The Profit First system uses five core accounts: Income, Profit, Owner's Compensation, Tax, and Operating Expenses. Keeping Profit and Tax in a separate bank makes them harder to raid when cash gets tight, forcing better spending decisions instead.
Okay, 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 talking about suffrage. I totally used the word suffrage incorrectly. So there's five accounts. There's the five, I call them the five 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. The next account is 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 shouldn't say only 93% of people are employees. Only 7% are entrepreneurs. And 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. Next account 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 competitor, owner, operator. Tax is 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 those five accounts. You need a second one to set two 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 of your primary bank, you transfer the second bag. It's outside 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 absolutely 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, and now you can't screw up the money. It's hidden from you.
There.
