You did it. You made it through another year. And it’s high time to treat yourself to a little extra. Because you know what? You deserve it. You’ve been working in and on your business, day in and day out, year after year. What’s the point of all that time and effort if you never get to enjoy it?
Believe it or not, your business knows how hard you’ve been working. You’ve been practicing Profit First diligently and have taught your business how to run more effectively. Now your business wants to give back, above and beyond what it already gives you. How? With a quarterly profit distribution.
In our experience, quarterly is the sweet spot; it’s long enough between distributions that they don’t feel like part of your income, but still frequent enough that you can enjoy the benefits of business ownership, not just “every now and then,” but here and now.
Not to be confused with Owner’s Pay, which is treated as a salary, the quarterly profit distribution is more like a bonus. This is your business’s gift to you as the owner for always going the extra mile to keep it healthy. And rather than only getting that gift once a year, you get it every. three. months.
Good Things Come in Quarters
Surely we’ve talked to death about the Profit First process and its five bank accounts: Income, Tax, Operating Expenses, Owner Pay, and (our favorite) Profit. The main purpose of the Profit account speaks for itself, but it also serves some other, secondary purposes:
• Growth metric. As your business grows, your profit grows in kind. The Profit account, then, is almost a small-scale model of your success.
• Cash reserve. Ideally, you only ever draw from this account when you want to, but, ready or not, emergencies happen. In those cases, the Profit account is the big, fluffy cash cushion that gets you through it.
• Quarterly reward. On the first day (or first business day) of the quarter, equity owners draw from this account as a thank-you for having the courage and risk tolerance to start and maintain the business.
It’s this third function that we’re homing in on here—the “reward” part, of course, but also the “quarterly” part. Some people choose to take their distribution more or less often. But in our experience, quarterly is the sweet spot; it’s long enough between distributions that they don’t feel like part of your income, but still frequent enough that you can enjoy the benefits of business ownership, not just “every now and then,” but here and now.
It’s best to follow the financial quarter, rather than counting the months from the first day you begin implementing Profit First. Let’s say your Profit First practice began August 12. You’d still take your distribution on October 1, the first day of Q4. It doesn’t matter whether you started on July 3 or September 26; what matters is that you get into a rhythm that’s as easy to track as possible.
Profit, Meet Pocket
On to the good stuff. Drawing your quarterly profit distribution takes three simple steps:
- Tally the total in your Profit Account as of the last day of the previous quarter. If it came in
- Take half of the money (that’s right:50%) as profit.
- Leave the other half in the account so it can keep serving its other functions, growth metric and cash reserve.
Let’s say, for example, you had $5,000 in your Profit account on September 30. If you are the sole owner, you’ve got $2,500 in your pocket on October 1. If you share ownership (ex., you own 60%, a partner owns 35%, and an angel investor owns 5%), then you would distribute the profit according to each owner’s share ($1,500, $875, and $125, respectively). In either case, $2,500 stays in the Profit account.
So what do you do with those funds? Whatever you want! Your profit distribution is that little extra you can put toward all the other extras of your life. There is, however, one exception: You can never put your distribution back into the company.
Always take your profit, and always treat it like profit. Use it on whatever gives you joy.
Your business gave you a gift that it doesn’t want back. Even if you try to dress it in fancy terms like “reinvest” or “profit retention,” you can’t cover up the fact that you are robbing Peter to pay Paul. Your business needs to run off the money it generates in its operating expenses. Full stop.
Always take your profit, and always treat it like profit.Use it on whatever gives you joy: A nice dinner for your family; a vacation; that new Tesla.
And if you could’t take enough profit distributions last year, make it a goal to have good habits and take more for 2023 and forward.
An Extra Layer: Debt
The percentages used in this article assume you don’t have any debt. Debt ties you to the past and prevents momentum. It’s important to keep your cash flowing for present expenses and future growth.
We encourage business owners to prioritize their debt—take on as little and pay down as much as possible. However, we also recognize that’s easier said than done. The beauty of Profit First is it can help you get rid of debt while still giving you profit to take home.
So, when you withdraw that 50% from your profit account at the top of the quarter, we suggest you take 98% of it and throw it at your debt! From our earlier $5,000 example, you would withdraw $2,500, put $2,450 toward your debt (Do you feel that? It’s the feeling of your success punching your debt in the face.) and take the remaining $50 as profit.
It’s important to enjoy the fruits of your labor; even if it’s a small portion, it still gives you more confidence than if you’d kept nothing. Only have enough to buy a Big Mac? It’ll be the best Big Mac you’ve ever had.
