Profit First: A smart accounting model for your photography business
Have you ever felt like you had a profitable work month only to look at your bank account and wonder where all the money went?
I have a friend who owns a business that takes in $12,000 a month, and after she checked her monthly expenses, she said she had only spent $4,000 but still couldn't figure out where the other $8,000 went.
I know I've miscalculated my gains and expenses before, more than once. Unfortunately, many business owners think that Sales - Expenses = Profits, but that's not the case.
It's common for most of us to have one checking account where all of our money comes in and out. But when our income is so closely linked to our expenses, it can get confusing to track where your money went at the end of the month.
Last month I read a book that revolutionized how I organized my business accounts, and I'm so happy with this model that I'd like to share it with you. The book Profit First: Transform Your Business From a Cash-Eating Monster to a Money-Making Machine by Mike Michalowicz.
In his book, Michalowicz introduces a fantastic way to keep track of your business finances called the Envelope System.
It works like this: instead of having one primary checking account where all of your income and expenses are processed, you create separate accounts to handle specific sectors of your business finances. To illustrate, see the image below:
You would structure your business accounts so that all of your income and paid invoices land in an Income Account. Then, you would transfer the money to 4 (or more) other accounts at different appropriated percentages.
As you can see from the diagram above, it's suggested that you put aside 25% of your earnings in your Expense Account and 15% into an account dedicated to covering tax payments. In comparison, 10% should go to your Profit Account, and 50% should pay yourself.
You may not be able to distribute the percentages in the same way as the example when you first start, but you should make it a goal to move towards those numbers if you want to keep your photography business financially healthy.
To transition your current account to the envelope system, you can start by converting your existing checking account into an Expense Account. Any business expenses, including payroll for employees, should be made from this account. Later on, as your business grows, you can create a separate account for Payroll.
It is recommended that you keep your Taxes Account at a different bank and transfer 15% of your funds there monthly or quarterly. That way, you avoid the temptation of borrowing money from your Taxes Account or any other account since that would defeat the purpose.
Any Owner's Pay can be transferred to your checking account. By paying yourself first, you ensure that you enjoy your business and make a living while also restricting the amount of money you allow to go towards expenses.
Your Profit Account should be used as an emergency fund or for quarterly bonus payments to yourself. Once your business expands more, you can open a separate emergency fund and put enough money to cover three to six months of business expenses.
You can set a schedule to transfer money from your Income Account to your other accounts on the 10th and 25th of every month to have money ready to cover expenses by the 1st and 15th of the month or choose dates that work best for you.
To illustrate what the Envelope System would look like when applied to a photography business that makes $1,000 a month, see the example below:
Did you know that most photography businesses don't last more than five years, and many business owners generally don't run a profitable business?
To avoid following this dangerous trend, it's best to start your photography business slowly. Do your best to cover start-up costs with money you've saved up instead of taking a loan or putting your expenses on a credit card.
Don't fall down the rabbit hole of spending so much money on gear that you put yourself in a deficit for the year. When you're forced to do the best work you can with the resources you have, you learn to get creative with your shoots.
Also, you'll get that much better with the gear you have, so when you can afford to upgrade, you'll already have a good foundation of photography skills instead of relying on your gear to carry you through.
Starting a photography business and keeping your finances organized to bring in a profit every month can be difficult at first. If you're willing to try the Envelope System to keep track of your accounting, you can make the process much easier. I recommend it!
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