If you’ve been following the blog for any length of time you will know by now that I’m a huge fan of Mike Michalowicz’s Profit First approach to business finance. If you haven’t already read the book, I highly recommend it (you can get a copy here). I also highly recommend implementing the Profit First method in your business as early in its development as possible – ideally, right from the start, but if you have an established business it’s never too late to start!

Here’s the thing, there aren’t many books out there on accounting and finance. The ones that do exist generally fall into two camps: the highly specific ones designed for accountants and finance experts like myself (or people training as professionals), and the basic introductions/guides designed for people who have no professional experience in finance but need to make financial decisions.

Some are designed for managing personal finance, but a lot are geared towards business.

And the majority of finance books are unbelievably disappointing.

I say this not only from my own perspective as a professional, but from experience speaking to numerous clients, business owners, and entrepreneurs who come to me frustrated by their inability to get a handle on their finances.

They’ve read the books, and they’re not helping.

Why?

While reasons vary, the majority of people seem to have some variation of the same core complaint: these books don’t provide an actionable plan that will produce tangible, immediate results, and the bottom line is that they always end up with a disappointing bottom line.

In other words, even if these guides succeed in explaining finance concepts and methods in an accessible way people can understand, the information doesn’t give them a practical way of increasing their profits.

Enter Profit First, the accessible, practical, actionable blueprint for creating and steadily increasing your profits.

A Beginner’s Guide To Profit First

Essentially, Profit First is a book about cash management, but in reality it’s so much more than that. The perfect accounting hack for busy entrepreneurs who are time-poor and overwhelmed, this is a system that is rooted in human nature and psychology , easy to understand, and perfect for business owners.

Sound too good to be true? Trust me, it’s real!

Here’s everything you need to know about Profit First to become a hugely successful entrepreneur, and build a strong, profitable business…

The Profit First Principle

The core principle behind Profit First is flipping the traditional view of accounting and cashflow on its head by changing the equation used to calculate profits and literally placing profit first, ahead of expenses. The traditional method of calculating profit, as we all know it, is:

Mike Michalowicz’s innovative Profit First approach is to reverse this equation, encouraging entrepreneurs to prioritise the level of profit they want to achieve and find a way to manage with the level of expenses they have left to work with. More importantly it is changing your mindset around profit:

Parkinson’s Law

When profit comes at the end of the equation we are making do with what’s left over. There’s a little theory called Parkinson’s law which tells us that work always expands to fill however much time we have available to complete it.

If there are 6 months available to complete a project, we will spend 6 months working on it. Give us only 1 month, however, and we’ll get exactly the same amount of work done in ⅙ of the time.

Often, taking less time over something actually improves the results, because we are more focussed and motivated. More than that we surprise ourselves when given a finite amount of time to do things, because we defy our expectations of failure and still get them done.

We achieve the seemingly impossible.

Profits and expenses work under the same principle. When profit is at the end of the equation all the money we have coming in is up for grabs. The ‘time’ factor in Parkinson’s law is replaced by the money factor – if we have X amount of money available to us our expenses will increase, gobbling up all that money.

If we have less money available to spend, we will find a way to do the same thing for less.

The problem with viewing profit last is that your expenses are free to expand into that space.

Flip it around, and the amount of money available for expenses is suddenly reduced. It’s finite. The amount we want to earn in profit simply isn’t available and we get the job done with what’s left over.

And it’s not a magic trick. It’s not going to come at the expense of the quality of our services or the products we produce. Rather, is forces us to stick to what is actually available – this much money, no more. We hustle a little harder, think a little deeper, and come up with innovative and creative  new ways to do things, or create new methods that don’t require as much capital to be spent on expenses.

We surprise ourselves.

We do that which we perceived to be impossible.

The Link Between Profit And Psychology

There are huge psychological benefits to this simple reframing technique, and it’s easy to see why – especially if you’re not a finance professional.

I’m the first to admit that accountants and bookkeepers are…different in their thinking to the majority of other people (save perhaps some types of scientists) because they think in numbers.

Numbers come naturally to us, and that simply isn’t the case for most people.

There’s a theory of thought that says everyone either thinks in words or images. Neither is better or worse than the other, it’s simply a different way of forming thoughts. Those who think in images are better at visualising things and doing tasks that require pictures, like reading sheet music, while the word-thinkers sometimes struggle with this but are better at other things. A lot of people have a mixture of words and images, and just a few think in totally abstract concepts.

Equations and calculations of any kind can be really tough for people to grasp because it requires them to literally change the way they think.

This is why so many entrepreneurs who are incredibly capable, creative, intelligent and hands-on in their business really struggle with their accounts: they think in words, or pictures, not numbers.

Having profit at the end of the equation is, for most people, a clear indication that it is the end result of your efforts. It’s a visual cue and a matter of word-order, making it difficult for non-number-thinking people (who are, by the way, in the majority!) to make it a priority because it comes last.

It’s what’s left over after you’ve done everything else.

We naturally focus on things that come first, and when profit is at the end of the equation we seek to increase it by increasing the front. So for a lot of people, the only conceivable way to increase your profits is to increase your revenue.

Reducing expenditure is something that simply doesn’t occur to many people. And if it does, it’s swiftly followed by thoughts of:

‘I can’t, all these expenses are absolutely essential.’

Or, ‘But I have plenty to cover all these expenses, with money left over – I don’t need to reduce them!’

Both of these are understandable perspectives, but they make it very difficult to increase your profits and, most crucially, ensure your business is profitable right from the start.

This is where Profit First comes in, because the simple reframing used to place profits before expenses means that expenses are the end result.

The thing that’s left over after everything else is done.

It’s so simple, but it’s an incredibly powerful shift in mindset.

The Benefits Of The Profit First Method

Although this simple shift in mindset is, in itself, a huge benefit to the Profit First system, it is by no means the only one. Profit First expands far beyond a model for managing your business cash, and becomes a tool that can be used for actively promoting the growth of your business as a whole.

It can even be applied to your personal finances, truly helping you to create the life and business you have always dreamed of – balanced, abundant, and stress-free.

This is the next huge benefit of using Profit First – it doesn’t require agonising over financial decisions. Once you set the system up for your business, it pretty much runs itself. The key is to ensure that you have it set up to suit your business, as every business is different. You need only check in occasionally and recalculate to make sure you’re still using the optimum percentages for your current financial situation.

A situation that, if you’re using Profit First correctly, will constantly be improving.

And that’s the true and greatest benefit: the ability to create real tangible improvements in your finances – both personally and professionally – on an ongoing, scalable and sustainable basis.

This is something a lot of entrepreneurs really struggle with, not just growth, but sustainable growth, and it is once again because they’re placing profit at the end of the equation, rather than putting it first – they prioritise growth over profit.

It can work in the short-term, but in the long run the growth you create is often unsustainable, and achieved at the expense of your profit margin.

The Problem With Growth Before Profit

Growth is a big buzzword in the business community, and for good reason. We’re all looking to grow our businesses, expand, and find ways of improving their success and profitability.

But it’s easier said than done, right?

Here’s a common problem a lot of businesses face: they devote years of effort to consistently increasingly sales. Year on year, their numbers go up, and they continually invest in new technology, methods, staff, and other things that seem vital to their continued efforts at growth.

They have a goal in mind. Maybe it’s $1 million, maybe $10 million, maybe even $100 million, but somewhere there’s a magic number.

If they can reach that number, they’ll have ‘made it’.

They’ll be successful.

And even when the number feels ludicrously high, it’s often very achievable. Just keep pushing those numbers up year after year, and eventually your revenue will hit the magic number.