Profit First by Mike Michaelowicz

1. Build profit into your business by paying yourself first, as a shareholder (and as an employee).
2. Cash in a business follows Parkinson's Law: if you don't pay yourself, you'll spend it.
3. You can build profit into your business with Mike's cash flow system & some discipline.

What is this?

A perspective framework and cash flow management system to growing a financially healthy business.

• Most business owners try to grow their way out of their financial problems, hinging “success” (profitability, owners compensation) on achieving a greater level of scale - but the result is usually just a bigger cash eating monster.
• This is apparently an extremely common problem. People become slaves to their businesses. Cites examples of people working on theirs for 10 years for free, reinvesting all of the money in pursuit of scale, growth, more top line revenue so that they can finally pay themselves a good amount via salary/distributions.

• Parkinson’s Law: work expands so as to fill the time available for its completion. Author argues that the same applies for cash expenditures as our revenues grow.
• The solution: Take profit first. You can’t grow out of your profit problem. You need to fix profit first, then grow.

• Revenue - expenses = profit?
• No, focus on revenue - profit = expenses

• When less money is available to run your business, you will find ways to get the same or better results with less. By taking your profit first, you will be forced to think smarter and innovate more.
• You are forced to focus on the things that make profit and dump the things that don’t (Pareto 80/20 rule)
• Defeats Parkinson’s Law

• How it works in practice: Twice per month, transfer money from income account (deposits) to opex, owners comp, taxes and profit on a pre-set % allocation (e.g. 1% to owners comp, 1% to taxes, 1% profit, 97% to opex).
• CAPS (current allocation % per account) vs. TAPS (target allocation % per account)
• Multiple accounts in our bank with mandatory deposit % allocation per account = using smaller plates to reduce portion size when you’re dieting
• Operating expenditure account gets put on a diet
• Implement this and start small to avoid strangling the business (e.g. 1% per account for the first quarter) so that the change is nearly undetectable

• You should consider the money transferred into owners comp & taxes to be considered INELIGIBLE for reinvestment to the business. These will be really small amounts to start so this shouldn’t be a problem.

• Logic for not reinvesting this money:
• This will build good expense habits and a cash framework for how to operate the business in a way that you can be most confident you'll never need to shut down.
• Reinvestment for the sake of growth AT THE EXPENSE of paying yourself allows Parkinson’s law to come into play.
• Owners are most valuable employees by far. Not paying most valuable employees builds business practices that are unsustainable, and the assumption that sustainability will come with top line revenue growth is a dangerous one. Author argues it usually doesn’t - because of Parkinson’s law. It is smarter for long term success of the company to start NOW with habits that can scale, and that means starting to paying out.

Tidbits

• 3 months of cash on hand is best practice
• Perspective of rewarding yourself for saving money the same way you do for increasing revenues, get excited/hype about it
• Your business should serve you, not the other way around. You should not be a slave to it, it should be an entity that serves you. Paying yourself is a first, key step towards changing that.
• something
• UPR system, any expenses you cut going forward will be directly contributing to our ability to pay for yourself. You cut or save $300 from the business? Consider that $300 in your pocket.

Expense control practices recommended by the author:

• Seek a free option whenever possible
• If you can get the exact same benefit from buying something used, as when you buy it new, always go for the used option
• Always try to avoid paying full price for things if you can avoid it
• Build up your negotiating skills
• Seek more cost effective alternatives before blindly paying for things
• Delay making major purchases until you’ve brainstormed 5-10 alternative options to spending that money and have reasonable thought each one through

Recommended by Jeff:

• Instead of thinking “is this a justified expense” (which I think enables unnecessary spending ), try to think “does the business REALLY need this to get us to the next level?”

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