Before You Start

This guide assumes you have a solid understanding of the Profit First methodology by Mike Michalowicz and administrator access to your client’s financial platforms (QBO/Xero and banking).

Overview

35 min
Setup Time
Intermediate
Difficulty
Monthly
Maintenance

What You’ll Learn

  • How to educate clients on the core Profit First principles
  • Setting up dedicated bank accounts for profit, owner’s pay, tax, and operating expenses
  • Creating the initial instant assessment and target allocation percentages (TAPs)
  • Automating fund transfers and tracking allocations in QuickBooks Online or Xero
  • Conducting quarterly reviews and making necessary adjustments

1. Preparation Steps

Before configuring any accounts in their software, ensure your client has the necessary physical bank structure and is bought into the methodology:

Required Client Bank Accounts

  • Income Account (Checking)
  • Profit Account (Savings)
  • Owner’s Pay Account (Savings)
  • Tax Account (Savings)
  • Operating Expense (OPEX) Account (Checking)

Required Accounting Software Accounts (QBO/Xero)

  • Corresponding Bank Accounts (e.g., “Profit Bank Account”)
  • Equity Accounts for Profit & Owner’s Pay (optional, for deeper tracking)
  • Tax Liability Account
  • Revenue Accounts (as per existing setup)

2. Choosing Your Tooling

You have several ways to track Profit First, but some are more efficient than others.

Method A: Manual Tracking & Spreadsheets

This approach relies on manual transfers and spreadsheet-based tracking.

Pros:
  • It’s free (no software costs).
  • Flexible for unique client needs.
  • Good for very small businesses with low transaction volume.
Cons:
  • Time-consuming and manual.
  • Higher risk of data entry errors.
  • Lacks automation and easy reporting.

Method B: Accounting Software with Bank Rules (QBO/Xero)

Leveraging your client’s existing accounting software for tracking.

Expert Tip: We strongly recommend implementing Profit First directly within QuickBooks Online or Xero. By utilizing bank rules, recurring transactions, and a well-structured chart of accounts, you can automate much of the process, ensuring accuracy and saving significant time.

3. Step-by-Step: Implementing Profit First

Here is the high-level workflow for setting up and managing Profit First.

The core idea is that incoming revenue is first deposited into an Income Account, then systematically transferred to other dedicated accounts (Profit, Owner’s Pay, Tax, OPEX) based on predefined percentages. Your accounting software records these transfers, providing a clear audit trail and real-time visibility into cash flow.

Here is a sample JSON structure representing a Profit First allocation transaction.

{
  "transaction_id": "PF-20251029-001",
  "date": "2025-10-29",
  "total_revenue_allocated": 10000.00,
  "allocations": [
    {"account": "Profit", "amount": 1000.00, "percentage": "10%"},
    {"account": "Owner's Pay", "amount": 1500.00, "percentage": "15%"},
    {"account": "Tax", "amount": 1500.00, "percentage": "15%"},
    {"account": "Operating Expense", "amount": 6000.00, "percentage": "60%"}
  ],
  "notes": "Bi-weekly revenue allocation per target percentages."
}

4. Setting Up Your Accounting Software

  1. 1

    Configure Chart of Accounts

    Ensure all required bank accounts are linked or created in QBO/Xero. Add specific equity accounts for “Profit Held” and “Owner’s Pay Accrual” if desired for enhanced tracking.

  2. 2

    Initial Instant Assessment & Allocation

    Work with the client to complete their Instant Assessment. Based on their actual percentages, calculate and initiate the first physical bank transfers. Record these transfers in the accounting software.

  3. 3

    Automate Recurring Allocations

    Set up recurring transfers (e.g., twice a month, on the 10th and 25th) directly with the client’s bank. In QBO/Xero, create bank rules or recurring journal entries to categorize these transfers automatically.

Common Error: Inconsistent Transfer Dates

Ensure your client’s automated bank transfers consistently occur on the same dates each month/period. This helps maintain clean reconciliation and prevents confusion between accounting records and bank statements.

5. Review & Optimization

Quarterly Review Checklist

  • Review actual allocations against Target Allocation Percentages (TAPs)
  • Discuss potential adjustments to TAPs based on business performance and goals
  • Verify all bank accounts are reconciling cleanly with the accounting software
  • Provide insights into the client’s improved profitability and cash flow
  • Address any questions or concerns the client has about the system

Need Help?

Get Support

Implementing new advisory services can be complex. Our team can help troubleshoot your Profit First setup or refine your client’s cash flow management.

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