The Profit First system uses five core accounts: Income, Profit, Owner's Compensation, Taxes, and OpEx. Two additional hold accounts at a separate bank keep profit and tax money out of reach, preventing the temptation to spend them and enforcing disciplined financial decisions.
OK, so in Profit First, we have to set up a whole bunch of accounts. What are those accounts, and how many banks do I need?
I'm laughing at that talk about suffrage. I totally used the word suffrage incorrectly. So there's 5 accounts. There's the 5— I call them the 5 foundational accounts. So, here's what they are. There's the income account, is a depository-only account. It collects inbound cash flow. It's used to measure how much money you're receiving on a given time frame. Next account's called profit. This is an account that pays the shareholders, the people that started the business or invested in the business. It's a reward for starting a company in the first place and giving employment to other people. Only 93%, I'm just gonna say only, 93% of, people are employees, only 7% are entrepreneurs. And, um, as an entrepreneur, you take a big risk, and you're supporting the rest of the 93% of people who want to work for a business owner. So that's what the profit accounts for, to reward you for taking on that risk. Uh, next half called owner's compensation. This is for what's called an owner-operator. So if you work inside the business and still produce for the business, this is your normalized salary. And then that's different than profit. Profit is a shareholder Owner's Comp and Owner Operator. Taxes to pay the tax liabilities of the shareholders of the business. And the last account is OpEx. That's what's truly left available to run the business itself.
Great. And how many banks do I need?
So you need one to set up those 5 accounts. You need a second one to set up 2 additional accounts. These are the Tax Hold and the Profit Hold accounts. It's a way to remove the temptation from borrowing from ourselves. So minus the profit account, your primary bank, You transfer the second bag, it's out of sight, out of mind. And you manage the money for our business. You put money in the profit account, I'm the one invoking the transfer over to, we use E-Trade, and it sits there. So the profit account is constantly depleted, so we can't say, oh, we're short on money today, we need to borrow from the profit account. We actually have to cut costs and reconsider the operation of the business, or more importantly, sell something at a higher price point.
Exactly.
So you can't, and that way you can't screw with the money. Yeah. It's hidden from you.
Yeah. Mm.
