Profit First – A Basic Summary
You work hard to run your small business – doing it profitably can sometimes become difficult if you’re too caught up in the whirlwind of your day to day operations. You’ve heard of the Profit First method from the #1 bestselling book Profit First by author Mike Michalowicz. You’d like to get a quick overview of the strategy, so you can see whether it could benefit you? No problem!
The founder of the Profit First methodology compares these cash management techniques to operating a healthy business with maintaining a healthy diet. It includes reducing portion sizes, taking in nutrient-rich foods first, removing temptation, and building up the right habits.
If you’re in a rush to get the gist of the Profit First method, you can use this 5 point overview to get the highlights and determine whether increasing your profitability is worth investing your time and resources. In essence, it’s the “pay yourself first” theory, applied to businesses. Let’s have a look at the pillars behind this popular and effective strategy:
Use Smaller Plates
When managing your cash, it’s easy to spend more, if we have more money available to us. Parkinson’s Law explains how our available resources (for example time and money) expand to fill any space made available for them. It’s a natural behavior that is witnessed in all kinds of scenarios. As revenue increases, expenses increase.
The keystone idea behind the Profit First method is to divvy up your incoming revenue into smaller accounts (like using smaller plates to reduce your portion size when trying to lose weight). In doing this, you’re forcing yourself to operate your business more efficiently, on a smaller operating budget.
When done right, you can gradually transition your company’s habits from overspending on operating expenses, to streamlining your operations to run more efficiently. This will leave more money left over to increase the owner’s pay, set aside money for taxes due, grow your “vault” for upcoming investments, and increase profitability.
How does cashing in an owner’s profit disbursement cheque every quarter sound to you?
Get the Nutrients First
In the health industry, it’s recommended to eat your vegetables first. This provides your body with the nourishment it requires, without filling yourself with a plate of empty carbs, then being too full at the end of the meal to get the nutrients in (*I am not a health expert, so excuse the oversimplification of this theory – but I’m sure you get what I mean!).
So if we apply this theory to running a healthy business, getting in the “nutrients” first translates to taking your profit first. You see, the old method of accounting (Revenues – Expenses = Profit) means that profitability becomes too much of an afterthought.
You may be familiar with James Redfield’s famous quote “Where Attention goes Energy flows; Where Intention goes Energy flows!”. It’s the principle that guides the idea of putting more attention on our profitability, instead of making it something that “might” be left over, after expenses have been paid.
The Profit First method sets you up to take a pre-determined percentage of each sale as profit first, before leaving what is left over to operate your business. This reinforces the need to operate your business more efficiently, which is the key to sustainability.
Just as when trying to eat healthy, you’re doing yourself a disservice if you keep the unhealthy foods that you’re trying to avoid in plain sight. You’re better off not even bringing them into your house, because we all know how difficult it is to resist, when we know how easily we can have those treats.
Our will power is a limited resource so it is our duty to make it easier on ourselves to behave the way we know we should. Why would you intentionally make it harder on yourself than it needs to be? This is exactly the reason why we introduce the idea of removing temptation to the Profit First method.
This is accomplished by moving the “profit” account out of arm’s reach. By making it more difficult (nearly impossible on a whim) to access the funds in these accounts that are off limits for day-to-day operating expenses, we are simply forced to work with the operating budget that is available to us. What’s even better, is that by removing the temptation to steal money from these accounts, you don’t even start the habit. We know how slippery that slope can be – changing or eliminating bad habits can be extremely challenging. Following the Profit First method prevents you from getting tempted to introduce profit-eating habits.
Establishing a Rhythm
Speaking of habits, establishing a Profit First rhythm in your business is the best way to automate these positive behaviors. You’ll get on this 10th and 25th day of the month routine of allocating your funds to their appropriate accounts and paying your bills.
Establishing this Profit First routine twice a month allows you to become aware of your business’ natural ebbs and flows. You start to operate more pro-actively, instead of the highly inefficient, reactionary types of behaviors that cost your business money and strains relationships with key stakeholders.
Essentially, this becomes a highly systematized and streamlined way to manage your cash and keep your operations organized instead of flying by the seat of your pants as many other businesses tend to do when they’re too caught up in “the whirlwind” of their operations.
Living the Profit First Lifestyle
The lifestyle you’ll create for yourself as a Profit First business owner is a frugal one. It will require you to start living and operating your business within your means. But stick with me here for a quick sec – the frugal lifestyle isn’t the same as a “cheap” one. The ultimate goal is to be as profitable as possible because the more money you can accumulate, the more money your money will start to earn for you. Once the money you’ve collected over the years starts earning your more money each year than you spend, you’ve reached the ultimate in financial freedom. This will lock in your lifestyle
A few simple ideas that you can implement in your business if you’re having trouble finding ways to reduce your operating expenses are:
- Seek a free option whenever possible
- If you can get the exact same benefit from buying something used, as when you buy it new, always go for the used option
- Always try to avoid paying full price for things if you can avoid it
- Build up your negotiating skills
- Seek more cost-effective alternatives before blindly paying for things
- Delay making major purchases until you’ve brainstormed 5-10 alternative options to spending that money and have reasonable thought each one through
- Save your splurges for when you get your quarterly profit disbursements – that money is for you to celebrate! So treat yourself! (And no, these disbursements are NOT meant to be reinvested into your business! These are your reward as the owner of the business for the amazing job you’ve done!)
Profit First In The Fix This Next Business Hierarchy of Needs
The profit first method shows you a tactical system to manage your cash flow so you can boost profitability. But it does NOT mean that focusing on profit is where every business necessarily needs to be prioritizing their efforts.
Yes, you heard me right.
You see, every business has different levels of needs. And the 5 core levels of needs build on each other. The very first, foundational level that every business needs to prioritize their efforts first, is ensuring that you make sales. Because without sales, you don’t have any cash flow and without cash coming into your business, you don’t really have a business. Once you have met the sales-needs of your business (get your self-assessment here to see if you fulfill the sales requirements for your business), that is the time when you shift your attention to make sure you’re running the business profitably. For more information on how to determine your business’ true needs, based on the Fix This Next Business Hierarchy of needs model, click HERE.
With this overview you’ve had a chance to get a glimpse into the Profit First method. What it doesn’t do is go over how this could positively impact your entire life. If you’re tired of the constant stress caused by the financial strain in your business, I encourage you to take action. Let’s chat about what this next step could look like for you. Go on now, get to it!