Summary of Profit First
The GAAP (Generally Accepted Accounting Principles) formula for determining a business's profit since time immemorial has always been:
Sales - Expenses = Profits
While that formula is logically accurate, it doesn't really take human nature into account. Specifically, most small business owners do what can be termed "bank balance accounting" – they look at their bank balance and make decisions based on the balance they see. That relegates profit to an afterthought – something which will be left over at the end of the year with a bit of luck.
The Profit First Accounting (PFA) approach is to flip the standard GAAP formula this way:
Sales - Profit = Expenses
You take a predetermined percentage of profit from every sale first and then use only the remainder to pay for your expenses. Or put another way, with PFA, you secure your profit first and then run your business on the remaining cash.
PFA Take your profit first and then scale your expenses to match that goal
“It comes down to this – do you want to treat your profitability like leftovers, knowing you may only find scraps or an empty plate? Or do you want to get your full, healthy share right up front? I don't know about you, but I want to get my due portion first. I have taught the Profit First system to small companies and big companies, to private companies and even public companies. It works for all of them. And it will work for you. My commitment to you is that, if you follow the Profit First system, your business will become permanently profitable from the moment of your next deposit."
- Michael Michalowicz
About the Author
MICHAEL MICHALOWICZ is a serial entrepreneur and former small business columnist for The Wall Street Journal. By his 35th birthday, he had founded and sold two multi-million-dollar enterprises before losing everything by becoming an unsuccessful angel investor. He, therefore, started his third enterprise and worked to build it into a million-dollar venture. He formerly was a business make-over expert on MSNBC and is now a popular keynote speaker on entrepreneurship. He is the author of three books including The Pumpkin Plan and The Toilet Paper Entrepreneur. He is a graduate of Virginia Tech.
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This is a summary and not a critique or a review of the book. It does not offer judgment or opinion on the content of the book. This summary may not be organized chapter-wise but is an overview of the main ideas, viewpoints, and arguments from the book as a whole. This means that the organization of this summary is not a representation of the book.
Profit First offers readers another method of thinking about bookkeeping. Rather than calculating your profit based on the distinction between your Sales and expenses, Mike Michalowicz recommends calculating your costs from the difference between your sales and profit. Take your Profit First, at that point work out how to cut your costs.
Mike built up this thought from the most effective weight loss methodology – limiting bits by using more modest plates. Mike Michalowicz's framework expects to turn businesses from feeling like money-eating beasts into feeling like profitable cash cows.
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