Profit First

This entry was posted on

  • business
  • growth
  • profitability
  • saving
  • revenue
  • startup

What I read

Profit First: Transform Your Business from a Cash-Eating Monster to a Money-Making Machine

Buy it on Amazon

224 pages

Author: Mike Michalowicz

Book Cover
Book Cover

Summary

The book is based on the premise that to grow an efficient and profitable business, you need to take the profit before paying expenses. This approach works for both new and existing businesses. At the end of each chapter, Mike suggests some actions that you can take to achieve a profitable business. He shares many examples of entrepreneurs who have applied the Profit First methodology scenarios as well as examples of how to apply the system. For some of the techniques, he also gives some advanced strategies.

The book starts by giving you a way to assess your business and setting up accounts to get started with the Profit First Technique. It then gives a roadmap to continuously apply the profit first technique on a regular cadence. The book also shares some tips on reducing expenses, personal finance, handling layoffs and finance for kids.

Key Quote

Revenue is vanity, profit is sanity, and cash is king

Key Takeaways

  • A business is made up of 5 components
    • Income
      • The total revenue of the business
    • Profit
      • Profit distributions to all the equity owners
    • Owners Compensation
      • The amount all the equity owners take as pay
    • Tax
      • The direct tax liabilities of the business and the personal income taxes of the owners
    • Operating Expenses
      • All other expenses required to run the business
  • Most businesses fail because of lack of profitability.
  • Real Revenue is the money that your company makes after paying for material and subcontractors.
  • For each full-time employee, your company should generate a Real Revenue of $150K-$250K
  • For a tech business, real revenue should be 2.5 times the labour cost
  • For a cheap labour field business, Real revenue should be 4 times the labour cost
  • Growth is only half the equation. It is an important half but still only a half
  • The perfect size of your business will happen naturally.
  • You want at least a 5% profit allocation to have a minimum buffer to keep your business afloat.
  • A higher (current) profit allocation percentage implies higher efficiency in running the business which means less in operating expenses. eg
    • 5% profit allocation = 3 weeks of operating cash
    • 12% profit allocation = 2 months of operating cash
    • 24% profit allocation = 5 months of operating cash
  • The goal of every business is health and that is achieved through efficiency not by cutting owners compensation
  • Have at least a 3-month reserve
  • Figure out how to consistently be profitable and then do everything to grow that.
  • Assess your business by comparing your Current Allocation Percentages(CAP) against the Target Allocation Percentages(TAP)
  • Cancel whatever you don’t need to run your business efficiently or to keep your customers happy
  • Negotiate every expense except payroll
  • Challenge yourself to go just 1 more day without the item that you need to purchase. Sometimes, you will discover that you no longer need the item.
  • Parkinson’s Law: The demand for something expand to match its supply. It triggers 2 behaviours when supply is scant
    • You become frugal
    • You become innovative and find ways to get maximum value.
  • Thinking that something good will happen just because we work harder, longer or better does not work in real life. It just happens in the movies.
  • Try to become the best at one thing i.e. mastering the process of delivering perfectly and efficiently rather than trying to do a large variety of things.
  • To grow the biggest, you need to determine what you are best at and do it even better.
  • If you believe that achieving a number is possible, you will achieve it.
  • You must pay yourself first even if you are in debt
  • Get rid of bad clients who want your least profitable products and services because you are losing money.
  • Every time your income increases, set aside at least half of the increase as savings and you can use the rest for lifestyle upgrades.
  • Remember to celebrate.
  • More revenue does not mean that you are more successful, what matter is Profit
  • Maximize Profit regardless of the current size of your business.
  • Accountants define Profit as a number at the bottom of an accounting report. We just need to define it as Cash in the bank.
  • To keep big margins, you have to make the most of it when you have them and keep innovating to increase profitability by becoming efficient.
  • Efficiency (getting more things done with fewer resources) is directly related to profitability.
  • If you have to layoff people, its better to let 1 more person go than asking the remaining people to take a pay cut.
  • Have only 1 round of layoffs and assure the rest of the team that everyone remaining is to stay after explaining the reason of the layoff.
  • Instead of giving kids an allowance, give them job list with corresponding pay rates that they can choose from.

Other Quotes

  • Failed entrepreneurs are, in fact, the lucky ones! The majority of the businesses that survive are racking up debt, and their leaders are perpetually stressed.
  • When you hit rock bottom, sometimes you get dragged along the bottom, scraping your face on every one of those rocks until you are battered, bruised and bloodied
  • A financially healthy company is a result of small daily financial wins, not one big moment.
  • Profitability isn’t an event; its a habit
  • If you think you can or think you can’t, you’re right. - Henry Ford
  • Well-dressed poverty is still poverty
  • Effort is financial cost and time cost
  • Small questions lead only small answers
  • Money can always be found through streamlining and innovation, and that begins with asking the big questions
  • Innovation occurs in small steps, big leaps and everywhere in between
  • When you make enough money, you don’t have to budget
  • Cash is cash. Either you have it or you don’t

Recommendation

There are a few topics like Personal Finance, Layoffs and Finance for kids that I think other books are better suited for and could have been avoided. However, the core of the book is a must-read for anyone wanting to own a profitable business. The step by step guide with examples make it very easy to understand the concepts and to apply it to your business.

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