By: David Richter
I am a big Mike Michalowicz fan. I’ve read several of his books. He is a very practical author.
One of his books is titled Profit First. This book was written as a supplement to that for real estate investors.
The main concept from the book is separating you business accounts into several accounts to simplify the management of your cash.
Similar to the Dave Ramsey envelope system. The author mentioned dozens of accounts. Far too many to be practical.
For our properties, we form multiple entity specific accounts to keep funds completely separated. That is an essential step.
For our actual business operations, these accounts are relevant:
- Income Account: account that all income goes into.
- Operating Expense Account: account that your CFO transfers money into monthly to pay routine operating expenses, including owner salaries.
- Profit Account: account that you transfer into monthly a predetermined amount you are setting aside for profit.
- Reserve Account: account that you keep 3 months of operating cash into. Whenever you make a new hire, you need to ensure that you have those additional funds in reserves.
- Other People’s Money Account: account where you receive and hold investor money for specific projects to keep it separate.
- Debt Account: account you store cash from debt or lines of credit to separate those funds until in use.
- Tax Account: account to hold cash to pay for the owners’ taxes directly related to owner salaries.
The point in having all of these accounts is twofold.
- To proactively create discipline with cash within your business. You make a plan for the cash and stick to it.
- You can easily see the health in your business at a glance. Financials accomplish this but most small business owners need a quicker indicator. Do you have 3 months reserves? Yes. Is your profit account growing? Yes. You are moving in a healthy direction.
The book was okay. The core concept is practical and simple. That is powerful for small business.