For those who know me – I’m an avid reader. While fiction is my go-to, I try to sneak in a business book in between my readings. Profit First, by Mike Michalowicz, was my choice for the first non-fiction for the year.
It’s a book about business, organization, and finances. For me, the idea of looking at profit first, and not as the bottom line was mind-blowing. And I can see the merit to it (guess who has an appointment at the bank to get all the bank accounts set up?)
For those unfamiliar with the Income Statement, it’s pretty much
Revenue – Expenses = Profit
The issue Mr. Michalowicz raises is: We’re thinking about our business profit LAST. Also, accounting regulations are not like our bank account. Your business can run a profit, but you can have no money on your bank account. Sounds crazy – but it’s just how it works.
Mr. Michalowicz had the epiphany during his own hard time. It’s so refreshing how honest he is about his path – and the amazing method that came out of it. If we can learn from other people’s mistakes – this sure is a good lesson.
In a nutshell, Profit First set up your business with the premise that
Sales – Profit = Expenses.
See what he did over there? You take your profit FIRST, and then you expense the money you can. Do you really need a shiny office? Do you really need that assistant? Do you really need the latest computer?
There’s an instant assessment that you can make to see your “business health”. There are percentages: Owner Compensation, OPEX (Operating Expenses), TAX (yes, this is your job as a business owner to pay taxes), Profit and Revenue. Those are the 5 foundational accounts. Sounds familiar? It’s the upgraded version of the envelope method.
A few things to bear in mind: You cannot “borrow” money from one account to the other. And you should start small so the goal is achievable. Let’s say: 1% for Profit, 60% for Owners Compensation, 20% for Taxes and 19% for OPEX. That means that your business operating expenses cannot be higher than 19% of your revenue. Brilliant, isn’t it?
My favorite part of the book? Mike Michalowicz is all about positive reinforcement – you can use your profit funds to celebrate as you see fit. You’ll have the funds to pay for taxes. And above all, you’ll run a profitable business.
If you’re interested in learning more about Profit First, click here for free resources from the man himself.
Interested in applying this in your business? Click here to schedule a free consultation with me.
Let me know on the comments below your experience with Profit First and what do you think about it.