Biz Book Review: Profit First How it changed the financial stability of my business.
Updated: Mar 30
I am so pumped and excited to be sharing my very first book review with you. As I have already mentioned… I. LOVE. BOOKS. And I love to read business books as I want to learn everything I can to give my businesses the best chance possible to succeed. The most impactful book to date that I have read is Profit First by Mike Michalowicz. In this post, I am going to share what I thought were the most note-worthy principals taught in the book and how I implemented those into my personal businesses, both my bookkeeping firm and my bookstore.
I will preface today’s discussion by admitting that I had a business fail in 2012. I opened our bookstore with ZERO business ownership experience, knowledge or desire for entrepreneurship (I didn’t even know that was a thing). To be completely honest, I opened my first business because I didn’t want to go back to secular work.
So, I did what most small business owners do… I worked too many hours for too little pay and was stressed out 90% of the time. I scrambled to come up with the money to pay the monthly sales taxes, payroll taxes, bills and rent. It was not a fun experience. But I dutifully went through the motions hoping that if I kept trudging along, things would get better. As we know, if you keep doing the same thing --- you get the same results.
After I closed the store, I went to school to get my accounting degree. Because I had been in the bookkeeping field for so many years, the classes were actually really easy for me and I graduated with a 3.9 GPA (no thanks for the Writing and Astronomy class 😊). No class I took though, taught me how to run a business or manage cash flow. Profit First did that for me. It radically changed how I manage business income, expenses, and now profit! But, before we jump into what I learned from the book, let’s start with some stats (since we are numbers people you know😊)
Business Statistics that Matter
The most recent statistics show that there are approximately 33.2 million small businesses in the United States. Of those, 23 million are Sole Proprietorships (meaning the owner is the sole employee). That is 75% of all small businesses. The interesting thing is that the SBA (Small Business Administration) classifies a small business as a business earning $25 million or less a year. Just saying… If my business is making $24.5 million/year, it is not a small thing to me !! Now, here come the sobering stats….
20% of small business fail within the 1st year.
30% fail within 2 years.
½ have failed within 5 years.
70% fail within 10 years. ☹
According to Forbes, a global media company that focuses on business, technology, entrepreneurship and similar topics, stated that the reasons for these failures are as follows:
· Growing too fast
· Failure to Track Finances
· Failure to change with the times
· Underestimating the competition
I want to help you beat these odds and prevent you from joining these statistics.
What makes the Principles taught in "Profit First" Different?
The first thing you need to know is that the Profit First book actually teaches you how to implement a cash management system for your business. This is HUGE! There IS a difference between making money (income) and taking money (profit). As the book says, “Profit is not an event, it is a habit” -- I like that. And it has most definitely become a habit for me.
As an accountant, we are taught that the traditional formula for calculating profit is Sales – Expenses = Profit. And that’s the way nearly every business owner thinks. But that is incorrect if you want to succeed and actually make a profit in your business. Instead, the book teaches a new formula… Sales – Profit = Expenses. And it works! I have two businesses that prove the formula works MUCH better than the traditional. I ran my first business off the traditional formula and there was never any profit left. I worked for 5 years making $325/week GROSS as a business owner working more than 50 hours/week EVERY week of the year. No vacation. No paid days off. No sick days. No holidays other than Easter, Thanksgiving and Christmas (retail doesn’t get all those lovely Federal holidays). It was exhausting and frustrating when I saw how much I was working and how little I was making. ☹
Let’s get down to the good stuff now.
Putting "Profit First" to Work in your Business
Let’s get practical and tactical! I am going to share my EXACT process for implementing this cash management system into my bookkeeping business.
I have 5 business checking accounts.
1. Income account
2. Profit account
3. Owners Compensation account (draw)
4. Tax account (self-employment taxes)
5. Operating account (OPEX)
Setting this up was simple and easy with my bank and I use online banking to quickly and easily make transfers when it’s time to.
ALL business revenue goes in the Income account. My SOP (Standard Operating Procedure) requires that all monthly clients pay their fee on the 1st of each month via bank ACH. Therefore, all recurring income comes into my business on the 1st of each month. On the 1st or 2nd of each month, I reallocate those funds as follows:
5% of the Income gets transferred into the Profit account. (this is the money set aside for quarterly distribution)
50% of the Income gets transferred into the Draw account. (this is the money I am free to take whenever I want or need to)
15% of the Income gets transferred into the SE account. (this is the money set aside to make my quarterly estimated tax payments)
30% of the Income gets transferred into the OPEX account. (this is the money for paying the business bills with)
As you can see, that’s 100% of the Income/Revenue. For my business, doing this only once on the first of the month works great because I’m getting a whole month’s worth of wages at the beginning of the month. Any side work that comes in throughout the month is held in the income account until the 1st of the next month, it accumulates and is included in the allocation for that month.
Once a quarter, I take ½ of the funds in the Profit account and put it into a separate Savings account at a different bank (I use a local Credit Union) and keep it there. I don’t touch it. I don’t think about. I just know it’s there if I ever need it. It’s like my business Emergency Fund. The other ½ of the money is mine to do with as I please!
In all transparency…. Using this method has paid off two cars for us within the last two years because I’m using the Profit that I take from the monthly draws and the Quarterly profit draws and using that to eliminate personal debt. Using this method has allowed both our businesses AND our personal finances to be completely debt free outside of our home mortgage. NO credit card debt. No loan debt. Nothing owed but mortgage.
Please know that I am not sharing this with you to be bragging. I am simply showing you that the system does work and to give you hope if you are currently struggling with your business finances that you too can have financial stability in your business and personal finances. You absolutely do NOT have to start with the % of allocations that I am currently at but do start somewhere! And make sure that you are at least taking a 1% profit allocation or you will always have an excuse as to why you can’t take a profit at all.
I honestly cannot express to you the difference this book has made in our business AND personal lives because I’m applying the system to all areas. It’s like Financial Peace University (Dave Ramsey) for businesses! The two programs totally complement each other.
There is SO much more detail in the book and I hope that you will get you a copy of it soon and not just read it but apply it. I promise you that it’s worth it.
And that’s a wrap for todays post. I pray that it has been helpful to you and that you can apply something you’ve learned to make your job more enjoyable for you and those you serve.
Be blessed my friend!
See below the Amazon affiliate link so you can get the book at a great price. Book link https://amzn.to/42R8Rc6