PROFIT FIRST by Mike Michalowicz | Core Message

[Music] i recently read profit first by mike michalowicz building a business with an idea some hard work and a special collection of skills can feel like nothing short of a miracle but for most entrepreneurs that miracle quickly turns into a nightmare when the business becomes a cash-eating monster that empties their bank accounts and maxes out their credit cards the mistake most entrepreneurs make is that when they make a sale they use the majority of their sales revenue to grow their business and increase their expenses with most of sales revenue going to pay expenses there's rarely any profit left over but that's okay they think because one day when the business is much bigger profits will come but sadly that day never comes because when sales dip expenses stay elevated and cash bleeds out of the business and the business doesn't survive but it doesn't have to be this way what most entrepreneurs don't realize is that you can grow your business and be profitable from day one the key is to tweak the universal business formula from sales minus expenses equals profit to sales minus profit equals expenses instead of first paying down expenses with sales revenue and seeing what profit is left over take a portion of each sale as profit no matter what and then use what's left over to pay expenses this doesn't seem like a big change but this can completely change the way you do business and can convert your business from a cash eating monster into a money making machine now if you don't own a business don't worry the profit first principles you're about to learn can be applied to your personal finances and your investments the profit first system relies on four principles these are the same four principles that millions of people around the world use to lose weight and stay fit the four principles are use a smaller plate serve sequentially remove temptation and enforce a rhythm profit first principle number one use a smaller plate when you serve yourself on a large plate you tend to fill your plate with excess food and then feel obligated to eat everything on your plate even when you're full but if you serve yourself on a small plate you'll be forced to put less food on your plate and automatically consume fewer calories and shed more weight over time so how does this relate to business just as constraining the size of your plate can help shed excess weight constraining the size of your operating budget will help you shed excess expenses the cash you collect from every sale is served to four different plates money can go to operating expenses that is anything you need to run your business that's rent supplies software marketing and employees or it can go to owner's compensation that's the money you need to pay your living expenses or it can go to taxes or you can go to profit typically operating expenses is a massive plate some businesses use 80 percent of the cash from a sale to pay for their operating expenses if you allocated 80 of every sale to operating expenses but were suddenly forced to make do which is 70 you'd probably find a way to run your business with less money you and i are always more resourceful when we need to be just think back to the last time your toothpaste was running low when the tube of toothpaste was nearly empty you probably got 10 more brushes out of the same amount of toothpaste that you used when you first opened the toothpaste tube parkinson's law states that when we have more time money food or toothpaste available we tend to consume more but when forced to work with less we suddenly become thoughtful and resourceful and discover that we need less than we thought in business when you allocate more money to profit and force yourself to spend less on expenses you're forced to find efficiencies and cut unnecessary expenses maybe you find a piece of software that streamlines a process and allows you to rely on fewer contractors or maybe you discover that having office space isn't necessary and allow all your employees to work remotely one entrepreneur in the book likes to ask his team how can we keep doing what we're doing for a third of the cost cutting expenses by two-thirds seems unrealistic but if you ask yourself that question every day you'll be amazed at the creative insights you'll have and how well you run your business a year from now profit first principle number two serve sequentially if your first course of a meal is a leafy green salad rich in nutrients you'll tend to not overeat when consuming future courses how does this relate to business if you distribute the money you make from a sale to your profit bank account first you naturally won't want to spend that money on expenses profit is to your business psyche as nutrient rich food is to your stomach because profit is satisfying in three ways first profit makes business rewarding because at the end of each quarter you get to distribute profit to you and your partners and spend that profit on whatever the heck you want essentially profit money is play money or party money number two profit creates a cash reserve for emergencies which provides peace of mind when running a stressful business number three profit becomes the best metric you can find for measuring the health of your business because if you're able to steadily increase profit that means your business is performing better and if you can't keep increasing profit your business is telling you that something needs to change now if you're not taking a profit or you think it's unreasonable for a new business like a startup to take a profit then just start super small start by allocating just one percent of every sale to a profit account taking one percent of every sale will not impact your business now it also won't lead to substantial gains in profit but the mere act of putting money into your profit account with every sale is symbolic and will have a powerful impact on how you think about your business it will motivate you to focus on your best products and services with the highest margin and ignore the mediocre products that won't substantially increase your profit in other words as soon as you start taking profit first you will focus on what you're best at and get even better at it profit first principle number three remove temptation if you remove junk food from your house and force yourself to drive to the store to consume a chocolate bar you'll probably consume fewer chocolate bars how does this apply to your business well if you move your profits to a separate bank that is hard to withdraw funds from because there is a fee associated to a transfer or there's a significant delay to get the funds then you'll be less tempted and less likely to use your profits to pay for expenses profit first principle number four enforce a rhythm if you wait too long between meals you'll be more likely to gorge on your next meal and consume more calories than you need however if you have several small meals at the same time every day you'll control your hunger and be less likely to gorge on comfort food during your next meal now how does this apply to business well if there are big gaps between financial assessments of your business you'll tend to think that you're doing much better than you actually are and take on more expenses than you can actually afford with the profit first system you do a simple one-minute scan of five bank accounts income operating expenses owner's compensation taxes and profit on the first and fifteenth of every month which allows you to pay all your bills on time but also stay keenly aware of how your business is doing and what adjustments you need to make now that you know the four principles of the profit first system let's put it all together and get started step one create five checking accounts at your bank nickname the accounts income this is the account that collects sales revenue opex for operating expenses comp for owner's compensation tax and profit step two determine what percentage of income you currently allocate to opex comp tax and profit then put the allocation percentages at the end of each nickname so for example if you currently allocate eight percent of your sales for owner's compensation modify the nickname of your comp account to read comp eight percent if you currently don't allocate any money to profit start with one percent and subtract one percent from opex step three determine your target allocation percentage for each account author mike mccalluex can help with this mike has assessed thousands of small businesses and collected average allocations of healthy businesses and he's found that healthy businesses that have less than 250k in revenue allocate five percent of profit 50 to comp 15 to tax and 30 to opex healthy businesses that make between 250k and 500k in revenue allocate 10 to profit 35 to comp 15 to tax and 40 to opex step four on the first and 15th of every month transfer all the money in your income account to the other four accounts according to your current allocation percentages the ones you've listed next each nickname remember to allocate to profit first step five at the end of every quarter increase the allocation percentage on your profit comp and tax accounts by one percent and reduce the opex allocation percentage by three percent until you reach your target allocation percentages and step six in a separate bank account create a profit and tax savings account then at the end of every quarter transfer money from your main profit and tax bank account to these external profit and tax accounts so money is out of sight and out of mind if you follow this profit first system you'll be forced to cut more and more non-essential expenses and find creative ways to grow your business without mindlessly increasing expenses after a year of following the profit first system your business will gradually transform from a cash-eating monster to a well-oiled profit-making machine because you made profitability a habit not an event someday in the future that was the core message that i gathered from profit first by mike michalowicz mike is an excellent writer and he makes business finance fascinating i highly recommend this book if you would like a one-page pdf summary of insights that i gather from this book just click the link below and i'll be happy to email it to you if you already subscribed to the free productivity game email newsletter this pdf is sitting in your inbox if you like this video please share it and as always thanks for watching and have yourself a productive week

Channel: Productivity Game

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Keywords: Profit First Book, Profit First, Profit First by Mike Michalowicz, Mike Michalowicz, Michalowicz, Michael Michalowicz, Profit First Book Summary, Profit First Book Review, Profit First PDF, Profit First PDF Summary, Profit First Quotes, Profit First Audioboook, Profit First Amazon, Profit First by Mike Michalowicz Book Summary, Profit First Book Video, Michalowicz Books, Profit First Book Summary Video, Small Business Books, Entrepreneur Books, Productivity Game

Id: OoxFlYYpFqY

Length: 10min 54sec (654 seconds)

Published: Sun Oct 03 2021