Profit First: Transform Your Business from a Cash-Eating Monster to a Money-Making Machineby Mike Michalowicz
Profit First is a business and finance book that will save you from the financial struggles of owning a business. This contains simple and efficient methods that will guide you in revamping your business and finances without learning complex accounting. It won’t just help you create a healthy business, but you will also have the lifestyle and financial freedom you desire. Profit First has already helped hundreds of entrepreneurs, CEOs, freelancers, and business owners. It’s time to help you as well.
Define the health of your business
“Without an understanding of profitability, every business is a house of cards, no matter how big or successful.’’
Profit First simplifies accounting and helps you develop a financially healthy and profitable business. If your business is also struggling financially, the methods presented in this book can help you rise from the ashes. It’s not about working harder, longer, and better to wipe out the business debt. It’s about realizing your strengths, shifting your focus, and managing money like a pro.
There is a big difference between making money (income) and accumulating money (wealth). Wealth comes if you know how to manage your expenses wisely. If you have enough cash left after you cover your costs each month, you are on an excellent path forward.
Money problems occur when one of two things happen:
- Sales slowdown: not having enough to cover expenses if there is a dip in sales.
- Sales speed up: when income rises, so do expenses. There is always a more extended period when you have to wait for a check to come in, but you need to cover your expenses quickly. And that causes cash flow problems. It’s difficult to cut expenses, and business owners reach to take on new debt to cover expenses.
Money is the foundation for almost anything. Remember that an increase in sales does not automatically lead to profits.
Actions to take
Learn the importance of cash inflow and outflow
“It takes money to make money. But how come no one ever told us what that really translates to: It takes more money to make less money.”
Most businesses are created from nothing. It all starts with a great idea, the founder’s unique talent, and a few resources that a founder has at their disposal. Thus, you should be proud of yourself if you created your business from scratch.
However, the reality of running a risky business is never easy. It goes in a circle where you are faced with an empty bank account, credit card debts, and loans, and it seems like the agony is never-ending, which might cause you anxiety.
Most businesses operate in the following way: you look at your bank account balance and see that you have money. You feel great for a short period. This is called a recency effect, where we place more significance on what we experienced most recently. You pay the bills that are due, and your balance quickly goes to zero. And you start to panic.
To overcome this, you need to make a complex change. Start with a shift in mindset and change your natural tendencies to operate your business based on how much cash you see in your bank account. Looking at cash flow and balance sheets is more important than a bank balance.
Think of it like a survival trap, where you are at point A, called the crisis, and you quickly want to get to point B, your vision. But your current point is surrounded by many actions and doings that only get you further from point B. For example, adding new products to make fast money pushes you away from reaching your goals. New questions emerge. Is this product in alignment with your target market? How many additional expenses does this new product create? With time, businesses become less efficient and more costly to run.
Business accounting works straightforwardly. You subtract all the costs from your sales, pay taxes and take your owner’s distribution. No matter how much money you make, you will find a way to spend it. Therefore, you need a system that immediately tells you how ‘healthy’ your business is and automatically tells you how much you can spend and how much you need to save.
Actions to take
Make the first step toward a healthy business
“Profit First is a simple, “small plate” diet philosophy.”
Profit First is like our eating habits. If you change the size of the plate, you will eat less. You need to change the structure around you and leverage those habits. It’s the same for your business; if you reduce the ‘plate size’ of your business’s operating account, you will spend your money differently.
It can also be compared to a successful diet. When you use different accounts, or small plates, that have another purpose, you will look at your spending habits more wisely. Those other accounts will help you save and spend money sequentially. You will realize what is important and how you can cut down on your expenses.
Some helpful ways you could do to lessen your spending are removing temptations and making your account hard to access. You also need to stop borrowing money from yourself or others. Once you get into a good habit of doing your payables twice a month, your cash flow will be much healthier.
The revenue-focused approach is typical in the business world. Most businesses cover monthly expenses, and there is no profitability. Bigger is not always better. Profit First flips the account formula. Instead of selling, paying expenses, and seeing what’s left, the focus is on securing the profit first and then running your business on the remaining cash you have left.
Actions to take
Instantly assess your business health and set up new goals
“Whether your business is simply not as profitable as you would like it to be or is in full cardiac arrest, I need you to be willing to keep your eyes wide open.”
Entrepreneurs often ask other entrepreneurs how big their business is or how many employees they have but not how healthy one’s business is. Everyone’s perception of wealth is different. A more prominent company does not necessarily mean a better and more profitable business. A more robust bottom line of profit and loss statement is better than the size of your business.
Spending time worrying about the side of your business while compromising substantial profits will make your business unhealthy. Big business is excellent only if there are solid and healthy profits. That same principle applies to small and medium companies. Any size is great if there are healthy profits with stable margins.
You can also use Profit First if your business is brand new. It will help you form a powerful habit right from the start. When someone asks you the question: ‘’how big is your business’’, you can confidently answer: ‘’healthy, things are very healthy!’’
Once you assess your business, you can set up new percentage goals. You’ll need to determine your target allocation percentages as they serve as a guiding principle. These are the percentages of each deposit that will be allocated to different elements and accounts of your business.
Depending on your real revenue range, you will have different percentages. If your real revenue is less than $250,000, you can distribute it like this: profit can be 5%, owners pay 50%, tax 15%, and operating expenses 30%. You can have different allocations based on what you think is best for your business. As your revenue increases, these percentages might change. Profit percentage will always increase, owner’s pay allocation would decrease, the tax will stay the same, and operating expenses would also increase.
Actions to take
Get into an automatic rhythm of doing Profit First accounting
“Your Profit Percentage may seem steep or out of reach, but by the end of this year, you will be closer to it than you thought you could be.”
To fully implement Profit First, you need to develop a system that your accountant also follows. If your accountant is against it, you either need to convince them more or find another accountant. It’s challenging to implement changes when your close partners or business associates are against them.
Implementation of Profit First is straightforward, and you only need to remember two dates in a month. You can do your accounting every 10th and 25th. Most payments arrive by the 15th and the end of the month when most bills are due. Twice a month rhythm will benefit your business because your vendors will be paid on time, and you will have a better overview of the financial health of your business.
If you don’t have enough money to do all steps, you need to make some changes. It means you are spending more than you can afford, and this is not helping your business. However, don’t get discouraged. You can still get into the 10/25 rhythm to get a sense of the flow and accumulation of money. Get into the habit of doing account twice a month.
Remember that you can take a profit distribution from the Profit account on the first day of each new quarter. A Profit account serves as a cash reserve; it’s a metric to measure growth and profit. You can sum the total profit and take half. The other half will remain in the account as a reserve. You can spend half for your benefit because you’ve earned it.
Actions to take
Focus on the positive and become debt-free
“Getting that healthy business all boils to a simple formula: You must consistently spend less money than you make.”
Like most entrepreneurs, your income is unpredictable. It changes month by month. And you soon start to get into debt. Too many entrepreneurs believe that the top line is what defines success. However, just because your business generates lots of money doesn’t mean it’s healthy and thriving.
Many businesses go into debt, and this is a challenging situation. Not being able to pay off debt is probably the most painful experience every entrepreneur goes through. Like many people, you probably work hard to reach that threshold when debt-free. However, most people revert to old habits quickly. Therefore, you must start building up cash reserves now. Learn how to be frugal. You need to spend less money than you make consistently.
Wealth is a game of emotion. When something makes you happy at the moment, you’ll keep doing it. If you like spending, then you will spend more. If you like saving money, then you will save more. When things go right, people feel relief and are optimistic about the future. But if things don’t turn out as planned, people go into panic mode.
More joy comes when you don’t spend money. If the bottom line of your business statements grows, so will your satisfaction and happiness. And that is how you build a healthy business. Challenge yourself. Try to go just one more day without the desired item. As time passes, you will realize that you don’t need that item that much, pushing you to save even more.
Cutting costs can be challenging. But when it comes to getting out of debt, other’s people opinion does not matter. You are not here to impress others. You are here to keep your business running. You win based on efficiency, frugality, and innovation. The goal here is to cut costs, not compromise the business operations.
Actions to take
Focus on efficiencies
“To tap into the river of profit flowing just under the surface of your company, you need to look at efficiency in every aspect of your business.”
Increasing the profitability of your business is the end goal that can be achieved by building efficiencies. Focusing solely on increasing sales is not enough because it only leads to increased costs.
As businesses become more profitable, the competitive pressure sets and prices drop to attract more customers. When your competition drops prices, you have to lower prices to stay in business. This leads to a decrease in profits. As you get more supply, their quality drops. When profit margins are prominent in business, people immediately start to duplicate what you’re doing. That is why you need to work on your efficiency to stay in business and be better than the competition.
Efficiency increases your profit margins or the amount of money you earn as profit on each product or service you offer. Increased profit margins will, in turn, boost your company’s earnings without the need for increased sales. Every aspect of your business can be improved and can become efficient. The fewest things you can do repetitively to serve a consistent core customer need. You need to ask yourself: ‘How do you get two times the results with half the effort?’
Letting go of clients who are decreasing your profit margins is one way of becoming efficient. Bad clients drain your energy and have an excessive array of varying needs that only lower your profit margins. This strategy leaves more room for good clients who appreciate your time and work. Those good, strong clients love working with you, and all have similar needs. Focusing on them will improve your efficiency because you now serve very few but consistent requirements.
Actions to take
Start or join an accountability group
“Profit First is 1% inspiration and 99% perspiration.”
The Profit First system seems simple, but it takes discipline to implement it thoroughly. To make this transition smoother, creating accountability groups is the way. Other people working in the same system can help you reach your goals, stick to your habits, and pass through difficult times. And if you look around you a bit, you will notice that there are accountability groups almost every time.
Sometimes you need that slight push to get started, which is why accountability groups work. These types of groups can accelerate your profitability. When you have a group of people who want to achieve the same, the energy gets you going, especially when you need to show results and don’t want to come to the next meeting and have nothing to share. A little bit of competition is always good.
There are a few options to become a part of an accountability group. You can join accountability groups with experts that already exist and who went through this book and applied its principles. Or you can start your accountability group. You will soon realize how these accountability groups can be beneficial. Often, entrepreneurs get stuck at some point in their journey. However, when they hear stories from others and ask for advice, they find a solution to their problems. It’s easier to share your issues with other business owners who had similar issues. With three to ten members, you can have input from several people.
Actions to take
Apply Profit First techniques in your life
“The path to financial freedom is paved with simple, small habit changes that become systematized.”
Profit First can also be applied to your personal finances. The golden rule is to always allocate money to different accounts or envelopes before doing anything else.
Profit First is about a frugal lifestyle because it removes financial stress and enables you to appreciate and enjoy the things you purchase. We often fall into the trap of spending more when our incomes increase. If you give yourself two weeks to complete a project, you will get it done in two weeks; but if you give yourself two days, you will finish it in two days. The same goes for spending. The more you have in your pocket, the more you are tempted to spend it right away.
The ultimate secret to financial freedom is to live within your means. Promise yourself that you won't expand your lifestyle habits no matter how great things get. Imagine how you would be better off when you start setting aside half of the increase in a savings account. Profit First can lead you to financial freedom; when you are financially free, you have enough money saved, and this money yields enough interest to support your lifestyle.
If you want to live debt-free and have savings that could secure your life, you also must try cutting your credit cards, as they can be misleading. Instead, spend only what you can afford and start saving as much as you can.