The Cash Envelope System

The Cash Envelope System

In the last post, we reviewed the Profit First system. The basic idea: take your profits first, before expenses.

The next step is to make sure you don’t spend your profits.

To do this, the Profit First book recommends setting up a number of different bank accounts that serve specific purposes.

For example, open one bank account for depositing your sales receipts, and then have other accounts for profit, taxes, owner’s draw, and operating expenses.

This idea is based on the old school “cash envelope system” where you take your personal cash and divide it up into different “envelopes” based on required savings or spending.

For example, you’d have envelopes for savings, rent, groceries, car payment, entertainment. Whatever is in the envelope is the most you can spend.

So, if your goal is 10% profit in your brewery, you put 10% right off the top into the profit bank account.

Here’s how this “envelope system” might look for a typical brewery:

1. All cash receipts go to the Sales bank account: $50,000
2. This cash is then moved to different bank accounts in pre-determined percentages:
   1. 10% to the Profit account: $5,000
   2. 10% to the owner’s draw account: $5,000
   3. 15% to the tax account: $7,500
   4. 75% to the operating expenses and cost of goods sold account: $32,500

The idea here is that you can’t spend more than you have in each account.

The “envelope system” forces a disciplined approach to managing your cash, and prioritizing how it will be used. 

Will this system work in your brewery?

Try it for yourself. Below are next steps to use the “envelope system” in your business.

Do this next:

1. Watch the short explainer video below
2. Join the brewery financial network – our members focus on Profit First all the time.