Coral DarbyYes, tax talk! The author, Michalowicz, finally discussed the reason for a tax bucket in the Profit First* plan. Many entrepreneurs pay taxes through paychecks, especially if set up as an S corporation. According to the book, the funds allocated each quarter to the tax bucket get reimbursed to the business owner at the end of the year. This system helps the entrepreneur understand if the percentage allocations match profits or need adjusting. This makes sense to me – however – isn’t the money, in the eyes of the IRS, still profitable and, therefore, subject to taxation? If so, I think the tax projections bucket must be incorporated into the big picture.
(Actually, after another quick review of this section of the book, the author says any extra money in the tax bucket can be moved to the profit bucket and taken by the owner as a distribution. So yes, this is profit and must be considered ‘taxable income’).
As my accountant and subject matter expert alluded to in my recent interview, it is always beneficial to do quarterly check-ins with an accountant to ensure enough money is being tucked away (or paid quarterly) to be compliant with the IRS. Truthfully, I don’t see my accountant this often, but my accounting team reconciles my books every month, so the once-a-year tax meeting is a cadence that works well for the agency.
In this week’s reading of Profit First, the book offered some insights into the emotional connection of money management, which I found fascinating. Michalowicz references one of my favorite financial experts, Suze Ormand. He mentions how Suze talks about the exercise of eliminating debt and saving money generates an emotional connection for the individual. ‘Wealth, business success, and profit first is a game of emotion.’ The author argues that this same rush comes from tackling his Profit First system. It’s about control, paying down debt, and prioritizing profit through a methodical savings program. I can understand how this program creates confidence and ensures the development of smart business habits.
The best takeaway from my recent deep dive was the section about debt. The tips were galore! My favorite was “The trap we fall into is believing our best month is the new norm.” I couldn’t agree more, and I am profoundly guilty of doing this and building business infrastructure around this month. Michalowicz provides a follow-up tip that is excellent advice. He says, “To prevent shortsighted behavior, always look at a 12-month rolling average to provide the most accurate snapshot.” He says, and I LOVE this, “Strive for the best month to be our average month.” Great practical advice that most entrepreneurs can utilize immediately.
Next week, we will discuss debt management and how to instantly activate a debt freeze. Michalowicz is about eradicating what he refers to as ‘entrepreneurial poverty.’
*Michalowicz, M. (2017). Profit First, Transform Your Business from a Cash-Eating Monster to a Money-Making Machine. Penguin Random House
Coral,
Interesting stuff here! You raise a really good question to open, as I have to question whether or not all of that effort and discipline is worth it in the long run or if the juice is indeed, worth the squeeze! As it is considered taxable income, it seems the efforts here are simply to ensure there is some type of surplus for tax and other potential shortages. While this policy makes sense to me, I still have to wonder if simply managing the business as you reference, with a monthly review of the books and financials isn’t adequate to ensure things are running smoothly. While I am entirely sure the recommendations here are aimed at first time entrepreneurs, whom often fall prey to lack of preparation and unforeseen expenses, the process does entail quite a bit of diligence (and possibly expense)! It seems the practice may be ideal for those who are less financially savvy or plan to manage their own finances within the business, thus ensuring they don’t get blindsided down the road. In this regard, I think it is essential that “we know what we don’t know” and it is up to each entrepreneur to understand where they need help.
Finally, many business owners have fallen victim to the best month being the new norm and I have seen that play out up close and personal. Those outlier months now become the bar by which the business is measured and often times, expenses are bloated in anticipation of accommodating this new business growth (ie..staff). Unfortunately, that is rarely the case and instead, the advice of using a 12 month rolling average is very sound. Personally, I have always preferred to remain ultra conservative in my projections, leaving ample room for error. You’ve done a great job with this book, I really enjoy reading your thoughts from the perspective of an existing business owner!
Cheers,
Zane Breeding
Zane,
Thank you for reading my blog! The most important takeaway from my post and your comments is the importance of diligence concerning finances. Understand your numbers and where every penny goes. It’s the key to success!
Coral
Coral,
It’s really great you were able to connect some of the book’s concepts discussed in this post to the ideas explored and talked about in your Subject Matter Expert interview. That’s what classes like this, and learning as a whole, (in my opinion) are all about, making connections. I will make sure to check this out in your SME interview!
I think your discussion of the emotion connection between an entrepreneur/business owner and their finances, specifically paying off debts and generating more incoming money is great and fascinating. I definitely think times of financial prosperity and success have a positive emotional impact. However, the excitement surrounding the success can lead to less caution and a false or unnecessary sense of confidence moving forward. Although this is a different situation, I discussed emotion in business in my interview with classmate Rachael Petty. I asked something along the line of whether or not she gets caught up in the passion and creative aspects of her business, such as her love for decorative and perfecting, and finds herself losing some focus on the financial side of her business. I said this before because pursuing something you are so passionate about and that brings your enjoyment can result in disregard for the cost of certain materials and the time commitment because you just want to let your creativity flourish in that moment. I find this similar to some of the ideas presented in you post here, as it connects emotions and finances in business, and not necessarily in a positive way. It poses it more as a distraction in a sense.
-Maddie
Dear Coral
I appreciate your excitement and enthusiasm regarding your book choice, especially regarding tax management and the emotional aspects of financial decisions. The strategy of quarterly tax bucket allocations appears logical, but you must consider the tax implications for profits.
Your current approach of monthly bookkeeping and an annual tax meeting are effective for maintaining a strong grip on the financial oversight for Darby Communications, as I know you didn’t feel like you had much control when you had outsourced the booking.
The emphasis on emotional connections to money management and the practical advice on avoiding short-term thinking with a 12-month average are things I am going to consider. Money really is a game of emotion, and it feels good to save! Sometimes it feels good to spend, but not impulsively (my bad habit at times when I am stressed.)
Thanks again for another great post!
Kindly,
Shawn