This book gives an in-depth look at how to create a business that will give you freedom and financial success. It teaches the reader how to think like more of a capitalist so they can start profiting from their own entrepreneurial efforts, while creating positive change for themselves and others.
“The Profit First Formula” is an easy-to-read book that has been written by Mike Michalowicz. It’s a quick read, as it only contains about 100 pages. The author uses the Profit First formula to help readers create their own business and make money while they sleep.
Are you seeking for a synopsis of Mike Michalowicz’s book Profit First? You’ve arrived to the correct location.
After reading Mike Michalowicz’s book, I wrote down a few significant takeaways.
If you don’t have time, you don’t have to read the whole book. This book synopsis gives you a quick rundown of all you can take away from it.
Let’s get this party started right now.
I’ll go through the following themes in this Profit First: Transform Your Business From a Cash-Eating Monster to a Money-Making Machine book summary:
What is the purpose of Profit First?
By following the procedures indicated in the book Profit First, business owners may notice an instant change in their financial accounts. There’s an explanation of why conventional accounting prevents organizations from making money, as well as a new technique for ensuring consistent success.
Who wrote the book Profit First?
In his 24-year career, Michalowicz has built four multimillion-dollar businesses. He has written pieces for the Wall Street Journal, Entrepreneur Magazine, and Harvard Business Review, as well as giving talks at Columbia and Princeton universities. He has published four additional publications in addition to The Toilet Paper Entrepreneur and The Pumpkin Plan.
For whom is Profit First?
Profit First is not a book for everyone. It could be perfect for you if you are one of the following categories of people:
- Entrepreneurs that are having difficulty turning their company around
- Successful company owners that wish to boost their revenues
- Accounting and finance managers that want to learn new techniques
Summary of the Book Profit First
Introduction
New enterprises are difficult to start, and everyone who succeeds should be commended for their efforts. The difficult times do not stop when a firm opens its doors.
Entrepreneurs strive for development and sales from the outset, aiming to discover a means to generate more money than they spend. However, the vast majority of them never make it to that point. According to the author, 50% of firms fail within the first five years, and those who do survive live paycheck to paycheck and often accumulate debt.
This is not the way to attain profitability. There is a better, more obvious approach to generate and build earnings. You’ll discover how it works and how to put it into practice straight away in this book.
Lesson 1: Traditional approaches to profit do not work since they go against our natural impulses.
There are millions of enterprises across the globe, ranging from small shops to large computer corporations. Their owners are all eager to earn money. Fortunately, there’s a tried-and-true strategy for achieving just that. After you’ve sold as much as you can and deducted your expenditures, you’ll be left with the remainder.
Doesn’t it seem like a simple path to success? Not at all.
According to a research done by the Global Entrepreneurship Monitor between 2013 and 2015, eight out of every ten enterprises failed owing to a lack of earnings. Why is this occurring when a formula exists? The issue lies with the formula itself.
Businesses fail in a variety of ways as a result of the formula. To begin with, our natural inclination is to eat whatever we own.
The quantity of effort necessary to finish a job grows proportionately to the amount of time available, as Cyril Northcote Parkinson observed in the 1950s. If a report must be finished in two days, people will work on it for two days. The identical report will take them a week to finish.
When time is swapped for money in business, the same thing occurs. Entrepreneurs will spend and cut into their earnings regardless of how much money is available.
A notion known as the Primacy Effect is another method in which the formula hinders profitability. Selective attention is the propensity for individuals to concentrate on what they notice initially and dismiss everything else. For example, the words near the top of a list are more likely to remain in your mind.
Because the formula begins with sales and finishes with profits, entrepreneurs focus all of their efforts and resources on expanding sales, believing that this will lead to profits on its own.
However, as you’ve just discovered, earnings are hard to come by. The million-dollar issue now is: how can entrepreneurs assure their own success?
The trick is to rework the formula. Instead of removing expenditures, determine how much profit you should earn and deduct it from your sales. Before you spend money, you may deduct it from your profit target. Your capacity to work with whatever money you have left will kick in, regardless of how much or how little you have.
Rethinking your company formula is crucial to increasing profitability, but it is just the first step. The remainder of the plan will be discussed in the following chapters.
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Lesson 2: Managing your finances is simpler when you have less money.
If you’ve ever attempted to lose weight, you’re probably aware with the concept of using smaller plates to consume less calories.
Because we try to pack as much food as possible onto a plate, using smaller dishes makes it easy to eat less. When he first heard this, it was a eureka moment for him. He put all of his money into a big bank account and then wasted it all. As a consequence, he just need lesser sums of money in order to spend less.
What is the most effective method for dividing your money into smaller amounts? By establishing many bank accounts. You should create five distinct bank accounts, according to the author. The company profit account, the owner’s pay account, the tax account, and the operational costs account should be the four primary accounts.
Here’s how to keep track of your accounts after you’ve got them. After it is generated, company revenue is put in the income account. The money is then sent to the other accounts, with the profit account always being the first. After you’ve collected your planned profit, your leftover money are utilized to finance the rest of your accounts.
Accounts should only be used for the reasons for which they were established. All firm invoices must be paid from the operational expenditures account, and payments from the tax account must be made during tax season.
Even the most self-disciplined individuals are susceptible to temptation. As a result, just as some individuals attempt to avoid consuming junk food by preventing it from entering their houses, you may avoid draining two crucial accounts by keeping them out of sight.
You have profit and loss statements.
Why? Profit is just what you need, therefore draining that account is counterproductive. What about the tax situation? You may get into a lot of trouble if you don’t pay your taxes.
To keep the money secure, it’s ideal to have these two accounts with distinct banks. Your earnings and taxes are maintained here in the long term. After you’ve split the money across the accounts at your primary bank, transfer the earnings and taxes from those accounts to the accounts at the new bank.
When you check your bank balance, the less often you see this money, the less inclined you are to spend it.
Lesson 3: Taking incremental efforts toward a clear goal is the key to increasing profitability.
When your primary income account reaches zero, you may begin distributing funds from your other accounts, including a profit account. Do you start collecting your earnings as soon as your firm produces a profit?
Profits, like many other things, do not appear suddenly. It’s also crucial to build up your earnings gradually and consistently.
There is an optimum profit % that you should aim for, and your objective is to achieve it. It is necessary to specify this proportion.
One approach to achieve this is to look at firms in the same sector. By comparing a company’s income to its overall sales, you may calculate its profit %.
Based on this data, you’ll be able to determine what your objective should be. Keep this as the name of your profit account so you don’t forget what you’re attempting to accomplish.
Now that you know where you’re heading, how are you going to get there?
Starting with one percent or one step is a good place to start. One percent of your company’s earnings should be put into the profit account, and subsequently one percent of running expenditures should be cut.
Remember that achieving sustainable profitability is a marathon, not a sprint. Consider what would happen if you took a 20% profit only to find that your firm was struggling and you had to utilize all of your earnings to rescue it. You’d be back at square one, with no earnings and a diminished enthusiasm for the task.
Also, even if you start at 1%, you won’t be able to stay there for long. At the conclusion of each quarter, increase your profit allocation to move closer to your objective, and cut your operational expenditures by the same amount. It is suggested that you increase by three percentage points per quarter.
As a result, if you start with 1% of earnings, you will climb to 4% the following quarter. This little modification will pay off handsomely in the long run.
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Lesson 4: Reward yourself and utilize revenues to safeguard your company.
Assume you’re making a cake from scratch. You admire your work after coming up with the right recipe, collecting the ingredients, and then frosting it.
You’re just interested in admiring. There is no frosting on your cake, not even a smidgeon.
Imagine doing the same thing with your business: working hard, seeing your revenues rise, but never getting a cut. What a waste of time.
However, you do not have limitless access to your earning account just because you choose to spend it. Instead of taking earnings every quarter, take them at the end of each quarter, like major public company stockholders do. As a consequence, instead of depending on your revenues for support, you’ll look forward to them.
Similarly, just as you wouldn’t (or shouldn’t) consume the whole cake at once, don’t invest all of the company’s earnings at the conclusion of each quarter. Profits of 50% should be spent on yourself or your family rather than the company. You’ve earned it! Profits should continue to be put in this account as a company emergency reserve.
After expanding your profit account for a time, you will notice a significant difference in your profit %. After you’ve taken your 50% at the end of the quarter, you’ll discover that the remainder will fund your company expenditures for more than three months!
During this period, profits from your company account may only be reinvested in the firm. If you leave three months’ worth of funding, you may utilize the extra money to assist build your firm.
Now is the time to give yourself a pat on the back! You have money in your pocket to show that your company is profitable on a regular basis. That isn’t to say that everything is over. By freeing up additional finances, you can still enhance your earnings. This is something we’ll talk about in the upcoming chapter.
Lesson 5: Increase your revenues by learning how to accomplish more with less.
What’s it like to suddenly discover money in your coat pocket or beneath the couch? It’s fantastic, isn’t it?
What’s more, guess what? Your company can give you with the same level of fulfillment. It’s just an issue of understanding how to go about doing it.
The first thing you should think about is the efficiency of your company. Is there anything that you pay more for than it should? Are there any things that you could finish faster? There are several techniques to increase your earnings.
UPS, or United Parcel Service, is the solution. In order to improve their efficiency, they implemented a lot of intriguing and beneficial modifications in 2006. Drivers who make left turns, for example, waste more gas and spend more time waiting at traffic lights. UPS saved $6 million a year in time and fuel by instructing drivers to avoid left-turn lanes as much as possible.
It’s time to look at your clients and enhance the way you serve them now that you’ve decreased time-wasting and cut expenditures in your organization.
If everyone of your consumers has highly diverse wants, you’ll have to spend time and money responding to their individual needs. If all of your customers want the same thing, you can emphasize providing that one item well, fast, correctly, and at a lesser cost until you are servicing more clients with fewer resources. This is efficiency in action!
Enhance the areas where your business succeeds. Clients who are in need of your services should be informed about them. You will be able to meet your profit targets more quickly if you do so.
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Lesson 6: Paying off debt does not have to be a barrier to making your company successful.
Isn’t it true that money is required to earn money? This is especially true for business entrepreneurs. Sometimes you just don’t have the funds to start a business.
Borrowing money from family and friends, taking out loans, and even maxing out credit cards are all common ways for entrepreneurs to go into debt. When this occurs, being debt-free might easily take priority over generating a profit.
This does not have to be the case.
You should continue to invest a part of your earnings into your profit account regardless of your company’s debt. You will develop your cash reserves and ultimately be able to meet future costs if you do this while paying off your obligations.
If you’re wondering where the money to pay off your debt will come from, look at your bank account.
Do you keep track of how much profit you make each quarter? To be precise, 99 percent of them will have to die. Keep 1% of your earnings as a profit share for yourself. Pay off your debts with 99 percent of your earnings. Regardless matter how painful it is to lose so much money, you will be debt-free much sooner.
You must not only have the money to repay your bills, but you must also be strategic in how you spend it. The steps are as follows.
The lowest debt should be stated first, followed by the greatest obligation. If you have debts of the same amount, start with the one with the greatest interest rate. Then, along with the rest of your debts, you should pay off the lowest one first.
Use the money you have left to pay off this obligation. When you’ve paid it off fully, you may use the money you’ve saved to pay off the next loan on your to-do list.
Before you know it, you won’t have anything left to pay off, and you’ll have more profit to enjoy.
Lesson 7: When applied to your personal life, profit first may help you achieve financial independence.
Isn’t it wonderful if we didn’t have to worry about money ever again? Imagine yourself living in your ideal house and taking vacations whenever you want. You may also want to know that you’ll be able to handle any unexpected costs.
You may construct a life free of financial worry using the same profit-boosting strategies you just learned.
Similarly, just as your company has several accounts for different reasons, you should separate your personal money among many accounts. Keeping track of your daily costs, regular payments, retirement money, and any unexpected expenses can make it easier to manage your finances.
Every time you are paid, make sure you contribute a percentage of your money into your retirement account. Because you’ll need this money at some point, the account gets first dibs, followed by the others.
If debt is keeping you up at night, do what you’d do in your company. Keep 1% of your money in your retirement account and use the rest to pay down your debts. Then, after your debt is paid off, return your focus to expanding your savings.
As you see it develop, you may be tempted to live a little larger. Why not, because it’s your money? The exact opposite is what you should do.
Saving as much money as possible can assist you in being financially self-sufficient. In other words, regardless of how much money you have in your bank account, your lifestyle should not alter. The author suggests that you keep it for five years.
To keep your prices down, do your research before purchasing anything. Before you make a significant purchase, think about it, explore for free or cheaper alternatives, and learn how to haggle.
If you’re thinking to yourself, “Wait, this frugal lifestyle isn’t enjoyable,” don’t fret; you can have fun while saving money. If your income rises as a result of a raise or a tax return, invest half of it in your lifestyle and the other half in your retirement account.
After contributing to this fund for a sufficient number of years, it will generate enough interest to allow you to live your life as you like.
Final Thoughts
The greatest way to make money is to just take it. When you instantly assign a portion of every amount of revenue to profits, you develop the habit of operating your firm with less money. Examining your operations more closely will motivate you to become more inventive and efficient, resulting in more money in your pocket.
Instead of waiting until the end of the month, divide your money across your accounts every two weeks and make any required payments.
Keeping track of your finances in this manner ensures that you are constantly aware of where your money is going and how your savings are performing, so you are always aware of where you stand.
Additional Reading
If you like Profit First, you may be interested in the following book summaries:
Profit First is a book that you should get.
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