Unrelated to tech, I do get questions such as “Are you making a profit?”, “How are you paying yourself?”, or “What do you do about taxes?”. So I decided to answer all of the question from my Facebook groups and address them here.
Before I jump into Q & A, I’m going to give you the meat upfront. I use the Profit First Method! I have a bank account that all of my business income goes to and I use profit first percentages that dictate how much of the income goes to my salary (into my personal account). I pay myself on the 10th and 25th.
Maisha Harris Can you explain “profit first percentages” more? Thanks in advanced.
Profit first method.
100% Income is divided into the following…
10% – Profit
15% – Taxes
25% – Expenses
50% – Salary
You start with percentages that are most comfortable and work your way towards your target. Or you may only be able to put 1% of income towards business profit and expenses % is high, but every quarter you move your % towards your target.
Ms. Maisha Harris My salary is my salary. My profit is my businesses money. I don’t usually touch my business profit. If I wanted to expand my business or open a store or something I’d use my profit as the business investment to do it.
Oh Nica This is basically everything that comes in from your business that you separate into these percentages?
Oh Nica yes. Every paid transaction is income. If I sell you a $25 cup I’m splitting that $25 up into those 4 %s. So I let my income stack up for 2 weeks then I split them into the 4 accounts and repeat.
Malachi Dawkins what do you do with “profits” if that isnt used to pay yourself? Seems I’ve been doing things the hard way.
Malachi Dawkins your Profit is to expand or grow your business. Have some equity. If you got the bills paid taxes paid and your salary paid you can’t just bankrupt your biz. Let’s say you want to expand or go commercial you should not be using your own funds, use the business funds for that. Your salary is your money.
Leslie Nichols Super helpful!!! How long were you in business before you could start to pay yourself?
With this method, I started paying myself with my first sale. Now I may have been only able to pay myself like a sweat shop worker first starting off because my expenses were through the roof. However, I just humbled myself and said “stop complicating your business and trying to run like a fortune 400 company when you’re a start up, act like it” and I cut out waste in my business processes, stopped spending money on systems that did not contribute to my bottom line or that I could not leverage the true value of the tool and reworked my pricing strategy. Even if I could only pay myself 10% of income. I was putting something in my pocket and working my way to a higher percentage.
Now when you determine your percentage for salary, know how much money you want to make. If I know I want to earn $5,000 a month I then take the percentage of my monthly income goal and adjust it until the salary percentage works out to $5,000.
So, the profit first method also calls for multiple accounts. Expenses, Profit, Profit Holding, Taxes, Taxes Holding and owner salary (your personal bank account). I only have 3 accounts, Expenses (main checking account), my personal checking account for my salary and one account with two savings for profit & taxes.
If you have trouble getting a bank account for any reason here’s a solution to still follow Profit First Method because trust me, you do not want this all in one account…it 👏 just 👏 won’t 👏 work 👏!
Accept all of your business income via PayPal or Stripe. Transfer all of your income to a Prepaid Bank Account, I highly recommend PayPal Prepaid. Pick two dates in a month to transfer to your percentages. If you need a personal checking, get a Cash App Card and load it with your pay two times a month. If you went with the PayPal Prepaid, they allow you to create multiple savings accounts (at .5% interest as well that pays out quarterly!) and name one Profit and one Taxes and move the percentage amount into the savings. You can even set it for automatic transfer if funds are rolling in like that. If you don’t go with the PayPal prepaid, find prepaid solution that do offer savings opportunities or open all your accounts with OneUnited who offers second chance banking.
And if you can not afford the book, sign up for Audible free 30 day trial and listen to Profit First for free. But you have to finish before the 30 days! That’s great accountability. Or, if you have a Barnes and Noble nearby, squat and read this book!
Hope this has been helpful, feel free to leave a comment or questions!