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

by Mike Michalowicz

Without enough money, we are slaves to the businesses we launched. I find this hilarious because, in large part, we started our businesses because we wanted to be free.

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.

Sustained profitability depends on efficiency. You can’t become efficient in crisis.

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.

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.

When profit comes first, it is the focus, and it is never forgotten.

Money works the same way. As you implement Profit First, you are going to use the powerful force of “out of sight, out of mind.” As you generate a profit (which, remember, starts today), you are going to remove the money from your immediate access. You won’t see it, so you won’t access it. And just like anything that you don’t have a reasonable degree of access to, you will find a way to work with what you do have and not worry about what you don’t.

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. Collectively, these are the five foundational accounts (Income, Profit, Owner’s Comp, Tax, and Operating Expenses), and where you should get started,

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. And if there isn’t enough money left for expenses? This does not mean you need to pull from the other accounts. What it does mean is that your business is telling you that you can’t afford those expenses and need to get rid of them. Eliminating unnecessary expenses will bring more health to your business than you can ever imagine.

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Denial is a wonderful thing; it lets you ignore reality until reality punches you in the face.

you can download a printable copy from the Resources section at Mike Michalowicz.com.). Go to the back of the book (Appendix 2) for a full-page version of the Instant Assessment form.

Fig. 4. Target Allocation Percentages (TAPs).

Profitability isn’t an event; it’s a habit.

Henry Ford, who said, “If you think you can or think you can’t, you’re right.”

we should work on our business, not in it. This “on versus in” philosophy is spot-on, and yet most entrepreneurs have trouble executing it. Working on the business does not mean hiring a bunch of people to do the work and then spending all the livelong day answering their never-ending questions about how to do the job (the job you used to do). Working on your business is about building systems.

Because if your business can’t afford to set aside two percent of your revenue, it’s probably not a business worth pursuing.” Start slow. Real slow. Put the percentages at a level where there is no excuse not to try.

Profit is a reward for equity owners, and Owner’s Comp is the pay for people who are owner operators in the business.

“The solution to debt is this simple: If you want to get out of debt, you must get more enjoyment out of saving your money than you do spending your money.”

The premise is simple—we avoid pain and move toward pleasure, putting a significant emphasis on the moment and very little emphasis on the long term. Immediate pain gets the ball rolling, but pleasure keeps it moving.

Projections are an opinion. Cash is a fact.

I had earned (but not “learned”),

According to Parkinson’s Law, if you have ten dollars in your pocket, you will spend ten dollars.

PROFIT FIRST KIDS Regardless of how you get your money, the universe seems to find a way to make us earn it. This is why I don’t gift my kids an allowance. Instead, I set up a job list (a variant on chores) with corresponding pay rates and post it on the refrigerator. (You can download one from the Resources section at MikeMichalowicz.com.) The kids decide how much they earn by how much they work for it. As I write this, my daughter is on a six-week vacation in Hawaii that she paid for herself. Three years back she went to Spain on her own dime. This is surely a little bit of Daddy’s bragging, but also I want to drive home the point that the goal of Profit First for kids is to make them appreciate the value of money, learn to manage it, and strip away any sense of entitlement. Here’s the basics of how to do it: Give your kids some mailing envelopes (you know, the snail-mail type) and have them label each one: One for the big dream, like my daughter’s horse. Have them stash up to 25 percent of their chore money in this envelope. One to help support the family. This number should be a recurring number, such as five dollars a week to contribute to groceries or entertainment. The key is to have a recurring fee so they get used to having to pay out something on a regular basis. Make sure the number is age appropriate. One for impact. Have them put 5 to 10 percent into this envelope to give to a charity of their choice, or to use in a meaningful way . . . like starting their own...

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.

Money is made by efficiency—invest in it.

You need to invest thought, not reinvest money.

Profit is a reward (in the form of a cash distribution) for the equity owners of the business, and is above and beyond their pay from working in the business (Owner’s Comp).