If you’re scrambling to make ends meet with your business, it might be time to re-evaluate the way you pay yourself. In his book Profit First, Mike Michalowicz shows you how to do just that. Some might think his approach is crazy, but it can revolutionize the way you understand your business and its expenses.
The Profit First Formula
Most business owners wait patiently to see what profit is left over after paying all of the monthly business expenses before they pay themselves. Instead, Michalowicz recommends setting aside the expected profits into separate owner checking accounts before expenses are deducted. That’s where the title Profit First comes from.
Usually, the formula is sales-expenses=profit. In Profit First, Mike Michalowicz flips the script. His formula for success is sales-profit=expenses.
Most entrepreneurs think this is crazy. However, the strategy makes sense when you consider his argument. If you wait to pay yourself until all of your expenses are paid, you’ll always be settling for less. If you pay yourself first, you’ll be forced to reconsider your costs and find creative ways to make ends meet.
Profit First Book Review
In Profit First, Mike Michalowicz breaks down some of the critical components of a profit-first mentality. Many business owners make the mistake of thinking that growth will lead to increased profits, and some might be right. However, profit is essential regardless of the size of your business for it to be sustainable.
To truly see a profit from your business, you need to be efficient. When business owners prioritize growth over profit, they run up more expenses in the name of seeking more sales. But where does it end? Is there ever a point at which a business has grown enough? What if you could see higher profits without increasing your business any larger than it already is?
By depositing your expected profits before paying off your expenses, you’ll need to make do with less. Keeping the business afloat will require you to find ways to cut costs and make the most of the money you have now, not the money you can expect to make down the line. This mentality will help you keep your business streamlined and eliminate unneeded costs.
When you pay off your expenses before collecting a profit, you’re sending a signal to yourself that your own needs come last. However, the business can’t flourish if you’re struggling to support yourself and your family. By putting profit first you’ll have less money to pay your expenses, but you can make do with less more quickly than you think.
Figure out the aspects of your business that make money and cut out the things that don’t. You’ll be amazed at how many “necessary” expenses are not only superfluous but can be costing you money in the long run.
The Profit First method might not be for everyone, but it’s worth considering to give you a new perspective on your profits and expenses. If you enjoyed this Profit First book review, click on my contact form for a complimentary coaching session to work on implementing the Profit First system in your business.