Late last year I rebooted my monthly membership to Audible.com, a service I use exclusively for “reading” business books. (I’m an avid fiction reader and love paperbacks and my Kindle, but when it comes to non-fiction, I’m a better listener than reader.)
Anyhow, I just finished up Profit First by Mike Michalowicz and thought I’d share a quick review.
Note: There are affiliate links in this post. They won’t bite.
The Premise of Profit First
Have you ever heard of Parkinson’s Law? It basically says that your work will expand to fill the time available for its completion. For example, you’ve got 2 weeks to finish your taxes. Guess what, you’ll finish them in 2 weeks. But give yourself 8 weeks? Well, you’d be a normal human if you took all eight weeks to get the job done.
Now apply that same principle to your business income.
The basics of old-school accounting go like this:
Income – Expenses = Profits
But if your expenses are expanding to fill the money made available by your income, your profits drop. So what happens when you put profit first?
Income – Profit = Expenses
The idea is that you take whatever top-line income you make and, before paying any bills, deduct a pre-determined percentage of profit (Michalowicz makes lots of recommendations on these percentages in the book).
But what if you take profit first and then don’t have enough money left to pay your expenses? Then Captain Obvious appears to tell you that your income doesn’t support those expenses. Cut what’s not essential.
In summary: Don’t settle for the leftover crumbs in your bank account. Take your profit off the top and let the leftovers drive your budget.Don't settle for the leftover crumbs in your bank account. Put profit first. Click To Tweet
In addition to discussing Profit First accounting techniques, Michalowicz actually goes into some great tips on running a profitable business. These were some of my favorites.
Not All Income is Equal
All income is good, right?! Michalowicz says no. He gives an example of his lawn service guy seizing an opportunity for an upsell by offering to clean gutters. Long story short, the cost of several trips to Home Depot (or wherever) to buy a ladder, a gutter snake, etc., actually cost more than what he made cleaning the gutters.
But he can clean other people’s gutters and make up that cash and be profitable over time, right? Again, Michalowicz says it’s unlikely. The more gutters Lawn Guy cleans means the fewer lawns he’s mowing.
And is he a lawn mower or a gutter cleaner?
This really resonated with me as I’ve thought about the services I’ve offered clients in the past. Can I do many different things and make money at them? Yes. Does that variety of services actually serve my larger business goals? Not really.
Every project or product I work on either moves me closer to my goal or distracts me from it. While the distractions do produce income, it’s not worth it.
Double Your Results and Halve Your Efforts
Michalowicz takes the premise of cutting your business expenses while producing the same income (do you really need that new laptop?) and applies it to our work.
While this could be a call to reduce inefficiencies in work habits and tasks, it’s also a challenge to see if there are better ways to do things. It’s easy to get stuck in a rut.
I’m still noodling over this one and what it might look like for my business, but this is a fun puzzle to put my mind to.
Cut Recurring Costs
I like this one because it’s immediately actionable. Yesterday I went through every recurring business cost (both monthly and annually recurring) and got rid of the ones I didn’t need.
I wasn’t exactly bleeding cash here (it averaged out to about $20/mo), but it was such a ridiculously easy way to immediately put more cash in my pocket.
A couple of tips: If you feel a little out of control here and can’t readily find your recurring costs, call your credit card company (or bank) and ask for a new card. All your recurring payments will fail on the next billing cycle and you can decide whether it’s one that needs to continue or not.
Also, if you have a PayPal account, don’t forget to go through your pre-approved payments (under your profile settings).
The only thing I didn’t like about this book (which is actually the author’s Most Important Step) is to open a variety of bank accounts (with varying level of ease of access) to distribute your profits. I love the organization of this method and using specific accounts for specific purposes, but I don’t see myself opening up a dozen new accounts anytime soon.
Aside from that, the book gives absolutely solid (and practical) advice when it comes to managing your business finances, eliminating debt, and, best of all, making a profit.
If this piques your interest, pick up a copy of the book. If it doesn’t, then know I’ve just saved you $15. 🙂
p.s. Interested in discovering more great business books? Here’s a list of my favorites.