If you’re a small business owner, you need to read Profit First. It gives you a stronger understanding of cash management and simplifies the book-end of your business. But there are some things you should know about it first. So here’s my honest Profit First summary.
But before I begin, here’s a little background on Profit First.
It was written by serial entrepreneur Mike Michalowicz, who had already built multiple multi-million dollar businesses when he wrote the book. Since then, it’s attracted a huge following. People enjoy Mike’s dynamic personality and conversational tone. As a result, they really bought into the Profit First system.
I’m one of them.
I’m a Master Certified Profit First Professional. That means I’ve got a badge that proves I know Profit First better than just about anyone.
But that doesn’t mean I always stick to the script. I like to do a few things differently — and with good reasons.
That’s because I combine the Profit First system with almost two decades of CFO experience. I’ve helped dozens of naturopathic doctors grow their practice since. With that kind of experience you could say I’m uniquely qualified to give this review.
Profit First Summary
Revenue — Expenses = Profit
becomes
Revenue — Profit = Expenses
Why? Because the accounting equation wasn’t meant for entrepreneurs like yourself. It was meant for accountants (Shocking, I know).
What I mean is, it’s designed for people who have an intimate understanding of numbers. People who can be completely objective with them. That can be hard if you’re in charge of your own naturopathic clinic. You’re emotionally attached to your business.
Luckily, the Profit First formula helps you reprogram your brain. It’s cash flow management for humans.
It teaches you to understand where your money is coming from and where it’s going. It pushes you to focus more on your bottom line than your top line.
And for entrepreneurs who are just starting out, that makes a big difference.
Here’s your Profit First summary: when you pay yourself first, you don’t just put cash in your pocket — you become smarter with your business finances.
The 3 Psychology Hacks of the Profit First Method
What Mike Michalowicz does in the book is combine accounting principles with good, old-fashioned psychology to help you become “instantly profitable.”
I get that it sounds a bit strange. But one of the reasons most small businesses fail in the first five years is poor cash flow management.
These psychological concepts play on human nature to develop good money management skills.
The Small Plate Analogy
The first principle Profit First uses is the small plate analogy.
You know, that technique people use to control weight?
When you fill your plate with food, you eat everything on it. It’s just a habit. (Especially if your mom wouldn’t let you leave the table until you did!) Using a smaller plate forces you to eat less food.
You can use the same technique for your money. If you put all your funds into one big account you will inevitably spend all that money. What you need to do is learn how to run your practice on a more frugal budget.
The best way to do that is to separate your income into separate bank accounts. That way you can only use the cash available in your operating expenses account to pay for those parts of your business.
Parkinson’s Law
The next principle is called Parkinson’s Law. It argues that the demand for something expands to match its supply.
Take time for example. If you have a week to do something, chances are you’ll procrastinate a little and just get it done in the seven-day deadline. But if you’re forced to do the same task in a day, you’ll get it done right away. And most of the time, you get better results.
In Profit First, Michalowicz argues that this works for your money too. By taking profit first, you learn how to get the same things done for less money.
And he’s right. It works.
If you own a naturopathic clinic, you’ll be able to understand this better than most. You have accounting software, POS, your EMR, office rent, payroll and so many other expenses.
Give yourself limits on how much you allocate to each operating expense. You’ll probably notice that you were able to do the same things with more affordable alternatives.
Habit Building
The final bit of psychological principle Profit First uses is habit building.
While this is not explicitly called out in the book, I thought I’d borrow some words from Charles Duhigg’s The Power of Habit.
Duhigg talks about habits like they’re subconscious behaviors. And they can be.
He explains that to create a new one, you have to match a behavior with a cue or trigger.
And to keep those habits from breaking, we follow that behavior with a strong reinforcer.
That’s what profit is. Profit is a reward for your hard work as a business owner. It is not your salary. When you continue to reward yourself for building a leaner business, profit becomes a habit.
My Thoughts on Profit First
That Profit First summary sounds pretty good right?
Well, I wouldn’t use Profit First if it wasn’t a good system.
But it does have some limitations I want you to be aware of.
Like I said earlier, this is a cash management system. Reading this book will not qualify you as an accountant. You will still need a CPA or fractional CFO like Every Single Bean.
Profit First gives you a better understanding of your money.
Here’s what I mean …
When you’re starting out, you could use the general allocation percentages. But you really should be using Profit First to fit your unique business needs.
If you’re just starting out, you might want to take less profit at the beginning.
And when it comes time to scale, you’ll still want to consult a professional.
The Profit First method is a framework for how you run your books. You will still need to learn what those numbers mean.
If you find that you’re overspending on operating expenses, how do you know which piece of equipment or software you should eliminate? How do you know if it’s an overstaffing issue? Do you have enough money set aside for emergencies? Do you have a plan in place to pay off your debt?
These are the types of questions a Certified Profit First Professional can help you with.
Would I still recommend the book to you? Absolutely.
Every successful business needs a good cash management strategy and this is a great way to start. Especially if you’ve just opened a new naturopathic clinic or you need help building good financial habits.
But if you really want to scale your business and take home more profits, having a Certified Profit First Professional on your team makes all the difference.
Profit First Giveaway
I hope you enjoyed this Profit First summary. I believe in this system so much that I want you to try it for yourself. That’s why I’m offering to send you a free copy of Mike Michalowicz’s Profit First.
Email me at Dan@everysinglebean.com to download your free ebook.
And if you have read it, I’d love to know what you think.