A Simple System To Transform Any Business From A Cash-Eating Monster To A Money-Making Machine — Goodreads Link
After hearing many people mention Profit First in podcasts and newsletters, I dove in and started reading the book in September of 2020.
The author lays out his ideas clearly an offers and easy-to-read chapters. The main point becomes clear after one hour of reading, but I also found other useful nuggets as I skimmed the second half of the book.
This is not the startup roadmap and veers sharply away from most entrepreneurship advice. If a new opportunity requires scaling and growing as fast as possible, leaders must borrow money to take advantage.
Following the simple formula that Sales – Expenses = Profits, one can easily focus on profitability.
Expenses tend to expand to consume all income, leaving a business owner with nothing, or worse, carrying debt.
Making profit the top priority helps a business owner keep the lights on, grow to an appropriate size, and run things in the best way possible.
Who should read / listen to it
New business entrepreneurs and also experienced business owners. The ideas mostly apply to lifestyle businesses or companies aiming for longevity or building slowly for many years.
🥦 Impressions + Impact
I plan to follow the suggestion and aside a small amount of business income as profits each month, even just 1%, and to slowly increase that as your business grows and your expenses stay low.
And I never fully understood how misleading my checking balance can be! What looks like “disposable income” fails to account for upcoming bills, mortgage and taxes. I like the idea to open separate checking accounts to hold upcoming expenses.
💬 Top 3 Quotes
1) Reverse Engineer Profitability
Profit First sparks faster growth because it makes you reverse engineer your profitability. When you take your profit first, your business will tell you immediately whether it can afford the expenses you are incurring; it will tell you whether you are streamlined enough; it will tell you whether you have the right margins.
2) Cash is King
Do you know the saying “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. As you focus on profit, you’ll discover new ways to both streamline and grow your business.
3) The Right Size will find you
The perfect size for your business? It will happen naturally, when you take your profit first. You will reverse engineer all the elements of your business, and as [Jason] Fried says, “the right size will find you.”
8️⃣ Eight High-Value Take-Aways
1) Making Smarter Turns
You may not have noticed but UPS trucks take right turns almost every time.
They ran a study in 2006 to determine more fuel-efficient techniques and discovered that left turn lanes wasted burned extra fuel. UPS now saves six million dollars a year through the initiative to take more right turns.
2) Two Money Problems in Business
Most obviously money problems come from sales slowing down. If a business operates from check to check, one missed deal makes it incredibly difficult to pay the bills.
The second cause is sales speeding up with causes expenses to quickly rise. A high-income month can often follow with a dip, and all of a sudden those high expenses cause a month of negative profits.
3) Pay bills twice a month
By setting aside two specific days, Mike recommends the 10th and the 25th, to pay bills, you avoid the pitfall of paying bills only when account balances are high. Transferring money more often also makes it easier to see the true cash flow because accounts reflect the true profits more often.
4) Profit Percentages
- Look up other companies in your industry >> find their financial profiles online
- Websites include marketwatch.com, yahoo finance and google finance
- Profit percentage calculation: (The net income) / (Total Sales & Revenue Number)
5) One-More-Day Technique
If you find yourself needing to purchase something try to pause. Can you go one more day without it?
If you can interpret this as a fun challenge and see how many days you can pass up the opportunity to buy that thing, it becomes fun (and cost-effective). And occasionally that the need to buy that product or service just goes away.
For major purchases, don’t pull the trigger and make any big purchases without listing 5-10 alternatives.
6) Keep doing the work
You may get up to $500k in annual revenue with a few employees, but you still have to show up and contribute 90% of the time (build, sell, whatever needs to get done). The other 10% is when you can focus on building systems.
You will probably always work on your business. Even if you get to 80% systems building, you will still show up 20% of the time for big sales or decisions.
7) Pay off debt first
Set up the DEBT DESTROYER account. Dave Ramsey’s advice is to pay off your smallest debt first. Use 99% of your profits to pay your debt. But save 1% for celebrating each month. Maybe that’s only enough to buy one small chocolate.
8) The Wedge Lifestyle improvement
If your income goes up, take half of that increase and set it aside. Live on less, even if your income jumps from $60k to $100k per year, you should set aside $20k of that and live off $80k. You don’t want to increase your cost of living too quickly or you risk ending up in debt.
❇️ More Resources
🎙 How To Take A Profit-First Mindset During A Pandemic – Mike Michalowicz | Foundr Podcast (Sep 2020)
This conversation hits the main points of the book and offers some actionable advice for businesses facing economic slowdowns.
📝 Profit First Book Website
The site offers some helpful resources and chapter samples
📗 Dave Ramsey — Total Money Makeover
Dave Ramsey’s book first suggested the concept of paying off the smallest loans first