Profit First

By Engr. Carlos V. Cornejo

I think this is one of the best books in entrepreneurship or running a business, “Profit First: Transform Your Business from a Cash-Eating Monster to a Money-Making Machine” by Mike Michalowicz.  This is applying the right concept of saving money which is income minus savings equals expenses rather than income minus expenses and whatever money is left after subtracting becomes your savings.  The latter idea does not work because often times your income will always equal your expenses when you don’t have that saving and cost-cutting mindset.

The same can be applied in business, the author says by subtracting profit first from your sales and then whatever is left is spent on the expenses of your business. What used to be a cash draining business will then start turning out profits even if it’s just small at the early stages of your business.  If you are a start-up entrepreneur or someone who has been in business for some time but is suffering from high expenses this book is must read for you if you want to get more details of it.  Here is a summary of the author’s ideas taken from the four principles that millions of people around the world use to lose weight by using a smaller plate, serving sequentially, removing temptation, and enforcing a rhythm.

Use a Smaller Plate

Just as constraining the size of your dinner plate will automatically lead to less calorie consumption and help you shed excess weight over time, constraining the size of your operating expenses budget will help you shed excess expenses over time.

When you allocate more money to profit and force yourself to spend less on expenses, you’re forced to find efficiencies and cut unnecessary expenses. For example, you may find a piece of software that streamlines a process and allows you to rely on fewer contractors. Or maybe you discover that having office space isn’t necessary and allow all your employees to work remotely. One entrepreneur in the book likes to challenge his team by asking: “How can we keep doing what we’re doing for one third of the cost of running our business?”

Serve Sequentially

If your first course of a meal is a leafy green salad, rich in nutrients, you’ll tend to not overeat when consuming future courses because you have acquired that wellness mentality. Profit is like nutrient rich food. When you begin allocating real sales revenue to profit first, you’ll increase your satisfaction and naturally want to spend less on expenses because: (1.) Profit makes business rewarding because at the end of each quarter (January 1st, April 1st, July 1st, and October 1st), you distribute profit to you and your partners and can spend that money on whatever you want. Essentially, profit money is play money (or party money!). (2.) Profit creates a cash reserve for emergencies, which provides peace of mind when running a stressful business. (3.) Profit is the best metric to measure the health of your business.

Remove Temptation

If you move your profits to a separate bank, one that makes it difficult to withdraw funds (withdrawal fee + delay), you’ll be less tempted (and less likely) to use your profits to pay for expenses.

Enforce a Rhythm

If you have significant time gaps between financial assessments, you’ll tend to think your finances are much better than they are and purchase more expenses than you can afford. When you use the profit first system, you transfer money from the INCOME account to the operating expense account (OPEX), owner’s compensation account (COMP), tax account (TAX), and profit account (PROFIT) on the 1st and 15th of every month, which allows you to frequently assess the health of your business.  The details of how to manage these different accounts regularly is in the book.

If you follow this profit first system, you’ll be forced to cut more and more non‐essential expenses and find creative ways to grow your business without mindlessly increasing expenses. After a year of following the profit first system, your business will gradually transform from a cash‐eating monster to a well‐oiled profit‐making machine because you’ve made profitability a habit, not an event someday in the future.