Business Book Review: Profit First by Mike Michalowicz

Profit First will have you rethinking conventional accounting to help your business grow a profit first, cash is king mindset for long-term sustainability.

My Rating: ★★★★

Length:  224 pages
Publisher: Portfolio
Released: 2017

Key Takeaways for Personal Branding

Mike Michalowicz highlights the uncomfortable truth many business owners ignore:

“Revenue is vanity, profit is sanity, and cash is king. It is a succinct reminder that your job is to maximize profit, regardless of the current size of your business.”

Profit First challenges you to stop seeing profit as an end of financial year event, the end of your five-year plan or something that might happen someday:

“Profit must be baked into your business. Every day, every transaction, every moment. Profit is not an event. Profit is a habit.”

As so many business thought leaders ignore, Michalowicz proposes that you must reverse-engineer your profit - to take it first.

Accountants and entrepreneurs have different ideas of profit. The first’s is based on fictitious numbers at the bottom of an account report. While for Michalowicz:

“Our definition of profit is simple: cash in the bank. Cold. Hard. Cash. For us.”

Everything else is a vanity metric, or worse, keeping your business from long-term sustainability.

Profit First, is a step-by-step guide with meticulous attention to detail worth exploring in the book. In the meantime, here are my top takeaways:

Parkinson’s Law and ‘Small Plates’

Parkinson’s Law, a favourite of many productivity thought leaderships, is shared as:

“One thing that will forever change your relationship with money.”

Generally speaking, the law says that work expands to the amount of time you have allocated for it. Expand the amount of time and the time it takes to complete it will expand.

Despite its popularity, it’s talked about less by financial experts. Michalowicz, however, challenges you to relentlessly think about how less is more in your business operations.

The more money you allocate to profit, the less you allocate to expenses. And the more innovative and resourceful you’ll be with every minute expense and its value. Michalowicz likens this to cultures that eat from small plates, managing their portion control, versus those with growing plate sizes and consequently, diets.

Even changing the sequence of how you eat can bring nutritional balance to your diet, helping reduce temptations. This is a parallel Michalowicz draws to a Profit First mentality.

The Primacy Affect

So, why Profit First?

Simply put, humans have a primacy bias. We put more significance on what we encounter first.

Say day-to-day you follow the conventional formula of:

• Sales - Expense = Profit

Profit becomes the afterthought.

Michalowicz instead proposes:

• Sales - Profit = Expenses

You treat the money that comes into your income account as a serving tray for other accounts, in predetermined percentages.

The five ‘foundational accounts’ are:

• Income

• Profit

• Owner’s compensation

• Tax

• Operating expenses

Allocation Percentages

The Profit First system is not designed to create wealth overnight. However, the small percentage allocations that Michalowicz recommends, to begin with, is designed to build confidence. As you see the small efforts accumulate, the goal is to win over your mind before growing (or reducing, depending on the account) your Target Allocation Percentages (TAPs).

The bigger your profit allocation expense eventually becomes, the more efficiently you’re running your business. This means every seemingly insignificant business expense, like subscriptions, to the big cash costs, like rent and salaries, come under the microscope.

Enforce a Rhythm

In the spirit of not making profit an event, Michalowicz suggests allocating specific days in the month to managing your Profit First system. With those being the same days every month. This helps you both get into a routine and identity patterns.

Every quarter, distribute a percentage (50 is suggested) of your profit for owner compensation. The only rule - it must be enjoyed for your personal benefit. Because you’ve run such an effective system between these periods and reduced all unnecessary temptations along the way, this is your chance to celebrate, without worrying about reinvesting into the business, and focus on whatever brings you joy.

Michalowicz opens up about his personal experience with ignoring Profit First thinking. Sharing how he went from the top of the mountain to rock bottom. He vulnerably shares his mistakes, so they don’t have to be yours.

The model is reminiscent of other popular personal finance models supporting the distribution of your pay cheque. While these can sometimes leave entrepreneurs, with their ever-fluctuating income, scratching their heads, Michalowicz speaks directly to entrepreneurs and business leaders. Furthering his mission to eliminate entrepreneurial poverty.

Profit First by Mike Michalowicz:  Available on Amazon.