The Three Tier Profit First Banking System

Understanding the Three-Tier Banking System for Profit First
Hi everyone! Today, I want to discuss a concept I’ve developed called the Three-Tier Banking System for Profit First. As far as I know, this is a unique system, but it builds on the foundational philosophy of Profit First. When working with clients at CTA, I always emphasize that Profit First is 80% foundational principles and 20% personalized fine-tuning. While it’s not an exact science, I’ve found that this system simplifies financial management significantly. So, let’s dive into the three-tier banking system!
Tier One: Traditional High Street Banks
When you start with Profit First, you likely already have an existing bank account, usually with a traditional high street bank such as Santander, Barclays, or Lloyds. This is common for those who have been in business for several years.
For example, we used Santander for our main banking needs. Typically, you would have one primary bank account, but Profit First advises against this. The first step is to split this into two accounts: one for income and one for expenses. If you already have a secondary account, like a VAT or tax savings account, you can repurpose it for your income.
To make it easier, use your main account for expenses and the secondary account for income. This setup is relatively straightforward and aligns with Profit First principles.
Tier Two: Fintech Banks
The second tier involves setting up a new account with a fintech bank, such as Starling, Monzo, Tide, or Revolut. These banks offer features like creating spaces or pots within your account, which is essential for implementing Profit First.
Personally, I prefer Starling, but the key is to choose a bank that allows multiple spaces or pots. You will need these for the additional Profit First accounts, typically including:
Profit
Owner’s Pay
Tax
These three are crucial for ensuring the owner benefits from the business's success. Depending on your business type and size, you might also need pots for VAT (especially if you’re VAT registered) and Cost of Goods Sold (COGS). For example, a coffee shop might have a pot for coffee beans, while an Amazon seller would have one for stock.
Each week, you’ll transfer money from your income account to these pots. The remaining funds will go to your expense account to cover operational costs. This method provides clarity and control over your finances.
Tier Three: Long-Term Savings
While not immediately urgent, Tier Three involves setting aside money for profit and owner’s pay in a way that your mind won’t play tricks on you by seeing the money readily available. This is why using pots in the second tier is beneficial. It helps you know the money is there without the temptation to spend it.
In summary, the three-tier banking system simplifies financial management by dividing your accounts into specific purposes. This system ensures you allocate funds appropriately and maintain healthy financial practices.
Quick Recap:
Tier One: Use traditional bank accounts to separate income and expenses.
Tier Two: Set up fintech bank accounts with multiple pots for detailed financial management.
Tier Three: Focus on long-term savings and profitability by keeping funds out of immediate reach.
By following these steps, you can implement a structured and effective financial system that aligns with the Profit First methodology. Happy banking!