With the integration of Square Savings into QuickBooks or Xero, Bookkeep will help you leverage the benefits of using a Profit First approach – which will make your business more innovative, more frugal, and more efficient.
You, like everyone else, are subject to Parkinson’s Law, meaning you use what you have. If all your business funds are held in one bank account, you tend to use them until nothing remains to pay yourself or government taxes. However, if you set money aside in separate bank accounts for profit, owner pay, and taxes, you are “forced” to operate your business with less.
This puts positive pressure on your business to be more innovative, frugal, and efficient.
How do you do this? Profit First, a cash management system that, with the launch of Square Savings and the integration into QuickBooks or Xero by an accounting automation tool Bookkeep, is more attainable.
In this article I’ll discuss Profit First, its real-life application, Square Savings, and how Bookkeep is automating the process.
What is Profit First?
Profit First is a cash flow management system for small businesses. In his book, Profit First, published in 2014, Mike Michalowicz created and coined the idea after having built and sold two businesses yet nearly going broke because of poor financial management. He set out to enlighten business owners how to avoid the financial pitfalls that caused his downfall.
How Profit First Helps Your Business
Entrepreneurs love the Profit First system because it is easy to use, employing your bank accounts to gather a clear understanding of your financial situation.
With Profit First, you set up multiple bank accounts and designate a specific purpose for each. Typically, accounts are for income, profit, owner pay, taxes, and operating expenses. Your revenue is deposited into your income account, and then twice a month, usually every 2 weeks, you disperse the funds accumulated in the income account to the other accounts.
You set aside your Profit First, instead of waiting to see if there is any left.
The same is true for the owner’s pay and tax accounts. Instead of the typical business equation Sales – Expenses = Profit, a new formula is used Sales – Profit = Expenses.
I learned about Profit First from Dave Fedoroff of Fedoroff’s Roast Pork. Dave says:
“Profit First is just a great way to manage your money. Often times, your profit loss statement might say $10,000 one month, but there’s not $10,000 in your account. Where did it go? You don’t know, but the money’s gone. If you allocate 5% profit with the system, you will end up with 5% profit at the end of the quarter. You won’t dip into the money because it’s in a separate account. If you have trouble saving 5%, you can cut costs or try to sell more to get to the 5% profit. It’s a great way to gauge if your business is healthy or not.”
For a newer and/or smaller business with revenue less than $250K, 5% goes to profit, 50% goes to owner pay, 15% to taxes, 30% to operating expenses. This ensures you take out your Profit First, and what is left is used to run the business. These are guidelines for businesses operating with excess cash. If you are struggling to cover all your expenses, start slowly, perhaps only setting aside 1% of profit and also determine what you can do to cut your operating expenses by 1%.
Profit First for eCommerce Sellers
In 2019, Founder of Bookskeep Cyndi Thomason adapted the concepts of Profit First in her bestselling book, Profit First for Ecommerce Sellers. An accountant and financial advisor for ecommerce sellers, Cyndi knew the concepts of Profit First would help all clients and reach many more than she could advise through direct services. Common concerns and challenges she guided her clients to overcome were never having enough money to pay for the next inventory order and relying on debt if anything didn’t go as planned. Having sellers add bank accounts exclusively for inventory funds teaches them how to plan for inventory purchases; the Profit First system gives sellers clear insight into the cash they have to operate their business.
Using the benchmarks of Profit First, Cyndi also created an Owner Pay Calculator so ecommerce business owners understand how their business needs to grow to a level that will support their livelihood and preferred lifestyle. Many sellers intend for their ecommerce business to replace their “day jobs”; this calculator identifies when that is possible and makes a road map for that big day.
Introduction of Square Savings
Square Savings is a business savings account integrated with Square payments. In an effort to help businesses manage their business financesmore competently and more effortlessly, Square Savings automatically sets aside money from each Square sale–since owners already manage much of their sales and business in Square. The idea of redistributing funds to separate accounts within Square piggybacks on the concept of Profit First, which reminds business owners that what is in their checking accounts is not “their” money to use, but instead should be set aside for clarity of how well a business is doing and also for future use to build a financial safety net.
Applying Profit First principle to Square Savings
Using the principles and teachings of Profit First, you would set aside a percentage of sales (or deposits) into sub-grouped accounts in Square Savings. For instance, you may choose to distribute 9% of sales into a designated tax account in Square Savings for sales tax. Maybe you choose to distribute 2% of sales into another account designated for profit. Whatever amount and whatever account category you choose to create and distribute funds is to better manage your business’s finances, as Profit First intends.
Using Bookkeep with Square Savings
Bookkeep believes in Profit First. My team knows from personal experience, even if we closely monitor our finances, how easy it is to spend money in the business account that we shouldn’t be spending. And so we set out to ensure the Bookkeep tool automatically integrates Square Savings into its own account in QuickBooks or Xero.
This is a huge step toward strengthening your business’s financial positioning, because Profit First is about ensuring your sales adequately support your business expenses and savings goals.
