Profit First: Transform Your Business from a Cash-Eating Monster to a Money-Making Machine (Summary)
For generations, we've been taught the logical, time-honored formula for business: Sales - Expenses = Profit. But what if this formula is a lie? What if it's the very reason why millions of hardworking entrepreneurs find themselves in a constant cycle of struggle, unable to pay themselves what they're worth? The author, a self-described 'recovering entrepreneur,' discovered a simple, behaviorally-sound flip that changes everything: Sales - Profit = Expenses. It's not an accounting change; it's a cash management revolution.
The GAAP Formula Is a Behavioral Trap
The standard accounting formula (Sales - Expenses = Profit) makes profit a leftover. Human nature dictates that we use what's available, so we spend whatever is in the bank account on expenses, leaving little to nothing for profit.
Author Mike Michalowicz built and sold two multi-million dollar companies and yet was personally broke. He was practicing 'bank balance accounting'—if he saw $100,000 in the business account, he assumed he had $100,000 to spend on growth and expenses, never realizing he was spending his own profit and tax money.
Harness Parkinson's Law for Financial Health
Parkinson's Law states that our demand for a resource expands to meet its supply. When it comes to money, we spend what we have. By taking profit out first, you artificially constrain the money available for expenses, forcing you to innovate and find more efficient ways to run your business.
Think of a tube of toothpaste. When it's new, you squeeze out a generous, wasteful glob. When it's nearly empty, you become a master of frugality, carefully squeezing and rolling to extract every last bit. By creating a smaller 'plate' for your operating expenses, you force that same resourcefulness on your business.
Manage Your Money with 'Small Plates'
Instead of managing cash from one giant bank account (a 'serving platter'), the system requires setting up multiple, smaller bank accounts for specific purposes: Income, Profit, Owner's Pay, Tax, and Operating Expenses. This provides instant clarity on your financial position.
This system is like using a smaller dinner plate to lose weight. By pre-allocating money into separate accounts, you can't accidentally spend your tax money on a new piece of equipment. You see exactly what you truly have available for operations, which changes your spending decisions immediately.
Remove Temptation and Automate with a Rhythm
To make the system stick, you need to make it difficult to cheat. The book prescribes a simple allocation rhythm and a crucial structural change to remove the temptation to 'borrow' from your profit or tax accounts.
The book recommends opening your Profit and Tax accounts at a completely different bank from your Operating Expense account. This physical separation creates friction. If you're tempted to raid your profit account for an operational shortfall, the two-day transfer delay gives you time to reconsider and find a more creative solution.
