8 min read ⌚
Transform Your Business from a Cash-Eating Monster to a Money-Making Machine
Has your business eaten most of your earnings?
Are you an advocate for the “Bigger is better” philosophy?
Let us hear from Mike on why profits should be the only measurement of success and prosperity.
Who Should Read “Profit First”? And Why?
As the title implies, “Profit First” tackles conventional business-doing logic, and puts profits at the center of operations.
No more excuses as to why you should plow back all of your profits, and not having a pinch at the chubby quarterly checks!
With that in mind, we reckon that “Profit First” is best suited for entrepreneurs and those in the making. Keep an open mind, dive right in!
About Mike Michalowicz
Mike Michalowicz (entrepreneur, author, keynote speaker) has had a lot of ups and downs in his career.
After selling two multi-million-dollar companies, he went onto becoming an angel investor.
Upon squandering his fortune, he set on discovering a formula that will ensure profitability from the outset.
His insights and methods are taught in Universities and applied by companies worldwide.
“Profit First PDF Summary”
Putting together a list of qualities and ideas you came up with, and weaving them into a business plan is nothing short of a miracle.
On top of that, being able to proceed with limited resources at hand, is certainly something to be admired.
Perhaps, you’ve been there as well.
Eventually, you’ll start feeling as if this huge, money-making machinery, has turned into a cash-eating monster that needs to be tamed.
How can you address this problem? Most entrepreneurs put “growth” at the center of their endeavors, thinking that more sales, more customers, and more funding could salvage the situation. As far as Mike is concerned, Growth is only half the solution.
Some entrepreneurs even reckon that running a business is the closest you’ll ever get to experiencing a nervous breakdown beforehand.
It’s like a horror story, with no end in sight.
Woooah, let’s backpedal a bit to get a clue on how to fight off these tendencies.
Mike starts by pointing out that not every sale is a good sale.
Think of it this way, if you decide to create a new product add-on in order to increase your sales, but you don’t envision your company selling that kind of products; then you need to stop harming your business.
The Survival Trap, as Mike likes to call it is a mindset that is not driven towards a vision.
It’s an ill-considered decision predicated upon our desire to get out of a crisis, at the expense of our broader picture, which we often neglect.
In doing so, we end up squandering opportunities and money, taking bad clients, and making short-sighted decisions.
Revenue generation is by all accounts the pitfall we so often fall into.
As one falls deeper and deeper, it tends to justify anything that brings in more money even if that means evading taxes.
The devil is in the details – sounds familiar?
The GAAP (Generally Accepted Accounting Principles) claims to have all the answers as to how a business can optimize its operations.
Sales – Expenses = Profits
Start with sales, subtract direct costs (the cost of manufacturing or producing your product/service), pay the employees, subtract indirect costs, pay taxes, and then redistribute the profit.
This cycle is composed of earn as much as you can, and spend the least you can.
Nice logic, but is it feasible?
As the monster grows bigger, it takes more effort to feed him.
Higher direct costs, higher wages, higher indirect costs, and then suddenly we are on a page where every client is a good client – regardless of how it can impact our business.
Meanwhile, our utilities increase and subsequently there are bigger issues and loans for you to take care of.
That’s why the Profit First system, is by far the most effective way of looking at a business.
What if you look at the profit first, instead of being just another revenue-focused entrepreneur?
The Profit First Accounting method, takes a different approach, and it revolves around not how much money you spend and earn, but the difference between these two.
Sales – Profit = Expenses
While conducting this experiment, Mike realized that the paycheck-to-paycheck system is a living hell.
Fed up with insecurity, he set his thoughts on profitability and building a system that will underpin his efforts.
Here’s how to do it:
Step #1 – Go to your bank and set up four accounts:
- Profit Account
- Owner’s Pay Account
- Tax Account
- Operating Expenses Account
Step #2 – Set up two more savings accounts with a bank other than the one you are using for daily operations.
- No-temptation Profit Account
- No-temptation Tax Account
Step #3 – You don’t want any deals nor conveniences regarding these accounts.
Just deposit the money, and leave them be – forget about them, completely.
In the entrepreneurial world you’ll often hear this question – How big is it?
Well, if you have a dirty mind, this may seem laughable but people are actually talking about your business.
How many employees, what is the extent of your operations, etc.
Profits? Nah, I would rather talk about something else.
Mike talks about a guy he met at a global entrepreneurial summit – Phil Tirone (the founder of 720CreditScore.com).
Phil told him that over the years, he witnessed the misconceptions most people had about wealth.
They are all hiding their financial predicament, and want to give the impression of being rich and successful, but that’s rarely the case.
Nowadays, the America business culture happily embraces the thesis – Bigger is better.
Even investors have given up on finding stable businesses that have become such a rarity today, that is almost unbelievable. Accumulating debt and living in a crappy apartment is regarded as the way to go.
If we keep putting profits at the bottom of our to-do list, we’ll never be able to enjoy the fruits of our labor.
How healthy is your business, to begin with? Most of the times, pretty detrimental, but where there’s a will there’s a way, and Mike has the answer.
This is a Profit Assessment Form, and it will help you understand what it takes to make your business profitable.
No more day-to-day panic attacks, because profitability is not an event, but a habit and way of life.
If by any chance you feel overwhelmed by this book, Mike advises you to take a breather and come back when you feel ready to face the music.
Meanwhile, you are required to put at least 1% to a separate account and keep it low for a while.
Entrepreneurs, in general, encounter two problems when they embark on the Profit First system.
- Getting trapped in the details (Analysis Paralysis) and fail to understand that perfectionism doesn’t exist
- Taking action too big and too fast
When you decide not to take caution like Mike did; out of habit, you’ll probably put the blame on the system.
On the other hand, if you rack up the profits like really quick, try to remain with both feet on the ground. It’s not over yet!
The path leading to the impeccable implementation of the Profit First system is composed of a series of small steps, that give the impression of trivial tasks.
And remember, long gone are the days when everyone would get their fair share of the monthly work, except you (the owner).
Why would you even bother building something that condemns you to a lifetime of servitude? You would say, that’s the best way to achieve growth but is it? When you were first starting out, the business had very few employees (if any), and in fact, you were 10% entrepreneur and system-builder and 90% employee.
As the company grows (in terms of profit, not revenue), you’ll be able to transition from working for the business to working on the business.
So you might be wondering, what actions are required to make this happen:
Step #1: Determine your custom Profit, Owner’s Pay, Tax Percentage based on your industry
Step #2: Adjust the numbers in your Instant Assessment Form
One story that Mike lays out for us shows exactly how powerful your mindset can be when opting for the Profit First system.
A promising and gifted motivational speaker started off on the right foot by disclosing a step-by-step system that will help anyone to convert 80% of the audience when holding a speaking event.
One of the attendees accepted the challenge and went on to test it.
She managed to reach 25% in a short amount of time.
With time, she broke the 50% barrier and eventually landed the 75% mark.
At one occasion, she laid eyes on the instructor who advised her to use the system in order to increase sales.
She was curious to find out what is needed to reach the 80% milestone, and he replied: 80% I said 18%.
The reasonable goals others have set shouldn’t be construed as your limit, but as an opportunity, for you to exploit.
Before you opt for a full-scale transition make sure to notify your accountant; a word of warning – you might not hear words of encouragement.
If that’s the case, find a new accountant.
Another thing that Mike believes to be noteworthy – this is not “Next Monday” kind of thing. It’s more like “get your ass up, and take action right now” kind of thing.
So, the first quarter is drawing to a close, and it’s time to see whether the strategy has panned out!
Sometimes, your fiscal year, will not match the calendar year, but let’s assume that it does.
- Quarter 1 – Jan 1 to March 31
- Quarter 2 – April 1 to June 30
- Quarter 3 – July 1 to September 31
- Quarter 4 – Oct 1 to December 31
On the first day of each new quadrant, you need to distribute the profit on your Profit Account.
Take 50% of what’s in there, and leave the rest as a reserve.
Try not to make any excuses as to why you shouldn’t do that. And if the company has multiple owners, distribute the profit based on the percentage of equity owners.
It’s celebration time.
Use your Tax Account to cover the finalization of taxes.
If you come short, use the money left in the Profit Account to reimburse the loss.
Make sure to give this book a nice read, because it covers way more things than what we could have listed here.
It’s worth it!
Key Lessons from “Profit First”
1. Get your hands dirty
2. Take action or collapse
3. Fill in the shoes of great leaders
Get your hands dirty
Generating revenues can be both a blessing and a curse, depending on the structure of the business. Owners who go about hiring extra people in order to get as far away as possible from the operational responsibilities are the ones with the least healthy business.
Not that there’s anything wrong with that, but you should bear in mind that this will reflect badly on your income and profits.
It takes time before you can actually hand over the hard work to others, and focus on growth.
Take action or collapse
The business reality is anything but pretty.
Sometimes, you need to take drastic steps such as firing your accountant or doing some things that you’ve never done before.
It’s your job to embrace profitability as the only way to run a business, and not be merely a revenue-driven organization.
Fill in the shoes of great leaders
Great leaders know how to get things done, and there’s no “Can’t” in their vocabulary.
Gird your loins, and go out there!
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“Profit First Quotes”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. Click To Tweet Putting your nose to the grindstone is a really easy way to cover up an unhealthy business. We think that if we can just work harder, longer, better—if we can just hold out—something good will happen one day. Click To Tweet Sustained profitability depends on efficiency. You can’t become efficient in crisis. In crisis, we justify making money at any cost, right now, even if it means skipping taxes or selling our souls. Click To Tweet Focusing solely on increasing sales is like setting up a bunch of rain barrels next to your house and doing some frantic rain dance in a loincloth while ignoring a massive water source right beneath your feet. Click To Tweet You may not have a million dollars in debt, but I’ll bet that whatever debt you’re carrying feels like it might as well be a million dollars, at times. Click To Tweet
Our Critical Review
It comes as no surprise to anyone that Mike’s books receive a boatload of praise and prestigious accolades.
Their widespread momentum is fueled by actionable rhetoric and guide, that penetrate deep into the business environment and questions its methods.
Keep learning; keep reading.