How many of us know business owners that work extremely hard, have decent sales, pay their staff and there is nothing left for them?
Maybe they even put their own money into their business “to help it grow” (pay all the staff and suppliers first).
I want to share with you a system to make sure that You, the business owner, Profit First. Business owners have sometimes heard of the principle of “paying yourself first” and one day (in the future) they promise themselves that they will. They think all businesses lose money in the first three years, their friends tell them that is the way of the world. Surprise, surprise their business loses money! Well it does not have to be like that. I have a system for you.
You may be thinking, “but I don’t have a business”…. Well if you are going to invest in assets to create a second income stream, unless you create a business you will create a job. A business is a profitable commercial enterprise that works without you. Please think about that. So this applies to you if you already have a business or intend to start one soon. I would love to spend time with you face to face to take your questions and explain in detail how this system works. What I will do now is give you the simple top level principles.
For any business set up five bank accounts for your business.
The first account receives all the income from the business and distributes it to the other four. For this example we will use a simple £100,000 per month.
The second account is the Profit you will make. The amount of Profit on income will depend on your business sector, strategy and size. You are literally going to pay your profit in to this account first and force all the other numbers to follow. This may sound unusual, even crazy. If you cannot do this you do not have a business. Your Profit is a percentage of business income (also called turnover). Our example business is turning over £100,000 per month or £1,200,000 per year.
At this scale of operation you (the founder) are probably still working in the business, and for your sector and strategy at this size we have decided the benchmark is 15% profit. That is, you will have 15% of your turnover left as profit after all costs including paying yourself. Therefore on a monthly basis £15,000 is transferred to your Profit account.
The third account is your Personal salary. So many business owners work 60, 70 or even 80 plus hours a week (Because they “have to”…. Really?) and pay themselves whatever is left, if anything. Decide how much you would have to pay an employee to do what you do and turn this into a percentage of turnover. As #6 Wealth Through Property founder you are probably Managing Director. The MD of a £1.2m company will probably be paid at least £80,000. For this example I will say 7%, which is £84,000 per annum. This salary is after tax and may well be paid to you as a dividend. Let’s not get distracted by details, just stay high level for now. I did say after tax which is what goes into the fourth account.
The fourth account is Taxes. This is all taxes. The list will include net VAT, personal tax on your income and corporation tax. There may be more depending on your industry. This figure needs careful attention and of course will depend on a number of factors. VAT is currently 20% on turnover. So in our example of £1.2m per annum total turnover £200k is VAT we would be due to pay, however we would also reclaim a large proportion as VAT input tax. That is the VAT we have paid on goods and services our company has paid for. I am going to say the net VAT is 10% and we need to add corporation tax on our profit plus enough to cover our personal tax on salary. For this example company I am going to say 15%. We have now allocated 15% to Profit, 7% for You, 15% for taxes giving us a total of 37% of turnover. So we have 63% left.
The fifth and final account is all other costs, lets call it the Monthly Expenses account. 63% of turnover is paid in here weekly or fortnightly. In our example £63,000 on a monthly basis. Your business can spend this much on everything else excluding the items above. So when you ask yourself “Can the business afford it?” you have a very simple rule: Yes if it is from the 63%, no if not. This will make your business profitable from the start.
Knowing the total you can spend will make you very inventive, resourceful and position you to drive the appropriate bargains. So many entrepreneurs focus on sales and growing the business they do not focus on the “bottom line”: Profit.
I want to share far more with you about this system through my amazing business partner who is a Profit First Certified consultant .
There are nuances, improvements and much more to be made. This is the skeleton, it will serve you well. To put more “flesh on the bones” I look forward to seeing you soon.
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