I had the pleasure of speaking with Jen Percival @women_rocking_real_estate about this topic for her podcast, where we discuss money, mindset, and a profit model that can work for you. You can listen to it here. I've captured the discussion we had around a watered-down approach to the Profit First model designed by Mike Michaelowicz that you can implement right now so you can start to create a steady income stream and support your business.
As an entrepreneur, you’ve likely had to overcome a few financial hurdles to turn your passion into profit. But once you start to gain traction and win a few clients (hello, cash flow!), it’s not time to buy a new car or blow it all on a shopping spree. Yes, you can celebrate your success with a small splurge, but this is the best time to implement an income allocation system that will provide you peace of mind in the long run.
My approach is less rigid than the model in Profit First and it’s for entrepreneurs looking for a quick system to start right now. If you want to go deeper on the topic, I highly recommend reading the book.
I love the idea of the Profit First model for two reasons:
Here’s the crazy new idea: instead of paying all your bills and taxes first and using what’s left over to pay yourself, you pay yourself first, and your bills and taxes follow.
The Profit Model sweet spot: how to allocate your money
There are 4 different accounts that you will set up at your bank, and with each deposit, you allocate according to these guidelines:
For illustration purposes, let’s say you deposit a $10,000 cheque to your account. Based on the allocations noted above, it will look like this:
Pay (20%): $2,000.00
Profit (3%) $300.00
Taxes (33%): $3,300
Operating Expenses (44%): $4,400
Creating a steady income for yourself can help reduce stress and keep your focus on building your business. If you decide you need only $800 a week, your $2,000 Pay bucket will have $1,200.00 left to draw another $800 from the following week. The goal is to make your income less sporadic, and more dependable.
If you don’t have enough to pay your expenses, you have two choices: increase your sales or reduce your expenses. It sounds harsh, but when it boils down to it, there are no other choices. You’re in business to make money, remember?
This method will take time to implement, but it’s important to stick to it. Naturally, human behaviour will kick in and it’s easy to steal from one account to cover another (we’ve all been there!). To reduce temptation, consider transferring the taxes and profit accounts to another bank altogether. The goal here is out of site, out of mind. Just be mindful of the transfer fees at your bank, otherwise this method could become expensive. Good luck!
*Note that the tax bucket depends on how much you earn over the year and are guidelines only.
Stephanie Wolfe is a certified financial coach who lives in Toronto. She is a passionate advocate for empowering women to attain financial independence and freedom through education and counselling.