Last weekend, my dear friend and colleague Kim Dolniak posted a photo of herself on Facebook at her beach house. She was drinking wine, wearing a t-shirt that says, “All I want is everything,” and reading Profit First by business writer, speaker, and advisor Mike Michalowicz.
Being a fairly impressionable human, I ordered the book on my Amazon app before I’d event “liked” the post. It was delivered to my house late Monday night, and I read the book the following day.
I will read any book an admired colleague recommends. This practice has caused me to read a wide range of authors. In the best-case scenario, I end up reading a Jim Collins Good to Great-level book that transforms my understanding of business systems, and in the worst case scenario, I get a few really good tips in a sea of fluff. Either way, I learn something.
As I started into Profit First: Transform Your Business from a Cash-Eating Monster to a Money-Making Machine, I was optimistic. The recommendation came from a very astute and successful business owner whom I think quite highly of. As I tore through the first few pages, however, I began to wonder if this was going to be more on the fluff end of the spectrum. There was a lot of build up to the point, which can be an engaging tool for readers. However, for my hyper-efficient/impatient brain, the content in the first part of the book was a pink flag . . . not quite red.
But once the author made his first great point, I was hooked. I also then saw how the information provided at the beginning of the book provided the context for this discovery and practice, which in my mind solidified his street cred as an entrepreneur. If you happen to be an impatient reader like me, keep reading. Trust me, and you’re welcome.
As the title suggests, the premise of the book is to put profit first in your business. He explains, “Profit must be baked into your business. Every day, every transaction, every moment. Profit is not an event. Profit is a habit.” He continues, “If you want healthy, sustainable growth, it is inevitably a scramble to grow at all costs . . . (including the quality of your life). When you focus on profit first, you inevitably figure out how to make a profit constantly.”
Sounds great, right? But if it were that easy, wouldn’t every company just be making a profit? Well, yes. Michalowicz asserts that the reason why business owners don’t put profit first starts with the generally accepted accounting principles (GAAP). “GAAP’s fundamental flaw is that it goes against human nature. No matter how much income we generate, we will always find a way to spend it – all of it . . . GAAP teaches us to focus on sales and expenses first…we [then] focus on what comes first (sales and expenses) and actually become blind to what comes last…profit. GAAP was never intended to manage only cash. It is a system for understanding all the elements of your business…Sales – Expenses = Profit is a formula that is horribly flawed.”
I had never really thought of it that way. I give a lot of thought and airtime to the concept that the bottom line is so much more important than the top line, but it’s simply human nature to put the priority on the top line, and to deprioritize whatever comes last . . . which, unfortunately, on your P&L sheet is profit!
So how do you put profit first? Michalowicz has a detailed but easy to follow system laid out in the book. Having worked with companies with $100k/year in revenue up through the billions, I can’t think of one example where his method wouldn’t work. It’s a gradual plan that allows you to make slow and incremental changes that last, reducing waste, but always paying profit first. Before you pay a single bill, you pay profit. It’s a wonder how creative we can be when we have to work with less, isn’t it? I almost get a high off the challenge of making a limited amount of funds do something really great. That’s when we are at our bests: when we are challenged to find a way to do the same (or better) with less.
Michalowicz describes this concept as Parkinson’s Law, named after Cyril Parkinson, a British Naval Historian who wrote about the concept back in 1957. Essentially, “the demand for something expands to match its supply.” When you have less, two things happen. First, you become frugal and lean. Second, you become innovative.
Michalowicz proposes a new formula: Sales – profit = expenses!
It is so simple, and yet if you can follow the steps in the book, it will revolutionize your business. I enthusiastically recommend this book to any business owner, or anyone who is thinking of opening a business. If you happen to check it out, we’d love to hear from you! Let us know your thoughts in the comments, or feel free to email me directly: firstname.lastname@example.org