How to Manage Money in a Small Business: The Profit First Way to Keep More of What You Earn
Your accountant's reports look backwards. To run a business day to day, you need a money system that looks forward.
A markup isn't your profit. Until every expense is covered, that 50% markup is just gross margin.
Profit First splits every dollar that comes in across separate bank accounts for profit, tax, operating expenses and owner's pay, so the money can't quietly disappear.
Set your percentages to suit your stage of business. A startup might allocate 1% to profit and still build the habit.
Once money lands in the profit account, leave it there. If the bills aren't covered, the fix is more sales, lower costs or faster payments, not a raid on profit.
Kate has a client who had a decent income coming in and nothing to show for it in the bank. He asked her one simple question.
If you've ever looked at a healthy sales figure and an empty bank account in the same week, you'll know the feeling. In Episode 6 of our Roadmap to Business Success series, we moved into Quadrant 2 of the Thriving Business Wheel, Keep More, and talked about how to manage money in a small business so you actually keep what you earn. Sam led this one. Money is her favourite topic.
"My client who was making $300,000 but never had any money in the bank and said, "Where is it all going?"" — Dr Kate De Jong
That client started using the Profit First model. Now he always has money for tax, he's building profit and taking holidays, and in Kate's words, he says he can sleep at night.
Why does a profitable business still run out of money?
Because revenue and cash in the bank are two different things.
Most business owners can tell you what they earned. Far fewer can tell you what they kept. Sam's view is that this comes down to education, not intelligence.
"There are some big holes in education as far as money management goes." — Sam Morris
Most of us only learn it after a nasty surprise. For Kate, that was a $9,000 tax bill early in her business that came out of nowhere.
It's a common story in Australia. In ASIC's corporate insolvency statistics for 2022–23, liquidators listed "inadequate cash flow or high cash use" as a cause of failure in 52% of reports, the most common cause named. And 82% of the failed companies had fewer than 20 employees.
Why doesn't my accountant's report help me run my business day to day?
Because it was built for compliance, not for decisions.
Your accountant reports what's already happened, adjusted the way the tax office requires. It doesn't tell you whether you can pay the bills on Friday.
"Those reports and what your accountant prepares is all historical. They tell you what has already happened. That doesn't help you with what is going on today." — Sam Morris
Sam put it even more simply: accounting and bookkeeping look backwards, and business owners need to look forward. Some accountants are proactive and run Profit First with their clients. In Sam's experience, they're the exception rather than the rule.
Is my markup the same as my profit?
No, and mixing them up is one of the costliest mistakes we see.
Your markup only covers what it costs to deliver the thing you sold. Your rent, software, insurance and internet still have to come out of what's left before you see any profit.
"It is a very common misconception, Kate, that margin or markup is the amount of profit that you're going to make." — Sam Morris
Put a 50% markup on a product and you haven't made 50% profit. Your overheads still need feeding.
How should I set up my chart of accounts?
Split the costs of delivering your work from the costs of simply being open.
Your chart of accounts is the list of categories every dollar gets sorted into. Most of us use the default template that came with Xero or MYOB, and Sam's point is that you don't have to.
She restructures it so cost of goods sold (or cost of services sold) clearly shows every cost you only pay when you're doing paid work. Everything else sits in operating expenses. One client had parking fees listed as a general expense, but they only paid for parking when they went to client visits.
As Sam told them, you're not paying for parking unless you're out working. That one change moves the cost into cost of goods sold, where it belongs. Once the split is right, you can see what it costs every week just to keep the lights on.
How do you manage money in a small business with Profit First?
Give every dollar a job the moment it arrives.
Profit First comes from Mike Michalowicz's book Profit First, first self-published in 2014 and released in a revised edition by Portfolio in 2017. The core idea is to take your profit first, as a set percentage of every deposit, rather than hoping something is left at the end.
In practice, you open separate bank accounts. Money comes into an income account. Then, on a regular rhythm, you transfer set percentages into other accounts for profit, tax, operating expenses and owner's pay. Kate does her transfers about twice a month. Sam runs a hybrid of the method, adapted for the clients she works with, and she's upfront that she's not Profit First certified. For businesses with staff, she adds a holding account for things like leave entitlements, so a resignation with five weeks of leave owing doesn't hurt.
Why does it work so well? Behavioural economist Richard Thaler described mental accounting as "the set of cognitive operations used by individuals and households to organize, evaluate, and keep track of financial activities" (Thaler, 1999). We all sort money into mental buckets. Profit First makes them real, so the tax money can't quietly fund a new laptop.
Owner's pay matters most. And it takes a mindset shift for anyone coming out of a salaried job, because the money hitting your business account isn't yours to spend.
As Sam put it, in business you stop being the one waiting with your hand out for your pay. Now your suppliers and the tax office are the ones with their hands out.
The system also smooths out the ups and downs. Without it, Sam says, the pattern is predictable.
"The really good month is when people go out and splash the cash. And then the next month, what happened? There's no sales, and I have no money." — Sam Morris
What percentages should I use?
Start with your real numbers and your stage of business, then adjust.
There's no single right answer. Sam's starting point is your historical data, and the stage you're at matters. A startup can't allocate 10% to profit the way an established business with steady cash flow can.
When Kate started, she set 5% to profit, 30% to operating expenses and 30% to tax, and adjusted as she learnt what her business needed. As a rough guide, we talked about 20–30% for tax in a small business. Sam's caveat is important: the right tax figure depends on your structure (sole trader or company) and whether you're registered for GST, so check yours with your accountant.
If you're just starting out and there's no profit yet, Sam's advice is to set the profit allocation at 1%. It's small, but it builds the habit. And if your operating expenses account keeps running dry, change the percentages rather than abandoning the system.
Super matters here too. Since 1 July 2026, under Payday Super, employers must pay super at the same time as wages so it reaches the fund within 7 business days, according to the Fair Work Ombudsman. If you pay yourself a wage through payroll, plan for it every pay cycle.
How big should my cash buffer be?
Big enough that a slow month doesn't become a crisis.
Sam's rule of thumb is to review the profit account each quarter. You can confidently take out half, for a reward, a piece of equipment or whatever you've planned, and leave the other half as a buffer. Talk to your accountant first, because what you draw affects your tax.
The buffer is your runway. Once you know your weekly "lights on" number from your chart of accounts, it's easy to work out. If it costs $1,000 a week whether you work or not, 90 days of runway is about $13,000. Kate suggested working towards around six months once you're established. Sam agreed, while being clear that it's not possible in the early days.
For Kate, as a solo operator, $10,000 in the buffer feels like the safe amount. If it gets below $5,000, that's when she starts sweating.
What if the money coming in doesn't cover the bills?
Fix the business, not the buckets.
This is the golden rule. Once money is in the profit account, you leave it alone.
"Do not touch it. That is your reward." — Sam Morris
If you're short, Sam's list is practical: cut expenses, increase your sales, negotiate longer trading terms with suppliers, and get customers to pay you faster. Kate added chasing outstanding debtors. Robbing the profit account just hides the real problem.
"Don't avoid it by robbing your profit account because you're gonna have to do this to stay in business." — Sam Morris
That's why we like this model. It pushes you towards the right behaviour. Sam described it as a healthy lifestyle rather than a restrictive diet, and said it's actually liberating once you change how you think about money.
Frequently Asked Questions
What is the Profit First method?
It's a cash management method from Mike Michalowicz's book of the same name. You split every deposit across separate bank accounts, usually for profit, tax, operating expenses and owner's pay, taking profit first instead of hoping something's left over.
What's the difference between markup and profit?
Markup is what you add on top of the cost of delivering a product or service. Profit is what's left after every cost is paid, including rent, software, insurance and your own wage. A 50% markup never means 50% profit.
How much should a small business put aside for tax?
In the episode we talked about 20–30% of income as a rough guide for a small business. The right figure depends on your structure, whether you're registered for GST and your income, so confirm your percentage with your accountant.
Does Profit First work for a new business?
Yes, if you set the percentages to suit where you are. A startup might allocate just 1% to profit to build the habit, and adjust as revenue steadies.
We're Dr Kate De Jong, a PhD engineer turned business strategist, and Sam Morris, a Navy veteran who's spent 20 years in business working out what makes businesses tick and what makes them stall. Together we host the Thriving Business Podcast.
What can you do this week?
Three small steps to start keeping more of what you earn.
Open your profit and loss report and check your markup against your real profit. Is what you think you make on each sale what's actually left once overheads are paid?
Go through your chart of accounts and find one cost that only happens when you're doing paid work, like parking for client visits. Is it in cost of goods sold?
Open one extra bank account for profit and transfer 1% of everything that comes in this week. How does it feel to see it there, untouched?
"People, you don't have to struggle with this. There is a better way to do it." — Sam Morris
Further Reading
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