What is Profit First?
Hi, I’m Mike Wright. I’ve been involved with business finance for over forty years, starting as an insurance auditor and then moving into taxes and accounting. I thought I really understood how an entrepreneur got information about his (or her) business from their accounts and financial statements.
But I also knew that just reporting on their income and expenses wasn’t helping them become more profitable. I could only see things from the accountant’s view. Problem was, my clients weren’t accountants.
The cool thing is, now that I am a Profit First Professional, I have Mike Michalowicz as part of the team that I can bring to my client’s business. You see, it’s not just a book, but it’s a world-wide family of accounting, bookkeeping and consulting professionals who serve over 1,000 clients in a dizzying array of businesses. And we all share and confer and help each other.
Please take the time to read the overview below. Then consider scheduling a complimentary phone call to see if Profit First can make a difference in your business.
PROFIT FIRST OVERVIEW
THE PROFIT FIRST FORMULA
The GAAP (Generally Accepted Accounting Principles) formula for determining a business’s profit
is Sales – Expenses = Profit. It is simple, logical and clear. Unfortunately, it’s a lie. The formula, while
logically accurate, does not account for human behavior. In the GAAP formula profit is a left over, a final
consideration, something that is hopefully a nice surprise at the end of the year. Alas, the profit is rarely
there and the business continues on its check-to-check survival.
Sales – Expenses = Profit
With Profit First you to flip the formula to this:
Sales – Profit = Expenses
Logically the math is the same, but from the stand point of the entrepreneur’s behavior it is radically different. With Profit First, you take a predetermined percentage of profit from every sale first, and only the remainder is available for expenses.
Author and historian C. Northcote Parkinson theorized that our demand for a resource increases to meet the supply of it. That is why when we are given two weeks to do a project it takes two weeks, and when we are given eight weeks to do the same project it takes eight weeks. That is why when given $1,000 to complete our work we get it done with $1,000 and when given $10,000 to complete the same work, it takes $10,000. Profit First makes Parkinson’s Law an asset. By taking profit first the money available for expenses lessens, and we are forced to find ways to get the same things done for less money.
BANK BALANCE ACCOUNTING
Most entrepreneurs don’t have the time or gumption to read the different accounting statements necessary to manage the financial aspect of their business. Theoretically you should review and correlate your Income Statement, Balance Sheet and Cash Flow Statement monthly (or more frequently), but few entrepreneurs do. Most resort to “bank balance accounting,” where we check our bank balance every day and make
financial decisions based upon what we see. Per Parkinson’s Law, we consume what we see in our bank account. Profit First encourages the entrepreneur to continue “bank balance accounting” by first allocating money to profit (and other accounts) so that the entrepreneur sees the actual portion of deposits that are available for expenses and they automatically adjust their spending accordingly.
DON’T CHANGE HABITS, LEVERAGE THEM
Many entrepreneurs try to force themselves to become better at accounting and to become more disciplined
in their fiscal management by pure willpower. But just like a muscle, willpower can be drained. And in a
moment of financial stress or bigger than expected expenses the entrepreneur will break their own fiscal
rules and spend the money they have. The Profit First principle does not try to change your habits (that is
nearly impossible to do), Profit First works with your existing habits. By first allocating money to different
accounts, and then removing the temptation to “borrow” from yourself, your business will become fiscally
strong and you will benefit from regular profit distributions.
DID THIS MAKE SENSE TO YOU?
Are you tired of arguing with your accountant trying to make sense of balance sheets, profit and loss statements and cash flow statements? Maybe you’d like an easier way to find out just where your business stands at any given moment.