Updated: Dec 18, 2021
When I went to college, I learned to account like this:
Revenue - Expenses = Profits
What does this mean?
You go out and sell a bunch of stuff. That's your revenue.
Then, you deduct your expenses. You pay your employees, your bills, and all of that stuff.
Once you've gone out and sold stuff and paid everything off, there's money left over for ME! YEAY!
The only problem was....many times there was no profit left over for me. Everyone else got paid, but I didn't.
So then, the next money I would try harder - Sell more, pay everything off, and hopefully this month I can pay myself.
This went on for years...and years...sometimes paying myself, but most of the time not having enough.
Those of us that are "college-educated" in accounting are left wondering if owning a business is actually worth it. And when there's no money left over, we're thinking "man, I'd rather be the employee that gets the money first than the owner who pays himself last."
If you can relate to this, then I'm about to blow your mind.
In 2018, I read a book called Profits First. The author had a different formula for accounting. It went like this:
Revenue - Owner's Pay - Profit - Taxes = Expenses
That's odd...why are the expenses the LAST thing?
The answer is GENIUS...and it's the way God wants us to manage our money.
In the profits first method, you go out and serve the marketplace with a great product or service, and you collect revenue for that. Then, pay yourself first. Next, you save some money. Then, you pay Uncle Sam (your government taxes).
Now, whatever is leftover from that, this is what you have to pay your rent, employees, and the cost of running your business.
But wait, Alex, what if there's not enough to cover rent, pay employees, and pay all the bills?
Well...then that means YOU'RE RUNNING THE BUSINESS INCORRECTLY. You're mismanaging the business. Things you need to consider are
your prices are too low
your rent is too high
you've got unnecessary expenses
you need to let go of some employees
See, if you keep paying for all of these things first, then you'll always think YOU are the problem because there's no profit at the end.
No...you aren't the problem. Your heart is in the right place. You have a great product or service. The problem is the mismanagement of what God has entrusted you. God has given you money and resources, and you're not managing it all correctly.
That's the issue.
The reason we need to change our accounting formula is that we need to rule money, not have it rule us. We need to tell the money where to go, or it will grow legs and walk away on its own. In a nutshell, when money comes in, you automatically send a percentage to separate accounts you’ve set up for profits, your pay, taxes, and operational expenses.
The bible says:
Cast your bread on the surface of the waters, [be diligently active, make thoughtful decisions], for you will find it after many days [be richly rewarded]. (ECCLESIASTES 11:1)
As a business owner, you must make diligent decisions with your money. The same way I wouldn’t let my 2-year-old son make his own decisions, you shouldn’t let your money come in without a plan behind it. Taking the ideas from the Profits First method, I’m going to share exactly how I divide up money when it comes in.
I highly recommend you read the book for yourself so you can build a customized plan based on your revenue and goals. Like I mentioned before, when money comes into my account, I automatically divide it up into operational expenses, taxes, my pay, and profits.
(Amazon Link to Book: https://www.amazon.com/Profit-First-Transform-Cash-Eating-Money-Making/dp/073521414X/)
Here’s the plan.
Operational Expenses (55%)
This is the money needed to run the business. This is your rent, employee Pay, vendors, software, utilities, etc. If you can’t run your business with 55% of the revenue coming in, you likely aren’t charging enough, or your costs are too high. You need to make some adjustments. Taxes (10%) A percentage of your money will go to taxes. It’s better to put the money away each month than to be left with a big bill at the end of the year that you’ll have to scramble (or cheat) to pay.
Owners pay (30%)
I pay myself 30 percent of the money that comes in. What’s the point of owning a business if I’m not going to have money to pay my bills? And if you can’t pay yourself this much, then once again, something is wrong with your pricing or business costs. You must keep your formula the same and instead look at your revenue and expenses and begin to make changes. Don’t sacrifice your pay! Then what’s it all for?
This is my favorite account to watch grow. This money forms the backbone of my company and helps me make purchasing decisions for cool new upgrades I want to make for my business. Money here goes towards the future of my business.
I’ve shared a system that I use for my own business that has helped me get out of debt and be excited to own a business. I was excited before, but now I’m excited because I’m the best financial manager for God that I can be. Once we all start getting in the habit of telling our money where to go, we open up God’s financial blessings over our businesses.
Imagine if we all were great stewards of the money coming into our business?
How much more would God bless us if we were diligent with our finances like he commands us to be?
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