Is revenue minus expenses equals profit the way you keep your books? This seems to be the accepted method of accounting in the United States at least. What profit do you show each year? 

For the month of August, I have committed to writing a daily blog that shares different successes and challenges I encounter in my daily life as a small business owner. Earlier this week, I finished a book called Profit First by Mike Michalowicz. He advocates a very different method of accounting. Revenue Minus Profit Equals Expenses. The premise behind his method is to make a company more efficient and leaner. Most companies think that as their revenues go up, their expenses increase the same amount. What if you have an off month and now you have higher expenses but lower revenue? What if the economy goes south. We had a lot of companies go out of business because they didn’t have enough money in the bank to pay their bills when the pandemic hit and revenues decreased or halted.

I am in the process of converting my bookkeeping system over to this method, which calls for seven accounts. The seven accounts are listed below. 

At Bank One: 

  • Income
  • Profit
  • Tax
  • Owner’s Comp
  • Operating Expense

At Bank Two: 

  • Profit
  • Tax

Essentially, the goal is to have all revenues come into the Income account and you then create percentage allocations to the Profit, Tax, Owner’s Comp and Operating Expense accounts. If you have been in business for a while, you may start with one set of allocation percentages but set target allocation percentage to work towards. If you are just starting a business, read the Profit First book and see if this system makes sense for you. Having it in place as you get started is a great way to create profit early on.

While I am NO EXPERT in this system since I just finished the book and am just working on implementing the system for my own company, I encourage you to read the book, talk with your accountant and ultimately make a decision that is best for your company. I do intend to update this article once I’m six+ months into this new system. 

If you are considering starting a business or in the early stages of entrepreneurship but aren’t quite sure what your next steps might be, check out our podcast and video pages or set up a 30-minute complimentary discovery call with me.