Profit First: Transform your Business from a Cash-Eating Monster to a Money-Making Machine
Managing finances is a challenge. Often, being a successful and profitable business owner takes a lot more than being great at making your product or providing your service. You need to be good at the business side of things.
The most crucial step for any business owner is education.
For a healthy financial future, you need to learn and understand the necessary skills needed to run a small business.
I just finished reading Profit First, by Mike Michalowicz. It was everything the reviews said and more. If you are a small business owner or want to manage your finances more healthily, you want to learn about this system.
Why Profit First?
At least 50% of businesses fail in the first five years due to a lack of profitability. Many continue struggling, burning cash, and accumulating debt before collapsing. Entrepreneurs start a company to do what they love and gain financial freedom. They work hard, invest their life savings, but, in the end, they still don’t make money.
Most businesses use the traditional formula (Sales – Expenses = Profit).
Profit First is a cash-management system and it proposes this new accounting formula: Sales – Profit = Expenses.
The solution is so profoundly simple and so genius: Take your profit first!
Make profit your focus, not an afterthought.
James Clear summarized the book for us. If you don’t have time to read more, read this.
“Before you pay your expenses, take your profit first. Run your business based on what you can afford to do today, not what you hope to be able to afford someday. When profit comes first, it is the focus, and it is never forgotten.”
Summary
Here, some core ideas from the book, according to James Clear.
- Profit First Author“Revenue is vanity, profit is sanity, and cash is king.”
- Money is the foundation. Without enough money, we cannot take our message, our products, or our services worldwide. Without enough money, we are slaves to the businesses we launched.
- Growth is only half the equation. It is an important half, but still only half.
- Remember, your business is supposed to serve you; you are not in service to your business!
- Profit is not an event. It is not something that happens at year-end or at the end of your five-year plan or someday. It isn’t even something that waits until tomorrow. Profit must happen now and always. It must be baked into your business. Every day, every transaction, every moment.
- Profitability isn’t an event. Profit is a habit.
- Take profit first. You can’t grow out of your profit problem. You need to fix profit first, then expand.
- You must figure out the things that make a profit and dump the things that don’t.
- Sustained profitability depends on efficiency.
The System
Use small plates
When you put all your money in one account, you feel wealthier and spend more. Reduce the amount of available cash, so you’re forced to be smarter and more innovative with how you use each cent.
Change your meal sequence.
Never pay bills first. Allocate your business income into sub-accounts in this sequence: Income => Profit => Owners’ Pay => Tax => Operating Expenses (Opex).
- If you get a $1,000 deposit, starting today, transfer $10 into your PROFIT account. If you could run your business off $1,000, you can indeed run it off $990. If you get $20,000 in deposits, you transfer $200 into your PROFIT account. If you can run your business off $20,000, you absolutely can run it off $19,800. You’ll never miss that 1 percent. It is a low bar. But something magical will happen. You will start proving the system to yourself. You won’t get rich overnight this way, but you will get a wealth of confidence.
- When less money is available to run your business, you will find ways to get the same or better results with less. By taking your profit first, you will be forced to think smarter and innovate more.
- Also, eliminate unnecessary expenses. It will bring more health to your business than you ever imagined.
Remove temptations
It’s human nature to seek convenience. Once you’ve taken your profit, remove temptation so you won’t use it for your business or yourself.
Mike suggests opening two bank accounts at a different bank.
Enforce a Rythm
Do your allocations and payables twice a month. Mike suggests doing this task, specifically, on the tenth and the twenty-fifth.
A few extra tips to stay on top of your finances.
- Pay yourself first.
- Have a good billing strategy.
- Spread out tax payments.
- Monitor your books.
- Focus on expenditures, but also ROI.
Final words
If you apply this approach to a new business, you can make profits from day one. Set up good financial habits from the beginning and establish internal financial systems to protect your business’s financial health.
If you’ve been losing money for years and can’t even pay yourself a salary, then it’s time to transform your business.
It is also a lifestyle. 10/10 I would recommend it for a healthy financial life.
Seriously. Buy This Book. Read this book. Implement this book. You will thank us later.
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