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, and 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 money, I didn’t pay myself very much throughout the year and I don’t have much profit, where did all the money go?”
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, where your savings are going, what you’re doing with your savings, if you don’t have a significant amount of savings, or you don’t save money year over year, then this book is for you, it can help.
Whether you want to learn about financial management for your business or your personal life I highly, highly recommend this book, once again, it’s called Profit First by Mike Michalowicz.
I’ve read this book several times and hosted a Mastermind series discussing this book and its concepts in detail.
The concepts I learned really changed the way I think about financial management and the way I run my business
The author describes the way most people run businesses and the way most of us live our personal lives from a financial standpoint, he says that 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.
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 are really inhibiting their own growth, they’re not paying themselves enough, they don’t have profit to show for the business and that’s detrimental to the way you think about your business and it’s detrimental to the overall impression that you give yourself of your business when you don’t have profit to show for the business itself.
What I really love about this book is that Mike not only talks about the concepts, but he also discusses how you can be better, and he shows a process that you can implement in your business right away.
He leads with the concepts of how most businesses operate, the idea that we already discussed – revenue minus expenses equals profit and at the end of the year they don’t have any profit because they spent all their revenue trying to grow.
Then he gives you the keys to his system, his financial management system, that gives you the step-by-step rules for how to create your own financial management structure, so that you can not only have profit for your business, but you can also pay yourself for working in the business as an employee of the business.
So, if you are an employee of the business and the business owner, you should get paid twice. You should pay yourself a salary as an employee that works in the business and the business should have profits left over at the end of the year to pay you dividends as an owner.
The primary guidance revolves around creating multiple bank accounts to manage your money, five accounts to be specific.
Income
Profit
Operating Expense
Owner’s Salary
Tax
All revenue for the business goes directly to the Income account.
And on a regular basis, weekly or bi-weekly, the income account gets divided into the other four accounts.
And the book gives you guidance on the percentages of the income account that get transferred into the other accounts based on the size of your company and your annual revenue.
For example, if your income account collected $10,000 in a week, you might transfer
10% to Profit, or $1000
65% to Operating Expense, or $6500
15% to Owner’s Salary, or $1500
10% to Tax, or $1000
These percentages are intended just for the purposes of this example and the book’s recommendations vary based on your annual revenue.
By transferring the money into separate accounts, you guarantee yourself that you will have Profit, money to pay your tax bills and money to pay yourself.
And when you are planning and budgeting for the growth of your business you know that you are limited to spending the operating funds in the operating expense account.
This is a brief overview of the concepts in the book, Profit First.
The concepts, strategies and implementation were amazingly impactful for me, and I implemented these concepts in my business immediately.
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 and 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 haven’t been able to pay yourself a reasonable salary, or if you if you haven’t had money for payroll taxes or federal taxes when they are due, he gives you guidance on how to avoid these business killing situations.
