The traditional accounting formula of any business is Sales – Expenses = Profit.
Concise, clear, and logical, right?
Wrong! It’s not true. It’s a lie. A fake. A Fugazi. A myth. The truth? You can take your profit first. In fact, you should take your profit first. As a human being, you are wired to do so. Yet, in the original “accounting formula,” human behavior was omitted. As you’ll see in Parkinson’s Law below, it’s our tendency to consume based on availability. We don’t want leftovers, we want our piece first! Then, we can worry about other things.
For this, it’s time to embrace your new accounting formula:
Sales – Profit = Expenses
How to Become A Profit Maximizer
Most dentists don’t review their financial statements as they should. Don’t feel bad if you’re one of them; it’s quite common for any type of entrepreneur, actually. Most business owners just use “bank balance accounting.”
You know what this is. “Bank balance accounting” is when you check your bank balance and make decisions based on the number you see staring back at you.
And, per Parkinson’s Law, we consume based on what is available. But I want you to embrace your humanity. There’s no use fighting it or thinking you can just rely on “willpower” to push through. Bank balance accounting is okay, so long as the balance you are looking at is the money available just for expenses. By allocating your money first, the temptation is gone as is the ambiguity of how much goes to what. In doing so, your practice is going to become more (and more) fiscally powerful. Plus, you’ll reap huge benefits from regular profit distributions!
So, how do you become a profit maximizer?
1. SET UP YOUR CORE 5 BANK ACCOUNTS
The first thing you want to do is setup your “Core 5” bank accounts. These accounts are:
- Income (Checking)
- *Profit (Savings)
- Owner’s Pay (Checking)
- *Taxes (Savings)
- Operating Expenses (Checking)
Did you notice the asterisk (*) by accounts 2 and 4?
These accounts should be set up at a different bank. Ultimately, this removes the temptation for you to “borrow” money from them. The harder you make it to get to the money, the less likely you are to spend that money.
2. SET UP YOUR TARGET ALLOCATION PERCENTAGES (TAPS)
Now that your Core 5 accounts are setup, it’s time to setup your Target Allocation Percentages (TAPS) for your dental practice. Keep in mind, every dental practice is different. The wrong allocation could prove disastrous or leave you owing a large sum for taxes, underfunding your operating expenses, or worse, spending money you should be paying to yourself instead!
For this reason, this is where you should consult a certified Profit First Professional.
There are only a select few CPA firms worldwide who practice this revolutionary form of cash management, but Hinrichs+Pesavento is the only dental CPA firm that is certified in the Profit First method.
3. ESTABLISH THE 10/25 RULE
After setting up your Core 5 bank accounts and working with a Profit Advisor to properly establish your TAPS, you then want to establish the 10/25 Rule.
This rule makes paying expenses and team member salaries a breeze. From there, you will also set up quarterly tax payments and profit distributions from the Owner’s Pay account.
Isn’t that great? Earning profit from your business consistently can actually be done!
Turn Your Practice Into a Money-Making Machine!
While I can’t explain every area of Profit First to you in a single blog post, I hope you will at least start with the basic principles of the program I have outlined above. For more information on this topic, I’d recommend the book, “Profit First: A Simple System to Transform Your Business from a Cash-Eating Monster to a Money-Making Machine,” by best-selling author, Mike Michalowicz. It’s available now at most major retailers, including Amazon.
HOWEVER, you can visit www.hpadvisors.com, right now, and download the first 2 chapters absolutely free!
While you’re there, sign up for our free Webinar, “Become A Profit Maximizer.” Let us help you turn your practice into a money-making machine! What’s stopping you?
Happy profits!
Finances are one of the biggest struggles when starting and running a small business. Not only are you excepted to keep track of everything, pay taxes, and follow all the legal requirements, but also actually make some money (that’s the whole point of this thing, right?). But seeing as most of us struggle with personal budgets and spending, it’s no wonder that managing money for your business can be hard.
So you might be able to relate the the relief and excitement I felt when I discovered “Profit First”, a book by Mike Michalowicz that is all about implementing an easy and, dare I say, fool-proof system that WORKS.
Below is my experience with implementing Profit First in my business, the surprising hurdles I encountered, and the serious benefits that came came out of it…
STEP 1: READ THE BOOK
I borrowed Profit First from the library, but you can easily buy it from Amazon for about $20. It is one of the most beneficial and absolutely crucial books I’ve read for my business this year.. so yea, totally worth the twenty bucks! Mike Michalowicz goes over the entire system, why conventional ways of keeping track of money simply don’t work (spoiler alert: we tend to spend everything we see in our bank account, plus 10%), and what you can do about it.. which is implementing the “Profit First” system.
The concept is super simple. Basically you’ll want to split up your money so that you’re not spending tax funds on a business purchase. And hey, maybe you want to make an actual income from your business one of these days. The idea is to have several bank accounts which serve as buckets for your money. Everything you make should flow into the “money in” account. Then you move money out of that account based on percentages of how much you allocate for your business, owner income, taxes, and yes, profit. It is a very intuitive way of splitting things up and making sure you cover all your bases.
But while being simple, it’s still very important to read the book fully to understand Mike’s approach. So start there. Get the book. Read it. And then it’s time for Step 2!
STEP 2: FIGURE OUT YOUR PERCENTAGES
Mike Michalowicz gives some examples for how you should be splitting up your gross business income in his book, but every business will be different. He suggests looking at benchmark surveys (PPA has this for photographers) for other businesses in your field to get some idea of what successful business owners allocate for their spending. How much you invest back into your business is also going to be different based on where you are in your journey. If you’re just starting out, you might be pouring most of your income back into your business, and if you’ve been at it for a few years, you’ll probably want to make sure you’re actually getting paid a livable wage.
Since I’ve had my photography business for a few years already, I was able to look at my finances and see exactly how much I’ve been spending (on average) on my business, what was left over, and create percentages based on that. On average, I spend about 35% of gross income on running my business (that includes inventory, Studio rent, education, software, hardware.. basically EVERYTHING I need to pay for).
Currently, my breakdown looks like this:
- Business Spending: 35%
- Owner Compensation: 37%
- Taxes: 25%
- Profit: 3%
I raised my profit to 3% this year, up from 1% last year, which is what Mike suggests starting with. I then created a tab in my financial tracking spreadsheet with those percentages so that I can put in my income at the top and have the different amount auto-generated for me. Taxes are a bit tricky to predict since I file jointly with my husband, but I had enough allocated for them last year, so I kept the percentage the same for now.
*One thing to note, my tax allocation is 25% of the total gross income, which is actually 40% of my take-home earnings. Numbers can look deceiving sometimes!
STEP 3: FIND THE RIGHT BANKS
Of all the hurdles of implementing “Profit First”, finding the right bank(s) and opening all the different accounts is probably the hardest. Banks don’t really understand why you should need 4 bank accounts. They don’t really like the idea of having one account that you essentially empty twice a month (this is the “money in” account). They want to know how much you plan on keeping in your accounts and will charge you fees for all sorts of things.
If you have gold or platinum status with a bank, that’s a good place to start. You will be able to open multiple accounts and will hopefully avoid any fees. Your best second bet is a smaller local bank chain or a co-op bank, which often (but not always) have less fees and more lenient practices. After dealing with a bank that literally changed their policy about 6 months after I set up all of my accounts, I had to find a better option, which ended up being Bankwell (a CT-only bank that’s primarily in Fairfield County). They allow you to open as many accounts as you need with no fees or minimums.. and they have a branch about 0.2 miles from my house.
So, once you have your business and personal accounts opened, you have to go to another bank altogether for the federal taxes and profit accounts. Why a different bank? Because you don’t want to be seeing those numbers when you look at your everyday spending accounts.
A list of all the bank accounts I use:
- Money In Account (Bank 1)
- Business Spending (Bank 1)
- Owner Compensation (Bank 1)
- CT Sales Tax (Bank 1)
- Federal Taxes (Bank 2)
- Business Profit (Bank 2)
That’s SIX bank accounts! And I could definitely use one more, just for the larger business expenses I have to save up for. The more you split up the money that’s coming in, the better! Because now you will always have enough for taxes, you won’t accidentally spend the sales tax you’ve collected for this month, and you can actually enjoy your business profits every quarter!
STEP 4: TRACK YOUR FINANCES
I use a simple (or, slightly complex) spreadsheet to track everything and since I don’t have a ton of transactions each month, I can input income and spending manually without much issue – in fact, I prefer to feel the pain of putting in that $100 I spent on printed magazines this month to make sure it really is a necessary purchase. I use Square to process all payments (keeping everything in one place is super helpful) and put all purchases on my one business card (that then texts me the details of the transaction).
You can use QuickBooks to track your finances, or a free spreadsheet like I do.. but until you do, there is little hope that you will know exactly what’s happening with your money. The Profit First system works spectacularly well, as long as you have a different bank accounts, know how much money should go where, and then actually move the money into the different buckets while keeping track of your expenses and earnings. It’s things you should be doing in your business anyway, the biggest difference is that you’re no longer seeing a giant pile of money.. instead, you know exactly how much you have to spend on business expenses and will never have to worry about having enough to cover taxes ever again.
STEP 5: MAKE IT YOURS
No system is absolutely perfect for every person. It’s important to tweak things so they work for you and your personality. For my business, it makes sense for me to distribute money into the different account when big payments come in (vs the 2 times a month that Mike recommends). It also makes sense for me to allow myself permission to not be super exact with the numbers – I’m the type of person that will start hyperventilating because $10 went into the personal account instead of the business one, which is why I have to remind myself that the allocation percentages are guidelines, not hard and fast rules. The system if there to work FOR us, to make sure we don’t spend more money than we should, which may or may not be a problem that you struggle with.
A surprising thing I encountered, and something banks don’t really tell you about, are external transfer limits for moving that federal tax and profit money out of the everyday-spending accounts and to a different bank altogether. So sometimes I will deposit a check directly into the tax account instead of it going into the “money in” account. I will then compensate accordingly from my other income (in the end, the percentages end up the same), so I can avoid hitting those transfer limits. A suggestion has been made that I should be able to simply write myself a check and do a mobile deposit. Using Zelle has also been suggested.. but I still just feel more comfortable with simply depositing a check and having it go directly to taxes.
I know how much we all struggle with money. How easy it is to spend it in the name of business improvements, product samples, new equipment, and marketing. How simple it is to forget to pay yourself, to put money aside for April’s tax season, and to end up wondering why in the world you’re even doing all this work in the first place. “Profit First” was life-changing for me. I can look at my bank accounts and actually know how much I have to cover Studio rent and other business expenses and whether I can afford to invest in a new pair of jeans (that’s personal spending, btw). But most of all, there is no longer any panic at the end of the month (sales taxes are due) or during tax time (when a BIG chuck of money is needed).. and that, my friends, is priceless.
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