Profit First invoice tracking question for small business
Hi, I've been hearing about the Profit First method which I'm quite interested in using in YNAB. But I have a question about invoicing.
I have a service-based business which means that I will invoice a client for a job, but more often than not, more than half of the invoice amount will be going toward paying contractors I work with.
How do you enter this kind of income using the Profit First method, because I can't take 50% of the invoice and claim it as my profit (I wish!!).
Should I record just the amount that is due to myself only?
And if so, how does this work when I am tracking my invoices using an asset tracking account?
Thanks for your advice in advance!
Hi Skylark !
I did a quick search of the Profit First method to get a brief understanding and found a simple equation for it:
Sales — Profit = Expenses
You mentioned taking 50% is too much, could you adjust to 40% or 30% (another search told me most businesses aim for 20%)?
Depending on your income, I think subtracting a flat percentage as profit and using the rest for expenses would be a great way to build up True Expenses.
For instance, let's say the invoice is for $100, you'd categorize it as Inflow: To Be Budgeted - you budget $30 towards Profit (which you can withdraw or transfer to a personal account) and then budget the other $70 towards expenses. In an ideal situation, expenses are much lower than $70 so you can build a buffer for future expenses (or increase your profit percentage if sales history is stable and shows you make enough consistently to do so).
I'm hoping other YNABers will chime in here, but wanted to give a quick idea of how you could give those dollars jobs and cover your true expenses. :)
Hi Faness ,
Thanks for your reply.
The problem I'm faced with is that not every job is the same.
For example, I might invoice a client for £2,000 for a band to play at an event. If the musician fees (my contractors) are £1700, I can't simply take a flat % off for profit, because it's likely that I'll send another client an invoice for £500 and need to pay less out (like £200) which is actually a higher profit margin.
I'm also a musician, so sometimes I'm one of the contractors too. (don't know if this is getting confusing or not!).
And so, although I'd like to track unpaid invoices using an Accounts Receivable process, I'm not clear on how to move that money through the Profit First system when, essentially, a large amount of that income will be going to pay contractors for work completed.
Should I only move money through the Profit First system after I've paid my contractors? Because what's left is essentially my money? (although paying contractors is also a business expense...)
First off, of course PF will work for you. Second, I have never heard of a 50% TAP for Profit for Profit First unless it was a PURELY service business with low overhead. Don't forget that owner's compensation is a part of the calculations, too.
Here's a video on how I get YNAB set up for PF at a basic level.
Please note: the video utilizes the US tax system / expense accounts, but that's easy enough to switch to your country / system.
Start tracking - When you have an AR invoice, put it in an AR tracking account. When you get paid, you'll move the money into an on budget account and flow it through PF from there. If you find that certain services that you offer are not profitable enough for you, then stop providing them and focus on the higher profit services OR raise your prices by adding value without adding cost.
Thanks for the input. I think categorising the cost of paying musicians separately like an obligation is perhaps the way to go and then I'll run the remainder (which is my fee) through PF.
I guess it's similar to running a nanny company or cleaning company. You might charge £10 per hour for a cleaner, but the majority of that gross income goes to pay the cleaner. You can't just triple the hourly rate in order to get a fee which gives you a higher "profit" margin. So I think removing the contractor's fees from the income altogether is best, if that makes sense.