Money that sits all in one account gets spent all at once. The solution is to divide it as soon as it comes in: one envelope for profit, one for taxes, one for your salary, and one for business expenses. That way profit isn't a year-end hope but becomes a monthly action. This is the idea behind Profit First by Mike Michalowicz, and it works even with very small numbers.
Most owners run their business by looking at the account balance. When there's money, it's spent. When there isn't, they tighten their belts. The problem is that the account balance shows neither profit nor the tax that's quietly accumulating. Michalowicz turns the old formula upside down. Not sales minus expenses equals profit, but sales minus profit equals expenses. Profit comes first, and expenses learn to live on what's left. You don't need a sophisticated bank for this. Four bank subaccounts, or even four real envelopes, are enough to get started.
The most important envelope for your peace of mind is the one for taxes. The annual profit tax return is filed by March 31. A business that sets aside a percentage for taxes each month isn't rattled by this deadline, because the money is already there. The same logic applies to VAT. The VAT money you collect from customers isn't yours; it's funds in transit to the government. If you put it into its own envelope the day it comes in, the periodic payment becomes a routine matter rather than a crisis. You can find the exact rates and thresholds on our tax pages, or confirm them with your economist.
A shop in Tirana averages 1,000,000 LEK in monthly revenue. The owner decides to start with small percentages. Every Monday, when she reviews the week's takings, she divides them as follows. 11% for the profit envelope, i.e. 10,000 LEK per month. 51% for her salary as owner, i.e. 50,000 LEK. 10% for the tax envelope, i.e., 100,000 LEK, a starting percentage that the economist adjusts according to her tax regime. Everything else, 840,000 LEK, remains for the shop's expenses. After three months, once the system is in place, she raises the profit margin from 11% to 21% and her own salary from 51% to 71%. Increases are made each quarter, by one or two percentage points, never in large jumps. Within a year, the store has 150,000 LEK in tangible profit in a separate account and no anxiety about March 31.
At the Resource Center you'll find the simple allocation format, a four-envelope worksheet, the start percentages, and the quarterly growth calendar. Complete it once with your economist, then follow it yourself twice a month for ten minutes.
In Michalowicz's terminology, the target percentages are called TAPs, Target Allocation Percentages, while the actual ones are called CAPs, Current Allocation Percentages. The point-in-time assessment is made on actual revenues—that is, revenues minus materials and subcontractors—not on gross turnover. The distribution is carried out twice a month, usually on the 10th and 25th, in line with payroll. For clients with weak discipline, it is recommended that the profit and tax accounts be opened at a second bank, without a card and without internet banking access. Removing the temptation works better than willpower. The behavioral basis is Parkinson's Law: demand grows to fill the available supply, so an artificial cap on the operating account forces detailed budget control.
Start with 1% anyway. Ten thousand LEK per month won't knock out any business that brings in one million LEK. If even that seems impossible, the problem isn't the percentage but the prices or costs, and that's another conversation worth having as soon as possible.
Not at first. All you need is a sheet of paper where you note what belongs to each envelope and the discipline to keep from touching it. As the amounts grow, bank subaccounts make the system self-enforcing.
If you want someone to calculate your start-up percentages with you and track them month after month, talk to us. See our packages at offer or write to us at Contact page.
We take care of accounting and taxes, so you can save time, money, and focus on growing your business.
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