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A Profitable Business Should Actually Produce Profit

A business can generate plenty of revenue and still leave its owner wondering where all the money went.

Profit First challenges the traditional formula of Sales − Expenses = Profit. Mike Michalowicz argues that when profit is simply whatever happens to be left over, business owners naturally find ways to spend most—or all—of the money available.

His alternative is surprisingly simple:

Sales − Profit = Expenses

Instead of waiting to see whether the business makes a profit, you intentionally set aside profit first and operate the business on what remains.

What This Book Is About

Profit First is a practical cash-management system designed especially for entrepreneurs and small businesses.

The system divides incoming revenue into separate accounts for purposes such as income, profit, owner's compensation, taxes, and operating expenses. Money is allocated to those accounts according to predetermined percentages.

The goal isn't simply better bookkeeping. It's to change the way you make spending decisions.

When all of your cash sits in one account, the balance can make you feel like you have more money available than you actually do. Separating that money creates boundaries and makes the financial condition of the business easier to see.

Why RVBN Recommends It

Many small business owners become very good at doing the work their business sells without ever becoming particularly comfortable managing the money their business generates.

Profit First provides a system that doesn't require you to become an accountant.

One of its strongest ideas is that profit shouldn't be an event you hope happens at the end of the year. It should be built into the way the business operates.

The system may not fit every business exactly as written, but the underlying discipline is valuable: deliberately decide where your money goes instead of allowing expenses to consume whatever happens to be available.

Who Should Read This Book?

This book may be especially useful if:

Your business generates revenue but rarely seems to have cash.
You aren't sure how much you can safely pay yourself.
Tax time regularly creates financial stress.
Business expenses seem to grow along with revenue.
You tend to manage your business by checking your bank balance.
You want a simple system for developing better financial discipline.

One Big Idea

Don't wait to see if your business is profitable. Make profit part of the plan.

Traditional accounting treats profit as the remainder.

Michalowicz turns that around. By allocating profit first, the amount available for expenses becomes limited. That constraint forces the business owner to look for ways to operate more efficiently.

It's a small change in the formula, but it creates a very different way of thinking about the business.

Put It Into Practice

Take a look at how money currently moves through your business.

Ask yourself:

Do I know what percentage of my revenue actually becomes profit?

Do I consistently pay myself, or only take money when it seems available?

Am I setting aside tax money as I earn it?

Which expenses have grown simply because the money was available?

If I had 10% less money available for operating expenses, what would I change?

Could separate bank accounts make my business finances easier to understand?

You don't have to implement the entire Profit First system tomorrow. Start by understanding where your money currently goes. Then decide where you believe it should go.