Profit First by Mike Michalowicz

A while ago, I read Profit First by Mike Michaliwicz and it transformed how I manage my money. It wasn’t easy – it can be uncomfortable to go against how you have been trained to deal with your business finances, and you need to hold yourself accountable for the decisions you make, but when implemented correctly, it can change how you manage your finances and helps you build the business that you set out to create.

What’s wrong with how we currently manage money?

The conventional wisdom is that you sell what you can, pay who you owe and then keep the rest.

The problem with this is that we’ve automatically put ourselves last. We’re an afterthought, and in just the same way that you will use all the time allotted for a given task, you will spend all the money earned before you get a chance to see what’s left.

We’re also affected by the Primacy Effect, which states that we focus on whatever we see first and ignore the rest. For example, you’re more likely to pay a bill in hand than to put money aside for a bill that is due in 6 months (like tax). Both are just as important, but what we see is given an automatic boost in priority. 

How is Profit First different?

Profit First flips the formula. Instead of subtracting expenses from your sales, you determine what you want your profits to be and then subtract that from your sales. This way, you’ve excluded it from the funds available for spending and you then work with what you have left.

Not seeing this money in your bank account means you are much less likely to spend it.

How does it work?

The book suggests setting up different accounts for different purposes. It recommends 5 accounts – main income, profit, owner’s salary, taxes, and operating expenses. 

The idea is money gets transferred into your main income account from your clients, and then you divide it up, in order starting with profit, into the other accounts.

This is a tactic that people often use for savings, or if you’re organised, VAT, so Profit First just takes that principle a step further and ensures you pay yourself first.

As each account is only used for its specific purpose, you’re not tempted to spend more than available in each pot.

How can I implement this system?

I highly recommend this system for all businesses, but remember that it may be a challenge, to begin with as it goes against natural instinct.

If you want to see how it could affect your business profits, you have two options:

1. Read the book and do it yourself
2. Give me a call and I’ll help get you set up in 20 minutes

Once you understand the principles and have set up your accounts, it’s a case of following through with the process.

Summary

If you’ve built a business in order to create the life you dream of, then growing your profits should be top of the list.

Using the Profit First method takes time to get used to, but it will help you manage your money in a much more productive way and help you reach your goals faster.

If you want help setting yourself up with these principles, or need someone to help keep you accountable once you’re up and running, I’d be very happy to discuss whatever you need.

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