“A financially healthy company is a result of a series of small daily financial wins, not one big moment. Profitability isn’t an event: it’s a habit.”
Profit First: Short Summary
If you own a business, Profit First by Mike Michalowicz is a must-read. The book teaches you how to run a profitable business and explains every business metric that matters. Moreover, you will also learn the difference between making money (income) and accumulating money (wealth).
Save your money and block access to it so that it doesn’t get stolen…by you.
Sales – Profit = Expenses
Taming the Beast
Business growth is critical, but it is half the equation of profitability.
Living from paycheck to paycheck causes panic and is a survival trap.
The only way to fix your financials is by facing it by taking the following action steps:
- Draw the line in the sand and commit to running a profitable business
- Agree not to beat yourself up
How Profit First Works
Here is how the Profit First method is like a successful diet:
- Use small plates: When money comes into your main operating account, immediately dispense it into different accounts in predetermined percentages for profit, owner pay, taxes and, consistently operating expenses
- Serve Sequentially: Always move your money to the profit account first, then to your owner pay account, then to your tax account, with what remains to expenses
- Remove Temptations: Move your profits account and other accounts out of arm’s reach to make it difficult for you to access your money
- Enforce a Rhythm: Do your payables and pay your bills twice monthly (specifically, on the 10th and the 25th)
Here are some action steps to get your business profit-ready:
- Have two checking accounts with your bank (operating expenses and owners pay accounts) as well as two savings accounts (tax and profit accounts)
- Set up two more external accounts with a different bank: the no-temptation profit account and the no temptation tax account
- Don’t enable any convenience options for your two external accounts e.g viewing the accounts online, getting checkbooks for the accounts
The Naked Truth
How healthy is your business? A great business is one that has healthy profits.
As business gets healthier, taxes will increase.
Profitability isn’t an event. It’s a habit. Profitable habits practiced consistently cause a company to be financially healthy.
Applying the Profit First principles in a new business that is yet to make any revenue is an advantage because it allows you to form the right habits from the get-go.
Forming the right business habits from scratch prevents you from forming bad habits that can be difficult to break in the long run.
In the early stages of building a business, the focus should be on selling and doing. The processes and systems come later.
Start by allocating 1% to your profit account, 50% for the owner’s pay, and 15% for the tax account.
Choose Your Adventure
Perfectionism kills every dream.
Bigger profit percentages lead to lower operating expenses in a business. Profit percentages ought to be small at first, then grow gradually with time.
You are your business’s best and most important employee.
Day One, Quarter One, Year One, and Forever
Start with small profit percentages to establish a new automatic routine for you. Take action now.
You can easily cut 10% of your expenses by:
- Canceling anything you don’t need to help your business run and to keep your customers happy
- Negotiate every remaining expense except your payroll
The 10/25 Rhythm is beneficial in the following ways:
- It will help you become less reactive towards bills, causing you to feel more in control
- It helps you take note of and get rid of unnecessary expenses and effectively cater to small recurring ones
When you don’t have enough money left over to pay your bills, it is a warning from your business that you can’t afford the bills you are incurring.
The lifeblood of your business is money. It should flow like a rhythm, not randomly.
After every quarter, withdraw 50% of your profits and keep the rest as your reserve.
Enjoy yourself with the money you withdraw each quarter. Celebrate and treat yourself.
If you owe taxes at the end of the year, and you don’t have enough money in your tax account, this is the only time you are allowed to withdraw from your profit account for a reason other than profit distribution.
When you have excess money in your tax account, you can transfer it to your profit account.
If the money in your profit account is over a 3-month reserve, put the money back into the business. Set up a celebration list for the ways you’d like to indulge each quarterly.
Paying yourself should always be your priority even if you’re in debt.
Practice the one more day technique. Hold off on purchasing something and test how much you need it.
You’ll feel rewarded when you see yourself saving more by going without certain items.
“To stop yourself from accumulating debt, cut off the fat from your business. Don’t cut the muscle.”
Modern-day success is not about earning the most revenue, hiring more employees, and having the biggest office spaces: It is about generating the most profit through the fewest employees with the least expensive office space.
You cannot add new debt as you pay the old debt off.
Pay your smallest debt off first.
95% of your company’s profitability depends on what goes on beneath the surface (after the sales), and not the sales themselves.
Serve your clients with the same or very similar problems, using your one consistent solution to solve the problems.
The key to being efficient is repeatedly serving a consistent core customer need.
“Innovation in business and efficiency comes from big, bold questions.”
The more you focus on improving efficiency, the closer you’ll get to achieving double the results in half the time.
Fire bad clients, clone your best clients, sell smart. Selling more is the most difficult way to increase profits.
Focus on one area of your business that benefits your best customers and challenge yourself to figure out how to get twice the results for half the effort.
Sticking With It
Here are the numerous benefits of accountability groups:
- Having accountability partners can make a potentially challenging experience bearable
- Enforcing a plan or a system with others ensures that you are more likely to do your part
- When you regularly meet with an accountability group, you get into a rhythm that makes it easier for you to stay the course ad achieve your goal
Accountability groups work. Keep the accountability groups honest! Let your accountability partner(s) not be your friends.
You must be accountable for the process by any means necessary.
Profit First – Advanced Techniques
Implement the advanced techniques after at least two quarters of implementing the basics.
The extra accounts opened in addition to the four primary accounts are:
- The income account
- The vault for difficult business days
- Stocking account for big purchases and to fund buying of inventory
- Pass through account
- Materials Account
- Subcontractor/Commissions account
- Major Equipment Account
- Drip Account
- Petty cash account
- Sales tax account
Living Profit First
Your business grows faster when you focus on profit first and pay yourself first.
Financial Freedom: Doing what you choose to do when you choose to do it.
Lock in your new lifestyle of living within your means.
Where It All Falls Apart
The fastest way to screw up Profit First is to start sliding back into the old beliefs that got you into trouble in the first place.
Don’t go too big, too fast, cut the right costs, and Invest in assets.
Assets: Anything that allows you to bring more efficiency to your business by allowing you to get more results at a lower cost per result.
Adjust your percentages should you find yourself unable to cover your expenses.
Don’t raid your tax account.