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In other articles I have talked about my thoughts and benefits of running the profits first system, I thought it might be best to run through how I practically use Profits First in my firm.
I will note that there are some differences to how I operate then how it is described in the book but the Profits First system is nothing if not adaptable.
As a bit of background if you are comparing, Black Sheep Advisory falls in the $250k - $500k bracket and I have one part time employee (administration) and one contractor (part time) that helps with my marketing. I invoice either when a one-off job is completed or if I have clients on monthly billing they all go out automatically on the last day of each month.
I have also been operating my business using my version of the profit first system for 18 months now so I won’t be going through the TAP’s and CAP’s
The first part of the equation is how I am setup in the bank accounts and my accounting systems.
I currently have seven accounts that are used by my company. Split across two banks, (Commonwealth Bank and Newcastle Permanent). I use Commonwealth as my main bank and I use Newcastle Permanent for my second bank but my seven accounts are split up a bit differently:
In the Commonwealth Bank:
1. Revenue - As in the Book
2. GST - This is where all the GST from the weeks revenue is stored
3. Superannuation (6%) - This is for Superannuation for my employee and also my own super
4. Opex (27%) - As in the book
5. Owners Comp (40%) - As in the book. This is for my after tax wage payment
In Newcastle Permanent:
1. Tax (18%) - As in the book. This covers my personal (PAYGW) and any company taxes
2. Profit (9%) - As in the book.
I use Xero as my accounting software, I use Hub Doc to upload my receipts and I use a fortnightly payment cycle and to view my cash flow wave. I have also taken time to get all my clients and supplier details corrects. I utilise aba files to pay my bills spending time to get your “financial eco-system” properly setup will save you a mass of time doing your accounting.
I also use a fortnightly cash wave. I do all my companies bookkeeping every second Wednesday afternoon. One of the main reasons I choose this frequency is I have just gotten used to getting paid on a fortnightly basis and with a fourteen day cycle I never end up being late paying my suppliers.
I have everything setup so that all my income revenue from my bills goes to my Revenue account. These just come in at any time during the fortnight and accumulate until I attend to my bookkeeping on that second Wednesday.
The first thing that I do is I go into hub doc and upload all the bills outstanding into Xero and then approve them. I also then do all the bank reconciliations from the previous fortnight so that my Xero is completely up to date. This also helps keeps in my mind what happened also fortnight and also monitor the payments that have come in over the fortnight.
I review my bills owing and then choose the bills that are due in the next fortnight and prepare an aba for payment.
I do the same for payroll, creating two different aba files, one for myself (management pay run) and one for my part time employee and any casual employees. I also lodge my single touch payroll.
The next step is to do the bank allocations. For this I have a simple excel page which helps me to allocate easily.
Profit Fist example data sheet
In the fortnight that I am using as an example $12,700 in revenue came in. The first thing I do is to remove 10% of GST. People will comment that I should adjust this as I need to take into account the GST I can claim back on my expenses, but being a service based business I have found that a purely accurate percentage is about 9 and I use that extra percentage point for something else later on. As a note if you are not a service business and your net GST is significantly different to 10% this adjustment can be made here.
With that adjustment I get a real revenue amount of $11,545.45 to allocate across all the different accounts. One thing that is different from the books is I don’t have a second account for profit and tax at the Commonwealth Bank.
The reason this is different is that banking standards in Australia are different to the USA. As soon as I make any transfer in Australia the money can be seen to have left the account immediately so there is no reason for these extra accounts.
I then allocate the money as per the allocation percentages above, this results in the Revenue account being reduced to zero and the money allocated all across the accounts.
Then I upload my 3 aba files to the bank and approve them and then my fortnightly accounting is done. I then review my aged receivables and my management scorecard prior to leaving early so that I can pick Elizaveta up from child care.
My fortnightly cycle works on rinse and repeat until the first Wednesday of the new quarter (Eg first Wednesday of April.
The first part of the afternoon stays the same, I run the same cycle as above. Following this I then need to complete my additional quarterly tasks.
The first thing I always do is to pay out half of the balance of my profit account to myself as a dividend. This usually goes into my holiday and fun accounts (I tend to save more out of my normal fortnightly wage and I don’t have any non-mortgage debt). This always feels good we always make the effort to go out as a family and do something special to celebrate.
Before we can go out though I do have to do a very other things. The first is to pay my superannuation that is due quarterly. I have my super account linked through Xero so to pay the superannuation is a quick task. The second it to lodge my BAS, also through Xero and then to pay the balance. I do this in two bpay payments. The first is from the GST account, which represents the GST payable and the PAYG withheld on my employees, the second one, out of my Tax account which represents my PAYG withheld for the quarter.
Around the end of the financial year I have a couple of extra tasks. As I am a Personal Services Business I need to take out all my accounting profit at the end of each year. Because my financials are so up to date by following this system I usually have a very good indication of where my profit levels are.
On this last pay run before the end of the year I need to take up any additional income to make my accounting profit as close to zero as possible.
On the first Wednesday in July I finish my accounting for the year. Here we need to do our normal PAYG/GST/Superannuation payments but before we do our Tax and Profit payments we need to balance everything off so that we can make sure that our Tax and Profit payments are reflective of the end of year result. If we need to we take money from our profit account to pay our taxes or if it is the other way around we can take an extra bonus payment from the extra money we have saved for our taxes throughout the year.