How Profit First Helps you with Tax Preparation

tax

Most naturopathic doctors don’t know if their practice is financially healthy or not. You might glance at your bank account, see increasing revenue and assume all is well. But that’s not always the case. In fact, you might be leaving money on the table. How can a money management system like Profit First make it easier? 

 

It takes care of all your tax preparation ahead of time.

 

When you’re proactive about your cash flow, you get a more accurate idea of how financially healthy your business is. 

 

Here’s how Profit First works and why it can help you with tax preparation.

 

Understanding the Profit First System

Before you implement Profit First into your practice, it’s important to understand how it works.

The traditional accounting formula says to subtract your expenses from your total revenue to calculate your profit. 

Sales – Expenses = Profit

But Profit First flips that age-old formula so you keep more of your money.

Sales – Profit = Expenses

profit firstLogically the math is the same. But traditional accounting will let you down because:

  1. It’s designed for accountants, not business owners

  2. It prioritizes expenses instead of profit

  3. It doesn’t protect you from overspending

This is backed up by psychology. Parkinson’s Law says the demand for something expands to match its supply. In other words, by taking profit first you learn how to get the same things done for less money.

How Profit First Works

The Profit First system is simple. Start by opening multiple bank accounts and transferring a percentage of your income into each one. Do this every two weeks.

Not only can you track your money with a quick glance, it makes profit a habit.

Here are the five foundational accounts Profit First recommends:

  1. Income = Your total revenue
  2. Profit = 10% of your total revenue
  3. Owner’s Pay = Your salary
  4. Taxes = Payment for the government (See the next section for more details)
  5. Operating Expenses = Day-to-day running expenses

The trick is sticking to the system. If you stay disciplined, you’ll end up with more money in your pocket.

You also avoid scrambling through your statements in April, trying to make sure you have enough money saved up for taxes.
figuring out taxes

Why Profit First Makes Taxes Easier

 

Running your own practice is hard enough without having to worry about taxes. Profit First helps you set aside the right amount of money early on so you can forget about the dreaded tax-time headache.

So how much are you supposed to allocate to your tax account?

About 15%.

The average tax rate in the United States is 25-30%. As a small business owner, you get taxed on how much you make after operating expenses.

You also pay your tax estimates on a quarterly basis. So it’s even more important to set money aside early.

That’s why Profit First author Mike Michalowicz suggests taking 15% of your top-line revenue and putting it into a separate “tax” account as soon as you get it.

Because Profit First is all about being more proactive than reactive.

Here are a few other reasons why it’s better to file your taxes earlier:

  • Evade tax refund fraud by filing your returns before potential identity thieves 

  • Avoid late fees which can build up the longer you wait to pay them

  • Reduce stress — 2020 was bad enough without worrying about taxes too

Just remember to file all your taxes before deadline day — April 15, 2021

Summary

Having a working understanding of business finances and a cash flow management system makes filing your taxes much easier. It allows you to have more control of your money.

Getting your tax refund earlier also means you can spend it. 

 

If you want to set up your own Profit First system and get rid of the tax-time headache, give Every Single Bean a call. Together we’ll design a strategy to help your business grow more profitable and become financially prepared for anything.

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