BBG Owner's Manual

$ · Money

Pay yourself and protect profit on purpose

Most owners pay everyone else first and take whatever is left. Usually that's not much. The fix is to decide in advance how every dollar that comes in will be split, so profit, taxes and your own pay are protected before the spending starts.

5 min readTools: Allocation calculatorGo deeper ↓

Why "what's left over" never works

The standard formula is revenue minus expenses equals profit. In practice, spending grows to match whatever money is in the account. If all the cash sits in one checking account, it looks available, so it gets spent, and profit is whatever happens to remain.

Mike Michalowicz's Profit First turns the formula around: take profit first, then run the business on what's left. The method uses separate bank accounts so money set aside for profit, owner pay and taxes isn't sitting in the account you spend from.

How the allocation works

  1. All income lands in one account. Every client payment goes here first.
  2. On a set schedule, split it. Twice a month is common. Move fixed percentages into separate accounts.
  3. Profit: held back, not spent on operations. Some goes to the owner as a reward, some stays as a reserve.
  4. Owner pay: your salary for the work you do, paid regularly.
  5. Taxes: set aside so tax bills are never a surprise.
  6. Operating expenses: everything else is paid from this account only.

Start with small percentages for profit and grow them each quarter. If the operating share can't cover your expenses, that's not a reason to skip the system. It's evidence that costs are too high or prices are too low.

Tool · allocation

Split your income

Choose your own percentages. The example split is only a starting point to adjust with your accountant.
After pass-through costs, like materials billed straight to clients.
Not counting owner pay or taxes.
The BBG take

Profit is a decision, not a leftover

Reality check

If the operating share can't cover your costs, the business has been running on money that should have gone to you, your taxes or your reserve. Better to see it now.

Tight ship

Do the split on the same days every month, without exception. It's the kind of small routine that prevents a large crisis.

Dossier

Changing your allocation percentages is a Class II decision. Write down why, and review it at the end of each quarter.

Protect the owner

An owner who never gets paid burns out and hides the true cost of the business. See Protect the Owner.

General education only. Tax set-asides and owner pay depend on your business structure and situation. Talk to an accountant or tax professional.

Go deeperCase file, step-by-step how-to, common mistakes and questions to work through

Case file: The owner who never paid himself

A fictional example

Andre runs a small painting company with four painters. Revenue is about $35,000 a month. He pays everyone, every bill and every supplier on time. He pays himself whatever's left at the end of the month, which some months is $4,000 and some months is nothing. Every April, the tax bill is a crisis.

With his accountant's help, he set up four accounts and chose a starting split for money coming in, after paint and materials billed directly to jobs: 3% profit, 40% owner pay and payroll taxes for himself, 15% taxes, and 42% operating expenses.

The first month was a shock. The operating account didn't cover his usual spending. He'd been running the business on money that should have gone to taxes and his own pay. Instead of skipping the system, he went through every expense. He cancelled two software subscriptions he no longer used, switched to a cheaper insurance policy after shopping it, and raised prices on new jobs by 8%, the first increase in three years.

Within four months, the operating account covered his costs. He paid himself a steady amount twice a month. In April, the tax money was already waiting. After a year, the profit account had built a cushion, and he raised the profit share to 5%. He said the biggest change wasn't the money. It was knowing every morning exactly where he stood.

How to set up your allocation, step by step

  1. Open separate accounts for profit, owner pay, taxes and operating expenses. Ask your bank about no-fee business accounts.
  2. Look at the last six months to see your real numbers: income, operating costs, and what you actually paid yourself and in taxes.
  3. Set starting percentages with your accountant, especially the tax share. Start profit small, even 1% to 3%.
  4. Split on the same days every month, the 10th and 25th, for example. Put it in your calendar as an appointment.
  5. Pay operating costs only from the operating account. If it runs short, cut costs or raise prices. Don't borrow from the other accounts.
  6. Review quarterly and move a percent or two toward profit as the business gets healthier.
Your twice-monthly routine

"On the 10th and 25th: check the income account, move the percentages to each account, pay myself from owner pay, and write one line on the weekly checklist about anything that looked off."

Common mistakes and how to fix them

MistakeFix
Starting with a profit percentage the business can't support yetStart small and raise it each quarter as costs come into line.
Dipping into the tax account "just this once"Treat it as money that already belongs to the tax authority.
Skipping the split in busy monthsThe routine matters most when you're busy. Keep the dates fixed.
Guessing the tax shareAsk a tax professional. It depends on your structure, income and location.

Questions to work through

  1. How much did you pay yourself last year, and was it planned or leftover?
  2. Has a tax bill ever caught you by surprise? What would have prevented it?
  3. If 40% of your income went to operating costs, what would you have to cut?
  4. Which expenses have grown just because the money was there?
  5. What would it feel like to know your tax money and pay were already set aside?