Profit First Book: A Brief Summary
Today I am going to review a cult classic’s author book, “Profit First: Transform Your Business From A Cash-Eating Monster To A Money-Making Machine.” This book is essential for business owners who want to maximize their profitability and take control of their finances. This book, written by Mike Michalowicz, a business expert and best-selling author, offers simple yet powerful strategies to help entrepreneurs, freelancers, and small businesses make more profit while managing their cash flow.
“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. WHY” Mike Michaloweicz
Many people have found this book to be an invaluable resource in taking control of their financial destiny. It is filled with practical advice that can be applied immediately to any business situation.
Conventional accounting uses the logical formula: Sales – Expenses = Profit. Serial entrepreneur Mike Michalowicz has developed a behavioral approach to accounting for flipping the formula: Sales – Profit = Expenses to propose a modern approach to a successful and profitable business.
About The Author
Mike Michalowicz is an author, entrepreneur, and speaker with over 20 years of entrepreneurial experience. He has founded and sold several multi-million dollar companies, authored four books, and regularly contributed to major news publications. Mike’s passion is helping entrepreneurs understand their financials and use them to achieve their dreams.
Points To Ponder In Profit First
Revenue – Profit = Expenses
The generally accepted accounting principles are turned on their head by changing the way you operate your business from revenue – expenses = profit to revenue – profit = expenses. This minor change has a massive impact on your psychology and flows into business and financial efficiency. The author offers an accounting system that is simple to implement but can yield massive financial gains over time. He shows that entrepreneurs will transform their businesses from cash-eating monsters to profitable cash cows by taking profit first and apportioning only what remains for expenses.
The New Definition Of Success Is About Most Profit
The new definition of success is not about the most revenue, employees, and office space but the most profit generated through the fewest employees and with the least expensive office space. Make the game of winning based on frugality and innovation, not on size, flair, and looks. All revenue is not the same. Suppose you remove your worst, unprofitable clients and the now-unnecessary costs associated with them. In that case, you will see a jump in profitability and a stress reduction, often within a few weeks. Equally important, you will have more time to pursue and clone your best clients.
How Can I Make My Business Healthier?
A lack of profitability is consistently the major reason cited for business discontinuation. We assume that multimillion-dollar companies are turning big profits, but it’s rare to find a truly profitable business. Stop asking, “How can I make my business bigger?” Instead, try to ask, “How can I make my business healthier?” A financially healthy company results from small daily financial wins, not one big moment. Profitability is a habit. Small, repetitive, continuous actions, chained together, build momentous momentum.
“You are no longer asking, “How can I make my business bigger?” You are asking, “How can I make my business healthier?” WHAT” Mike Michaloweicz
Profit Is A Habit
Profit is not an event. Profit does not happen at year-end or the end of your five-year plan or someday. Profit isn’t even something that waits until tomorrow. Profit must happen now and always. Profit must be baked into your business. Every day, every transaction, every moment. Profit is not an event. Profit is a habit.
The system for profitability we have been using since the beginning of time is totally stupid. You must figure out the things that make a profit and dump the things that don’t. When you take your profit first, your business will tell you whether you are streamlined enough to pay your bills. If you can’t, you must address these points and make fixes. The ultimate in innovation is to extract more benefits from less expensive resources.
It plays to the common human trait of using resources to make things happen. If we have one month to complete a project, it’ll take us one month. If we have a week, it’ll take us one week. Urgency and scarcity work as incentives. This same principle is used here for treating expenses when running a business.
However, if you are interested to expand your knowledge about such things you can quickly read the short summary of “The compound effect book” whose author perfectly explains the whole journey of getting financial success. You can get some tips from that book by knowing what things can make your journey successful and what things take you away from the financial freedom journey.
Setup Different Stakeholder Accounts
Set up five accounts. Income, owner’s pay, operating expenses, profit, and taxes. Determine target allocation percentages based on an instant assessment, but start slow (1% at implementation). From here, all receipts from sales go into the income account, and on the 10th and 25th of each month, you’ll spread the money into the other accounts as per your allocation percentages. Then disburse salaries from the owner’s pay account and pay bills from the operating expenses account.
“When you base decisions on your best revenue month, you will run out of cash—quickly.” Mike Michaloweicz
At the start/end of each quarter, take 50% of the money from the profit account as profit distribution. To optimize this system, set up the profit and tax accounts with a separate bank. No matter your target number, if you work toward it and believe it, it is possible to achieve it. And not just that, you will even blow past it. However, don’t cut your salary to make the numbers work. Digging a well is smarter than trying to make it rain. Every business should have a three-month cash reserve. The company should reserve personal income tax liability and then pay it. The business should pay the taxes. Every business’s goal is health, which is achieved through efficiency.
Lock In Your Lifestyle So You Can Achieve Financial Freedom In The Long Run
It is extremely important not to expand your lifestyle in response to more cash. It would help if you accumulated cash. Lock in your lifestyle to achieve financial freedom in the long run. Parkinson’s Law applies to your money because when you have lots available, you’ll use it; when you don’t, you won’t. By restricting access and visibility of your money, you’ll blow less cash and run a leaner operation.
I would love to suggest the book “Rich Dad Poor Dad” for all those who have zero knowledge about financces. It’s very informative and helps a lot in making a money mindset by knowing the difference between money myths and reality.
Final Thoughts
There’s no such thing as an overnight success when running a business. It takes hard work, consistent effort, and the right mindset to succeed financially. You can take control of your finances and run a profitable business by taking Mike Michalowicz’s advice to ‘Profit First.’ By focusing on profit first, you can make real changes in your business and achieve financial freedom in the long run. So take the time to set up five accounts and start applying the Profit First system in your business today!
