Hey Square Readers,
We hope you’ve started to dive into reading Profit First by Mike Michalowicz!
As we begin, let’s first lay the foundations for the Profit First plan by looking at what profit actually is, why it’s important to be profitable, and the reasons why so many businesses don't reach profit.
Why Profit is Important:
The author writes, “What I’ve found is that the fastest, healthiest growth comes from businesses that prioritize profit. And it is not because they plow money back into their businesses. Businesses that plow back their profits aren’t truly profitable; they are just holding money temporarily (feigning profit), then spending it, just like any other expense.”
The author lays out the difference between Accounting Profit and Real Profit. He gave the example of his accountant giving him his annual statement showing that he made $15,000 in profit, but that he spent it on expenses. Technically there was profit, but in reality, if you spend it on the business, is it really profit?
Real profit is operating without debt, and maintaining continual cash reserves after all of your expenses. Profit can be used to distribute to owners/shareholders, to fund the business in case of emergency, or in a select few other cases.
Why Your Business is Not Profitable:
The author talks about the Survival Trap, where business owners go through cycles of:
- Being in a crisis period of having very little money in the business accounts
- So they try a lot of different strategies to bring in extra money
- Which brings them into a period of big sales and income
- So they end up spending it all to pay expenses
- Which brings them back into a crisis period with very little money
Not only does this make your business unprofitable and adds extra stress to your life, it also pushes your business further away from its actual vision and purpose.
Why Profit First:
One of the main goals of Profit First is to be able to avoid this Survival Trap. By enacting Profit First, businesses can end up being consistent with the amount of money that they have, and also by making business decisions that keep you in line with the vision of your business.
This is done through being aware of how you spend your money, putting money aside for each of your spending and savings goals, and cutting down on spending along the way.
The author says, “When you take your profit first, your business will tell you immediately whether it can afford the expenses you are incurring; it will tell you whether you are streamlined enough; it will tell you whether you have the right margins. If you find that you can’t pay your bills after taking your profit first, you must address all those points and make the fixes.”
Next week we’ll dive into the heart of Profit First: the core principles and the first action steps of how to enact the Profit First plan!
We’d love to hear your answer in the comments:
- What does profit look like for your business? What do (or would) you do with your business’s profit?
- Have you been in the Survival Trap? What have you done (or are currently doing) that has brought in more money but not profit? Which of them would you stop if you were profitable?
Feel free to share any other thoughts you have about this book. We can’t wait to hear your thoughts in the comments below!
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Happy reading,
Pesso
