- October 14, 2017
- Posted by: Topher Morrison
- Category: Book Reviews
Author: Mike Michaelwiczs
Rating: 5 out of 5 Head Tilts
This is the 40th book I’ve read this year, and frankly, it will be hard for me to find a book I’ve enjoyed more than this one in 2017. This book has fundamentally changed the way I run my business, and I’ve already had about 20 of my clients pick up the book, and the sentiment is always the same; “This is a great book!”
For anyone who owns a business and says things like, “I’m not really a numbers guy, that’s why I hire accountants.” Profit First is a must read for you.
It operates off of an incredibly simple, yet powerful concept that I think far too many business owners have turned a blind eye to:
The traditional model of determining profit in a business is fundamentally flawed:
Sales – Expenses = Profit
Instead, Mike’s theory is astonishingly simple. Make a sale, take the profit, pay the bills with the remainder.
Almost immediately I thought to myself, “If I could afford to do that I would, but I’ve got bills to pay that exceed the revenue so I first need to sell more in order for me to be able to do that.”
Here’s where it gets interesting, and frankly, undeniable.
You will find a way to spend in your expenses any amount of money you make each month. Also known as Parkinson’s Law: The demand for something expands to match its supply. If you make $50,000 in sales one month, you’ll have $50,000 in expenses. If you make $250,000 in one month, you’ll find $250,000 in expenses. In never matters how much money you make in sales, you can always find a way to utilize it when you put profit last.
Think about it. You’ve proven this to be true if you’ve ever worked on your business with the intention of selling your way into profit. “If I can just increase my sales by 20% I’ll be profitable.” And then a year later, your sales are up 20% and you say, “If I can just increase my sales by another 15% I’ll be profitable.” The can just keeps getting kicked further down the road.
The book is similar to the personal debt elimination techniques made famous by the Dave Ramsey envelopes, but in business his system has you set up, initially, 5 separate bank accounts.
A Revenue Account
A Profit Account
A Tax Account
An Owners Compensation Account
An Operating Expense Account
All the revenue is deposited into the revenue account. On the 10th and 25th of each month, you first transfer a percentage to the Profit Account (He recommends starting with 1%). Then 15% immediately goes into the Tax Account, another percentage into the Owners Compensation Account, and then the remainder of the money goes into the OPEX Account. You pay all the bills with the OPEX, and if there isn’t enough money to do so, you better call your payables and negotiate better terms.
Something magical happens when you do this. Immediately after setting up the accounts, and making the transfers, you are profitable, and it feels good. Like really good. The amount of peace and certainty I’ve felt just this past month about my business is unlike anything I’ve felt before. I sleep better. I handle fires at work better. And I like to think I’m easier to work with (you’ll have to verify that with my team).
Some of the gems in the book I highlighted were the following:
Putting your nose to the grindstone is a really easy way to cover up an unhealthy business.
Profit is not an event. Profit is not something that happens at year-end or at 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.
If you don’t change the way you take your profit, you’ll never take a profit.
Working on your business is about building systems. Period.
If your business can’t afford to set aside two percent of your revenue, it’s probably not a business worth pursuing.
One of the unexplainably magical affects from doing this process is this: Your profit increases consistently. He accredits a principle called “The Primacy Effect.” We place additional significance on whatever we encounter first. So when we make profit the first line in our business, it begins to grown by the very nature of how we focus more energy on it.
Similar to working out. If someone says, “I’ll work out when I can fit it into my schedule” that is the strategy of an unhealthy person. Healthy people say, “I’ll schedule my day around my workout.” Well in business, if you take your profit after your expenses you’ll find it occurring about the same level of frequency as someone who works out when they “find the time.” But if you work your business around your profit, you’ve got a healthy company.
Okay, if you’ve read this far, there is only one thing to do. Get the damn book. This one piece of advice I can guarantee you’ll be grateful for. Get it. Now.