When In Doubt, Open An Account! Cheesey? Sure. But So Right On!
We have this saying in the Profit First community: “when in doubt, open an account.” Now if you are new to Profit First, it’s already a bit scary to be opening so many accounts – Income Focus, Owner’s Pay, Profit, Taxes + finally, Operating Expenses. Then there the two other accounts to be opened at your “no temptations” bank. So when I ask clients “are there any other bank accounts that you think you might like to open?” I very often get push back. Given that, I thought it might be a good idea to explain why with a case study example from my other company – the skincare company.
For that company, I had 12 bank accounts, now down to 10. They were as follows:
Primary Bank: Income Focus, Owner’s Pay, Profit, Sales Tax (GST), Tax, COGS/Inventory, New Product Development, Debt Killer (now closed)
No Temptations Bank: Profit Hold, Sales Tax (GST) Hold, Tax Hold, COGS/Inventory
Why so many accounts? Because each bank account has a specific purpose. Each bank account allows me to set aside money as a recurring habit proactively. Each bank account accumulates cash for the big, scary “how am I going to pay that?” moments. So now when I place a purchase order with the factory, it’s no big deal. Now when I pay my sales tax/GST bill or my income tax bill, it’s no big deal. The money has already been set aside. I’m not able to touch it easily. How often have you looked at money in one account, or an open balance on your credit card and thought “I’m just going to take a little from there and I’ll pay it back next week?” And then you never do. And then when you don’t have enough money in your operating expenses account to pay for keeping the business running smoothly. And so then you panic, and borrow “just a little more”. Maybe this time you’re your Owner’s Pay account. And so the cycle goes.
By setting up separate accounts that have pre-set allocation amounts– made on a % of real revenue – and getting into a set rhythm of making those allocations (I do mine weekly), there’s never any doubt as to whether I’ll have the money to pay the bill once it is due.
For product companies, purchasing inventory or placing a purchase order with the factory can be panic-inducing. Having a separate account already set up and constantly funded takes that stress away.
For companies that are wanting to constantly innovate on products, proactively setting aside money for those new products well before launch is a way of proving to yourself that the existing company can actually support that growth into new product offerings. You could do the same if you are thinking about hiring for a new position, or moving into a new geography. Can the existing business support that level of growth? Test whether it can by opening an account and funding it as an additional allocation. Simple, right. Just make sure you are funding the additional percentage from your operating expenses allocation rather than the percentage going into the other “pay yourself first” accounts such as owner’s pay, profit, and taxes.
So that’s why we say “when in doubt, open an account.”
What are some of the extra bank accounts you would want to open in your business to fund specific initiatives that you might have?
P.S. Did you notice that I had an account called Debt Killer? Well I'm happy to say it has now been closed because, well, the debt has been killed! All thanks to implementing the Profit First system.