Profit First cover

Profit First - Book Summary

Transform Your Business From a Cash-Eating Monster to a Money-Making Machine

Duration: 23:05
Release Date: November 10, 2023
Book Author: Mike Michalowicz
Category: Entrepreneurship
Duration: 23:05
Release Date: November 10, 2023
Book Author: Mike Michalowicz
Category: Entrepreneurship

In this episode of 20 Minute Books, we will be delving into "Profit First" by Mike Michalowicz. Published in 2014, this game-changing book offers an invaluable guide for entrepreneurs, providing concrete steps that will make an immediate, positive impact on your bank account. Michalowicz highlights how traditional accounting methods can act as a roadblock between businesses and the profits they aspire to achieve, introducing a unique approach that guarantees consistent profitability.

The author, Mike Michalowicz, is an experienced entrepreneur with over two decades in the field and is the founder of four multi-million dollar companies. His valuable insights have been shared through columns in reputable publications such as the Wall Street Journal, Entrepreneur Magazine, and the Harvard Business Review, and he has served as a guest lecturer at esteemed institutions including Columbia University and Princeton University. He is also the acclaimed author of other business strategy books, including "The Toilet Paper Entrepreneur" and "The Pumpkin Plan".

"Profit First" is a must-read for struggling entrepreneurs seeking to turn their fortunes around and successful business owners aiming to take their profits to new heights. Accountants and financial managers interested in discovering innovative methods will also find this book insightful. Tune in as we explore the principles behind Michalowicz's profit-first approach and how it could transform your business strategy.

Discover how to navigate the road to profit-making with your venture

Every seasoned entrepreneur will tell you, kickstarting a fresh business and keeping it afloat is a herculean task. Those who succeed in this endeavour deserve to be hailed as heroes. But the victory doesn’t come easy, nor does it signal the end of difficulties.

From the inaugural day, entrepreneurs set off on a relentless hunt for growth and revenue, with a singular aim - to make their ventures earn more than what they expend. However, this dream eludes a staggering number, with 50 percent of businesses shutting shop within a mere five years. Those that manage to survive, typically do so on a shoestring budget, sinking into debt with each passing day.

Clearly, this isn't the route to building a prosperous venture. There's a far more intuitive methodology for reaping and expanding profits. This synopsis will guide you through this approach, outlining how it functions and how you can effectively implement it, seeing immediate results.

Through this summary, you'll gather:

why everything you've learned about profit is misguided,

why managing five bank accounts is better than one, and

how drivers at UPS hit the jackpot, driving straight into a whopping six million dollars.

Traditional profit strategies often fail because they contradict our natural tendencies

Globally, millions of ventures - from small local shops to massive tech giants - have one thing in common. Their owners all aim to generate a profit. Fortunately, there's a longstanding formula promising just that. Sell as much as possible, deduct your costs, and the remainder is your gain.

Sounds like an easy path to success, doesn't it? Well, it's not.

A survey carried out between 2013 and 2015 by the Global Entrepreneurship Monitor highlighted that eight out of ten businesses collapsed, primarily due to a dearth of profits. What’s perplexing is how such a thing can happen despite the existence of a formula? The problem, it seems, lies with the formula itself.

The principal takeaway here is: Traditional profit strategies often fail because they contradict our natural tendencies.

This formula sets ventures up for failure in several ways. Firstly, it triggers our innate tendency to exhaust whatever resources we have.

This principle was recognized in the 1950s when historian and author Cyril Northcote Parkinson formulated Parkinson's Law, which posits that the work needed for a task expands to fill the time available for its completion. For instance, if someone is given two days to finish a report, they will utilize the entire two days. If allotted a week for the same task, it will invariably take a week.

If you replace 'time' with 'money', the same principle applies to businesses. Entrepreneurs inevitably find ways to spend whatever capital is available, inevitably eating into their profits.

Another way this formula impedes profit generation is via something called the Primacy Effect. This psychological principle refers to our tendency to focus on what we encounter first and disregard the rest. For instance, when presented with a list of words, you're more likely to recall the ones at the top. As the formula starts with sales and concludes with profit, entrepreneurs tend to channel all their efforts and resources into escalating sales, erroneously believing this will invariably result in profits.

Yet, as we've observed, profits remain elusive. This leads to the ultimate question: How can entrepreneurs ensure a profit?

The key is to revamp the formula. Instead of subtracting expenses from sales, decide your desired profit and subtract this from your revenue. So, if you're aiming for a 5 percent profit, deduct this amount before you get a chance to spend it. Regardless of the amount of money left, your natural propensity to work within available resources will spring into action.

While revising the formula is a pivotal step towards making your venture profitable, it's just the beginning. As we proceed, we'll explore the remainder of the strategy.

Handling smaller sums of money simplifies your financial management.

If you've ever embarked on a weight loss journey, you're likely acquainted with the notion of using smaller plates to reduce your calorie intake.

Since we have an inherent urge to fill up our plates, using smaller ones aids us in eating less. When the author first encountered this concept, it sparked a revelation. He realized he had been depositing all his money into one giant account, subsequently spending it all. Thus, to spend less, he needed to handle smaller chunks of money.

The central insight here is: Handling smaller sums of money simplifies your financial management.

So, how do you go about splitting your money into smaller batches? The solution lies in creating separate bank accounts for distinct purposes. The author advises establishing five individual accounts for your business. A primary income account, one for your profits, another for the business owner's salary, one for your tax liabilities, and a final one for operating expenses.

Upon setting up your accounts, here's how you can administer them. Whenever the business earns revenue, it's deposited into the income account. Then, you distribute money to the other accounts, always starting with — you've guessed it — the profit account. After you've allocated your predetermined profit, the remaining funds are utilized to finance the rest of your accounts.

Every account should be used solely for its specified purpose. For example, all company bills should be paid from the operating expenses account, and when tax season rolls around, you work with what's available in the tax account.

However, even the most disciplined among us occasionally face temptation. Just as some individuals strive to avoid snacking on junk food by keeping it out of their homes, you can evade dipping into two crucial accounts by keeping them out of sight.

These accounts are your profit and tax accounts.

Why, you ask? Well, the whole aim is to increase your profits, so depleting that account would be counterproductive. As for taxes? Imagine the predicament you could land in if you fail to pay your taxes.

To safeguard this money, these two accounts should be held with a different bank. This is where your profits and taxes will be stowed away long-term. After you've divided the money between the accounts at your primary bank, transfer the profits and taxes to the corresponding accounts at the new bank. Not having to see this money every time you glance at your bank balances means you're less likely to spend it.

Incremental steps towards a set goal can propel profit growth.

With your diversified accounts set up, including a dedicated profit account, you're prepared to distribute incoming funds. However, should you instantly start allocating as high a profit as you envisage your business should be raking in?

As with many things in life, substantial profits are not an overnight phenomenon. Just as the tortoise triumphs in the race due to its steady pace, you too should adopt this approach for your profits.

The critical insight here is: Incremental steps towards a set goal can propel profit growth.

There indeed exists an ideal percentage that should be directed towards profit, and hitting this golden number should be your ultimate objective. Hence, you first need to establish this target percentage.

One method of identifying this figure is through studying other businesses in your industry. Since public companies are mandated to disclose their financial statements, you can ascertain their profit percentages by comparing their income to their total revenue. This can serve as a benchmark for setting your own target. Include this figure in your profit account name, serving as a constant reminder of what you're striving for.

Now that you're aware of your destination, the question is, how do you get there?

By commencing with a single step, or more accurately, one percent. Begin cultivating your profits by designating just one percent of your company's earnings to the profit account, concurrently cutting down your operating expenses by the same margin.

If this seems insignificant to you, bear in mind that this is a prolonged journey to sustained profitability, not a mad dash. Imagine if you ambitiously allocated twenty percent to profits, only for your business to encounter difficulty and necessitate the use of all those profits for its survival. You would be back to square one, devoid of profits and likely with dampened enthusiasm for the process.

While you may commence with just one percent, you won't stagnate there. At the conclusion of every quarter, increase your profit allocation to inch closer to your target, reducing your operating expenses correspondingly. The author recommends escalating it by at least three percentage points each quarter. So, if you began with one percent for profits, you would elevate it to four percent in the subsequent quarter. Gradually, these modest tweaks will yield substantial returns.

Your profits are a reward for your efforts and a financial safeguard for your business.

Picture this: You're baking a delectable cake for your enjoyment. After finding the ideal recipe, collecting all the ingredients, and garnishing it with icing, you're left admiring your masterpiece.

But that's all you do – admire. You don't taste a single piece or even lick the icing.

Now, envision the same with your business. You're tirelessly working on it, watching your profits multiply, but not reaping any of the monetary benefits. This is definitely not how you should approach profits.

The main insight here is: Your profits are a reward for your efforts and a financial safeguard for your business.

However, this doesn't imply you can dip into your profit account any time you feel like indulging. Rather, siphon off your profits at the end of every quarter, much like shareholders of vast public companies. This way, you'll anticipate your profits and avoid misusing them or depending on them for sustenance.

Just as you wouldn't — or shouldn't — devour your entire cake in one sitting, don't drain all the funds from the profit account at the end of each quarter and reinvest it into the company. Use 50 percent of your profits for personal enjoyment or sharing with your family – not for business expenses. Never forget, this is your well-earned reward! The remaining 50 percent should serve as a financial buffer for the business, and this is where your future profits will be deposited.

After consistently contributing to your profit account and enhancing your profit percentage over time, you'll witness a gratifying occurrence. When you withdraw your 50 percent at the end of the quarter, you'll realize that the residual amount can cover your business expenses for more than three months!

This is the only circumstance under which you're permitted to utilize funds from the profit account for reinvestment in the business. Extract the surplus money, ensuring that a three-month buffer remains, and decide how you can best employ it to augment your business.

At this juncture, celebrate your success! Your business is consistently generating profit, and you have the tangible rewards to show for it. But remember, your journey doesn't end here. You can release additional funds from your business and further boost your profits. Stay tuned for more insights in the upcoming section.

Mastering the art of doing more with less supercharges your profits.

Isn't it wonderful when you unexpectedly stumble upon money in an old jacket pocket or beneath your sofa cushions?

Well, guess what? You can experience the same thrill with your business, if you know exactly where to look and what actions to take.

The vital lesson here is: Mastering the art of doing more with less supercharges your profits.

The first place to scrutinize is your business efficiency. Are there areas where you're unnecessarily overspending? Can any tasks be accomplished more quickly? Even minute changes can trigger a substantial surge in your profits.

A case in point is the United Parcel Service or UPS. In 2006, they resolved to enhance their efficiency and implemented several unconventional, but highly effective measures. One such tactic was to avoid left turns during their delivery routes, as these resulted in longer wait times at traffic signals and increased fuel consumption. This simple maneuver saved UPS an astonishing six million dollars per year.

Once you've thoroughly examined your business for potential reductions in time wastage and cost savings, turn your attention towards your customers and streamline your services.

When your customer base has diverse needs, it inevitably leads to the dissipation of time and money in catering to each individual requirement. Conversely, if all your customers seek the same product or service, it empowers you to perfect the delivery of that one offering promptly, flawlessly, and at a reduced cost, serving a larger clientele with fewer resources. That's the epitome of efficiency!

So, identify your company's forte, and strive to excel in it even further. Then, attract the clients that require these specific services. The resultant savings will propel you towards your profit goal with accelerated speed.

Clearing your debt shouldn't come at the cost of your business's profitability.

You're likely familiar with the axiom, "you need to spend money to earn money." As a business proprietor, the profound truth in this statement is perhaps part of your daily reality. Establishing a thriving enterprise demands substantial funds, and there are times when your purse strings may fall short.

Many entrepreneurs find themselves in a financial quandary, resorting to borrowing money from acquaintances, procuring loans, or even pushing their credit cards to the limit. When embroiled in such circumstances, the urge to become debt-free can overshadow all else, including generating a profit.

However, it doesn't have to be this way.

The core insight to grasp here is: Clearing your debt shouldn't come at the cost of your business's profitability.

Regardless of the enormity of your debt, persist in allocating a percentage of your company's revenue to your profit account. Concurrently tackling debt repayment and building your profit reserves ensures a robust financial buffer to cover any potential expenses down the line.

Wondering where the funds to square away your debt will come from? The answer is right in your bank account.

Recall the profits you've been accumulating every quarter? You'll need to forego a significant portion of these – precisely, 99 percent. Dedicate 99 percent of your profit share to clearing your debt, while retaining a nominal one percent for yourself. While parting with such a large sum may sting initially, this method guarantees a rapid journey towards being debt-free.

With funds in hand to clear your debts, the next step is devising an effective strategy. Here's the plan:

Itemize your debts from the least to the most. If you have several debts of an identical amount, prioritize the one with the highest interest rate. Make the minimum payments on all your debts, with the exception of the smallest one topping your list. Channel the rest of your funds to this particular debt. Once fully cleared, redirect the freed-up funds to the payment of the next debt on your list.

Before you know it, you'll be free from the clutches of debt, and there'll be a larger share of profits for you to savor.

Integrating the profit first approach into your personal finances can set you on the path to financial independence.

Ever dreamed of a life devoid of money-related worries? Imagine residing in your dream house, embarking on spontaneous vacations whenever the whim strikes, or simply enjoying the peace of mind that you can comfortably handle any financial curveball life throws your way.

Regardless of how you envision a stress-free financial existence, it's entirely achievable by applying the same profit-increasing strategies you've just discovered.

The essential idea to grasp is: Integrating the profit first approach into your personal finances can set you on the path to financial independence.

Much like segregating your business finances into specific accounts, it's worthwhile to divide your personal funds into separate accounts too. Maintain an income account for your salary deposits, and create additional accounts for daily expenses, periodic payments such as insurance premiums or rent, retirement savings, and unforeseen emergencies.

Each time you receive your salary, swiftly transfer a portion into your retirement account. Given that this fund will be your lifeline in your sunset years, it deserves primacy, with the remaining accounts receiving their allocations subsequently.

If you're swamped by debt, adopt the same strategy as you would for your business. Use 99 percent of your retirement fund allocation for debt repayment, preserving a meager one percent in the retirement fund. Persist with this method until your debt is completely eliminated, and then resume your focus on augmenting your retirement nest egg.

As your savings grow, you may feel an itch to enhance your lifestyle. After all, if the funds are available, why not use them, right? Wrong. This thought process is the polar opposite of what you should adopt.

Attaining financial independence requires dedicated saving. Regardless of the balance in your account, your standard of living should remain constant. The author recommends preserving this lifestyle for a five-year period. Always strive to minimize costs by researching thoroughly before any purchase. Explore cheaper or complimentary alternatives, master the art of negotiation, and take ample time to ponder big-ticket purchases.

If the notion of maintaining a stringent budget dampens your spirits, here's the good news — it's possible to enjoy some of your hard-earned money and still save. Whenever your income swells due to a raise, bonus, or tax rebate, set aside only half of it for enhancing your lifestyle, ensuring the remainder finds its way into your retirement fund.

After several years of diligent saving, your retirement fund will start generating ample interest to support any lifestyle you fancy, providing you the ultimate freedom — financial independence.

Wrapping up

The primary take-away from our exploration:

The most effective strategy to secure profits for your company is to take it outright. By promptly designating a share of every income to profits, it becomes habitual to manage your business on a tighter budget. This practice spurs you to critically assess your operations and strive for innovation and efficiency wherever feasible, ultimately leading to higher earnings in your coffers.

Profit First Quotes by Mike Michalowicz

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