Profit First by Mike Michalowicz

Last updated: Sep 12, 2023

Summary of Profit First by Mike Michalowicz

Profit First by Mike Michalowicz is a book that introduces a unique and practical financial management system for businesses. The author argues that the traditional formula of Sales - Expenses = Profit is flawed and leads to financial struggles for many entrepreneurs. Instead, he proposes a new formula: Sales - Profit = Expenses.

The core concept of Profit First is to prioritize profit by allocating a predetermined percentage of every dollar a business generates to profit. Michalowicz suggests setting up multiple bank accounts, each serving a specific purpose. These accounts include the Profit Account, Owner's Compensation Account, Tax Account, and Operating Expenses Account.

The book emphasizes the importance of taking profit first, even if it means starting with a small percentage. By doing so, business owners ensure that they are always profitable and can gradually increase the percentage over time. Michalowicz also advises against using the profit account for emergencies or reinvesting in the business, as these actions can hinder long-term financial stability.

Furthermore, Profit First introduces the concept of "bank balance accounting," where business owners regularly check their bank account balances to make financial decisions. This approach simplifies financial management and provides a clear picture of the business's financial health.

Michalowicz also addresses common financial challenges faced by entrepreneurs, such as debt, cash flow issues, and the temptation to spend more as revenue increases. He provides practical strategies to overcome these challenges, including debt repayment plans, expense reduction techniques, and implementing a cash flow rhythm.

The book emphasizes the importance of behavioral change and adopting a profit-focused mindset. Michalowicz encourages readers to challenge their beliefs about money and to prioritize profit as a means to achieve financial freedom and business success.

In summary, Profit First by Mike Michalowicz presents a revolutionary financial management system that prioritizes profit and ensures long-term financial stability for businesses. By implementing the Profit First system, entrepreneurs can overcome common financial challenges, increase profitability, and achieve their financial goals.

1. The Profit First Formula

The Profit First formula is a simple and effective way to ensure that your business is always profitable. The formula is Sales - Profit = Expenses. This means that you should allocate a percentage of your sales as profit before paying any expenses. By prioritizing profit, you ensure that your business is always making money and that you are not just breaking even or worse, operating at a loss.

This formula is a shift from the traditional formula of Sales - Expenses = Profit, which often leads to businesses neglecting profit and focusing solely on expenses. By flipping the formula, you prioritize profit and force yourself to find ways to operate within the remaining budget. This mindset shift can have a profound impact on the financial health of your business.

2. The Envelope System

The Envelope System is a practical and visual way to manage your business finances. It involves setting up separate bank accounts for different purposes and allocating money to each account based on predetermined percentages. For example, you may have separate accounts for profit, owner's compensation, taxes, and operating expenses.

By physically separating your money into different accounts, you can easily see how much money is available for each purpose and avoid the temptation to dip into funds that are meant for other purposes. This system also helps you prioritize profit by ensuring that a percentage of your sales is immediately allocated to the profit account.

3. Parkinson's Law and the Power of Constraints

Parkinson's Law states that work expands to fill the time available for its completion. This means that if you have a lot of time to complete a task, you will likely take longer to complete it. The same principle applies to money. If you have a large budget, you will find ways to spend it.

By implementing constraints, such as setting a budget or allocating a specific amount of money for expenses, you force yourself to be more resourceful and creative. Constraints can lead to innovation and finding more efficient ways to operate your business. Embracing constraints can help you become more profitable by eliminating unnecessary expenses and focusing on what truly matters.

4. The Instant Assessment Technique

The Instant Assessment Technique is a method to quickly evaluate the financial health of your business. It involves looking at your bank account balances and categorizing them into different buckets: profit, owner's compensation, taxes, and operating expenses.

By regularly assessing your bank account balances, you can quickly identify any imbalances or areas that need attention. For example, if your profit account is consistently low, it may indicate that you need to increase your profit allocation or find ways to increase your revenue. This technique allows you to make informed decisions and take immediate action to improve the financial health of your business.

5. The Power of Small Plates

The Power of Small Plates is a concept that encourages you to start small and gradually increase your profit allocations. Just like when you eat from a small plate, you naturally consume less food, starting with small profit allocations allows you to build the habit of prioritizing profit without feeling overwhelmed.

By starting with a small percentage, such as 1% or 2%, you can gradually increase it over time as your business becomes more profitable. This approach helps you build momentum and ensures that profit becomes a consistent and sustainable part of your business.

6. The Omen of Plateauing

The Omen of Plateauing refers to the warning signs that your business may be stagnating or reaching a plateau. One of the key indicators is when your profit percentage remains stagnant or starts to decline. This may indicate that your business is not growing or that your expenses are increasing faster than your revenue.

Recognizing the Omen of Plateauing allows you to take proactive measures to reignite growth and profitability. It may involve reassessing your expenses, finding new revenue streams, or implementing strategies to increase your profit margins. By staying vigilant and addressing the Omen of Plateauing, you can ensure the long-term success of your business.

7. The Power of Behavioral Change

The Power of Behavioral Change emphasizes the importance of changing your mindset and habits when it comes to money management. It acknowledges that financial success is not solely dependent on knowledge or skills, but also on the behaviors and actions you take.

By implementing the Profit First system and adopting new financial habits, such as regularly assessing your bank account balances and prioritizing profit, you can create lasting change in your business. The Power of Behavioral Change reminds us that it is not enough to simply understand the concepts in the book; we must also take action and make consistent behavioral changes to achieve financial success.

8. The Importance of Celebrating Profit

The Importance of Celebrating Profit highlights the significance of acknowledging and celebrating your business's profitability. It encourages you to reward yourself and your team for achieving profit milestones, no matter how small.

Celebrating profit creates a positive and motivating environment, reinforcing the importance of profit and encouraging continued focus on profitability. It also serves as a reminder of the progress you have made and the financial success you have achieved. By celebrating profit, you create a culture of profitability and ensure that it remains a priority in your business.