When will your business become profitable? Next month? Next year? Mike Michalowicz, author of Profit First: A Simple System to Transform Any Business from a Cash-Eating Monster to a Money-Making Machine, says it should be today. “I always thought that I could run my business on the idea that I should sell as much as I could and spend as little as I could and that profit would ‘just happen,’” he says. “It never did. I realized that I run my business by looking at my deposits (sales) and then paying my bills from what I deposit (expenses)… and always could justify spending/investing every penny I had. Profit was always put off to a future date, and that date never happened.”
He believes the traditional GAAP (Generally Accepted Accounting Principles) formula of Sales – Expenses = Profit actually fails most entrepreneurs, because of human nature: if you have money, you spend it, and profits don’t materialize. “GAAP puts us in the habit of selling as much as we can and they paying expenses first. Expenses become a focus and for most businesses grow just as quickly as sales. Profit is a ‘leftover’ in the GAAP formula. It’s an afterthought.”
Instead, Michalowicz suggests looking at the situation differently, and deducting a pre-determined profit margin upfront. “By taking my profit first, from every deposit, profit is now a habit, not a hopeful ‘one day’ event,” he says. Of course, you can’t be greedy: “I have seen people try to extract way too much profit from their business starting from day one, and it cripples the business,” he says. “The key is to build a profit habit slowly.”
But if you take a measured approach, he believes the “Profit First” discipline helps you make better business decisions. “The expense budget gets squeezed down. This sounds like a subtle change from simply reducing expenses, but it is more than that… We take the profit first and what remains is the ONLY money available for expenses. You must find a way to make it work with what is left over for expense. Profit isn’t an option and it’s not a variable. It’s predetermined.” That forces you to be creative and innovative, says Michalowicz. “When you don’t have enough money to pay your bills, that is your business screaming at you, that your company is not in the position to incur those bills and that you need to find a way to not incur those bills going forward.”
It’s too easy to justify “investments” that won’t actually pay off, but which compromise our profitability, says Michalowicz. Instead, he says, “Be frugal but not cheap. In other words, we must build efficiencies throughout our business. And we do this by cutting unnecessary or low value costs, and squeezing all the juice out of our investments.”
Financial Foundations Coaching is a Profit First Certified Firm and we live and breathe the Profit First method.
If Mike’s views resonate with you, please reach out with us today to discuss your business and how it can be come profitable TODAY!