Adviser & Lead Profit First Strategist
Mike Michalowicz is the entrepreneur behind three multimillion dollar companies and is the author of Profit First, The Pumpkin Plan and what BusinessWeek deemed the entrepreneurs cult classic, The Toilet Paper Entrepreneur. He is a former small business columnist for The Wall Street Journal, speaks internationally on entrepreneurial topics, and is the creator of the Profit First method. Mike is an active adviser on Profit First to our firm.
The Profit First Formula
The GAAP (Generally Accepted Accounting Principles) formula for determining a business’s profit
is Sales – Expenses = Profit. It is simple, logical and clear. Unfortunately, it’s a lie. The formula, while logically accurate, does not account for human behavior. In the GAAP formula profit is a left over, a final consideration, something that is hopefully a nice surprise at the end of the year. Alas, the profit is rarely there and the business continues on its check to check survival.
Sales – Expenses = Profit
Sales – Profit = Expenses
With Profit First you to flip the formula to Sales – Profit = Expenses. Logically the math is the same, but from the stand point of the entrepreneur’s behavior it is radically different. With Profit First, you take a predetermined percentage of profit from every sale first, and only the remainder is available for expenses.
Author and historian C. Northcote Parkinson theorized that our demand for a resource increases to meet the supply of it. That is why when we are given two weeks to do a project it takes two weeks, and when we are given eight weeks to do the same project it takes eight weeks. That is why when given $1,000 to complete our work we get it done with $1,000 and when given $10,000 to complete the same work, it takes $10,000. Profit First makes Parkinson’s Law an asset. By taking profit first the money available for expenses lessens, and we are forced to find ways to get the same things done for less money.
Bank Balance Accounting
Most entrepreneurs don’t have the time or gumption to read the different accounting statements necessary to manage the financial aspect of their business. Theoretically you should review and correlate your Income Statement, Balance Sheet and Cash Flow Statement monthly (or more frequently), but few entrepreneurs do. Most resort to “bank balance accounting,” where we check our bank balance every day and make financial decisions based upon what we see. Per Parkinson’s Law, we consume what we see in our bank account. Profit First encourages the entrepreneur to continue “bank balance accounting” by first allocating money to profit (and other accounts) so that the entrepreneur sees the actual portion of deposits that are available for expenses and they automatically adjust their spending accordingly.
Don’t change Habits, Leverage Them
Many entrepreneurs try to force themselves to become better at accounting and to become more disciplined in their fiscal management by pure willpower. But just like a muscle, willpower can be drained. And in a moment of financial stress or bigger than expected expenses the entrepreneur will break their own fiscal rules and spend the money they have. The Profit First principle does not try to change your habits (that is nearly impossible to do), Profit First works with your existing habits. By first allocating money to different accounts, and then removing the temptation to “borrow” from yourself, your business will become fiscally strong and you will benefit from regular profit distributions.
Most profitable small businesses understand their cash flow.
“I’m making money… but where the heck did it go?”
Believe me I get it. Regardless of how much money you are making, at the end of the day if there isn’t much money left in your business bank accounts… it can make you feel frustrated.
Implementing the Profit First Method in your business will allow you to:
Keep more of the money you are making
Not have to worry about where you will find the money to make the next tax payment or payroll run
Let you know what you should and should-not be spending money on
Build a habit around the flow of money and so much more!
It helps you to create the HABIT of putting profit first (literally) and feeling empowered by my money instead of owned by it.
If you are in business you NEED to implement Profit First!
This investment will MORE than pay for itself.
I have yet to see where this type of financial awareness, strategy and automation hasn’t produced significant financial results for the business owner. It’s generally a pretty dramatic difference. And that doesn’t even begin to describe the intangible results, of feeling so much more empowered, confident, hopeful and a zillion pounds lighter.
Our process of maximizing your profits takes effect literally by your next deposit. There is no stretched, long consultative process or recommendations report that will sit on your shelf. We simply implement a few changes in your cash management and you are increasing your profitability from day one.
Make your business a profitable business.