an owner, draw one, you have no money to operate your business, which is really hard to do when software expenses come out, or you need to buy new gear or gas or whatever it is that applies to your business. Next for me, that was really hard was the owner's stroke.
So knowing how much to pay myself and having a set number, that really made sense for me. Believe it or not, the first three or four years when I was in business, I never actually paid myself out, ever. I just made whatever I made in a year and I saved it. My business accounts for back up money because I still working a full time job at the time.
So as a compulsive saver, I definitely encourage those out there that are similar to myself. Set a tap or a target allocation percentage for your salary and stick to it. Actually pay yourself out so you can reward yourself for the stuff you've been doing outside of work. Or if it's your full time job, actually pay yourself so you can pay your bills, cover the electricity, and get some food on the table as well.
I've been doing this accounting practice for over a year and a half now, and it's been really, really helpful for me with tax savings, with paying myself, with having a plan around my money and just having more structure around my accounting that way. There's many ways you can do your accounting. This isn't the only way, but if you're kind of struggling and reaching for something to make sure you're doing all the things we talked about saving for taxes, paying yourself, having kind of a plan and a structure, I definitely recommend taking a profit first approach, do it, give it a try and see if it helps.
Another strategy that I did, which I encourage you to do, is I built out a template for myself in a Google sheet. So I take this spreadsheet every 10th and 25th of the month, go through, add in the different accounts, balances that are in there, and it'll automatically spit out exact amounts that I need to be transferring from that income account to make sure that my taps are lining up.
So if you want to access something like that, I'll make sure to put a description box linked below as well. To a link to that template so you can download it and check it out. Feel free to use it and implement it in your business as well. So if you want to do this and you're ready to do it, here's the exact steps again to review how to do something like this for your business.
First is to open up all the different accounts that you need. So open up an income operating expenses, owner, stroke, profit savings in a tax. It means once you have all those set up, go in and allocate how much money that you want to do each pay period to the different accounts. So again, a really common one that a lot of people use is the 25, 25, 40, and ten example that we talked about.
Well, you can increase taxes, you can lower profit, lower your owner, stroke payment, whatever you need to do for your business and set those taps up in your spreadsheet. Then give yourself some grace and try it out for the first month 10th on the 25th. I like those dates because it's not the very beginning of the very end of the month.
And if you want to practice this with your business again, I highly recommend you actually get the real book, audio book, whatever it is, profit first. I'll put a link to that in the description box below as well. Really, really great stuff and one of the biggest impact books that I read last year was that one for sure because I took the practices, I read it to a tee, implemented it in my business and I've seen some great results.
I was saving much more for taxes. I was actually paying myself just a bunch of great benefits for me as a business owner, and I really encourage you guys to check it out. So hopefully you guys got some value out of this video. If you did make sure to give it a huge thumbs up and let me know in the comment section if you have any specific questions.
Again, I'm going to put links down below to the book so you can check out Profit first, as well as a downloadable spreadsheet template. That I built out that you can use as well to use for your own business instead of your taps, you know, exact amount they need to be sent into your business. Also, if this is something that you've been doing with your business, make sure to drop that in the comment below and give some people some encouragement or share your experiences with being more intentional and putting profit first in your business.