It didn’t take long during the early years of my business to figure out finances can get tricky – fast! It’s surprisingly easy for money to trickle away on subscriptions, software, courses, and “investing back into your business.” And what about paying the taxes?!

You might have noticed that I’ve mentioned the Profit First method on the blog just a *few* times! I’m a huge fan, and it was a game-changer for my business. It helped me get crystal clear on how much I should be paying myself, how much to save for taxes, and how to keep business expenses under control.

If you’ve heard of Mike Michalowicz’s Profit First method and you’re wondering how to get started, this blog is for you! 

What is the Profit First Method?

Profit First is a system that helps business owners and entrepreneurs take control of the cash flow in their business, so they can make sure they’re actually making money and getting paid. 

Traditionally, you’d subtract expenses from sales and count what’s left over as profit. The problem is that sometimes there are so many expenses that you don’t truly make money for the month (and then you won’t get paid). 

Profit First flips that script to subtract profit, taxes, and pay from your income first, then use what’s left over for expenses. 

This might leave you with less money than you’re used to spending on expenses, but I’ve come to love it! It forces me to evaluate each expense, run a leaner business, and be resourceful before I buy something. That’s not a bad thing!

What are the five Profit First method accounts?

In Profit First, you manage money with five separate bank accounts. The first is a primary account for income, and the other four are for dividing your income according to set percentages. 

Here’s the complete list of accounts and how they’re used:

1. Income. The main account is where all of your income gets deposited. From here, percentages of money will be transferred into the following four accounts.
2. Profit. A pre-set percentage of your income is set aside as pure profit.
3. Owner’s Compensation. Your paycheck! 
4. Tax. A percentage is set aside to pay the tax bill.
5. Opex. You’ll decide this percentage ahead of time, and it will make up your expense budget.

It’s ok if all of these are checking accounts, but I like to use savings accounts to give the profit and tax accounts a little boost from interest. 

You can also call these bank accounts whatever you want as long as you’re using them for the same general purposes. I renamed all of mine to help me remember what they’re for:

• Income Money In
• Profit
• Owner’s Compensation Owner Pay
• Tax
• Opex Operations and Expenses

How the Profit First method works

Every time money comes in, it goes into your Income/Money In Account. Then it sits there until “distribution day,” which is when you go into your account and split it all up. Some business owners do this twice a month, but I like to distribute mine each week, pay off my credit card, and take care of the rest of my bookkeeping routine.

Whatever works for you is the best way to do it! You can always change it down the road. If you ever miss an official distribution day, distribute the money the next chance you get.

At first, this seemed like a lot of fuss – I was worried that I was creating extra work for myself or doing something I could have taken care of with a spreadsheet. Taking the first step and setting up all of these bank accounts was the hardest part.

But take it from me…just open the bank accounts! It helps you get into the mindset of getting serious about implementing the system in your business.

Trust the system. The Profit First method works. Now that I’m a few years in, I LOVE having separate accounts for all of my funds (and it doesn’t feel clunky or confusing at all.)

Where to find Profit First banks

You’ll want to find someplace with no minimum balance fees and the freedom to create multiple accounts at no additional charge. Pro tip: it’s also best to find a place with instant or quick transfers, so you don’t have to show up in person or jump through a bunch of hoops to transfer money between accounts.

There are a ton of internet-based banks that will let you open a new account online in just a few minutes. I’ve used Novo in the past, and they were great! If you prefer to bank in-person or locally, you can usually work with a local bank or credit union – that’s what I do now!

My biggest tip here is to double-check that there aren’t any extra fees or minimum balance rules you need to follow to keep the account.

The original bank I used had a strange rule that you couldn’t have more than two checking accounts for one business. I Googled local credit unions until I found one that had heard of the Profit First method and was willing to set up the accounts I needed.

Things to look for with Profit First Banks

1. Are you able to open multiple accounts?
2. Are there extra fees for low balances on accounts? Personally, I don’t keep a lot of money in my Owner’s Comp bank account and pay most of it to myself. With a past bank I incurred fees for not keeping a minimum amount in the account.
3. Is their online portal easy to use and transfer money?

Benefits of using the Profit First Method

Overall, it’s been incredibly helpful to implement Profit First in my business! The main benefits I’ve noticed are:

• Tax savings – it’s so much easier to already have this set aside in its own account instead of having to take a lump sum out of my main account when it’s time to pay taxes.
• Emergency Savings – As an entrepreneur, having a separate nest egg is a huge peace of mind.
• Budgeting is easier – I’m not guessing how much I can spend on things; I already know based on the percentages of distribution and what’s in my bank accounts.
• A consistent paycheck – I know how much money I can count on each month.
• Running a lean business – I make better decisions about how to spend money when the number is already decided.

Does profit first work?

Oh my gosh, YES! It’s been amazing in my business. I always have money saved for taxes, I can consistently pay myself, and it helps me keep an eye on expenses.

Plus, every quarter, I pay myself a bonus from my Profit account, which is an idea I stole from Nick True. I never pay myself the whole balance – a bonus of 25% of what’s there allows my Profit account to continue to grow without feeling like I have a ton of money just sitting around that I could be investing or enjoying.

How to choose your Profit First percentages

The official Profit First method looks like this:

• Profit: 5-20%
• Owner’s Pay: 0-50%
• Taxes: 15%
• Operating Expenses: 30-65%

Super helpful, right? 😂 The truth is the percentages can look very different, depending on how things look in your business.

Right now, mine looks like this:

• Profit: 5%
• Owner’s Pay: 60%
• Taxes: 20%
• Operating Expenses: 5%

You can change percentages at any point (and you probably will a few times a year). I review my percentages quarterly and make adjustments as needed. The one that hangs most people up is knowing how much to set aside for taxes. That can depend heavily on where you live, how much money you’re making, and all kinds of complicated tax policy details.

Most people start with between 20 and 30% set aside for taxes until they have a better idea of what they’ll need to save. You can always ask an accountant for advice if you want to be sure! In my business, 20% typically covers my tax expenses and benefits, with a bit left over at the end of the year.

Profit First chart

If you’re more of a visual person, this handy chart can help! 

Ready to get started with the Profit First method?

Once you’ve set up your bank accounts, decided on percentages, and set a schedule to transfer money, it becomes an automatic process. After two years, Profit First runs pretty seamlessly in my business – it only takes five to ten minutes each week to implement and 20 minutes each quarter to review.

PS- I also talk more about how I manage the finances of my business in this post: Six Things That Helped Me Get to Six Figures.