Profit isn't a purpose, it's a result. To have purpose means the things we do are of real value to...
“A lack of profitability is consistently the major reason cited for business discontinuation.”
– Mike Michalowicz
Profit First, written by Mike Michalowicz, is a game-changing book for business owners who struggle with financial management and often find themselves in a constant cycle of cash flow problems.
The book introduces a unique approach to managing business finances that flips the traditional accounting formula on its head. Instead of following the conventional method of "Sales - Expenses = Profit," Michalowicz proposes a radical shift to "Sales - Profit = Expenses." This seemingly simple change has profound implications for how businesses manage their money, ensuring that profit becomes a priority rather than an afterthought.
At Salty Coaching, we have used this method in our own businesses and saw a significant improvement within months. Using it changed our approach to financial management and it helped provide better financial clarity and sustainability overall.
This is our brief summary and some key points to help get you started, but we always highly recommend reading the book for yourself (or listening to it) to really understand the principles and how to apply them in your own business in a way that works for you and your goals.
The Profit First Method – A Summary
The core of the Profit First methodology is straightforward yet impactful. It focuses on the principle of "paying yourself first" - something that is often not prioritised when getting a business off the ground.
Here’s our breakdown of how it works:
- Separate Your Money into Different Accounts: The method starts by setting up multiple bank accounts specifically designed for different business purposes. The primary accounts include:
- Income Account: All revenue flows into this account.
- Profit Account: A percentage of income is transferred here first.
- Owner’s Pay Account: This account is for the business owner's compensation.
- Tax Account: To ensure there are always funds available for taxes.
- Operating Expenses Account: The remaining funds are allocated to cover operating expenses.
- Allocate Funds Based on Pre-Determined Percentages: Each time money comes into the business, it is distributed into the various accounts based on set percentages. This process ensures that profit and taxes are always accounted for before any expenses are paid.
- Force Constraints on Spending: By allocating money into specific accounts, you force your business to operate within the limits of what’s left after profit, owner’s pay, and taxes have been accounted for. This reduces unnecessary spending and encourages more efficient business operations.
- Routine Reviews and Adjustments: Regularly review your percentages and make adjustments as your business grows. This keeps you aligned with financial goals and responsive to changes in the business landscape.
"The new definition of success is not about the most revenue, employees, and office space but the most profit, generated through the fewest employees and with the least expensive office space. Make the game of winning based upon efficiency, frugality, and innovation, not on size, flair, and looks."
– Mike Michalowicz
Why Putting Profit First Can Be So Valuable for Business Owners
Prioritises Profit: Many business owners focus primarily on sales and hope profit will follow, often leading to disappointment. Profit First forces profit to be a priority from the start, ensuring the business remains financially healthy.
Reduces Financial Stress: To us, this is one of the most critical steps for a sustainable business. By consistently setting aside money for profit, taxes, and the owner’s compensation, this method eliminates the uncertainty and stress of wondering whether there will be enough left over to pay yourself or cover tax liabilities.
Promotes Fiscal Discipline: The Profit First system imposes natural constraints on spending by allocating funds upfront. This encourages business owners to rethink their expenses and prioritize essential spending, ultimately leading to leaner and more sustainable operations.
Improves Cash Flow Management: Instead of scrambling at the end of the month to pay bills, Profit First provides a clear cash flow structure that makes financial management more predictable and controlled.
Empowers Business Owners: Profit First empowers business owners to take control of their finances, transforming their relationship with money from reactive to proactive. It helps them build a more resilient business that can weather economic ups and downs.
In Summary
Profit First is not just another financial strategy—it’s a mindset shift that redefines how business owners view profit and manage their cash flow.
By putting profit first, businesses can break free from the constant cycle of financial struggles and move toward sustainable, long-term success. Implementing this method helps business owners ensure their hard work translates into actual financial gain, bringing clarity, control, and confidence to their business journey.
For anyone feeling overwhelmed by their business finances, Profit First offers a proven, practical approach to achieving profitability and financial peace of mind.
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