Profit Before Growth – How to Build a Business That Will Last from Profit First by Mike Michalowicz
In America we like things big and flashy. Whether it’s homes, trucks, boats, yards… we are led to believe that bigger is always better. And the flashier it is, the more we can show off to others. But this need for more, more, more creates stress, envy, and financial disasters.
This is true for our lives, but also our businesses. We are led to believe that bigger is best. Every penny our business makes needs to be reinvested for growth. Rather than worrying about the bottom line (profit), we only think of the top line (revenue), and fully ignore all those pesky expenses we incur along the way.
But if is this how you operate your business, you will always be one bad month away from disaster. Your business will consume your life and create huge amounts of stress. You need to have business reserves if you want to have sanity.
If you’re ready to learn more about how to make this happen, Mike Michalowicz’s Profit First is a great resource to get you headed in the right direction.
Profit Before Growth – How to Build a Business That Will Last
1. Create a business savings account
The first and primary principle of Michalowicz’s system is that every business needs to make a profit. And you may be thinking – of course we need to make a profit, that’s how I pay myself, so I can afford to live. But Michalowicz is saying that you need to have enough to pay yourself and then have additional profit that you retain for your business – think of it as a business savings account. All businesses have fluctuation in sales, and inevitably you will face times when catastrophe hits. If you have a reserve account, what he calls your ‘profit’ account, then you will be able to manage those storms.
To make this happen, he recommends setting up a banking account nicknamed Profit, and twice monthly, deposit some percentage of your revenue into that account. To start, set aside just 1% of your revenue, but you should work your way up to depositing 5-10% (assuming you have revenue of $500,000 or less annually).
If you set aside this money right away, you will be forced to make expense decisions based on the remaining dollars, which will encourage more frugality.
2. Retrain your brain - revenue is not king
If you pay any attention to “business experts” on social media, all they will talk about is revenue, revenue, revenue. These “pop experts” will have you believe that more revenue and business expansion are the only indicators of success. But the truth is a lot of businesses grow but fail to make any profit. They either break even, or worse go deeper in debt the more they grow. As an owner this means more work and more stress for less money. Who wants that??
A bigger business is not a better business. You should only focus on expanding sales when you have the systems in place to manage those sales. And diversification and expansion only make sense if they can work within the systems you have already built for your business. Being very good at one thing—rather than ok at a lot of things—means you can better serve clients and be more efficient with your resources.
3. Cut unnecessary expenses to grow profit
Remember when you started your business and you magically made everything work on a dime. You only invested in what you really needed and found creative ways to get things done. (Or maybe you’re in that stage right now. )
Michalowicz thinks that entrepreneurs should stay in that stage throughout the life of their business. Don’t avoid expenses and investments that will make you more efficient and effective, but you shouldn’t be spending money just because you have it.
Avoid over spending on an office; especially if clients never go there. Don’t hire just because you can. And be thoughtful about expenses like travel, company parties, and other “nice to haves.”
To get started with cutting unnecessary costs, run a list of your monthly expenses from the last year and mark them as P (necessary for Profit), R (necessary but could be Replaced with a lower cost option), and U (Unnecessary). Then get to cutting those unnecessary expenses and exploring lower cost options for your replaceable expenses.
4. Remember - one good month doesn’t change everything
When you have a good month or sign on a big client, it’s tempting to believe that everything will be different. “From here on out we will have good months every month.” “This client means we won’t have money troubles anymore.”
While it’s great to be optimistic, a financial boost today may not continue tomorrow. Next month sales may drop back to your normal numbers, and your new client might not work out. Give yourself time to see if this is the new normal. Continue allocating a percentage of your income to your profit, and don’t raise expenses just because there’s more money today.
5. Try the one more day approach
When you feel as though you need something for your business, ask yourself, “Can I wait one more day before I buy it?” If the answer is yes, then ask yourself the same question tomorrow, and on, and on. You may find that you don't need that thing at all.
A caveat for this—if you are confident you need to buy something because it will make you or your team more effective or productive, even if you could go one more day without it, that probably doesn’t make sense. Don’t delay on efficiency and productivity.
Small Business Book Review: Profit First
Truth be told – I didn’t enjoy reading this book. It felt too salesy and too absolute. I tend to my roll my eyes when an author seems to be 100% certain that they have the only good way to do something.
However, I do think this book has some very important lessons for every entrepreneur to learn. Even if you don’t enact Michalowicz’s exact system (it was so detailed that I didn’t go into it here), you will still walk away with core principles that will help create a business and lifestyle that will help you thrive.
Overall, I give this book at 4/5 stars for small business owners. In a world that stresses more, more, more - Profit First is an important reminder that more isn’t always better.
