Profit First Explained: Why 5 Bank Accounts?

Written by Holly Tucker

The Profit First method, developed by author Mike Michalowicz, flips your money mindset on profit - instead of the traditional equation:

Sales - Expenses = Profit

Profit First says…

Sales - Profit = Expenses.

You take your profit… FIRST!

In order to “take” your profit first, the method works by setting up 5 foundational bank accounts to intentionally see, spend and save your money.

The 5 Profit First Bank Accounts:

  1. Income

  2. Profit

  3. Owner’s Pay

  4. Tax

  5. Operating Expenses

Why 5?

The first workflow in the Profit First system is to separate your incoming revenue (deposits) from your outgoing expenses (spending). This allows a high level of control and encourages a regular rhythm of checking your bank accounts to transfer funds between them.

The core 5 accounts have very separate and distinct purposes, which is why we designate their significance with their own unique bank account. This boundary allows for clarity and purpose so that the small business owner controls their cashflow — rather than their circumstances controlling them.

Purposes:

  1. Income: all incoming revenue sources, held until transfer day

  2. Profit: build your margin from day & dollar 1 — save this money for a profit bonus or rainy day

  3. Owner’s Pay: compensation to the owner directly for their hard work, dedication & sacrifice

  4. Tax: saving for the inevitable - at a ratio of gross profit to anticipate growth and liability

  5. Operating Expenses: funds day-to-day overhead costs

FAQs: Frequently Asked Questions

  1. Can I just do this in a spreadsheet? NO! Opening the bank accounts brings a level of real-time clarity to controlling your cash flow situation. A spreadsheet will become outdated, and it isn’t “fun” for most business owners to answer to a spreadsheet (meaning, it is often ignored when making spending decisions)

  2. What percentages should I use? A Quick Assessment of the revenue range of your business will give you a good guide for target goals — but this is not a starting place. Our Profit First coaches can evaluate your annual reports and suggest a healthy starting percentage split to implement the method, with a plan to work toward your goals.

Holly Tucker
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