A few months ago, I was lucky enough to receive a copy of Profit First by Mike Michalowicz in the post. One of my clients was keen for my thoughts. I’ve known of Mike for a little while from a podcast he produces for accountants. This book though casts a much wider net. It goes beyond bean counters to business owners and, frankly, any individual managing their own finances.
What’s it all about? Quite simply, Mike talks about flipping the profit equation. This means you focus instead on ensuring you take a designated ‘profit’ each month and work with what’s left to manage your expenses. In other words, instead of the traditional equation revenue less expenses is profit, Mike suggests we should be thinking revenue less profit equals expenses.
That’s it. It’s an incredibly simple concept, clearly with some practical hurdles. But, if you can think and act with this as a mantra, you will gravitate towards positive results.
What exactly is Profit First?
Mike explains that first, you must take your revenue and define a series of ‘buckets’. These cover various things, such as taxes, remuneration and of course, a target ‘profit’. The idea being you’ll have funds left, which should make up your operating expenditure. With that number to hand, you need to chip away at your expenses to make it fit the equation.
Say for example your revenue was £1,000. Take away your taxes, profit and remuneration and you’re left with £300. If your expenses currently are £400, you need to find a way to lower them. The book covers a few ways to do this and talks about some practical steps you should take. For example, reviewing your bank statement and being ruthless, finding the things you can cut and negotiate down, or hacking away at recurring expenses you don’t need.
Applying it in practice
The book covers extensively some practical tips, albeit you quickly realise it is directed slightly more towards the US audience. It doesn’t detract from the concept, but does need some consideration. For example, it refers to utilising multiple bank accounts. For a Limited Company, that simply isn’t practical – you’d be crippled with bank fees – however with the online challenger banks now offering saving buckets (i.e., artificially splitting your money) you have methods to do this a lot more effectively.
It also talks about things such as negotiating your expenses (which works, to an extent) and religiously allocating and distribute funds. Again, a lot of this depends on how you’re set up. If you run a Limited Company, distributing funds to yourself every month beyond a salary isn’t the best idea, so again, it’s something where you need to proceed with a little caution.
It is realistic though, suggesting you start small. For example, even if you put aside 1% profit, it highlights the psychological benefits of doing that. And I do agree, whilst 1% profit isn’t a lot, it is a profit. it is this psychological angle, which I believe is what makes the big difference here.
Some concepts though didn’t quite make sense.
An example is the mistakes section, one of which is “reinvesting”. It elaborates about this being a fancy term for diving into other pots to cover expenses. Whilst blindly spending money is never a good strategy, investing and reinvesting carefully clearly can have a positive effect. Not investing in technology which saves you time, or marketing which increases your revenue clearly isn’t right. Ironically, this comes after the previous mistake of “cutting the wrong costs”. In short, it’s a case of not cutting your nose off to spite your face.
Is it a good read?
Definitely, yes. I think the concepts are sound. There are some practical hurdles, but the book does somewhat acknowledge them. It provides you with practical advice and tools to overcome those hurdles. The book is quite verbose given how simple the concept is, with a lot of stories and filler, but when you get to the good ideas, they are clear and practical.
If you are finding profit elusive, some of the approaches in this book could help you. The testimonials paint a picture that this is a business / life changing concept. Whilst it can be, I do feel every business is different. Instead, I think the bulk of readers will find easy success in pragmatically adopting some of the ideas, opposed to living and breathing Profit First.
Did it work for me? It has, simply because the idea is so simple it’s difficult to forget. Particularly with my personal finances. it’s something where I’ve spent some of my down-time time trying to implement. And my client? I think it’s an even better fit for them, so I’m sure it’ll bring about positive results in their business. It is that psychological impact, that makes this quite powerful.
You can pick up a copy here or any good book store.
How I would think “Profit First” in Business
Even if achieving your dream margin is far away, it should not deter you from starting to apply some simple, practical steps.
- Put aside funds for your tax – Get out of the habit of spending every penny you receive. Set aside what you know you’ll need to pay for tax. Keep it simple. Save your VAT and Corporation Tax due from each receipt. When you inevitably must pay it across, you’ll find you probably have saved more than enough. A much nicer position to be in! Do the same for your personal taxes, particularly if you take sizeable dividends out.
- Use online banking savings pots (or set up a savings account) – This is simply about reinforcing the above. Banks like Starling are awesome. You can create as many artificial savings pots as you like. If you’re using a bank without that facility, try set up a savings account. I wouldn’t set up multiple accounts with different banks. You must be careful when it comes to using personal accounts for business.
- Do audit your expenses – What do you need to spend, what can you cut? Look deeper into things. Spending a few hours doing this could save you quite a bit of money cutting what you don’t need.
- Set a budget – I call this Plan First. Build a budget and think ahead, for the next 12 months. What does the ideal year ahead look like for your business? How much profit? Target sales? How should your expenses look?
- Proactively monitor your business – A cursory glance of the bank account isn’t enough. Use accounting software, understand your Income Statement and Balance Sheet.
If you set up the above, Profit First, particularly for a Business, will have a much higher chance of success.
If you want to find your path to profit, get in touch today and we can work with you to start a plan.