Hello all. It's been a while since my last post, but in the new year I plan to post more as I feel this is a healthy use of my time.
Profit First is a book written by Mike Michalowicz, an entrepreneur and business author. The book is focused on helping small business owners and entrepreneurs create a profitable business by re-arranging the way they think about their finances.
The central idea of the book is that small business owners should prioritize profit over revenue. According to Michalowicz, many small businesses focus too much on increasing revenue without thinking enough about how to make a profit. By focusing on profit first, small business owners can create a more sustainable and successful business model.
The book provides a step-by-step guide on how to implement this approach, including setting up a system of bank accounts that automatically direct a percentage of revenue towards profit, expenses, taxes, and owner's pay. To set up such a system, you would need to open several bank accounts, each designated for a specific purpose such as profit, expenses, taxes, and owner's pay. Once you have set up these accounts, you would then need to determine what percentage of revenue should be directed towards each account. For example, you might decide to allocate 50% of revenue towards expenses, 30% towards taxes, and 20% towards profit.
Once you have determined the percentages, you would then need to set up automatic transfers from your main revenue account to each of the designated accounts. This can typically be done through online banking or by working with your bank.
It's important to note that this approach is not a one-time setup, it requires ongoing maintenance, for example, periodically revising the percentage allocation as the business evolves. Also, it requires discipline, as it will be tempting to use the profit account for expenses, but it's crucial to stick to the system to make it effective.
This system of multiple bank accounts is one I've already used for a long time. For both my business and personal, I have a main bank account where all deposits are made, I then distribute funds to multiple labeled bank accounts for taxes, emergencies, expenses, etc. Unlike the book suggests, I've never had an account that I labeled profit, so the concept is interesting to me. It could be an approach I use in future, but I don't feel like I have sufficient cash flow for my business yet. Also since I have a day job, I'd rather compound any profit from my business until I am ready to give up that job.
The author also encourages the business owners to break down their expenses into necessary and unnecessary expenses, and to use the profit first system to prioritize where to allocate resources and to make better financial decisions.
The book also provides real life examples and testimonials of small business owners who have implemented the Profit First method and seen an improvement in their financial success.
Overall, "Profit First" is a practical, actionable guide for small business owners looking to improve their financial performance and create a profitable business. If you currently do everything with a single bank account, this book is worth a read. It gets a lot more complicated than that, and I'm not sure I would go back and implement every detail in this book. I do highly recommend the use of multiple bank accounts.
Thanks for reading!
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