The key ideas

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

Mike Michalowicz, 2017

Revenue is growing, there are more and more customers, yet the owner has no money. Mike Michalowicz went through this himself and came up with a system that flips the usual formula: profit is set aside first, and the business lives on what’s left. The book is about how to split money across separate accounts, start with one percent and see how much expenses really eat up.

Who it is for

For small business owners and freelancers whose revenue keeps growing while their account stays empty. And for anyone tired of living from one payment to the next and hoping for the next big deal.

You don’t need to be fixed. The system does.

A piggy bank on the holiday table

February 14, 2008. Mike Michalowicz sits at a holiday dinner with his family and can’t hold back his tears. A couple of years earlier he had sold his second company and felt rich: he bought three cars and invested in a dozen other people’s startups. Almost all of them went under within a year. That morning his accountant had told him about a tax debt, and Mike had only ten thousand dollars left.

His nine-year-old daughter silently goes to her room and comes back with her piggy bank. She slides it toward her father and says: “Daddy, we’re going to make it.” That evening Michalowicz understood what the girl knew without any books. Money has to be set aside and locked away, so that you don’t spend it yourself.

The Profit First system grew out of that lesson. The author tested it on his own companies, then on other people’s. He writes for the owner of a small business whose revenue keeps growing but who still has no money.

The book’s main idea flips the usual formula. Usually it goes like this: sales minus expenses equals profit. But in the author’s experience, almost nothing is left after expenses. Michalowicz proposes the reverse order: sales minus profit equals expenses. First you set aside profit, and the business lives on what’s left.

The less money in sight, the more inventive the business

After the crash, Michalowicz watched TV at night and once landed on a show about nutrition. An expert advised using smaller plates. People are used to filling their plate and eating everything on it, so a small plate shrinks the portion by itself. Changing a habit is hard, but changing your dishes is easy.

The author recognized his business in this. All the company’s money sat in one big account, and he spent all of it. Behind this is Parkinson’s Law: demand expands to match supply. From a new tube of toothpaste we squeeze out a generous dab, but from an almost empty one we coax out the last drop and invent clever ways to do it. When there is less money, a person not only spends more carefully but also starts to invent.

There is a second reason too. The usual formula puts profit at the very end, and we pay more attention to what comes first. This phenomenon has a name: the primacy effect. Because of it, profit turns into leftovers that nobody thinks about until last.

That is why the system doesn’t require willpower. Almost every entrepreneur checks their account balance several times a day and decides from it whether they can spend. Michalowicz doesn’t fight this habit but builds order into it: it’s not the person who changes, but the setup around them.

Read in Livria

About the author

Mike Michalowicz is an American entrepreneur who founded and sold two companies and writes books for small business owners. He came up with the Profit First system after losing almost his entire fortune.

All books by this author: Mike Michalowicz

Terms from the book

  • Parkinson’s Law
  • Mortgage
  • Startups: Young companies that are just starting out and looking for their way to make money.
  • Profit: In Michalowicz’s book, profit is not a figure in a report but real money in a separate account that the owner can take.
  • Revenue: All the money a business has received from sales, before any expenses are taken out.
  • Primacy effect: The tendency to give more weight to what you encounter first. The author believes it is why profit, which stands at the end of the formula, gets overlooked.
  • Operating expenses: All the ongoing costs of running a company: rent, staff salaries, materials, subscriptions. In the author’s system they are paid only from a separate account.
  • Income tax: A tax on a person’s income. In Michalowicz’s system, the business itself sets it aside and pays it for the owner.
  • Laughter: Peter Laughter, a longtime friend of the author who, when opening a profit account, asked the bank to make access to it as inconvenient as possible.
  • Target Allocation Percentages: The author’s term: the shares of each deposit that the business gradually moves toward. A target, not a starting point.
  • Current Allocation Percentages: The author’s term: the shares by which money is allocated right now. They are shifted a little toward the targets every quarter.
  • Courtright: Debra Courtright, owner of a bookkeeping firm and a friend of the author. She taught him to allocate money and pay bills twice a month.
  • Quarter: A quarter of a year, three months. In the author’s system, at the start of each quarter the owner takes part of the profit and reviews the percentages.
  • Morales: Jorge Morales, co-owner of a car electronics repair shop in Florida and one of the first to use the author’s system.
  • Pain: José Pain, the other co-owner of the same shop and Jorge Morales’s partner.
  • Repayment: Paying back a debt: paying off a loan, a credit line or a card balance.

All terms

Similar books