Today I want to talk to you about one of the best books that I have ever read related to business, called Profit First by Mike Michalowicz.
I highly recommend this book to anyone that is involved in any business or that deals with financial management in any way.
This book sets forth a framework for an implementable financial management system for businesses, but this same financial management system could also be applied to your personal life as well.
If you’ve ever thought to yourself at the end of the year,
“I’ve made all this revenue, I didn’t pay myself very much throughout the year and I don’t have much profit, where did all the money go?”
Or
At the end of the year your accountant gave you your tax bill, but you didn’t know where you were going to get the money to pay the taxes.
Or
In your personal life, if you don’t know where your money goes, if you have more month at the end of the money, if you don’t know how to save, if you don’t know where your savings are going, or if you don’t save money every year, then this book is for you, it can help.
The author starts by describing the way most people operate with money.
We have our revenue, or our income, that comes in and then we spend and spend and spend and whatever is left over is our profit, or savings.
When we have a big expense, we look at our bank account and ask one question, “Can we afford it right now?”, then we move on.
This is what we’ve been taught to think about our finances, Income minus expenses equals profit or savings.
The issue with this is that people in business will spend, and spend and spend with the purpose, the intent, the idea, is to do all of this spending so that they can grow their company, but they’re not paying themselves enough, they don’t have profit to show for the business, they don’t accumulate for taxes, and all of this is detrimental to the way you think about your business and it’s detrimental to the overall impression that you give yourself of your business. You spend all of that time, effort and energy, and you don’t have a profit at the end of the year, it is not a good long term strategy.
So, we have to do something different.
The author says that we should create separate “buckets” or accounts for our business and immediately funnel a portion of each dollar that comes into the business into these different accounts.
He suggests that the business collects its “Profit First”, from every dollar that comes into the business, hence the title of the book.
We do this by creating separate accounts, at minimum, these five accounts:
Income Account
OPEX Account
Payroll Account
Tax Account
Profit Account
And for your spray foam business I might even recommend another account, the Growth Account.
With these accounts established, all your incoming revenue would be received in the Income Account and then you would distribute a portion of each dollar that comes into the business into the other accounts starting with your current percentages, with a goal to move to more ideal target percentages.
The OPEX account would cover all business expenses.
The Payroll account would accumulate funds to make payroll payments.
The Tax account would accumulate funds to make tax payments – unemployment, state, federal and any other taxes you need to pay.
The Profit account would accumulate profit for the business.
And if you are daring enough to create a Growth Account, this would be to fund business expansion and the purchase of new equipment.
Your income would accumulate in your Income Account, and then on a regular basis, weekly or bi-weekly, the funds in your Income Account would be split into the other accounts based on percentages that are best suited for the type and size of your business.
For a spray foam contractor, the percentages might be something like:
40 to 60% for OPEX Account
15 to 25% for Payroll Account
10 to 15% for Tax Account
10 to 15% for Profit Account
3 to 5% for Growth Account
First, these target percentages are not set in stone, they may need to be modified based on your specific business.
And second, you may look at this and say, I am nowhere near 15% Profit, I could never pull this off, but remember, these are not starting percentages, these are target percentages. You can start this habit where you are at now, and slowly modify your percentages each month or each quarter until you get to these targets, or better target percentages that fit your specific business.
This is the foundation of a financial management system that you can implement in your business immediately.
The concepts, strategies and implementation were amazingly impactful for me, and I put these concepts into my business right away.
I think that if you have had any challenges with finances, whether in business or your personal life, you are really going to get a lot of value from this book, Profit First by Mike Michalowicz
That means that if you are not making a profit in your business, or you don’t know where that profit went at the end of the year, or if you have had trouble with payroll, or if you have ever not had money for taxes when they are due, he gives you guidance on how to avoid these business killing situations.
And finally, another version of this book for you to consider is Profit First for Contractors, by Shawn van Dyke, based on the same principles as Profit First, by Mike Michalowicz.
