The Profit First Formula Explained
Mike Michalowicz
As a keynote speaker and business author of multiple books including Profit First, I share my journey so yours is one of profitability.
Man, do I get hassled about the Profit First formula.?
Let me be clear, I do believe following the GAAP (Generally Accepted Accounting? Principles) is important so that when the time comes, you are prepared to submit taxes, and financial statements for investors. However, using the GAAP as your primary accounting method is the wrong way to grow a hugely profitable business.?
Replacing GAAP to track spending, enhance cash-flow? management, and assess the health of your company makes sense, you may just be afraid to go against what “everyone? knows.”?
Hot tip/reminder – Just because something appears to be true and? “everyone” goes along with it, doesn’t mean it makes sense – and it doesn’t make it true.?
The GAAP (Generally Accepted Accounting Principles)? formula for determining a business’s profit is Sales – Expenses? = Profit. It is simple, logical, and clear.? While logically accurate, it doesn’t account for human behavior. In the GAAP formula profit is a leftover, something that is hopefully a nice surprise at the end of the year. Alas, the profit is rarely there and the business continues on its check-to-check survival.?
With Profit First, you flip the formula to Sales – Profit = Expenses. Logically the math is the same, but from the standpoint of the entrepreneur’s behavior, it is radically different.? With the? Profit First formula, you take a predetermined percentage of profit from every sale first, and only the remainder is available for expenses.?
Profit First encourages you to continue “bank balance accounting” by first allocating money to profit (and other accounts) so that the actual portion of deposits that are available for expenses and you automatically adjust spending accordingly.?
This principle doesn’t try to change your habits? (that is nearly impossible to do), Profit First works with your existing habits. By first allocating money to different accounts, and then removing the temptation to “borrow”? from yourself, your business will become fiscally strong and you will benefit from regular profit distributions.?
Let’s get into some details:
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What are you waiting for? If you haven’t already, flip that accounting model and make profit a habit! Your company, employees, clients, heck your dog, will thank you!
Wishing you good health and wealth, always!
-Mike
Last I saw there was a discount! Get Profit First for you or a friend at Amazon , Barnes & Noble , or any of your favorite booksellers.
Profit First works with your existing habits. By first allocating money to different accounts, and then removing the temptation to “borrow”? from yourself, your business will become fiscally strong and you will benefit from regular profit distributions. – MM
The secret to financial success is to pay yourself first – MM
Entrepreneur, researcher, and technology commercialization expert. Doctorate in Business Economics. Ph.D. in Business Information Systems.
7 个月Intangibles bring a new note to the old song about profit.
You know those people who feel stuck in a 9-5, or a business they own trading their time for money? I help those people create a profitable online business sharing their knowledge & expertise to have more freedom in life
8 个月I implemented it in my business and the Profit First system definitely works :-)
?? Creator of "Your Core-4" ??Expert on values ?? Author and Storyteller ?? MA in International relations ?? Entrepreneur
8 个月What the startup scene has finally understood - profit over growth earlier than ever.
?? Sales Excellence, Effectiveness, & Success SME | The Sales Confidence Code | Team Success Habits Consulting | Inspiring International Speaker | Challenger Certified Facilitator | Best Selling Author | 847-531-3561 ??
8 个月Profit First is the best! I implemented it when I opened my business 3 years ago. It works!