If you’ve read any of my business finance posts before, then you now I’m a big fan of the financial management system explained in the book Profit First by Mike Michalowicz! (That’s an affiliate link!)
When I started my business, I really was stumped by some pretty basic business finances questions.
How much should I be paying myself? Am I paying myself wayyy too much, or some measly small salary? Was I blowing the wad on business expenses excessively, or was I limiting the growth of my business by underspending on it?
The good news is, Mike’s book walked into my life and answered all of those questions for me, along with giving me a super clear, easy-to-understand system for thinking about my business money, allocating it and spending it.
(As an aside, Profit First is hands down the funniest book on finances I’ve ever read. Straight up, Mike could have a very successful side-hustle as a comedian. The book is legitimately a joy to read, so I truly do recommend it to every business owner both for the legit info but also for a really enjoyable read! You bet my fiancé was giving me odd looks as I read a business finance book, laughing out loud the whole way.)
Okay, so before I can explain how YNAB fits into this, I just want to give a quick review of the principles of what’s taught in Profit First in order for this whole system to make sense.
Profit First advocates for dividing up your business revenue into 4 categories:
Profit
Owners compensation (read: what to pay yourself)
Taxes
Expenses
Depending on the total revenue of the company, the percentages that get allocated to each category are different. For this example, we’re going to use the percentages suggested for a business that makes 250k or less per year.
IF YOUR BUSINESS MAKES 250K OR LESS PER YEAR:
Profit - 5%
Owners compensation: 50%
Taxes: 15%
Expenses: 30%
(What if your taxes are more than 15%? That’s covered in the book! So if anyone else here is paying taxes in Europe RN like I am, first, you have my sympathy and, second, def read the book for how to handle that.)
The book suggests having a different bank account for each of these categories (or ‘buckets’) of money.
Why? Because human nature causes us to check out our bank balance to determine how much money we have to spend. Look at a profit/loss statement like our accountants and bookkeepers suggest . . . ? Ha! Like that ever happens!
Why is this important? Because when we look at a 50k bank balance, we feel like ballers, and then begin to spend like ballers . . . Only to realize later that 40k of that was really saved for taxes and now that we just balled out on a new laptop, camera, conference ticket, and team member . . . we’re actually indebted, even though there’s still 30k in the bank. Whoops!
Now opening multiple bank accounts is generally where Mike gets some pushback. Admittedly, I also wasn’t all too stoked on the idea either and went looking for another solution.
Enter YNAB. (That stands for You Need A Budget btw.)
YNAB is my fav budgeting software. I’ve tried lots of different ones, but they all didn’t really work in the way that I think about my money. YNAB was different.
In YNAB, you set categories of money. Money for rent, vacations, gas, insurance, fun money, savings, etc. When you make money, you allocate however much you want into each category. Then when you spend money, you take it from the relevant category.
Spent money on a movie? That comes from my ‘fun money’.
Spent money on gas? That comes from ‘gas’ money.
Put $200 towards a house down payment? That goes into ‘savings’ money.
You get the idea. Money gets put into and taken out of their respective categories.
Or in YNAB terms, you give every dollar a job. You put each dollar to work in the category you choose it to work in.
After throwing in the towel with opening multiple bank accounts, I tried figuring out another system. I considered an excel spreadsheet, until I remembered that I was awful with excel.
Then I remembered YNAB and tested out if it could work at dividing up my business money in the ways I wanted to.
Turns out, it worked! Perrrfectly!
They two systems really do work together beautifully.
For the step-by-step on exactly how I use YNAB to Profit First my business revenue, hit play on the video below, and I’ll show you the two systems working in action together!
How to use YNAB to Profit First your business money
I hope the video helped show ya exactly how these two systems work together.
I personally go through and YNAB my money according to the Profit First method once a week. I find it oddly enjoyable to divide up the money into their little categories. Not to mention, I love watching money come into the business, so maybe that’s part of it.
Anyways, when I’m wondering how much I have to spend on new investments, team members, education, conferences, etc., I just open up YNAB. The numbers are super clear in their respective categories.
Gone are the days I look at a bank balance of 100k feeling like a baller and then start spending like one, because I can see clearly in YNAB how much of that is actually set aside for expenses, and how much is saved for taxes, profit, and owners comp.
One last thing I find useful to do is to know what my expenses on average over the course of the year are and what my salary is per month. I can then divide the total money in the expenses and owners comp buckets by however much my average expenses are and what my salary is. That tells me how many months of savings I have in each category.
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