Sometimes the most important business ideas are the simplest. Focus on leads, not sales. Don’t sell products, provide solutions. Start small, build big. As for profitability, you can sum up why that matters in just one word: Stability.  Being profitable means your company can continue to offer its valuable services, even during challenging times. Being […]

Sometimes the most important business ideas are the simplest. Focus on leads, not sales. Don’t sell products, provide solutions. Start small, build big. As for profitability, you can sum up why that matters in just one word: Stability. 

Being profitable means your company can continue to offer its valuable services, even during challenging times. Being profitable means that you, your family, and your employees can maintain their lifestyle, come what may. 

“I love Profit First. I love it so much I wrote two books about it, Profit First for Optometrists and the upcoming Profit First for Cybersecurity,” says Rachel Siegel, CPA and owner of Go Figure Accounting. “I’m confident it can help all small businesses improve the overall health of their company. And be profitable. Because let’s be honest: in business we want to be profitable.” 

What Is Profit First?

Essentially, Profit First is a book about cash management, but in reality it’s so much more. Authored by Mike Michalowicz, it describes both a philosophy and a system for building businesses in a sustainable way that creates long-term success.

How do we do that? By flipping a universal rule on its head. 

The GAAP or Generally Accepted Accounting Principle is Sales – Expenses = Profit. In the formula, profit is a leftover, a final consideration, something that is hopefully a nice surprise at the end of the year. 

Profit First is mathematically the same, but it employs a shift in behavior: Sales – Profit = Expenses. With Profit First, every single time revenue comes into your company, you set aside a predetermined percentage of that revenue as profit. You transfer that profit to an account in a different bank, and you watch it accumulate.

Once you realize that your profit should be allocated before distributing money to rent, utilities, overhead, and other bills, the rest is easy. 

It’s basically the envelope method for personal finance, applied to business. Profit First is designed to provide clarity around your cashflow, allowing you to make informed decisions rather than emotional reactions or inaction.

Mindset Reset

We think of expenses as unavoidable—cost of material, for example. Rent, salaries, utilities, and so on seem equally intractable, at least in the short run. If we didn’t need to spend on something, we wouldn’t, right?

Not really. In fact, as humans we naturally focus on things that come first, and when profit is at the end of the equation, we seek to increase it by increasing the front—the revenue.

Reducing expenditure is something that simply doesn’t happen, and it may not seem feasible in growing business. The practice of setting aside a percentage of profit and spending only what remains is what makes the concept work. Expenses actually can be avoided, eliminated, or budgeted for a later date. Doing that can be uncomfortable, of course. It may mean some spending for equipment or expansion doesn’t happen immediately. Sometimes, difficult decisions about people and positions must be made.

Despite those hurdles, and the current bigger-faster-now culture, the profit-first approach is actually growth-friendly. When you come across a unique opportunity that will add to revenue and profits to your business, you will have the resources to invest without endangering the current business.

Benefits for Your Business

Rachel explains it this way: “If your company isn’t where you would like it to be and cash is not readily available, it is because you are not managing cash well. Small steps will get you to that goal. And that’s how Profit First works—with small steps.” 

Most of the clients who come to Go Figure typically have one, maybe two bank accounts for all of their finances. According to Rachel, when you’re looking at one large lump sum in your bank account, you’re much more likely to spend freely because everything feels like a small sum of the whole account. But if you separate all of your income to pre-determined allocations based on percentages, you force yourself to think more critically about your spending!  

The book recommends setting up five foundation accounts to start, but depending on your particular business it may be more.  If that seems overwhelming, Rachell says you can always start with two. 

Make a savings account in your existing bank and then allocate 1% of your income to that account, the profit account. The logic here is if you bring $1,000 of income this week, you can certainly run your business off $990. Ten dollars seems arbitrary, right?

Then we move to two or three percent. You can run your business on $980 or $970. If you do that for a few months, and grow your profit account, the pain point feels nonexistent and yet you have an entire account that’s just profit. And suddenly, Profit First seems completely logical and you’re ready for more foundation accounts, a.k.a. envelopes. 

What are the five foundational accounts? Income, Profit, Owner’s Pay, Tax and Operating Expenses. If your business carries significant debt, Rachel often recommends adding a sixth debt paydown account. 

Your exact percentages will depend on your business structure, type of business, and current financial situation, but let’s use this example: 

30% Owner’s Pay

10% Debt 

35% Expenses

15% Tax

10% Profit

Twice a month, the money coming in is divided by the percentages you have calculated and allocated to its applicable account to be used only for its specific purpose. 

“We have hundreds of success stories at every level,” says Rachel. “Profit First can make a huge impact whether you’re a solopreneur, a small family-owned business, or a giant corporation. By prioritizing profit and implementing a clear, disciplined system, business owners can achieve financial stability and growth. It’s a game-changer for those looking to build a sustainable, profitable business.”

Want to learn more about Profit First and how it could work for your business? Contact us today at gofigureaccounting.net/profit-first.

As an accounting professional, one of the most common concerns we hear from clients is the fear of a tax audit. While audits are relatively rare, they can be time-consuming and stressful, so ensuring your business is audit-proof can save you time, money, and stress.  Here are ten essential ways to keep your records clean […]

As an accounting professional, one of the most common concerns we hear from clients is the fear of a tax audit. While audits are relatively rare, they can be time-consuming and stressful, so ensuring your business is audit-proof can save you time, money, and stress. 

Here are ten essential ways to keep your records clean and compliant:

Accurate and Honest Reporting. The foundation of audit prevention is accurate and honest reporting. Maintain detailed and organized financial records, including receipts, invoices, and bank statements. Monitor your cash flow. And perform regular bank reconciliations to ensure your records match your bank statements. This helps catch errors early and keeps your books accurate.

Document Everything. Maintain detailed records of your income, business expenses, and deductions. This includes receipts, invoices, bank statements, and any other relevant documentation. It also includes contracts, agreements, and any relevant correspondence. Having thorough records not only helps you in case of an audit but also ensures you’re claiming all legitimate deductions.

Automate and Organize. Once upon a time, professionals kept all their business receipts in a manila envelope. This is still a good practice, but nowadays there are many apps and software options that can augment or even replace that envelope. Sync all your accounts, upload photos of receipts, write and deposit checks remotely, and enroll in autopay for recurring bills and invoices. The future is awesome.

Keep in mind, though, that technology is not infallible; it’s wise to review your transactions regularly to make sure your money is being moved where and how it should. An unwatched account is at a greater risk of fraud.

Also: store all your financial information in one place. This includes past tax records, as businesses are required by law to keep at least three years of tax documentation on hand in case of an audit. Prefer physical copies? Assign one drawer or folder to the task of storing your expenses. Hate all the paper? Keep two sets of digital records instead, one stored locally and one within the cloud. Because #techhappens.

Avoid Red Flags. Certain red flags can increase your chances of being audited. For example, large charitable donations, excessive business expenses, or claiming a home office deduction can draw scrutiny. While these deductions are perfectly legal, ensure they are well-documented and within reasonable limits.

Separate. They say you should never mix business with pleasure, and the IRS agrees: Keep your business and personal accounts separate. And by “separate,” we mean “as separate as possible.” Separate credit cards. Separate bank accounts. Maybe even separate banks, if you are especially prone to this habit. The more your expenses overlap—say your personal vehicle doubles as a work vehicle, or you bring your family along on a business trip and put it all on the company card—the more your expense reports will raise an auditor’s eyebrows. Co-mingling funds is one of the most common mistakes we see, and one of the biggest disasters. 

Be Careful with Deductions. This is one of the key areas that triggers disputes, so it’s critical to understand what does and does not qualify as a deductible. According to the IRS, business deductions should be both ordinary and necessary. In other words, any expense that is common for businesses in your industry and is necessary for keeping your business running can be a deductible. Pretty straightforward.

Except not really. The danger is in the expenses that seem deductible, but come with caveats (e.g., home office space, work lunches, capital expenses) or aren’t deductible at all (e.g., commuting costs, insurance, legal fees, business attire). When in doubt, ask your accountant. Aren’t you glad you have one?

Beware Employee Expenses. However much your personal finances can complicate your expense reports, your employees’ finances can complicate them even more. Remember: Only businesses can make business deductions. Employees cannot make business deductions on their personal taxes.

This is a relatively new change, within the past few years, so some people may find the consequences confusing. But the long and short of it is, if an employee incurs a personal expense on behalf of your business, they can only be reimbursed through your business. If your employees are frequently making business purchases, consider giving them a company credit card. It’s less hassle for everyone and makes those purchases more trackable to boot.

Record Charity with Clarity. Even if they are given in your business’s name, charitable contributions are not a business expense if you are a sole proprietor reporting your business income on a Schedule C. But they could potentially be an itemized deduction on your personal return. If the contribution is in exchange for a sponsorship, it can be categorized as advertising or marketing rather than charity.

Stay Compliant. Keep up with industry-specific regulations and ensure your business complies with all local, state, and federal laws. This includes labor laws, environmental regulations, and licensing requirements.

By following these tips, you can reduce your chances of being audited and have peace of mind during tax season. Remember, the key to avoiding an audit is accurate, honest, and well-documented reporting. If you’re ever in doubt, don’t hesitate to seek professional advice.

Ignoring technology is not an option in the fast-paced business world of today, and the accounting industry is no different. The level of application, however, should be limited.  Artificial Intelligence (AI) is revolutionizing the accounting industry by helping firms increase efficiency, boost accuracy, and provide greater value to their clients. That said, businesses are still […]

Ignoring technology is not an option in the fast-paced business world of today, and the accounting industry is no different. The level of application, however, should be limited. 

Artificial Intelligence (AI) is revolutionizing the accounting industry by helping firms increase efficiency, boost accuracy, and provide greater value to their clients. That said, businesses are still hesitant to integrate GenAI technology into their workflows. According to the Thompson Reuters Institute’s 2024 Generative AI in Professional Services Report (AI Report), 49% of tax and accounting firms currently have no plans to use GenAI tools, while 30% of them are still debating whether or not to do so. 

Their caution is warranted. You cannot trust AI with your accounting. 

CPA and owner of Go Figure Accounting Rachel Siegel says, “AI is proving to be a great tool and I’ve been having fun with it in my personal life. But professionally? Not yet. While AI can automate many routine tasks and enhance efficiency, it lacks the nuanced understanding of complex financial regulations and the critical thinking required for accurate accounting. Plus, AI can’t replace the judgment and ethical considerations that a real human brings to the table.”

Here are five reasons why you can’t trust AI with your accounting:

Data Security Concerns. Relying on AI for accounting involves sharing sensitive financial information with technology platforms, which can pose security risks. Human accountants are bound by confidentiality and professional standards to protect their clients’ data.

Lack of Nuanced Understanding. AI lacks the deep understanding of complex financial regulations and tax laws. Human accountants are trained to interpret and apply these rules correctly, while AI can only follow predefined algorithms.

Inability to Exercise Judgment. Accounting often requires professional judgment and ethical considerations, which AI cannot replicate. Human accountants can assess context, recognize subtleties, and make informed decisions that go beyond mere number crunching.

Risk of Errors and Oversights. While AI can handle repetitive tasks efficiently, it can also propagate errors if the initial data or programming is flawed. Human oversight is crucial to catch and correct these mistakes before they become significant issues.

Lack of Personalized Advice. AI cannot provide personalized financial advice tailored to an individual or business’s unique circumstances. Accountants offer customized strategies and insights based on their clients’ specific goals and needs.

According to Accounting Today, vice president of Intuit QuickBooks’s partners segment Jeremy Sulzmann pointed out that computers cannot take the place of the close relationship and comprehension that dependable professionals have with their clients. Accounting is still a relationship-based industry, and human oversight is still essential. 

Rachel agrees. “While technology and AI can assist with data processing and routine tasks, the true value of accounting lies in the personal insights, advice, and support that skilled accountants provide to their clients. It’s about understanding the unique needs of each business and individual, and tailoring solutions that technology alone simply can’t offer.”