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

by Mike Michalowicz

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.

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

Accountants define profit differently than entrepreneurs. They point to a fictitious number at the bottom of an accounting report. Our definition of profit is simple: cash in the bank. Cold. Hard. Cash. For us.

The solution is not to try to change our ingrained habits, which is really hard to pull off and nearly impossible to sustain, but instead to change the structure around us and leverage those habits.

In 1955, a modern philosopher named C. Northcote Parkinson came up with the counterintuitive Parkinson’s Law: that the demand for something expands to match its supply.

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.

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

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.

a simple new Profit First formula: Sales − Profit = Expenses

Here’s how you apply the four principles:

Use Small Plates—When money comes into your main INCOME account, it simply acts as a serving tray for the other accounts. You then periodically disperse all the money from the INCOME account into different accounts in predetermined percentages. Each of these accounts has a different objective: one is for profit, one for owner compensation, another for taxes, and another for operating expenses.

Serve Sequentially—Always, always allocate money based upon the percentages to the accounts first. Never, ever, ever pay bills first. The money moves from the INCOME account to your PROFIT account, OWNER’S COMP, TAX, and OPEX (OPERATING EXPENSES). Then you pay bills only with what is available in the OPEX account. No exceptions.

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

Remove Temptation—Move your PROFIT account and other “tempting” accounts out of arm’s reach.

Enforce a Rhythm—Do your allocations and payables twice a month (specifically, on the tenth and twenty-fifth). Don’t pay only when there is money piled up in the account. Get into a rhythm of allocating your income, and paying bills twice a month so that you can see how cash accumulates and where the money really goes.

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.

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

We can trace almost every major change to a pivotal moment when the pain of staying a certain way is greater than the effort to make awareness of it go away.

In short, if you wait to implement Profit First until after you pay down your debt, you are less likely to ever build the business efficiencies that will permanently eradicate your debt and create a perpetual profit stream. Start the habit now, and eventually that 99 percent will go toward building up your cash reserves and your own owner distribution.

Give yourself more joy when you choose not to spend money than you do when you choose to spend it. Give yourself more joy when your bottom line grows (not just the top line). Give yourself tons of joy when your profit percentage grows.

Acting as if your best month is the norm is one surefire way to keep yourself locked in the Survival Trap.

The only way to get out of debt is by being profitable.

Money is everywhere.* Money can always be found through streamlining and innovation, and that begins with asking the big questions. The impossible questions. The questions no one else would ever dare to ask. No one else but you.

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

By now you’ve figured out that focusing solely on top line thinking (sales, sales, sales!) does not lead to profitability. In fact, more sales, without efficiency, lead to further inefficiency.

So the method is simple: achieve greater efficiency first, then sell more, then improve efficiencies even more and then sell even more.

You want to duplicate your best clients, those who have a consistent need; and in turn, you want to reduce the variety of things you do to the fewest that will best serve your best clients’ needs.

The fewest things you can do repetitively to serve a consistent core customer need—this spells efficiency.

Most entrepreneurs focus only on tiny improvements—“How do I do this a couple of minutes faster?” Small questions yield only small answers. You want both the incremental improvements and the landslide discoveries, and you’ll find both of those with big questions.

Having clients with similar needs and very similar behaviors offers a few magical profit-making benefits: You will become superefficient, because you now serve very few but consistent needs, rather than an excessive array of varying needs. You will love working with your clones, which means you will naturally and automatically provide better service. We cater to the people we care about. Marketing will become automatic.

As the variety of things you do increases, you need to buy more tools and equipment and hire more specialized labor. And none of this gets used to its maximum potential because you do many different things, not one thing.

Sales without first putting efficiency measures and systems in place is a dangerous game that only leads to bigger expenses and fewer ideal clients.

You get what you focus on, so stop focusing on expenses. Focus on profit, and the expenses will be taken care of by default.

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.

Financial freedom means that you have reached a point where the money you’ve saved yields enough interest to support your lifestyle and continues to grow.

Here are five rules to help you stay locked in to your lifestyle for the next five years: Always start by looking for a free option. Never buy new when you can get the same benefit you would if you bought used. (It’s used as soon as you buy it anyway.) Never pay full price if you can avoid it. Negotiate and seek alternatives first. Delay major purchases until you have written down ten alternatives to making the purchase and have thought through each one. Save your splurging for Profit First quarterly disbursements! Yay!

The benefits of using an accountability buddy or group are numerous. Chief among them:

Your sticktoitiveness skyrockets because someone else depends on you, and good old friendly competition doesn’t hurt either. When you go through a painful process with others, the pain is diminished. The action of enforcing a plan or system with someone else ensures that you are more likely to do your part. When you meet regularly with your buddy and/or group, you get into a rhythm that makes it easier to stay the course and achieve your goal. Big aspirational goals get broken down into smaller achievable milestones.

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.

We need to invest in assets, and I define assets as things that bring more efficiency to your business by allowing you to get more results at a lower cost per result.

Money is made by efficiency—invest in it. If a purchase will bring up your bottom line and create significant efficiency, find ways to cut costs elsewhere, and consider different or discounted equipment (or resources, or services) rather than sacrifice efficiency for what you think are savings.

You need to invest thought, not reinvest money.