Profit First by Mike Michalowicz | Book Summary & PDF

Profit First: Transform Your Business from a Cash-Eating Monster to a Money-Making Machine by Mike Michalowicz promises your business, no matter its nature or status, permanent profitability through simple, deliberate steps you can take.

In this book summary, you will learn:

• An old belief to let go and avoid practicing now in order to turn around your business
• What to do when you’re out of money
• How to get into a healthy cashflow rhythm
• 3 simple ways you can take now to start implementing the Profit First system in your business

About the Author

Mike Michalowicz, a serial entrepreneur who has had multiple multi-million dollar exits, is the best-selling author of four amazing books: Toilet Paper Entrepreneur, Pumpkin Plan, Surge, and his latest, Profit First. He had grown a couple of companies – one was in computer networks, the other one was in computer forensics. He sold his first company to a private equity. His second business went to a Fortune 500 company.

How PROFIT FIRST Came to Be

Back then, Mike thought he understood money, but he realized it was not the case.

“I hadn’t mastered a key element, and that was the management of money. But after I sold that second company, the only thing bigger than my bank account at that time was my ego. I believed I was so smart and such a genius. I decided to become an angel investor and I started with roughly tech companies, all funding through me, and all of them collapsed.”

Mike had no focus. He did not really understand what he was doing. He just threw money into things and they fell apart. As the businesses were failing, he was actually spending more and more money, trying to buy his way out of failure.

“It only took two years. I literally lost everything I’d made in two years.”

A Daughter’s Humbling Act

Mike remembers going home to his family on February 14, 2008. It was on that particular Valentine’s Day that he discovered he was basically on the verge of absolute bankruptcy.

“I told my family it was all gone, and it was not an easy moment. I was crying and embarrassed and ashamed in front of my three children and wife, telling them everything’s gone.”

Just then, his then 9-year-old daughter ran out of the room. At first he thought she was running away, and he wanted to do the same. But she came back in seconds later with her piggy bank and she put it down in front of him and says:

“Daddy, I’m gonna help us.”

To Mike, it was a slap to the face.

“That was a humbling moment. I was proud of my daughter — I was ashamed of who I was. If anything, it triggered the realization that I had to find a better way. I had to fix the damage I’d done and find a solution. I really didn’t understand money. Literally my daughter had more money in that piggy bank, which she’d saved in pennies and nickels, than I had.”

So Mike endeavored to find the answer, which came out of watching a television show about fitness.

Connecting Fitness and Finance Leads to PROFIT FIRST

The fitness instructor on TV was saying that all the fitness gimmicks — like the ab electrocutor that you put on to electrocute you — don’t work. The essence of those products is that they require us to change our behavior so much that they are not sustainable. If we have to be different than who we are internally, it means they’re not successful.

So she said that the best ways to get fit and healthy are to use mechanisms and processes that allow us to continue our normal behavior.

One principle from her that woke Mike up to financial health didn’t talk about money itself, but rather of an item humans use daily.

It’s much easier to lose weight with smaller dinner plates.

The fitness instructor was saying that globally, especially in America, plates have doubled in size. So in the 1700s, in George Washington state, a plate that they served dinner on was the size of a plate that we now use as a saucer for a cup of coffee.

Our natural behavior is to serve food onto our plate, fill up the plate, eat everything that’s on it, and then clean it off.

So to no surprise, with the plates’ bigger sizes, our caloric intake has doubled.

We double what we consume. So the fitness instructor said: if you actually want to lose weight, the simplest principle is to —

Simply get smaller plates

Then continue your behavior: fill up the plate and eat what’s on it

Your calories would be cut in half and you’ll start to lose weight.

This light bulb moment for Mike led him to the idea behind Profit First:

Don’t use one big serving tray to eat off of. Set up lots of small plates.

The foundation principle of “Profit First” for financial health was this realization:

Most entrepreneurs put their money into one checking account. Then they look at their bank balance and then subconsciously start eating up that money.

They say, “Oh, I got enough money to buy that new equipment.” Or they move into a new office space, hire a new employee, and they go to that money very quickly.

You would not want to repeat this old cycle. Instead, from now on, profit first.

5 ‘Profit First’ Principles

1. Prioritize Your Profit Plate

When money comes into your business —

a) Immediately allocate a percentage onto the Profit Plate.
b) Allocate another percentage into your Tax Plate.
c) Set a plate for your pay.

Lots of owners pay everyone else and they pay themselves last. Instead —

• Pre-allocate money to the Profit Plate
• Allocate to another small plate called the Operating Expenses Plate

EXAMPLE: When $10,000 come in, it doesn’t sit in one account. You don’t really have $10,000 to spend. Rather, you have:

• – $2,000 to pre-allocate to the Profit Plate
• – $4,000 to maybe pre-allocate to pay the people that are sacrificing their life to make the business successful
• – Another $2,000 to pay the taxes
• And now you only have $2,000 left over for Operating Expenses

An Awakening

This is the moment you realize you don’t have $10,000 to run your business. You have $2,000 to run your business.

This principle forces frugality and innovation. This all happens by simply setting up multiple small plates for predetermined purposes of use of that money.

The Key: Set up these small plates first — set up more bank accounts.

“It’s wildly simple. Now stick to it.”

To adhere to this principle, live off of the smaller amount of money. The realization is you don’t have $10,000 or whatever number it is for your business.

2. What to Do When You’re Out of Money

When you don’t have money, blaze a new trail.

“You can’t follow the obvious path everyone else is doing because you don’t have the money. Be more innovative. Be more frugal. And ironically, it’s when you have less money that this innovation comes about that facilitates the most growth, because there’s the lack of money that forces innovation.

“Innovation is what facilitates growth. So by taking your profit first, you actually reverse-engineer your growth and success.”

Historically, when money comes in, we go right to getting that money out and paying the bills. The stuff that really caters to us — profit — comes last. An afterthought.

Avoid Repeating the Same Mistakes: Change the Money Sequence

In the old formula, we’re told:

Sales – Expenses = Profit

This is why most businesses are in the business of paying expenses. They grow to pay growing expenses. They stay in this cycle and never get the profit.

It’s time we flip that formula.

Sales – Profit = Expenses

Reserve profit for yourself. The remainder is expenses.

What happens when expenses come last and profit comes first:

• We’re much more critical
• We’re much more selective
• We squeeze the juice out of the investments
• We sustain profitability

“By taking our profit first, we’ve guaranteed profitability, the absolute health and nutrients, the best part of the business.”

3. Get Into the PROFIT FIRST Cashflow Rhythm

Most businesses address their cashflow too infrequently. As a result —

• They go to an oscillation of deprivation of money.
• Out of panic, they just do anything to sell.
• When there’s money in the business, they go focus on servicing or catering.
• Money fluctuations are likely to be all over the place and they become very reactionary.

Mike found that for most businesses, twice a month is ideal.

There are 2 perfect days — the 10th and the 25th of the month – to go through a Profit First cash rhythm.

How the Profit First cashflow rhythm works:

• Set up an Income Account at your banks, whose only purpose is to collect income. (Your serving tray)
• ​​​​​​​On the 10th of the month, the income gets allocated among the factors mentioned earlier. Once allocated out, look at your Operating Expense account, see what’s there, and then you pay your bills from that. If there’s not enough money to pay your bills, find a way to stop incurring them.
• From the 11th to the 25th of the month, the money starts accumulating on the income accounts. Whatever’s in there gets allocated on the 10th, then it goes back to zero and then it fills up again.

This is the simplest indicator for cash metric. It starts that pattern of filling up and emptying out, like waves in the ocean.

Get rid of panic moments to get you into this rhythm, to start this regular habit of seeing cash flow in and out of your business.

4. Reward Yourself

When that profit distribution comes out, it’s for you as a business owner to reward you for the risk you took.

Do not put that back into the company. That money is for you to celebrate.

Now do that for a couple of cycles and it’ll blow your mind away. You’ll think your company is rewarding you over and over again.

5. Implement the PROFIT FIRST System Now

If you’re just starting your business today, implement the system.

“We’ve been told it takes money to make money. I think that’s a lie. It takes innovation. It takes a unique approach to make huge sums of money by taking your profit first. With less money available you’re forcing frugality, you’re forcing necessity, and necessity is the mother of invention.

“You’ll start growing and you’ll be sure to profit for yourself in the beginning, so you don’t go through that phase of business many entrepreneurs do where they become resentful of their business. When you resent your business, that’s not a good ground to grow a successful business off of.”

It’s not easy to build a new kind of wiring in our minds. But if we put off our business profitability for a year or two, very soon it becomes entrenched in our mind that profitability is but a future thing. It’s going to happen one day and we keep on pushing off profitability.

Four or five years later, it’s still not profitable. It becomes actually harder to make that turn.

Therefore, the sooner we implement this system of taking our Profit First, the sooner we start rewiring our mind for a healthy mentality, and we’ll benefit from profits permanently.

Takeaways

Taking your profit first will make you look at your business differently.

• You realize you have less money to spend.
• It makes you more frugal and critical of where and when you spend the money.
• Your profitability is guaranteed.

Action Items

1. Call your bank

Tell your bank you want to open at least one additional account, whether a savings account or checking account.

Next, label it “PROFIT,” then allocate percentages.

If you’ve never had profit before, start off small. Don’t jump in and start reserving 10, 20, or 30%. 1% is adequate. For example, if you have a thousand dollar deposit, only $10 is going into a profit account, which means you still have $990 to run your business.

“You won’t feel it. But what will happen immediately once you start allocating even a small portion of money to ‘PROFIT.’ That day, I can assure you your confidence around money will change. You’re not gonna get rich overnight, but you’ll get rich in confidence overnight. Then stick with this program and very soon you’ll get actually financially richer, your wallet will fatten.”

2. Get an accountability partner

Your partner can be another entrepreneur or someone you know with whom you can do this program together. They’re doing their business, you’re doing yours.

Having someone else that’s doing the program with you will give you this friendly competition and support program in place that will make you more likely to stick with it.

Profit First works until it doesn’t. It falls apart when people don’t follow the program. For example, a bill unexpectedly came in and we decided to take from our profit that has been piling up and pay that bill.

It is in moments like this that you got to be calling your accountability partner, talking about your challenge, and working through it with them.

The “sticktoitiveness” is where the success is.

3. Get your accountant or bookkeeper into the Profit First system

Every business needs to have an accountant or bookkeeper. They manage your books already, they are already intimate with your numbers, but have them enforcing Profit First.

Now not only do you have a peer, someone you’re working out with — you have a “trainer,” too.

Tell your accountant or bookkeeper to get familiar with Profit First, or to go to Profit First Professionals, an organization of accountants and bookkeepers that adhere to Profit First, and get them doing it.

Follow these 3 steps and you’ll be ensured of profitability in your business. It’s going to change the way you do things.

“From my experience, it will facilitate faster, stronger, healthier growth and, for sure, way more money in your pocket than you ever anticipated.”

Related Readings

1. How to Get Rich by Felix Dennis
2. The Millionaire Fastlane by MJ Demarco

Visit http://profitfirstbook.com/ to learn more about the book and the author.