Profit First is a method of cash management that helps you set up guardrails for your business spending so that you can proactively plan for taking a profit from your business and to maintain healthy cash flow, no matter what.
This system is useful for interior designers because it divides your money into individual buckets (aka bank accounts).
Say goodbye to the days of money in one bank account fluctuating drastically every other day. Instead of receiving and making payments all from the same account, Profit First teaches you to open multiple bank accounts that correlate with your company’s financial activities. In this blog, we’ll talk about the basics of Profit First and how to use that system to manage your cash flow.
The Basics of Profit First
This method is designed to be proactive rather than reactive because more expenses will always come up, and it’s all too easy to continually cut your company’s profits (and often your own pay) to spend money in another area. The beauty of Profit First is that you plan ahead to make sure that doesn’t happen.
There are six foundational accounts that you will set up for your business when you begin Profit First.
Income – This is where every payment you receive will go first. You won’t ever spend money directly from this account – it is a placeholder before you allocate the money to the other four accounts.
Mats and Subs – There are a lot of unique materials and subcontractors to pay as you work on a design project. You can determine what money needs to go into this account by calculating payments from clients that are for product and subcontractor costs, plus any sales tax you owe. This dollar amount is what goes into your mats and subs account.
Profit – Even if your profit percentage is tiny, to begin with, you will still deposit a portion of your income into this account every time you make allocations! You can start small at 1%.
Operating Expenses – Anything from payroll to rent payments will come from this account.
Owner’s Pay – That’s right – you’ll never skip a paycheck for yourself again – this account makes sure of it.
Owner’s Tax – Rather than frantically gathering finances to pay your taxes every tax season, you will calculate an estimate of what your business will owe in taxes at the end of the year, and deposit money steadily so that you have what you need when you need it.
It can feel like a big step to open this many bank accounts, but we promise it’s worth it – especially for an interior designer like you! You are often receiving and paying large sums of money due to the nature of your work. This can create instability in your company’s finances over time because it’s so tricky to get an idea of how much money is yours and how much is your client’s. Now, you’ll always have an accurate picture of how much money you have for every area.
These upfront tasks take some work, but as you learn to use Profit First for your interior design accounting, you’ll begin to see cash flow where you previously thought there was none. You can identify areas where you’re over and underestimating your expenses, make adjustments accordingly, and get creative about where you can save.
We’re excited for you to begin this Profit First journey, and we’re here to be a part of it if you need us!
Click here for our complete guide to bookkeeping and profitability for interior designers.