Michael Michalowicz's Profit first book

A Review of Profit First

What if, instead of accounting using the equation sales minus expenses equal profit, you turned everything on its head and operated using sales minus profit equal expenses? This radical shift in thinking is at the heart of Mike Michalowicz’s book Profit First.  

Michalowicz delivers this theory in a conversational tone, complete with storytelling, analogies, and behavioural psychology insights. Unlike many accounting books, this isn’t a dry read, and it may just make you reconsider how you think about cashflow.  

Cashflow Allocation is Like Toothpaste

The author uses the analogy of toothpaste. When you have a full tube of toothpaste, you are likely to use enough for two or three mouthfuls, much of it falling off the brush and going down the drain before you can even use it. On the other hand, when you are nearly at the end of the tube, you will squeeze out a single dollop and make sure none is wasted.  

When you take your profits before you spend for your expenses, you are, essentially, forcing yourself to always work with a nearly empty tube of toothpaste. This psychological hack will lead you to run a lean and efficient business and to think deeply about every spending decision.  

More Bank Accounts can Equal More Money

To put this theory into practice, Michalowicz recommends opening up some new savings and transaction accounts. You will need: 

  • a profit account (savings), for accumulating profits;
  • an owner’s pay account (savings), used to pay your wage;
  • a tax account (savings), used to save for taxes; 
  • an operating account (transaction), for your day-to-day operations; 
  • and a revenue account (transaction), which is used for the deposit of income only.  

The system simply involves transferring percentage allocations of your cash deposits into these accounts. The tricky part is figuring out what Michalowicz calls your TAP or Target Allocation Percentages. To simplify this, he provides a lookup table as a free resource on his website, under the title “Instant Assessments.” Your spreadsheet may end up looking something like this.  

Limitations — It Doesn’t Replace Accounting

Michalowicz’s system can only work if the percentages you are allocating are achievable and reasonable. It would be easy to get into trouble by allowing insufficient funding for your operating budget. There is also a danger of cutting corners to meet your TAP in ways you may regret in the long run.  

It is also important to consider that the Profit First System does not replace the need for accounting. It does not help you understand financial performance and the levers you can pull to improve. It’s purely for cash flow management.

Conclusion

That being said, this system can work, provided that your TAP isn’t overly ambitious. It can be an excellent system for business owners and entrepreneurs who struggle to understand basic cashflow and accounting and lack discipline in their spending habits (which, let’s be honest, is most people.)

The system can also extend beyond business budgeting and applied to personal finances. Think of the profit account as a simple savings account, and the tax account as a house deposit or investment account, and Profit First should help with any individual or family budget. 

Because Profit First isn’t accounting, it may be worth investigating banks and accounting firms that understand and work with the system.  Michalowicz provides a listing of Profit First friendly banks on his free resources page.  

As a Profit First Professional, we have the honour of working with Mike Michalowicz to deliver Profit First to you.

You can create your own instant assessment or you can allow me to talk you through your full Profit First Assessment and Implementation roll out plan.

“What if, rather than you serving your business, your business served you? What if you could turn a profit from your very next deposit? And what if you had the power to guarantee that profitability?” Mike Michaolwicz, Profit First.

Book your assessment by CLICKING HERE today

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