When implementing the Profit First methodology in your business, one of the first things you learn is the importance of setting up different bank accounts for different purposes. In Profit First for ecommerce, that first account should be for inventory activity. Once you have separated your inventory banking activity from your operating expenses, you’re ready to focus on the other primary accounts: Profit, Owner’s Comp, and Taxes.
Your Profit Account
It’s no accident that Profit is the first account on our list. Typically, what comes first gets the most attention and results. In psychology, this is called the Primacy Effect and it means that “we place additional significance on whatever we encounter first.” This carries over into our thinking about profitability. The traditional formula for business profits is Sales – Expenses = Profit. In this equation, profit is what’s left over. Keeping Parkinson’s Law in mind, we also understand that we will use the funds available, so there really won’t be anything left over to call profit.
If we change the formula to Sales – Profits = Expenses, you can see that profits play a more significant role. Profit is not an afterthought; it will not be relegated to what is left. As Mike Michalowicz reminds us, “When profit comes first, it is the focus, and it is never forgotten.”
Your Owner’s Comp Account
The next account you need is an Owner’s Comp account. Who is your most important employee? Don’t look around the room, look in the mirror! It is you! If you are building a business that will be sustainable and that will be saleable in the future, you need to pay yourself. The decision to put yourself last in this equation means you will be forgotten along with profit. You are not creating a stronger business by plowing your income back into inventory. Instead, you are creating a situation that cannot exist long-term.
We have had many clients come to us with the goal of leaving their day job so they can operate their ecommerce business full time. After creating their Owner’s Comp account, they began funding it and grew it over time until they could reliably replace their salary from their day job. This allowed them to create the lifestyle they wanted their business to support!
Oftentimes, clients don’t see the need for a bank account for Owner’s Comp when they are on payroll and writing themselves a check. I recommend that you not skip the Owner’s Comp account. This account is funded based on your percentage of revenue. As your business grows, this bank account will grow. This will help you know when you can afford a raise for yourself. Also, a balance in this account can help you during a month when your revenue may be down. Our personal budgets require a steady paycheck, but our businesses don’t always comply. Building a 3- to 6-month buffer in this account can give you a steady income and peace of mind when a downward trend in your business may be causing stress. It’s always nice to isolate stress when you can!
Your Tax Account
Finally, taxes are your badge of honor for having a successful business. While you may not like the idea of paying taxes (who does?), it is a sign that your business is profitable. With Profit First we plan for success! Create a bank account for taxes and with each payout, fund that bank account with a percentage. You may have to start small, but you should grow it to 15% of your real revenue. I love hearing from my clients in March and April, when we get to celebrate that they owe taxes and they have set aside the funds to pay for them. Each year, I get several calls from clients telling me the same story, “My accountant called and sounded so concerned. I thought something was wrong. Turns out they didn’t want to share the amount I owed in taxes. I told them, no problem, I’ve saved for this. I already have the money set aside.” What a great feeling for them, and for us!
Are you making your business stronger? Have you set aside the funds for Profit, Owner’s Comp and Taxes? If not, take the first steps and open the bank accounts you will need. Your account for Profit and Taxes should be savings accounts. Open a checking account for Owner’s Comp. You have to start somewhere and opening these accounts will get you off to a great start!
Interested in Profit First?
You can also sign up for the Profit First for Ecommerce Sellers Online Course. As a Mastery Level, Certified Profit First Professional, I will teach you why Profit First works so well for ecommerce businesses and the particular challenges for businesses that have physical products requiring inventory management. You will learn how your behavior drives your money management habits for your business and how you can set up your business bank accounts to work with your habits.
Check out all our ecommerce accounting and profit advising services here!
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