The Profit First system is fantastic. It has changed both my personal and business finances and re-shaped the way I manage my resources. It simply works, and it is a game-changer. I have no idea how many different approaches may be out there, but it is the most effective banking management system, and thousands of business owners around the world agree with me (or I agree with them).
The Profit First book has a smashing 4.8/5 rating at Amazon.com for over more than 1,500 customers.
While this article is mainly focused on the system setup on Canadian Banks, it can easily be replicated in any other financial institution (and any other country).
The Profit First System
Profit First was created by Mike Michalowicz. It is amazingly explained in his book and essentially comes up to a system where you can organize your banking, focusing on paying your profit "first", right before everything else.
This is one of the must-read books I always recommend to friends, colleagues and especially, business owners. Profitability is more than getting net earnings. It takes practical management of your resources in order to get to it, so having a Profit First approach can help you fix that broken side of your business where you are actually "not seeing your results."
I won't dig here on how the system specifically works, but on how I implemented it for both my business and personal finances. My suggestion is that you get your copy of Profit First before setting this all up.
Business/Personal Banking Approach
In order to keep things simple, I will assume two scenarios: business banking and personal banking. The first one is more suitable with an "incorporated" approach: you have a business that has it's own separate bank accounts. The second one is more suitable for both self-employed and regular income individuals.
Business Banking Setup
For business banking purposes, we will go with the simplest and easiest way to organize the accounts. The Profit First system suggest having as many accounts as needed, but overall, we will focus just on the five basic ones:
Income Account: This is where deposits, cash, and invoices payments are received. The income account receives all the regular cashflow.
Profits Account: The main account of the system. The Profit account will hold all the funds that will count as the business cash reserve.
Owner(s) Compensation Account: This account takes care of paying all salaries, dividends, and owner remuneration. It could also hold funds for the bonus, performance-based or commission structure payments.
Operations Account: This is the main operation accounts of the business. From here, cheques will come out, Credit Card payments will be executed, and every single expense is paid off. The operations account will take care of all transactions that result in negative operating cash flow.
Taxes Account: Corporate income tax and Sales tax (GST/HST) fund reserve.
In this case, I insist, all five accounts are separated from a personal banking profile. I assume you have an incorporated company that has a separate business profile from your own personal banking one.
Personal Banking Setup
Personal finances are way more variable than what I will present in the following section, so I'll try to make things way simpler too for this scenario:
Income/Operations Account: On a personal banking setup, the chequing account is usually the one that receives all positive and negative cash flows. Salary and self-employment income lands here, but also all groceries, bills, and Credit Card payments.
Taxes Account: While this one applies more for self-employed and people who receive income other than salary, the taxes account plays a significant role here. It is where you will be storing all your funds for future tax bills.
Sample "Vacation" Account: I have labeled it as "Vacation", but it could be anything else: courses, house downpayment, kitchen re-design, new business idea funds... it can be ANYTHING you have in mind.
Registered Account Funds: While this is not a literal part of Profit First, it is something I want to insist on. Profit First focuses on what to do with the positive cashflow right now. I intend that you seriously consider it too for your "future" cashflow.
Once you have defined all the accounts you need, here is how you can set it up with a couple of major Canadian banks:
Profit First Setup with TD Canada Trust
TD Canada Trust is the second biggest bank of Canada, right after RBC. Still, I'm pretty happy with their customer service, online platform, and, more importantly, how useful it has been to operate with them among these years.
Business Banking Setup
- TD Canada Trust Business Chequing ACCOUNT (starting at $5 month, starting at $1 transaction fee & 0% interest)
Operations Account
- TD Canada Trust Business SAVINGS ACCOUNT ($0 monthly fee, $1 transaction fee & 0.45% interest)
Income Account
Profits Account
Owner(s) Compensation Account
Taxes Account
Personal Banking Setup
- TD Canada Trust Regular CHEQUING ACCOUNT ($3.95 monthly fee, $1 transaction fee & 0.15% interest)
Income/Operations Account
- TD Canada Trust Every Day SAVINGS ACCOUNT ($0 monthly fee, $1 transaction fee & 0.45% interest)
Taxes Account
Sample "Vacation" Account
"Short Term Projects" Account
- TD Canada Trust RRSP Investment Funds & TFSA Investment Funds
Registered Account Funds
Profit First Setup with Tangerine
Tangerine would be more my option #1 regarding costs, although it is not that easy to be approved for a business account. On the other hand, personal banking is straightforward to set up and can be completely done online:
Business Banking Setup
Unfortunately, Tangerine does not offer a chequing account for Businesses. It makes it really hard to set up a Business "Profit First" solution only with Tangerine, leaving it only available for storing liquid assets. By neither having a Credit Card or a chequing account, it is though to make PF work on a Business Tangerine Account.
For the account configuration, it would be:
- Tangerine Business SAVINGS ACCOUNT ($0 monthly fee, $0 transaction fee & 0.80% interest)
Income Account
Profits Account
Owner(s) Compensation Account
Taxes Account
EXCLUDED
Operations Account
Personal Banking Setup
For personal banking, Tangerine has outstanding options. The following setup is one of my favorites:
- Tangerine Regular CHEQUING ACCOUNT ($0 monthly fee, $0 transaction fee & 0.15% interest)
Income/Operations Account
- Tangerine Regular SAVINGS ACCOUNT ($0 monthly fee, $0 transaction fee & 1.10% interest)
Taxes Account
Sample "Vacation" Account
"Short Term Projects" Account
- Tangerine RRSP Investment Funds & TFSA Investment Funds (1.07% MER fee & 4.49-10.31% average return options)
Registered Account Funds
The Line of Credit Case
One of the approaches that work great with Profit First is by combining it with a Line of Credit (LoC) as overdraft protection on the operations account. You could read more about it in my article Implementing Profit First with a Line of Credit. LoCs are available across major banks in Canada and can be acquired with interest rates that range from 3.9% to 12.9% per year.
Personal Take
I manage all my business accounts with TD Canada Trust and most of my personal ones with Tangerine. Although TD is more expensive on a monthly basis, it provides the platform for business operations that Tangerine is not able to deliver today. If somehow they open their missing pieces, I would probably be moving away to save on fees.
What to do Next?
If you want to learn more about this topic, I encourage you to take a look at my other articles:
