The Counterintuitive Cash Management System

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What it’s about

Profit First by Mike Michalowicz presents a revolutionary approach to managing business finances. The book challenges traditional accounting methods and advocates for prioritizing profits over expenses. The author proposes that before paying any expenses, entrepreneurs should set aside a fixed percentage of income as profit. This method aims to ensure businesses become financially healthy. The book emphasizes that profit must be the focus and should never be forgotten. It suggests that profit is not an event but a habit that must be baked into your business every day, every transaction, every moment. By taking your profit first, you will be forced to think smarter, innovate more, and find ways to get the same or better results with less. This system transforms businesses from cash-eating monsters into money-making machines. Get the book here.

TAKEAWAYS

1. Take Your Profit First: The book introduces a unique system where you take your profit before paying your expenses:

   • Determine Your Profit Margin: The first step is to determine your profit margin. This is the percentage of revenue that you want to set aside as profit.

   • Set Up the Five Profit First Accounts: The system involves intentionally dividing revenue across different bank accounts. These include a profit account, owner’s compensation, taxes, operating expenses, and a revenue account.

   • Allocate Revenue to Each Account: After each sale, you allocate a predetermined percentage of the revenue to each of these accounts. The percentages can be adjusted based on the size and needs of your business.

   • Pay Expenses from the Appropriate Accounts: You then pay your business expenses from the operating expenses account. If there isn’t enough money in this account to cover an expense, this signals that you need to cut costs.

   The Profit First system is a shift from the traditional method of accounting, which is sales - expenses = profit, to sales - profit = expenses. This means you prioritize profit and then determine how many expenses you can afford. It’s like the envelope method of personal finance applied to business. This system aims to make businesses immediately and permanently profitable. It forces you to think smarter, innovate more, and find ways to get the same or better results with less.

2. Profit is a Habit, Not an Event: Profit should be baked into your business every day, every transaction, every moment. It’s not something that happens at year-end or someday.

3. Revenue is Vanity, Profit is Sanity: The book emphasizes that revenue doesn’t necessarily equate to profit. You need to focus on things that make profit and eliminate things that don’t.

4. Efficiency Leads to Sustained Profitability: When less money is available to run your business, you will find ways to get the same or better results with less. By taking your profit first, you will be forced to think smarter and innovate more.

5. Eliminate Unnecessary Expenses: Cutting down unnecessary expenses can bring more health to your business than you can imagine.

6. Start Small: Even if it’s just 1% of your income, start transferring it to your PROFIT account. This small step will not only prove the system to yourself but also build a wealth of confidence.

7. Profit First is a Cash-Management System: Run your business based on what you can afford to do today, not what you hope to be able to afford someday.