Profit First | Mike Michalowicz

Summary of: Profit First: Transform Your Business from a Cash-Eating Monster to a Money-Making Machine
By: Mike Michalowicz

Introduction

Are you struggling to make your business profitable despite following the age-old sales-minus-expenses formula? It’s time to unlock the secrets of the book ‘Profit First’ by Mike Michalowicz. Dive into a refreshing approach that’s designed to work with your instincts, instead of against them. In this summary, you will learn the pitfalls of the traditional profit formula, discover how Parkinson’s Law and the Primacy Effect play a role in your business’s success, and find out ways to rework the profit formula to guarantee consistent profits. Moreover, you’ll explore the importance of managing your finances with multiple bank accounts, an easy strategy for growing your profits, and how to apply these techniques to your personal life for financial freedom.

The Traditional Approach to Profit Rarely Works

The traditional approach to profit often leads to failure and goes against natural instincts. This is because the formula for profit triggers our tendency to use up whatever is available. In addition, the Primacy Effect causes entrepreneurs to focus on making sales, believing this leads to profits. However, to guarantee profits, entrepreneurs should rework the formula by determining their desired profit percentage before subtracting it from sales. This allows their natural ability to work with what they have to kick in.

Smaller Money Portions for Better Financial Management

Learn how to manage your finances better by dividing your money into smaller portions through multiple bank accounts.

Have you ever heard of using smaller plates to eat less food and lose weight? The same principle applies to managing your finances. Instead of piling all your money into one big account and spending everything, the author suggests dividing your money into smaller portions through multiple bank accounts.

The key message here is that working with smaller amounts of money makes managing your finances easier. The author recommends setting up five different bank accounts for your business – one for main income, one for profits, one for the business owner’s salary, one for taxes, and one for operating expenses. To manage your money effectively, every time the business earns revenue, it should be deposited into the income account. Then, transfer money to the other accounts, starting with the profit account. Once you’ve taken your predetermined profit, the remaining money is used to fund the rest of your accounts.

To ensure discipline, each account should only be used for its specified purpose. To avoid dipping into two important accounts – profit and tax accounts – the author suggests keeping them out of sight by having them with a different bank. This way, you are less likely to spend the money, and you can keep it safe for the long term.

In summary, dividing your money into smaller portions through multiple bank accounts helps you manage your finances more effectively. By having separate accounts for different purposes, you can keep track of your spending and avoid dipping into important accounts. This simple yet effective strategy can help you achieve financial discipline and success.

Grow Your Profits Gradually

To increase profits, start by setting a defined target percentage. Look at other companies in the same industry and use their profit percentages as a reference. Allocate just one percent of your company’s total revenue to your profit account and reduce operating expenses by one percent. Increase profit allocation and decrease operating expenses each quarter until you reach your target percentage. The key message here is taking small steps towards a defined target is the way to grow your profits.

Enjoy Your Profits

Don’t just admire your profits; use them as a reward and safety net. Take 50% at the end of each quarter and enjoy it, while the other 50% stays in the account as an emergency fund for the business. Only reinvest excess profits after setting aside three months’ worth of funds.

In “Enjoy Your Profits,” the author compares baking a cake to running a business and emphasizes the importance of not letting profits go to waste. Rather than simply admiring them, profits should be used as a reward and safety net for the business.

To make the most of your profits, the author recommends taking 50% at the end of each quarter and using it to treat yourself or your family. The remaining 50% should stay in the account as an emergency fund for the business. This way, profits are not misused or relied upon to support the business.

Only when the profit account has reached a certain level should excess funds be reinvested in the business. The author suggests setting aside three months’ worth of funds as a safety net before deciding how best to use the excess money to grow the business further.

By following these guidelines, the business will have a consistent profit, and the owner will have money in their pocket as proof. But the journey does not end here; the author hints at more ways to increase profits in the next part.

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