Profit First: Resolving the Death Rattle (aka: Creating Your Tax Accounts)

I’ll admit it: I have witnessed the call of a few death rattles in my time. The impending death of a business is a slow, agonizing, and painful experience for a business owner. When I look back, there have always been one or two smoking guns that show up: either not planning for cash flow, an unexpected tax liability, or both. As business owners we can get stuck on chasing the revenue to pay those expenses that are right in front of us, which is why being proactive to save and plan is so difficult. Difficult, but not impossible – even if you don’t have enough cash flow today to pay yourself. You just need to get started. Think of it as a anti-monster spray for your business.

If you are tired and done with having that unexpected tax bill or chasing revenue to cover your cash flow, then I challenge you to try something new. Obviously, what you have been doing is not working. So what do you have to lose here? Here is your step-by-step guide, all you need to do is take action.

Step #1: Set-Up Bank Accounts

YES you need to separate the funds so you need a couple more bank accounts. I recommend, at a minimum, setting up three accounts along with your existing business checking.

  • Profit Account – This is your cash cushion, your future growth funding, and how your business will truly support you with actual quarterly profit distributions. Eventual goal is 15%, but just start. I started with 1%. As your cash flow changes, this will be adjusted. If by chance you already have a savings account, then let’s convert that one to this purpose.
  • Tax Account – Even if you feel you are running a tax loss, get in the habit of putting tax savings away. This is not only to cover the business taxes that may come up now that you are a profitable business, it is also for your personal tax liability. Goal is the same as your Profit Account, 15%. Start with something! I hate to say it, but you are really going to have to trust me on this. Setting up this account will change your future.
  • Operating or Revenue Account – Start separating your funds to create smaller plate. This is a requirement to change your cash flow. No if, ands, or buts about this.

Why the bank accounts? You are literally setting up smaller buckets that you will draw from AND calling out an intentional use of those funds. This is about changing habit. Here is what normally happens:

Money is received into a general account. You are so excited you strip the account as fast as the money comes in. No reserve, no savings, no tax estimates. Normally, paying your expenses first before taking care of yourself, and whatever is left over is yours (if there is anything). Year-end comes around and there is tax owed and nothing available. Better get your butt in gear to chase after the revenue.

Until you create a reserve account as shown above, you will not get out of this haunted house from hell. If that is working for you, great, but why are you still reading this blog post?

Step #2: Regular and Consistent Transfers

I do mine once a week – I recommend that all businesses work ON their businesses at least once a week. Profit First method recommends twice a month. You find what works best for you, but just do it! Set the percentages at the beginning of the quarter and then review it the next quarter, adjust as needed. Start with small percentages. I know you may want to jump all in and go with the suggested 15%, but remember, we all start somewhere and this is about changing behaviors not stepping into it being perfect.

Step #3:  NO Stealing or Borrowing

These are your accounts – and yes you have control to take from one to pay the other. This is all about adjusting your cash handling behavior. The reason you haven’t

had enough cash flow or tax savings before today, was because you didn’t prioritize it and plan for it. Following the Profit First plan changes all that. This will be super hard to change this behavior, I know because I went through this stage. There is an odd energy shift when you let the accounts do what they are intended to do. You probably won’t believe me when you read that, but it really does happen. Money loves to hang out with other money, so when you let the accounts grow other positive financial things will happen.

Step #4: Pay Your Taxes Quarterly

While everyone runs away from paying taxes, what if next time you write a big ol’ thank you on the memo of your check? And no, I am not kidding about that. Work with your tax professional and when your tax liability kicks in, pay them quarterly. Again: it is about changing your behavior and playing with the energy of money. If you don’t know if you have tax liability, this is a perfect time to schedule a meeting with your tax professional. Choose to be proactive. Here’s a hint – if you owe tax, guess what…you have a successful profitable business. Congratulations! Isn’t that the entire reason you started your business?

Rinse and repeat.
Based on my experiences implementing Profit First, it will be a slow start.
Be consistent
Start with small percentages and adjust each quarter
Some hiccups will come up, take a moment: then keep moving forward.

If you are so done with not getting paid, being in a constant struggle with not having enough, and done with the unexpected tax liability shuffle, then follow these steps. YES you can get off the roller coaster from hell and make it to the promised land of a profitable successful business. Are you ready to join me?

If you would like some assistance in implementing the Profit First system into your business, contact us to schedule a ½ hour conversation about what option may work best for you. Maybe it will be six-month access to Profit University and online community. Or perhaps it is quarterly review and conversation that will work. Or maybe your accounting is a disaster and you need to start there first. Complete our consultation page which will take you to our online scheduling tool to find a time that works best for you, here.

PS – If you want to learn more info on using the Profit First method and planning for taxes, read this blog post.


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  • caleb says:

    Hello, love the blog! I’m getting ready to implement the Profit First model for my business, but I’m confused about one thing. In reference to the tax account: should employee’s payroll tax liabilities be deposited and paid from this account? or are those taxes considered part of your operating expenses and should therefore be paid out of the operations account? can you steer me in the right direction on this? thanks in advance!

    • admin says:

      Thanks Caleb, I enjoy writing it. The tax account is for income tax savings for the business (if were you live owe state/federal tax at the business level, C Corporations do and there tends to be minimum tax for S Corporations) and income tax for the owner or partners (IRS and Oregon that you would pay quarterly). So no, this would not be a savings for your payroll tax liabilities. Payroll tax liabilities is a combination of the tax withheld per the employees request and the employer expense, these are part of your Overhead bucket. They are not optional payments, even though I have seen many businesses do that with payroll liability taxes. As employers we are simply holding the money for the employees and sending it to the appropriate taxing agency on their behalf.

      Best practice for payroll liability is to pay them when you pay payroll which is why I recommend using a payroll service that will take the taxes owed and hold them for you. Profit First system can be customized for your needs. You could create a special savings account just to hold your tax liability payments if you happen to be a monthly depositor, then you control when the funds go out. Tax authorities don’t care if you pay your tax liability early either, so going back and paying the liability when you process your team payments is still a very good option.

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