Conventional accounting uses the logical (albeit, flawed) formula: Sales - Expenses = Profit. The problem is, businesses are run by humans, and humans aren't always logical. Serial entrepreneur Mike Michalowicz has developed a behavioral approach to accounting to flip the formula: Sales - Profit = Expenses. Just as the most effective weight loss strategy is to limit portions by using smaller plates, Michalowicz shows that by taking profit first and apportioning only what remains for expenses, entrepreneurs will transform their businesses from cash-eating monsters to profitable cash cows. Using Michalowicz's Profit First system, readers will learn that:
· Following 4 simple principles can simplify accounting and make it easier to manage a profitable business by looking at bank account balances.
· A small, profitable business can be worth much more than a large business surviving on its top line.
· Businesses that attain early and sustained profitability have a better shot at achieving long-term growth.
With dozens of case studies, practical, step-by-step advice, and his signature sense of humor, Michalowicz has the game-changing roadmap for any entrepreneur to make money they always dreamed of.
|Publisher:||Penguin Publishing Group|
|Sold by:||Penguin Group|
|File size:||2 MB|
About the Author
Read an Excerpt
Your Business Is an Out-of-Control Cash-Eating Monster
No matter how many years you've been at the grind, you are probably well aware of the statistic that roughly 50 percent of businesses fail within the first five years. What they don't tell you is that those failed entrepreneurs are, in fact, the lucky ones! The majority of the businesses that survive are racking up debt, and their leaders are perpetually stressed. Most entrepreneurs are living a financial nightmare, one that's populated by Freddy Krueger or Frankenstein's monster in its raw, unadulterated scariness. In fact, I am convinced that I am Dr. Frankenstein.
If you read Mary Shelley's classic, Frankenstein, you know exactly what I'm talking about. The good doctor reanimated life. From mismatched body parts, he stitched together a living being more monster than man. Of course his creation wasn't a monster at first. No, at first it was a miracle. Dr. Frankenstein brought to life something that, without his extraordinary idea and exhaustive hard work, could not exist.
That's what I did. That's what you did. We brought something to life that didn't exist before we dreamed it up; we created a business out of thin air. Impressive! Miraculous! Beautiful! Or at least it was until we realized our creation was actually a monster.
Stitching together a business with nothing but a great idea, your unique talents, and whatever few resources you have at hand is most certainly a miracle. And it feels like one, too, until the day you realize your business has become a giant, scary, soul-sucking, cash-eating monster. That's the day you discover that you, too, are an esteemed member of the Frankenstein family.
And just as happened in Shelley's book, mental and physical torment ensues. You try to tame the monster, but you can't. The monster wreaks destruction at every turn: empty bank accounts, credit card debt, loans, and an ever-increasing list of "must-pay" expenses. He eats up your time, too. You wake up before sunrise to work, and you're still at it long after the sun goes down. You work and work, yet the monster continues to loom. Your relentless work doesn't free you; it further drains you. Trying to keep the monster at bay before it destroys your entire world is exhausting. You suffer sleepless nights, worries about collection calls-sometimes from your own employees-and a near-constant panic about how to cover next week's bills with a few dollars and the lint in your pocket. Didn't you start a business so you could be your own boss? Now it looks as though this monster is the boss of you.
If you think operating your business is closer to a horror story than to a fairy tale, you're not alone. Since I wrote my first book, The Toilet Paper Entrepreneur, I've met tens of thousands of entrepreneurs; and let me tell you, most are struggling to tame the beast that is their business. Many companies-even those that appear to have it all together, even the big guys who seem to dominate their industries-are one bad month away from total collapse.
My own wake-up call came in the form of my daughter's piggy bank.
The Piggy Bank That Changed My Life
I lost my way the day I received a check for $388,000. It was the first of several checks I would receive for the sale of my second company-a multimillion-dollar computer forensic investigations business I had cofounded-to a Fortune 500 firm. I had now built and sold two companies, and that check was all the proof I needed that my friends and family were right about me: When it came to growing businesses, I had the Midas touch.
The day I received the check, I bought three cars: a Dodge Viper (my college-fantasy dream car, and what I have subsequently found many people identify as the "that-guy-must-have-a-tiny-penis" car), something I'd promised I would get for myself "one day" when I'd "made it," a Land Rover for my wife, and a spare-a tricked-out BMW.
I had always believed in frugality, but now I was rich (with an ego to match). I joined the private club: the one where, the more money you give, the higher they place your name on the members' wall. And I rented a house on a remote Hawaiian island so my wife, my children, and I could spend the next three or so weeks experiencing what our new lifestyle would be like. You know, "how the other half lives."
I thought it was time to revel in the money I had created. What I didn't know was that I was about to learn the difference between making money (income) and taking money (profit). These are two very, very different things.
I launched my first business on ambition and air, sleeping in my car or under conference room tables in order to avoid the cost of hotels when visiting clients. So imagine the surprised look from my wife, Krista, when I asked the sales guy at the dealership for "the most expensive Land Rover you have." Not the best Land Rover. Not the safest Land Rover. The most expensive Land Rover. He skipped his way to the manager, doing a giddy hand clap.
Krista looked at me and said, "Have you lost your mind? Can we really afford this?"
Full of snark, I said, "Can we afford it? We have more money than God." I will never forget the stupidity coming out of my mouth that day; such disgusting words, such a disgusting ego. Krista was right. I had lost my mind-and, at least for the moment, my soul.
That day was the beginning of the end. I was well on my way to discovering that while I knew how to make millions, what I was really, really proficient at was losing millions.
It wasn't just the lifestyle I bought into that caused my financial downfall-the trappings of success were a symptom of my arrogance-I believed in my own mythology. I was King Midas reinvented. I could do no wrong. And because I had the golden touch and knew how to build successful businesses, I decided that investing in a dozen brand-new start-ups was the best way to use my windfall. After all, it was only a matter of time before my entrepreneurial genius rubbed off on these promising companies.
Did I care whether the founders of these companies knew what they were doing? No-I had all the answers (read that with a massive douche emphasis). I assumed that my golden touch would more than compensate for their lack of business expertise. I hired a team to manage the infrastructure of all these start-ups-accounting, marketing, social media, Web design. I was sure I had the formula for success: a promising start-up; the infrastructure; and my incredible, superior magic touch (more douche emphasis).
Then, I started writing checks-$5,000 to one person, $10,000 to another, every month more checks, and still more. One time, I cut a check for $50,000 to cover expenses for one of these companies. I was focused on one thing and one thing only: growth. Mindlessly throwing money at start-up companies wasn't even in alignment with my values about money; I was a bootstrapper and proud of it. Still, I was blind to my mistakes. I was all pump and dump. Grow the businesses, then sell them. In retrospect, it was clear that I would not be able to grow all of these companies to the point where they would eventually become niche authorities, as I had with my two previous companies. There was never enough revenue to cover the ever-increasing mountain of bills.
Because of my massive ego, I didn't allow the good people who started these businesses to become true entrepreneurs. They were just my pawns. I ignored the signs and kept funneling money into my investments, sure that King Midas would be able to turn it all around.
Within twelve months, all of the companies I'd invested in, except one, had gone belly up. When I started writing checks to pay bills for companies that had already folded, I realized that I was not an angel investor; I was the Angel of Death.
It was a monumental disaster. Scratch that; I was a monumental disaster. Within a couple of years, I lost nearly every penny of my hard-earned fortune. Over half a million in savings gone. A much larger (embarrassingly larger) amount of investment money gone. Worse, I had no incoming revenue. By February fourteenth of 2008, I was down to my last $10,000.
I will never forget that Valentine's Day. Not because it was so full of love (even though it was), but because it was the day I realized that the old adage "When you hit rock bottom, the only way to go is up" is total bullshit. I discovered that day that when you hit rock bottom, sometimes you get dragged along the bottom, scraping your face on every one of those rocks until you're battered, bruised, and bloodied.
That morning I got a call at my office from Keith, my accountant (not to be confused with Keith, the hot-air balloon guy). He said, "Good news, Mike. I got a jump start on your taxes this year and just finished your return for 2007. You owe only twenty-eight thousand dollars."
I felt a sharp pain in my chest, like a knife stabbing me. I remember thinking, "Is this what it feels like to have a heart attack?"
I would have to scramble to get the $18,000 I didn't have, and then figure out how to cover my mortgage the next month plus all of the small recurring and unexpected expenses that added up to a whole lot of cash.
As Keith wrapped up the call, he said that the bill for his services would arrive on Monday.
"How much?" I asked.
I felt the knife twist. I had $10,000 to my name and bills totaling three times that amount. After I ended the call, I put my head on my desk and cried. I had gone so far astray from my values, from who I was at my core, that I had destroyed everything. Now, not only could I not pay my taxes; I had no idea how I would provide for my family.
At the Michalowicz household, Valentine's Day is a legit holiday-on a level with Thanksgiving. We have a special dinner together, exchange cards, and go around the table sharing stories about what we love about each other. This is why Valentine's Day is my favorite day of the year. Typically, I would come home with flowers, or balloons, or both. That Valentine's Day I came home with nothing.
Though I tried to hide it, my family knew something was wrong. At the dinner table, Krista asked me if I was OK. That was all it took for the dam to break. The shame was too great. I went from offering up forced smiles to sobbing in a matter of seconds. My children stared at me, shocked and horrified. When I finally stopped crying enough to speak, I said, "I lost everything. Every single penny."
Total silence. I slumped over in my chair; the shame was too great for me to face my family, not when all the money I had earned to support them was gone. Not only had I failed to provide for my family; my ego had stolen it all away. I felt pure, unadulterated shame about what I had done.
My daughter, Adayla, who was nine years old at the time, got up from the table and ran to her bedroom. I couldn't really blame her-I wanted to run away, too.
The silence continued for two painfully awkward minutes until Adayla walked back into the room carrying her piggy bank, the one she had received as a gift when she was born. It had clearly been cared for; even with all those years of use, there wasn't a single chip or crack on the bank. She had secured the rubber stopper in place with a combination of masking tape, duct tape, and rubber bands.
Adayla set her piggy bank down on the dining room table and slid it toward me. Then she said the words that will stay with me until the day I die:
"Daddy, we're going to make it."
That Valentine's Day I woke up feeling like Debbie Horovitch felt after her Instant Assessment: like a fool. But by the end of the day I'd learned what net worth really is, thanks to my nine-year-old daughter. That day I also learned that no amount of talent, ingenuity, passion, or skill would change the fact that cash is still king. I learned that a nine-year-old girl had mastered the essence of financial security: save your money and block access to it so it doesn't get stolen-by you. And I learned that I could tell myself that my natural aptitude for business, my relentless drive, and my solid work ethic could overcome any cash crisis, but it would be a lie.
Running the Instant Assessment can be like having a bucket of ice water dropped on your head (if you did the "ice bucket challenge" a couple of years ago, you know the spine-shuddering chill I am talking about). Or it can seem like the most humbling moment of your life, like when your daughter volunteers her life savings to save you from the mess you made. But no matter how sharp the pain is, it's better to face it than continue to live and operate your business in denial.
You have probably put a lot of work into growing your business. You are probably good or great at that part. That's awesome. And that's surely half of the equation. But colossal growth without financial health will still kill your company. With this book, you have an opportunity to master money.
Money is the foundation. Without enough money, we cannot take our message, our products, or our services to the world. Without enough money, we are slaves to the businesses we launched. I find this hilarious because, in large part, we started our businesses because we wanted to be free.
Without enough money, we cannot fully realize our authentic selves. Money amplifies who we are. There isn't a single ounce of doubt in my mind that there is something big you are intended to do on this planet. You wear the cape of what I believe is the greatest of all superheroes: the Entrepreneur. But your superhero powers can only yield as much power as your energy source provides. Money. You need money, superhero.
When I sat down to evaluate where I went wrong, I realized that while my own spending and arrogance definitely played a part, I also lacked knowledge. I had mastered how to grow businesses quickly, yet I never really graduated to understanding profitability. I had learned how to collect money, for sure, but I had never learned how to keep it, how to control it or how to grow it.
Table of Contents
Chapter 1 Your Business is an Out-of-Control Cash-Eating Monster 11
Chapter 2 The Core Principles of Profit First 34
Chapter 3 Setting Up Profit First for your Business 49
Chapter 4 Assessing The Health of your Business 59
Chapter 5 Allocation Percentages 75
Chapter 6 Putting Profit first Into Motion 89
Chapter 7 Destroy your Debt 114
Chapter 8 Find Money within your Business 133
Chapter 9 Profit First-Advanced Techniques 148
Chapter 10 The Profit First Life 163
Chapter 11 How to Keep it from Falling Apart 177
Appendix 1 The Profit First Quick Setup Guide 195
Appendix 2 The Instant Assessment Form 197
Appendix 3 Glossary of Key Terms 199
Most Helpful Customer Reviews
The best book ever! If I could, I would write chapter is about how amazing this book is for so very many different reasons. I have no business background, no accounting background, no finance background: I am a forensic psychologist. But I (was) not a business owner and never saw myself as becoming one. In fact, when I decided to start my business I was more freaked out than testifying on the stand! But I took the leap in July 2018, and I was fortunate enough to find Profit First and jump on it; the audiobook is hysterical, and I bought the hard copy as well just because it’s so good (and I like to take notes and look back at things). Within the first three minutes of the book I was completely hooked. Now, not only is it full of absolutely incredible information, which a lay-woman such as myself can actually understand, but coming from a psychological standpoint, so very much of it is absolutely accurately true and based in psychological science of simple human behaviors. It makes something seemingly incredibly complicated seem so damn simple! And do-able! Even for me! I found myself nodding, saying, “Yep. Yep, of course!” Simple changes to simple human behavior are used to make your business become PROFIT FIRST. I can’t drive home my point enough in that this is an incredibly educational book. I learned so very much about how to run my business, getting motivated and realistic about finally having financial freedom, being comfortable with the hours I work, the salary I pay myself, what all these numbers and names and acronyms and shit even mean. I am still no expert but I sure do know a hell of a lot more than I did last week. And I feel really great about going forward! So very much of that I attribute to Mike’s knowledge, work, and presentation(s). As I was fortunate enough to listen to the audiobook version, let me just tell you that Mike is likely a standup comedian on his off-nights. I found myself so entertained on my long commutes that I was laughing repeatedly despite it being 4 o’clock in the morning and living in Minnesota… You know what I mean… he is hilarious and yet poignant and concise. He’s a great storyteller and he drives everything home with a bang. And ALL of it applies to being PROFITABLE and HAPPY. I am truly going to miss having Mike in my CD player. But now I have his podcast (I’m so lucky!). I wrote him my first email (he says DO IT and I did), and he responded to me, human to human. How often do you get that these days? I really appreciated his kind words, words of inspiration and motivation; that he personalized my field, my career, and my goals and life ambitions. He genuinely cares about people - about us - and that’s because he is one of us. You have to buy this book, even if it’s not technically for a business! Because your family, your lifestyle, just your job and finances that you have right now, they can all be run as a PROFIT FIRST business and you will have a remarkable outcome such as retiring early and prosperous. Trust me, it’s the first thing I did (along with the business set-up) and I already feel so much more confident moving forward. 10 birds, one stone. He is the best. My psych-pals who are looking to start their own businesses – the first thing I told them was BUY THIS BOOK! And now they will be just as happy and profitable as me! Thank you, Mike! You have changed my life.
This book is a MUST READ for every entrepreneur. I’m a financial planner and have a master’s degree in banking, and don’t remember any of my class materials providing more valuable information. And, the audiobook is worth listening to, even if you’ve already read the book! Extra stories, context and Mike’s wonderful sense of humor!
This is a fabulous book and helps create am amazing paradigm shift for your business and money. A must read for entrepreneurs!