Profit First: Transform Your Business from a Cash-Eating Monster to a Money-Making Machine

by Mike Michalowicz

Putting your nose to the grindstone is a really easy way to cover up an unhealthy business.

eight out of ten businesses fail, and the number one reason they fail is lack of profitability.

The solution is profoundly simple: Take your profit first.

No matter how many years you’ve been at the grind, you are probably well aware of the statistic that roughly 50 percent of businesses fail within the first five years.

If you think operating your business is closer to a horror story than to a fairy tale, you’re not alone.

I discovered that day that when you hit rock bottom, sometimes you get dragged along the bottom, scraping your face on every one of those rocks until you’re battered, bruised, and bloodied.

But colossal growth without financial health will still kill your company.

Money problems occur when one of two things happen:

Sales slow down.

Sales speed up.

Without an understanding of profitability, every business, no matter how big, no matter how “successful,” is a house of cards.

Most business owners try to grow their way out of their problems, hinging salvation on the next big sale or customer or investor, but the result is simply a bigger monster.

Here’s the deal, my friend: 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.

you need to reverse engineer the profit.

When you focus on profit first, you inevitably figure out how to make a profit consistently. Profitability. Stability. Sanity. Forevermore.

This is why, if we are to free ourselves from living check to check and panic to panic, we must find a method that works with our nature, not against it.

The Survival Trap promises fast money, but when we’re caught in it, we, like Ernie, rarely think about the massive cost of opportunity; and most of the time, we can’t discern profitable income from debt-generating income.

The Survival Trap is not about driving toward our vision. It is all about taking action, any action, to get out of crisis.

You can’t become efficient in crisis.

GAAP’s fundamental flaw is that it goes against human nature. No matter how much income we generate, we will always find a way to spend it—all of it.

A secondary flaw is this: GAAP teaches us to focus on sales and expenses first.

As Charles Duhigg explains in The Power of Habit, it is human nature to revert to established habits in times of stress.

Here’s the deal. There is only one way to fix your financials: by facing your financials.

When less money is available to run your business, you will find ways to get the same or better results with less. By taking your profit first, you will be forced to think smarter and innovate more.

Primacy Effect. The principle is this: We place additional significance on whatever we encounter first.

What I’ve found is that the fastest, healthiest growth comes from businesses that prioritize profit.

To grow the biggest and the fastest, you need to be the best at one thing you do. And to become the best at something, you need to first determine what you are best at and do it a whole lot better. To get there, you take your profit first and the answers to being the best at something will reveal themselves.

Collectively, these are the five foundational accounts (Income, Profit, Owner’s Comp, Tax, and Operating Expenses),

Eliminating unnecessary expenses will bring more health to your business than you can ever imagine.

After setting up this new checking account at your bank, nickname the account PROFIT, and from this moment forward from any deposit you put into your normal checking account, transfer 1 percent of that deposit into your PROFIT account.

Open just one new account: PROFIT.

Here are the five checking accounts you need to set up: INCOME PROFIT OWNER’S COMP TAX OPEX

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.

Chief among these principles was frugality—I wholeheartedly believed that any entrepreneur could start a business with little or no seed money and grow that business no matter what they had in the bank.

no matter what the number is, if you work toward it and believe it’s a possibility, you will not only achieve it, you will blow past the “reasonable” numbers others have set.

I also want you to know that no matter how devastating this is, laying off people is necessary.

If you want to increase profitability (and you’d better friggin’ want to do that), you must first build efficiencies.

Because 95 percent of your company’s profitability is contingent on what goes on beneath the surface (after the sales), not what happens in the sky (the sales themselves).

“When you figure out a big leap in profitability, the competition will sniff it out, and it is just a matter of time before they do the same thing. Then someone drops prices to get more clients, and everyone else, including you, has to do the same to stay in business. This is how profits get squeezed.”

So the method is simple: achieve greater efficiency first, then sell more, then improve efficiencies even more and then sell even more. Over time, speed up the back and forth between efficiency and selling until the two happen simultaneously.

I want you to set a massive goal for yourself. Look at every aspect of your business and determine how to get two times the results with half the effort. That’s a biggie, so I will say it again: How do you get two times the results with half the effort?

The idea behind the Vault and the entire Profit First system is that it puts your decisions well out in front of any money crisis. Your business dynamics may not, in fact, improve; but your decision making will be much further out in front of the actual financial impact.

The ultimate goal of the Profit First lifestyle is financial freedom, which I define as doing what you choose to do whenever you choose to do it.

Now, I did not write this book to teach you about your family budget or your 401(k), but I do know this: If you own a business, your personal financial health is in lockstep with the financial health of your business.

The goal here is to remove financial stress from your life by eradicating debt, not to get better rates on more debt.

It’s common for us emotional humans to give up the stuff we can no longer afford (or couldn’t afford in the first place) by small degrees. We cling. We keep hoping that something will “turn up” and “save the day,” and so we dole out the pain in small increments, biding our time. We do this because we hate loss. More specifically, we have a far greater desire to avoid losing something than we have to acquire something. This behavioral response is called loss aversion.

What I am telling you is, in order for Profit First to have a permanent impact on your life, you need to build as big a gap as possible between what you earn and what you spend.

The worst enemy of Profit First is not the economy, your staff, your customers, or your mother-in-law. (Well, it could be your mother-in-law.) The worst enemy of Profit First is you.

To increase your profit, you need to become more efficient, to deliver the same or better results at a lower cost. Profit First works from the end goal backward. Once upon a time, you used to try to get more efficient in order to turn a profit. Now, by taking profit first, you must become efficient to support it. Same result, reverse engineered.

This is probably the most common objection I get when I share Profit First with others. Too many entrepreneurs believe that you can have only one or the other: profit or growth. It sickens me that so many entrepreneurs think it is a trade-off. Pick growth or pick profit, but you can’t have both. Bullshit! Profit and growth go hand in hand. The healthiest companies figure out how to consistently be profitable first and then do everything to grow that.