A CPA firm on "Profit First"
Another "profitizing" trend sweeps across America and bookkeepers were left cleaning up its path. A complicated guidebook for organizing your business money, Profit First by Mike Michalowicz is #1 Best Seller in International Accounting.
The major disruption in his new method is to pay yourself and your taxes first (by use of multiple bank accounts and regular transfers) and use the leftover to pay your expenses. If there’s not enough to pay expenses, you’re “not allowed” to pay for them out of your profit or taxes accounts. This effectively backs you, the business owner, into a manufactured corner to critically analyze your bills and, ultimately, cut unnecessary expenses.
This is, in truth, a great tool for some business owners whose spending is tanking their business. And, surely, the rave reviews and testimonials must carry some validity. At the end of the day, whatever works for your business (and is legal and ethical), is what you should do! We at Sweeten CPA support you, your business, and your profits!
A word of caution on the implementation of “Profit First,” though: prepare to double your bookkeeping costs and time. The more accounts and transactions, the longer it will take to reconcile your books. Plus, having 5 or more accounts is not only more bookkeeping but more complicated bookkeeping.
In the course of six months, the easiest client on my bookkeeping team became one of the most complicated after she added 6 accounts and continued categorizing them herself. I have an irreplaceable team of highly skilled professionals, but I personally spent hours untangling, deleting, and tying up her accounts because it was so overly complex and, honestly, unrecognizable. What usually took 2-3 hours per quarter by a bookkeeper instantly became a 10 hour project by a team lead.
Maybe up to this point, you’ve been reconciling your books by yourself. Moving to "Profit First" takes your bookkeeping into the major leagues. Without years of experience in QBO transfers, your books could become exponentially inaccurate. The longer you go without a professional reconciling these accounts, the closer you get to a professional not being able to reconcile your accounts and needing to start your books from scratch.
Don’t move into this lightly.
It sounds so easy to say, “I made four transfers that day,” but the software will not be your friend. You’ll end up with a balance in Uncategorized Asset, duplicate checking accounts, and uncleared transactions in the bank registers that are wildly over- or under-stating your bank balances. I see it all the time.
If you’ve got to add accounts to better manage your business, know the cost. You must hire a professional team who will stay on top of the books. With more than 4 accounts, your books have to be reconciled on a monthly basis. You can’t get by with your CPA or tax team reconciling the books in one catch-up at the end of the year. It’s too complicated. I can’t stress this enough: don’t do the books yourself and don’t let the books lag behind.
If “Profit First” is the way to go to achieve your business objectives, bake in the cost of a bookkeeping team or, if you already have a team in place, double your current bookkeeping time and costs.
What’s your story with “Profit First”? Has it changed the way you manage your business finances? I’d love to hear your story in the comments below.
From the desk of