As money issues come up in conversations with clients and friends, I decided to post about a basic question we all come across after we have run a business for a while: ‘How do I pay myself?’

The Profit First method for entrepreneurs

I came across a video by Amber Dugger, who talks about the typical mistakes people make when they work for themselves in regard to money management. Dugger advocates the use of the Profit First cash flow method. Apparently, it’s an old method, but Dugger helps modern-day entrepreneurs apply the model whether they run an online retail business or a personal service. This blog briefly runs through what I understand Dugger advises, so it will sound very basic, but if you want to know more, do look her up. She appears as a guest on a lot of YouTube videos and has a website here.

To begin with, you need:

• The intention. All business and productivity advisers begin this way. Dugger suggests you begin intentionally by looking at what you want your life to look like and what you want money to do for you. You also need to believe you can create your own wealth. (Our individual money mindset is pretty important, and all entrepreneurs probably need to look into their relationship with money in order to be able to make money .)
• Clear, realistic revenue goals.
• A pricing strategy.
• Consistently have more revenue going into your business than out. (This means you will have been running your business for a while, and set-up costs do not need to be considered. You should know what your regular expenses are and what your income looks like on a weekly/monthly/quarterly basis.
• No matter what state your personal and business expenses are in, shift into a state of gratitude.
• Be kind to yourself. If you have no savings or you’re in debt, there is no need to chastise yourself or feel ashamed as you are clearly moving towards changing your circumstances.

Using Profit First

Profit First is a cash flow management system that allows you to pay yourself consistently and strategise to achieve your goals. Profit First helps you pay yourself first, organise cash and create a smart system.

Typically, people (myself included until I learnt about Profit First) apply a system like this:

Dugger recommends splitting your income like this instead:

The benefit of Dugger’s version of Profit First is that:

• You can pay yourself regularly.
• A business profit is not the same as your pay! The profit can be treated as your bonus or split between a bonus and business reserves at the end of the year or certain periods. She recommends allowing yourself a percentage, e.g. 10 per cent.
• You’re saving for tax liabilities and if you have any left ver, it’s yours!
• It’s flexible. It is for you to decide how to split the money you have coming in from your business account (and to do this, you need to know your costs). But something like Profit 25%: Your Pay 25%: Taxes 25%: Business expenses 25% could be right for you. (Your business bank account may allow you to create pots, making it easier to split your income visually.)

Dugger advises staying aware of your goals. Check your accounts regularly and remain watchful of your spending and forecasts. She also reminds people to celebrate!

Parkinson’s Law

Dugger explains something called Parkinson’s Law, which describes humans as always utilising their resources (money and time). This means that we will always find a purpose for our money and spend it, no matter how much we have. Profit First allows us to continue that behaviour but in an organised way that keeps us safe, less stressed, and feeling more rewarded for our efforts.

More advice

Dugger offers worksheets to help you understand how much to pay yourself by going through a list of your actual needs and daily expenses. She also talks about setting financial milestones such as saving first for X amount of personal expenses or reserves, or dealing with debt.

How is this working for me?

Good. My business bank account (Mettle) offers ‘pots’ for free and my revenue is automatically split so I know I have enough of what I need and want. I feel more professional and organised too, and it has helped me develop better business habits, like invoicing people on time and chasing people for late payments (I used to be too relaxed about these things)!

I hope this post is helpful or at least offers food for thought. If you have any questions, feel free to send me a message.

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