There are a few authors and books that have changed everything for me and Mark, but one stands out as having the greatest, most clearly rewarding effect on both my business and our life. Profit First by Mike Michalowicz. His method for managing your business income has changed the way I allocate income and has allowed me to triple my salary within 2 years and quadruple it within 3. No really, I’m serious!! And that’s not all The profit first method has brought a peace of mind and clarity surrounding my business finances even though I’m not naturally a numbers person, and THAT has been priceless. 

Because of Profit First, I never stress about taxes anymore, I confidently give myself raises, and I know exactly what I can and can’t spend in my business. Of course, I highly recommend reading the book, but because it’s such a big part of my business and the way I educate on business finances, I wanted to break it down for you, from the perspective of a creative entrepreneur. I really really hope this inspires you to adopt this approach and find the incredible freedom and confidence in finances that I have! 

In short, Profit First is an accounting method that uses percentages to help you prioritize the right things in your business. Michalowicz encourages you to separate your income into four categories: salary, taxes, business, and profit. He specifically uses percentages because they will fluctuate as your business income changes and grows, unlike set amounts. To keep everything super simple and easy to see, you will create a separate bank account for each category. This might seem like overkill, but it’s how our brains naturally think and it really does make everything so much more efficient.

I’ll share some of my thoughts on the specific percentages for each category below, but it’s important to know that you will need to tweak them based on your needs. When you first start using this system, it may take you a little while to find the right percentages for your business, so remember you will be able to tweak these as you go. 

I think it’s best to start out estimating high for your business and tax percentages until you find your tried and true numbers. After you feel comfortable with your percentages, they should remain consistent for a while. They shouldn’t be something you change every month or quarter. It’s good to reevaluate them annually, but you’re likely to go multiple years with the same percentages. Some reasons you might need to change percentages could be:

• You saw a change in your tax bracket
• You have a change in your salary needs
• You are expanding your business or growing your team
• Your gross income has increased by quite a bit but your business expenses haven’t or don’t need to grow

Let’s take that scenario for instance. Your business is doing great, your income has increased substantially, but your expenses have stayed almost the same. You’ve found that the percentage of income that’s being allocated to business expenses is much higher than the expenses you actually have. This is a good time to shift some of the percentage allocation to profit or salary, rather than expenses. Ummmm yes please! Who doesn’t want a bonus or raise?!

Now that you’ve got the baseline of the Profit First Method, let’s talk a little bit more about each of the categories and how to use them.

Salary

This is the amount you’re going to pay yourself as an employee of your business on a monthly basis. Once you have decided on the monthly amount, your paychecks should be consistent each month. This means that you pay yourself the same amount every month even when you have bigger income months. Let me repeat that because I REALLY don’t want you to miss this. You pay yourself the SAME AMOUNT every month even when you have bigger income months. This is especially important for anyone in a seasonal business, but applies to every business. For many creative entrepreneurs, I recommend starting by allocating 30-40% of your income to Salary if you can.

To find the best percentage for you and your business, you need to consider two things: the monthly salary you need and what your business can actually afford to pay you. To determine your monthly salary need amount, you first need to have a personal budget. If you don’t already have one, I wrote all about how to get started budgeting. Don’t breeze over this, friend. This is essential. Once you know the amount you need to cover your personal monthly expenses, you’ll have a better idea of what your salary needs are.

You also need to consider what your business can actually pay you. Your business might not be able to pay you the salary you need right now, and that’s okay! It just means you can’t be full time in your business and rely on it as your sole source of income. You should still take the time to determine the amount your business CAN pay you and start paying yourself that amount every month no matter how small. Again, don’t miss this. You NEED to prioritize paying yourself in your business. This is to both develop a habit and to make sure you are being rewarded in some way for the blood, sweat and tears you’re putting into this thing. Without some sort of benefit or reward, burnout is imminent. 

Once you have set your salary amount, based on your personal needs and your business’ ability to pay you, you’ll be able to start working on setting your percentages, but we’ll talk more about that in a bit. 

You will need to set up a Salary Savings Account (more on money disbursement and the business accounts I recommend you have later) where you will put all your Salary savings. You will also pay yourself out of the Salary Savings Account. These payments should come at the same time and be the same amount each month. I recommend setting up an automatic bank transfer, similar to a direct deposit you may get if you worked for another company. This will help you resist the urge to pay yourself more. If you are taking out money whenever you want to get paid and don’t have a method behind paying yourself, it’s much harder to survive slower seasons, know when to go full time and generally grow your business.

Some months you may have more income than your salary allocated, that’s great! But like I said, big income months don’t give reason for an extra big salary that month, instead keep the excess in your Salary Savings Account. Doing this will allow you to build your Salary Savings Account. A good goal is to have 3-6 months of salary saved up so you have an emergency fund (or maternity leave!). This is especially important for businesses with busy and slow seasons. Once you have a good emergency fund built up and you’re consistently depositing more into that account per month than you’re paying yourself, you can give yourself a raise! 

Pro Tip

A good way to know how much you can pay yourself is to take the lowest three months of income and pay yourself the average of those three months. You can reevaluate this each year. This ensures that you’re never paying yourself too much and gives you the security of knowing that you can survive 2 or 3 bad months and still get paid a salary.

For example, let’s say that January-March are your 3 lowest grossing months. You made $2,000 in January, $2,500 in February and $3,000 in March. On average you made $2,500 per month. Now let’s say you’re allocating 40% of your gross income to salary savings. 40% of $2,500 is $1,000. You could set your salary for that year at $1,000 per month. As your business grows, your 3 lowest months will likely also grow and so will your salary. 

Taxes

This percentage covers the amount you are setting aside to pay your income tax at the end of the year. It is important to note that this is only covering income tax, not sales tax. You should be charging your customers sales tax for each of their purchases and setting that amount aside for when you make that quarterly payment. 

Before telling you percentage recommendations for taxes, I want to be sure you hear me say that you need to confirm your tax percentage with your tax accountant. The industry standard for income tax is 30% of net profit (your profit after you’ve subtracted your deductible expenses). When looking at gross income (which is what we’re doing with this method), most creative businesses will likely need to save 20-25% for taxes, but you must confirm this with a tax professional. I am not a tax accountant and because everyone’s financial situation is different, I cannot give you one-size-fits-all advice. 

When setting your tax percentage, I can’t say enough…. Always always always estimate high; it’s better to have more tax savings set aside than you need than to not have enough. You can even give yourself a bonus or make a special business purchase at the end of the year with any extra money you have saved for taxes. Of course, although I always recommend estimating high, you also don’t want to estimate so high that you’re missing out on the opportunity to allocate those funds in ways that can grow your business or your salary.

Just because this is so important, I need to say it ONE MORE TIME…PLEASE check with your tax accountant to ensure your tax percentage is correct for your business. 

Pro Tip

If you don’t have a tax accountant, you can get an estimate of your tax percentage by looking at your most recent tax return. Look at what you paid for the whole year in taxes. Divide that number by that year’s gross income. That decimal answer will be your estimated tax percentage. I recommend you round up a bit to be safe and ultimately strongly encourage you to prioritize hiring a tax accountant to do your taxes moving forward. This is a business expense and one of the wisest ways to spend your money because taxes can be so complex and a tax accountant will help not only do it correctly, but they will also help you pay less taxes so you can use that money to grow your business or pay yourself more.

Business

This is the money you are setting aside to cover all business expenses. You should be taking all business operating and overhead expenses into consideration. I created a spreadsheet to help you figure out what your business needs to operate. You can use my Overhead Expense Breakdown spreadsheet to list out all of your expenses and find the monthly/annual total for your expenses. If you have expenses that incur only when you book a job, I also created a Job Expense Breakdown to make sure you’re accounting for job specific costs. You can see more explanation of the difference between these expense types in my 5 Biz Numbers You Need to Know blog post.

By setting aside a percentage of your income for business expenses, you are ensuring you are always able to pay for your business expenses as they come. Allocating only a certain percentage to business expenses also limits you on how much you can be spending, which has two major benefits. The first benefit is the limit on your business allows you to pay yourself! That’s obviously a big win! But the second benefit is also huge! Placing a limit on what your business can spend can feel, well… limiting. And it is. But that limit unlocks your creativity. We can sometimes get a little lazy when we have unlimited resources. When we limit those resources, we have to get creative. And when we have to get creative, we begin to innovate and grow, which can produce incredible ideas! 

I recommend setting aside 25-30% of your income for expenses, but this could be totally different for your business depending on what you sell and what your expenses are. 

Profit

This is the money you are setting aside to ensure your business is profiting. Profit goes to you as the owner of the business. This is different from your salary which you get for being an employee of your business. It’s your ‘bonus’ fund. I recommend trying to set aside 5-10%, but just start somewhere! As Michalowicz says in his book, even starting at 1% is better than nothing, it’s going to get you into the mindset of prioritizing profits. 

For many of us, profit is a new concept. We understand being paid a salary as an employee of our business, but most likely haven’t been paid for being the owner. As the owner of the business, you should be getting paid when the business is profitable, just like you would if you were a shareholder in a publicly traded company like Apple. As an “owner” you get to benefit when the business does well. Michalowicz says the same should be true for every business, no matter the size and this principle has been life changing for me!

To put this into practice, once a quarter you should be paying yourself 50% of what is in your Profit Savings Bank Account as a bonus. By only taking half of this savings account, you are allowing it to continue to grow. The next time you get a profit payout, you will hopefully see larger and larger payouts. 

I love that Michalowicz says that the profit money should not go back into the business, it’s for you as the owner of the business and I recommend doing something fun with it! As entrepreneurs, especially early on in our business, we rarely get to see the fun financial side of our business profiting. Use this money to go out to dinner, go on a shopping spree, or to get your nails done. It’s your reward for all the hard work you’ve been putting into your business, which YOU 100% DESERVE!

The one exception to my fun rule is if you have personal or business debt. I do recommend using Profit to pay off any debt, but I also think it’s best to use a portion of the money for something fun. For example, you can use 90% of the profit money to pay off some debt you have, but use the other 10% on something fun. 

Profit can also act as a security blanket in an emergency. In a worst case scenario you can dip into profit to help your business stay afloat. 

Helpful tools to determine your percentages

• I’ve outlined a step-by-step process to setting your percentages in my How to Use Google Drive to Understand Your Numbers blog post. 

• Get access to my Google Drive Templates
  – In the Job Expense Breakdown, make sure your pricing can cover your costs and contribute to your other percentages
  – In the Annual Estimator, enter in your products/services in order to get an estimate for how many sales you would need to make in order to cover the salary and business overhead amounts you need
  – I recommend starting by completing the Annual Estimator for the previous year to see where you would have ended up if you had been disbursing the funds this way AND creating a goal version to see what you would need to do to hit your goals

The Profit First Workflow

So now that you have all your percentages figured out, you’re ready to start using the Profit First method in your business. Great! This is the workflow you should follow at least once a month. You don’t need to disburse your funds after every payment. That would just be crazy overwhelming! Once or twice a month should be plenty for the average business. If you’re a product based business and you’re bringing in a lot of money every week, you might decide to disburse your funds at the end of each week.

1. You get paid for the products or services you sold. Add up the TOTAL for all sales in that time period. (note: if you are a product business, your gross income should be after cost of goods sold – not all business expenses, just the actual costs of the goods sold)
2. Enter the total gross income into my Income Disbursement Calculator.
3. Identify how much money should be moved into your different bank accounts based on the Calculator.
4.  Transfer the amounts to the different accounts.

I highly recommend having a different bank account for each category. It may seem inconvenient to go into the bank, but the benefit from quick clarity on where you’re at financially is HUGE.

Pro Tip: When choosing a bank, make sure you know the restrictions your bank has on the accounts (like how many transfers per month, the minimum balance, etc.) If your current bank has really high minimums and fees, find a different bank!

You should have the following business bank accounts:

• Salary Savings Account
• Tax Savings Account 
• Profit Savings Account
• Business Checking Account
• Job Expense Checking Account – If you are the type of business that gets big payments and those payments need to contribute to job specific expenses. 

I only recommend a Job Expense Checking Account to businesses like wedding photographers who get big payments that need to contribute to expenses specific to that job (aka the income you’re receiving for that job needs to cover those expenses). For example, you may get a deposit or retainer. This payment needs to cover up-front costs like a booking gift, outsourcing engagement session editing, etc. These expenses aren’t incurred right when someone pays you, that’s why I recommend a Job Expense Checking Account to ensure the funds are set aside for when you need them.

Pro Tip: for service based businesses, set up a label for the emails you automatically receive when you’re paid from your payment processor (like Stripe, Square, etc..). I have a Gmail label called Deposits to Disburse. This allows me to get the emails out of my inbox, but they go into that label folder until I do my monthly disbursements. I use these emails to add up the totals to add to my calculator and figure out how much to add to each account.

Ok, friend, I know that was a lot of information and it was likely a new concept to you. Don’t let this keep you from pushing forward and trying to implement Profit First. And if there’s a piece to the process that is confusing to you or you’re not sure you really buy-into the concept – I highly recommend you read the book and/or reach out to me – I can help you through implementing Profit First in my course, Creative Income Cure!