Profit First by Mike Michalowicz is a small business classic. Mike preaches that you should take profit first – that you as a business owner, and IF you ever had shareholders, should expect profit – and the business will run better because of this process. It will be healthier because it will be formed on the premise that profit is important.
Basically “Profit First” is the ‘grandma envelope system’ but instead of for your personal finances, it’s for your business. Put aside your profit first, in a separate account, and prioritize its creation… increase the profit, and decrease the operating expenses by a couple of percents every quarter.
Here’s a Profit First Overview in 3-minute cartoon form:
Profit First Summary:
- You should identify where you’re at with your profit, owner’s draw, operating expenses, and taxes.
- Create separate accounts with clear names like OP EX 65% (TAP 51%) – the first percentage being where you’re currently allocating money, and the TAP being the ‘Target Allocated Percentage’
- Each quarter – move 4% out of Op Ex and add 1% to each of the other accounts.
- This will create a squeeze – since you’re used to operating at 65% and operating on 61% of revenue will feel tight. This is a good squeeze according to Mike – it’s like when you can make a tiny travel sized version of toothpaste last for a month if you have to, and you become less wasteful and conserve more as appropriate.
Profit First Review:
This is one of those books that I wanted to get out and try right away – even though I generally pride myself on taking things with a grain of salt and moving slowly. The reason it’s so tempting to just go for it now is that he leaves these ‘call-to-action’s’ throughout the book that push you to want to go for it now.
So my review is partly this way because I took action on the Profit First system, and am now implementing it in my small business:
- The system is difficult. It’s easier sometimes to just spend as much as you want on your business while your building it. The problem is that I was likely building out areas of the business that wouldn’t serve me long-term because they were low-profit, or no-profit – so they need to be trimmed or cut for the long-term health of the business.
- The book has a lot of urgency in it, and I really appreciate the little call to actions and emphasis placed on action.
- The book is well-written and Mike does a really good job of entertaining along the way.
*The Audible version is awesome – as Mike reads it and I really appreciate his playful and interesting approach in the reading:
- I might suggest re-reading this a couple of times, and I have started my second reading.
- Spend some time with this one, and get ready to write along the way.
If you’re also interested in cranking your Small Business marketing up to 11 – Check out my audio-book for a clear-cut, no-nonsense way to get more leads, and become famous in your niche.
Why Prioritizing Profit is Important for Your Businesses Health
The alternative to a profitable business? Your best people can easily get wooed away by competitors because it’s hard to raise compensation, the company can’t front the money for larger projects, and working capital or investments are harder because the businesses prospects are not so great.
The company needs to have profit to keep the owner’s confidence, be something they can sell later, and to carry them through the inevitable up’s and downs of business.
In short – being profitable is healthy for a business.
Come up with what you’re doing currently
The biggest first step to implementing a profitable system is that you need to get your current numbers.
Look at the last 3-6 months – what have you set aside as profit?
What are you using as operating expenses?
What are you paying in taxes?
If you can’t get those numbers as clean, and clear as daylight on a sunny river than you have to do whatever you need to do to make that possible. Personally, I use Bench.co (not an ad) to make sure my books are clear, Gusto.com for payroll, and Quickbooks for invoicing.
Bench.co is like a SAAS, but you have your own little team of bookkeepers, and you don’t need to hire for the role. Alternatively, you can hire a bookkeeper that specializes in your industry, like our client 24Hr Bookkeeper who is a construction bookkeeper.
Get your profit, owners draw, operating expenses and taxes clear – before moving onto the next step.
Make separate accounts in your bank
After you figure out your baselines – this whole thing is going to get a lot easier.
You can literally do this right now – or while you’re reading Profit First, and that’s ultimately a sign of a really great book – can you workshop elements of the book while you’re reading it?
In Wells Fargo, I just started creating the different accounts and giving the nicknames that he suggests in the book:
- Income Account – this one was previously my main account so it was both my income, and my operating expense account.
- Draw 10% (TAP 20%)
- Profit 10% (TAP 15%)
- OpXTax 80% (TAP 65%)
- Tax 0% (TAP: 0%) – I pay taxes through my payroll according to our bookkeeper’s suggestion so I’ve brought this one down to 0.
The best part of all of this is to make it super easy to allocate your funds around twice a month.
The first percentage is the current allocation, while the TAP is the percentage we want to slowly move it to.
I’ve only shifted the lines once towards the target in 9 months, even though he suggests doing it every quarter – my experience is that this is SUPER HARD to do.
Pay yourself what you’d have to pay someone else to do all that you do.
But what I understand, is that ultimately it’s important for small business owners to pay themselves at least close to what another person would need to do their job. Now I don’t expect most of our employees to be blogging at 10:13 on a Sunday night like I am currently, so I should be paid pretty well to do so:
- It’s not shameful to pay yourself well – in fact, it’s very healthy for your business to do so.
- You need to be realistic about what it would take to replace you.
- Owning a business is super hard, emotionally draining, and getting healthy amounts of pay is part of what is needed to sustain long-term energy in that direction.
- The business is not getting healthier because it’s Operating Expenses are swollen beyond what they should be, that extra money is actually negatively affecting your companies health. Be responsible, and get it fixed.
Move it closer to healthy percentages each quarter
Yes – this is what Mike Michalowicz suggests, but as I’ve mentioned earlier – this is super hard.
Overall, we know we need to slowly move the needle in the right direction.
Make it easy by naming your accounts correctly.
The naming conventions on the accounts is actually one of the most nitty-gritty elements of profit first, and one of the most helpful.
The point is – we each have a ‘smart self’ and a ‘dumb self’, and catering to your dumb self while your smart self is setting up the accounts has helped me consistently keep some key numbers and percentages in my eyeline related to my business.
Ultimately, Mike Michalowicz seems like a business genius, and his other book ‘Clockwork’ for small businesses is super amazing too, check it out!