Profit First - What do you do with the Profit?
Making a profit is the goal of every business, but what do you do with the profit once you've made it? Under the Profit First method, there are four different buckets that your revenue goes into. Let's take a look at each one.
Bucket #1: Operating Expenses
The first bucket is for your operating expenses. This includes things like rent, utilities, insurance, and other day-to-day costs of running your business. Once you've tallied up your operating expenses for the month, you'll transfer that amount into this bucket.
Bucket #2: Taxes
The second bucket is for taxes. This includes any VAT or income tax that you need to pay. The amount you set aside will depend on how much profit you've made and what tax bracket you fall into.
Bucket #3: Owner's Compensation
The third bucket is for owner's compensation. This is the amount of money that you, as the business owner, take home each month. After all, if you're not making a profit, then what's the point of being in business?
Bucket #4: Profit - What do you do with profit under Profit First?
The fourth and final bucket is your profit account. With the profit account, we distribute 50% every quarter to the owners of the business. The remaining 50% is left in the account to accumulate.
If the business (or business owner) has debt, 99% of the profit distribution should be used against debt. The remainder can be used for something fun!
If the business does not have debt then that money goes to the business owners. It should not be "re-invested" into the business - the purpose is to celebrate with!
As a business owner, it's important to have a clear understanding of where your profit goes. Under the Profit First method, your profit is divided into four buckets: operating expenses, taxes, owner's compensation, and profit reserve. By using this method, you'll ensure that your business is profitable and can weather any storm.
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