Today, we are thrilled to feature Mike Michalowicz, co-founder and CEO of Profit First Professionals. Mike is committed to helping businesses across the world add value to their bottom-line, having built three multi-million dollar ventures from the ground up. Now ProfitCon is just around the corner, Mike introduces one of the most fundamental principles of ProfitFirst: a radically simple principle that allows you to focus on what really matters.
Sometimes the most important ideas are the simplest, and you can sum up why profitability matters in just one word: Stability. Being profitable means that your company can continue to offer its valuable services. Being profitable means that you, your family and your employees can rely on maintaining your lifestyle.
Cash is the lifeblood of your company. Profit First works because we all need money to survive.
Rethinking the GAAP formula
The GAAP (Generally Accepted Accounting Principles) formula for determining a business’s profit is Sales – Expenses = Profit. It is simple, logical and clear. Unfortunately, it’s a lie. The formula, while logically accurate, does not account for human behavior.
In the GAAP formula, profit is a left over, a final consideration, something that is hopefully a nice surprise at the end of the year. Alas, the profit is rarely there and the business continues on its check to check survival.
With Profit First, you flip the formula to Sales – Profit = Expenses. Logically the math is the same. Yet, from the standpoint of the entrepreneur’s behavior, it is radically different. With Profit First, you take a predetermined percentage of profit from every sale first. Only the remainder is available for expenses.
It’s basic human nature to ignore or short change whatever comes last on our list. It’s about prioritizing. Just as you wouldn’t recover from a serious illness and resolve to put your health last, you must resolve to put profit first because that’s the only way you can ensure you actually make a profit.
The basic principle of Profit First is that every single time revenue comes into your company, you set aside a predetermined percentage of that revenue as profit. You transfer that profit to an account in a different bank, and you watch it accumulate.
Now this isn’t a new system for most people reading this article. It’s the “pay yourself first” principle that many folks use to save money personally, but the principle is applied to your business. The point is that it works. Profit First is based on sound, established principles.
about profit first
Profit First provides clarity around your cashflow that allows you to make informed decisions rather than emotional reactions or inaction. Angie Knoll is a perfect example. She started her business in 2007 and for years, struggled and stressed about her business. She came across Profit First in 2016 and implemented it immediately. After 2 months of doing Profit First, she "was stressing less, acting with more confidence, and making better decisions. I even slept better at night! I knew I had to do this for others and became a Profit First Professional.”
Every year Profit First Professionals come together for a conference like no other: ProfitCON!
A conference that gives you the opportunity to learn from the leaders of Profit First and world-class experts to help you master methods to grow and improve your business as well as how to tackle the challenges you are facing. Incredible impact is inevitable when a community with a shared mission to eradicate entrepreneurial poverty gathers together.