Profit First
Transform Your Business From a Cash-Eating Monster to a Money-Making Machine
Book Edition Details
Summary
"Profit First (2014, revised 2017) by Mike Michalowicz lays out a behavioral approach to cash management for entrepreneurs, flipping the traditional formula (Sales - Expenses = Profit) to Sales - Profit = Expenses. This system helps transform businesses from cash-eating monsters into profitable cash cows by taking profit first, ensuring sustained profitability and simplifying accounting through four simple principles."
Introduction
Most entrepreneurs pour their heart and soul into building their businesses, working tirelessly to grow revenue and serve customers, yet find themselves trapped in a perpetual cycle of financial stress. Despite generating impressive sales figures, they struggle to pay themselves a decent salary, live paycheck to paycheck, and constantly worry about covering next month's expenses. The traditional accounting formula of Sales minus Expenses equals Profit has created a system where profit becomes an afterthought, a leftover that rarely materializes. This approach has turned countless businesses into cash-eating monsters that consume every dollar that enters, leaving owners exhausted, underpaid, and wondering when their hard work will finally pay off. But what if there was a simple way to reverse this destructive pattern and ensure your business serves you, rather than enslaving you? The revolutionary approach you're about to discover flips conventional wisdom on its head and guarantees profit from your very next deposit.
The Profit First Formula and Core Principles
The Profit First system fundamentally transforms how you think about money by applying a deceptively simple principle: take your profit first, then run your business on what's left. This approach leverages four core behavioral principles that work with human nature rather than against it, creating sustainable financial health without requiring you to change who you are. Mike Michalowicz's revelation came during a dark period when he had lost nearly everything. Despite having built and sold multiple million-dollar companies, he found himself with only ten thousand dollars to his name and overwhelming debt. The turning point arrived on Valentine's Day 2008, when his nine-year-old daughter Adayla witnessed him break down at the dinner table after confessing he had lost everything. Without hesitation, she retrieved her carefully maintained piggy bank, slid it across the table, and declared with unwavering confidence, "Daddy, we're going to make it." In that moment, Michalowicz realized his daughter had mastered something he had failed to grasp: the importance of saving money first and making it difficult to access. This profound moment sparked the development of the Profit First methodology, which operates on four fundamental principles. First, use small plates by creating separate bank accounts that limit how much you can spend on different aspects of your business. Second, serve sequentially by always allocating profit before paying expenses, ensuring it never becomes an afterthought. Third, remove temptation by placing profit in separate, hard-to-access accounts. Fourth, enforce a rhythm by managing your money on a predictable schedule rather than reacting to financial crises. To implement these principles, start by opening five foundational bank accounts at your primary bank: Income, Profit, Owner's Compensation, Tax, and Operating Expenses. Then establish two additional accounts at a separate bank for your Profit Hold and Tax Hold accounts, making these difficult to access. Begin with just one percent of each deposit going to profit, then gradually increase this percentage each quarter. This system forces you to become more efficient and innovative with your remaining resources, ultimately creating a more robust and profitable business.
Setting Up Your Five-Account System
The foundation of Profit First lies in creating a multi-account system that automatically directs your money toward its intended purpose before you have a chance to spend it unwisely. This system transforms your relationship with money from reactive to proactive, giving you instant clarity about your financial position and preventing the common trap of mixing profit with operating expenses. Jorge Morales and José Pain, cofounders of Specialized ECU Repair, exemplify the power of this system. When they started their automotive electronics repair business in 2007, they dreamed of the financial freedom that entrepreneurship promised but found themselves trapped in the familiar cycle of reinvesting every dollar back into the business. After discovering Profit First, they began with a conservative two percent allocation to their profit account, skeptical but determined to try something different. Jorge initially resisted the concept, thinking it impossible to set aside money when the business seemed to need every available dollar for growth and operations. Within months of implementing the five-account system, Jorge and José witnessed a transformation that exceeded their expectations. They maintained separate accounts for Income, Profit, Owner's Compensation, Tax, and Operating Expenses, with additional no-temptation accounts at a different bank. As their profit account grew, they discovered they could fund equipment purchases, take dream vacations, and provide above-market salaries to retain top talent, all while maintaining healthy profit margins. Their business not only survived with less available cash for operations but actually became more efficient and profitable. To establish your system, contact your bank immediately and set up the five foundational accounts, nicknaming each according to its purpose. Choose checking accounts for flexibility, and don't let minimum balance requirements deter you. Next, find a second bank and establish your Profit Hold and Tax Hold savings accounts, deliberately making these inconvenient to access. Configure your income sources to deposit directly into your Income account, then establish the rhythm of moving money to appropriate accounts twice monthly on the tenth and twenty-fifth. Remember that this system works because it aligns with your natural tendency to spend what you see available. By immediately segregating money into purpose-specific accounts, you eliminate the temptation to raid your profit for operational expenses and create a sustainable framework for long-term financial health.
Cutting Expenses and Finding Hidden Money
The key to making Profit First work lies in discovering the remarkable efficiency gains possible when you're forced to operate with less available cash. This constraint doesn't harm your business; instead, it drives innovation and eliminates waste you never realized existed. The goal isn't to cut expenses arbitrarily but to systematically identify and remove costs that don't directly contribute to serving your customers or generating profit. Wesley Rocha, founder of LinkUSystems, experienced this transformation firsthand when he realized his business expenses were completely out of control despite growing revenue. For ten years, he hadn't given himself a raise while watching his company expand, unable to understand why increased sales never translated to leftover cash. After implementing Profit First, Wesley discovered he couldn't immediately slash expenses without damaging client relationships or operational capability, so he adopted a systematic approach to gradually reducing unnecessary costs. Over twelve months, he methodically eliminated six employee positions while simultaneously optimizing processes and discontinuing unprofitable services. Wesley's patient but persistent approach yielded remarkable results. He doubled his profits while increasing his personal income by forty-six percent, finally accumulating enough money to purchase his first home after more than a decade of entrepreneurial effort. The key was his shift from asking "How can we find more money to cover this expense?" to "How can we figure out another solution?" This mindset change forced creative problem-solving and revealed numerous opportunities for efficiency that had been invisible when money seemed abundant. Begin your expense reduction by printing your last twelve months of expenses and marking each item as either P for profit-generating, R for replaceable with less expensive alternatives, or U for unnecessary. Calculate the total amount you need to cut based on your Profit First allocations, then systematically eliminate U expenses, negotiate better rates for R expenses, and optimize your P expenses. Don't forget to address labor costs, which are typically the largest expense category for most businesses, and remember that keeping employees your business cannot afford ultimately serves no one. The most powerful technique is to challenge yourself to achieve twice the results with half the effort across every aspect of your business. This isn't about working harder; it's about working smarter and discovering innovations that make you dramatically more efficient than competitors who still operate under the old model of spending everything they earn.
Advanced Strategies and Living Profit First
As your Profit First system matures, you can enhance its effectiveness by adding specialized accounts that address your business's unique needs and extending the principles to your personal financial life. These advanced strategies help you manage seasonal fluctuations, large purchases, and complex income streams while maintaining the core discipline of profit-first allocation. Consider the inspiring example of Jesse Cole, owner of the Savannah Bananas and Gastonia Grizzlies baseball teams, who used advanced Profit First techniques to eliminate over one million dollars in debt while revolutionizing the fan experience. Instead of focusing solely on building better baseball teams like traditional owners, Jesse transformed his franchises into entertainment experiences, incorporating choreographed dances, unique food offerings, and engaging fan activities. This innovation wasn't just creative; it was driven by Profit First discipline that forced him to find cost-effective solutions that also enhanced value. Jesse and his wife established additional accounts beyond the foundational five, including equipment reserves, seasonal cash management, and debt elimination funds. When faced with the industry-standard thirty-thousand-dollar ticketing system, they innovated by purchasing one hundred thousand banana-shaped tickets for six thousand dollars, creating both a cost savings and a memorable brand experience. This exemplifies how Profit First constraints drive innovation that simultaneously reduces costs and improves customer satisfaction. To implement advanced strategies, consider adding accounts such as a Vault for emergency reserves, Equipment for planned purchases, Drip for managing retainer payments, and specialized accounts for materials, subcontractors, or seasonal variations. Document the purpose and process for each account to maintain clarity and consistency. Most importantly, extend these principles to your personal finances by establishing corresponding accounts for your household income, creating automatic allocations for savings, recurring bills, and debt elimination. The ultimate goal extends beyond business profitability to achieving complete financial freedom, defined as the ability to do what you choose when you choose to do it. This requires discipline to lock in your lifestyle even as income grows, directing increased earnings toward wealth accumulation rather than lifestyle inflation. Start with the foundation, build the habit, then expand the system to encompass every aspect of your financial life.
Summary
The path to entrepreneurial financial freedom doesn't require revolutionary business strategies, massive capital investments, or superhuman discipline. Instead, it demands a simple but profound shift in thinking: prioritize profit from the very first dollar rather than hoping it will appear after all expenses are paid. As this book demonstrates through countless real-world examples, "Profit is not an event. Profit is a habit." This fundamental truth transforms struggling businesses into thriving enterprises and exhausted entrepreneurs into financially free individuals who truly own their success. The five-account system, expense optimization techniques, and advanced strategies provide a complete framework that works with human nature rather than against it, creating sustainable prosperity without requiring you to become someone you're not. Your next step is deceptively simple yet powerfully transformative: contact your bank today, establish your foundational accounts, and begin allocating just one percent of your next deposit to profit, proving to yourself that this system works before expanding it further.
By Mike Michalowicz
