I was prompted to read this 200-page business cash management primer, Profit First, when a client asked if I agree with its message. Happy to read a highly recommended book that intersects business, profits, and accounting, I downloaded and read this in less than two wintery weekends. I highly recommend it for entrepreneurs who are short on time and eager to learn a different way to look at your income statement and improve your bottom line.
As many other online reviews profess, this book is easily digestible, in plain language, and contains simple actionable items for business owners at any point in their enterprise.
What I like about it as an accountant: it explains in a different way what we have been telling our clients for years. We also phrase it as “start with why.”
- Why did you start this business in the first place?
- Why do you work so hard to make this business thrive?
- Why is it worth taking this leap into the uncertain?
Answer: to make a profit — so you can: retire, put the kids through college, work in your pajamas, afford healthcare, etc.
The standard income statement format is sales – expenses = profit. Talking with many business owners about their accounting over the years, most start with sales and figure — hope! — that it will all work out from there and they will simply spend enough to keep generating sales. Then they get what is left, if anything, for themselves.
The book’s basic principle reminds me of our approach to budgeting and forecasting.
If you begin with what you need to live and thrive and enjoy your work, you start with profit. Figure that out first. Then, continuing with what you know… liability insurance, office rent, employees, internet costs, and all the other fixed and variable costs that you know you will need to spend, you end up with the amount of sales you need to generate.
Michalowicz’s methodology is: Sales – Profit = Expenses. A little bit different from starting with the profit target number on paper and working your way through expenses and sales from there, but the same idea. Take your profit first and make the rest work. It is the psychological reframing of the equation that makes this useful and easier to understand than telling yourself to read the income statement backwards (which I do 😉 by the way).
This approach also encourages ingenuity and thrift to make the last bits of remaining funds cover needed costs in the business. It is more difficult to dig into your owner profits when these funds are transferred out of the business the very moment they land in the operating bank account. You have got to think twice about taking money from your own retirement, kid’s college, etc when it requires you to take money from an account named “my profit” back to “business operations”.
A key trait of the book’s prescription is to set up several new bank accounts and use them as one might use envelopes or jars to budget and monitor spending. By creating strict spending limits before the funds run low, hopefully, you will stay on target and enjoy a profitable business.
We recommend reading this book to help your own business (or household, for that matter) if you have some room for improvement in the profit department, want to understand your cash flow better, or if you lack a bit of discipline with your spending habits. This is a fun and useful read!