Profit First

Profit First Plot Summary

Introduction

Imagine running a business where every deposit automatically makes you wealthier, not just busier. Where your bank account consistently grows rather than merely cycling cash through an endless loop of expenses. This isn't a fantasy—it's the fundamental shift in thinking that transforms struggling entrepreneurs into financially secure business owners. Most business owners operate on the conventional formula: Sales - Expenses = Profit. The problem? Profit becomes an afterthought, a hopeful remainder that rarely materializes. Instead of building wealth, entrepreneurs find themselves trapped in a cycle of covering costs, chasing the next sale, and wondering why their hard work isn't translating to personal financial security. The solution isn't working harder or even selling more—it's implementing a system that guarantees profit from day one, regardless of your current financial situation. By flipping the formula and taking your profit first, you'll not only transform your business finances but also reclaim the joy and purpose that inspired you to become an entrepreneur in the first place.

Chapter 1: Flip the Formula: Prioritize Profit Before Expenses

The traditional accounting formula—Sales minus Expenses equals Profit—is fundamentally flawed because it works against human nature. When we follow this formula, we focus on growing sales and then use the money to pay expenses, hoping something will be left over for profit. But as Parkinson's Law dictates, expenses will always rise to meet income. No matter how much you increase your sales, you'll find ways to spend it all. Mike Michalowicz discovered this painful truth when he lost his entire fortune after selling his second company. Despite receiving a check for $388,000, he quickly spent it all on luxury cars, a private club membership, and poor investments. Within a few years, he had lost nearly everything. The turning point came on Valentine's Day 2008 when he had to admit to his family that he was down to his last $10,000 with tax bills of $28,000 due. His nine-year-old daughter Adayla brought her piggy bank to the table and said, "Daddy, we're going to make it." That moment changed everything. Inspired by his daughter's simple saving system and dietary principles of using smaller plates to control portions, Mike developed the Profit First formula: Sales minus Profit equals Expenses. Instead of treating profit as leftovers, you take your profit first, then figure out how to run your business on what remains. This simple flip forces you to become more efficient and innovative. The system works because it aligns with how entrepreneurs naturally behave. Most business owners practice "bank balance accounting"—they look at their bank balance and make decisions based on what they see. Profit First doesn't try to change this behavior; it works with it by creating separate accounts for different purposes. When money comes in, you immediately allocate percentages to Profit, Owner's Compensation, Taxes, and Operating Expenses. To implement this approach, start by opening a separate Profit account and transferring just 1% of your income to it. Even this small step begins to build the profit habit. As Parkinson's Law works in your favor, you'll find ways to operate your business on 99% of what you had before. Over time, you'll increase your profit percentage while becoming increasingly efficient and innovative in how you run your business. The beauty of Profit First is its simplicity. You don't need an accounting degree or complex spreadsheets. You just need to take your profit first, every time money comes in, and then make the rest work.

Chapter 2: Set Up Your Profit Accounts and Allocate Percentages

Setting up your Profit First system begins with creating the right structure at your bank. You'll need five foundational accounts: Income, Profit, Owner's Comp, Tax, and Operating Expenses (OpEx). These accounts function like modern versions of the envelope system many of our grandparents used, where cash would be divided into different envelopes for different purposes. Jorge Morales and José Pain, owners of Specialized ECU Repair, were among the first entrepreneurs to implement Profit First after reading about it in Mike's earlier book. Despite initial skepticism, Jorge decided to start with a modest 2% profit allocation. "If your business can't afford to set aside two percent of your revenue, it's probably not a business worth pursuing," Jorge explained. This small start allowed them to test the system without disrupting their operations. The key to successful implementation is starting with Current Allocation Percentages (CAPs) that your business can handle right now, while working toward Target Allocation Percentages (TAPs) over time. For most businesses that have never taken profit before, this means beginning with just 1% allocated to profit, then increasing by small increments each quarter. Jorge and José gradually increased their profit percentage to 9% while still growing their business to nearly $1 million in annual revenue. To determine your ideal TAPs, complete an Instant Assessment of your business. This simple exercise compares your current allocations to industry targets based on your revenue range. Don't worry about getting the percentages perfect—the system is designed to be adjusted over time. The important thing is to start allocating profit immediately, even if it's just 1%. Once your accounts are set up, every deposit follows the same path: money comes into your Income account, then is distributed to your other accounts based on your predetermined percentages. The Profit and Tax accounts should be linked to accounts at a different bank—one without convenient access—to remove the temptation to "borrow" from these funds. This creates a psychological barrier that helps you respect these allocations. Remember that Profit First is designed to work with your natural tendencies. You'll continue checking your bank balances, but now you'll see exactly how much is available for each purpose. This clarity forces you to make better decisions about expenses and helps you build the habit of profitability with every transaction. Start small, be consistent, and watch as your business transforms from a cash-eating monster into a profit-generating machine.

Chapter 3: Implement the 10/25 Cash Flow Rhythm

The 10/25 Cash Flow Rhythm is the heartbeat of the Profit First system, creating a predictable pattern for managing your money. Instead of handling finances sporadically or reactively, you'll perform allocations and pay bills twice a month—on the 10th and 25th of each month. This regular cadence transforms chaotic money management into a streamlined process that gives you clarity and control. Debra Courtright, owner of DAC Management and a bookkeeping professional, taught Mike this powerful rhythm. Before implementing this system, Mike paid bills inconsistently—sometimes immediately upon receipt, other times letting them sit for 60 or 90 days. This reactive approach made it impossible to understand his cash flow patterns or keep vendors happy. When Debra saw him paying bills randomly, she called him out: "Well, that's dumb." After adopting the 10/25 rhythm, Mike noticed something magical happening. He became less reactive about bills and started to see patterns in his cash flow. He discovered that 80% of his bills were due at the beginning of the month while deposits were evenly distributed. This insight allowed him to better manage his resources and identify unnecessary recurring expenses. His vendors noticed the difference too. His web designer Liz remarked, "I don't know what happened, Mike, but you now pay on time every time. I wish all my customers were like you." Here's how to implement the 10/25 rhythm: First, deposit all revenue into your Income account. On the 10th and 25th of each month, transfer the accumulated deposits to your Profit, Owner's Comp, Tax, and OpEx accounts based on your allocation percentages. Then transfer the Profit and Tax amounts to your no-temptation accounts at your second bank. Pay yourself from the Owner's Comp account, and pay bills from the OpEx account. This system creates a natural buffer against cash flow fluctuations. During good months, money accumulates in your accounts; during lean times, you have reserves to draw from. If you consistently don't have enough in your OpEx account to cover expenses, that's your business telling you something important: your expenses are too high relative to your income. Instead of raiding your other accounts, you need to find ways to reduce costs or increase revenue. The 10/25 rhythm also establishes a quarterly cycle for profit distributions. Every quarter, take 50% of what has accumulated in your Profit account as a distribution to the business owners. This money is a reward for entrepreneurship and should be used for personal enjoyment, not reinvested in the business. The remaining 50% stays in the account as a reserve. This quarterly celebration reinforces the habit of profitability and reminds you that your business exists to serve you, not the other way around. By following this rhythm consistently, you'll develop a healthier relationship with your business finances. You'll make decisions based on actual cash flow patterns rather than emotional reactions, and you'll experience the satisfaction of regular profit distributions that reward your entrepreneurial courage.

Chapter 4: Cut Costs and Destroy Debt Permanently

Cutting costs isn't about sacrificing quality or growth—it's about becoming more efficient and innovative. When you take profit first, you're forced to run your business on less, which naturally drives you to eliminate waste and find creative solutions. This approach not only increases profitability but also helps eradicate debt permanently. Wesley Rocha, founder of LinkUSystems, hadn't taken a raise in ten years despite growing his company. After implementing Profit First, he realized his expenses were out of control. "I couldn't immediately implement [cutting costs] without grossly damaging projects," Wesley explained. Instead, he began chipping away at expenses gradually. Over the first year, he released six employees but replaced their efforts by "eliminating unprofitable products and services, re-creating and optimizing processes, and streamlining other portions of the business." The result? He doubled his profits and increased his annual income by 46%. When facing debt, many entrepreneurs make the mistake of focusing solely on debt reduction without addressing the underlying inefficiency that created the debt. This approach is like a crash diet—it might work temporarily, but without changing habits, the weight (or debt) will return. Instead, implement what Mike calls a "Debt Freeze" while simultaneously building the Profit First habit. The Debt Freeze begins by categorizing all expenses as P (directly generates Profit), R (necessary but can be Replaced with less expensive alternatives), or U (Unnecessary). Then eliminate all U expenses immediately and find ways to reduce R expenses through negotiation or alternatives. For labor costs, which typically represent the largest expense, evaluate each position to determine if it's truly essential. While layoffs are painful, keeping employees you can't afford will eventually sink the entire business. To destroy debt permanently, follow Dave Ramsey's "Debt Snowball" approach: list your debts from smallest to largest and focus on paying off the smallest one first while making minimum payments on the others. As each debt is eliminated, apply that payment amount to the next debt on your list. This creates momentum and psychological wins that keep you motivated. While working through your debt, allocate 99% of your profit distributions toward debt reduction, keeping just 1% to celebrate your progress. Jesse Cole, owner of the Savannah Bananas baseball team, used Profit First to pay down $1.3 million in debt in less than two years. Rather than following industry norms, Jesse found innovative alternatives to expensive systems. For example, instead of purchasing a $30,000 ticketing system, he spent $6,000 on custom banana-shaped tickets that doubled as souvenirs. This kind of creative thinking is what Profit First naturally encourages. Remember, the goal isn't just to cut costs but to become more efficient. Ask yourself: "How can I get twice the results with half the effort?" This question forces you to think bigger and find solutions that might seem impossible at first. By focusing on efficiency first and sales second, you'll build a leaner, more profitable business that can grow without accumulating new debt.

Chapter 5: Find Hidden Money Within Your Business

Your business has more money than you realize—you just need to know where to look. The key to uncovering this hidden treasure isn't about making it rain with more sales; it's about digging a well of efficiency that provides a sustainable source of profit. At a dinner with board members of Vistage, an executive organization, Mike met a businessman he calls "Mr. Innovator" who shared how he grew a $50 million company using his own version of Profit First. His company delivered oil to two types of clients: businesses that stored hundreds of gallons (like Jiffy Lube) and retail stores that sold quart containers (like Walmart). Initially, they used separate trucks, drivers, and customer service teams for each client type, essentially duplicating their entire operation. When costs became unsustainable, Mr. Innovator challenged himself to cut expenses by at least one-third while maintaining service levels. His breakthrough came when he asked, "What if we took a box truck and divided it in half? One side for a tank and the other side for shelves." This simple innovation allowed one driver with one truck to serve both client types. The result? He cut expenses nearly in half and built his struggling business into a $50 million company with a healthy bottom line. This story illustrates a crucial principle: 95% of your company's profitability depends on what happens beneath the surface (after the sale), not on making more sales. Focusing solely on increasing revenue without improving efficiency is like setting up rain barrels while ignoring an underground river flowing beneath your feet. To tap into this hidden source of profit, set a massive goal: figure out how to get twice the results with half the effort. This might seem impossible at first, but it forces you to think beyond incremental improvements. Consider how UPS saves $6 million annually by having drivers avoid left turns, or how they save seconds on each delivery by having drivers keep keys on their pinky fingers instead of in their pockets. These small efficiencies multiply across thousands of drivers and deliveries to create significant savings. Another source of hidden money is your client base. A study by Strategex found that the top 25% of clients typically generate 150% of a company's profits, while the bottom 25% create a 50% loss. By firing your worst clients—those who pay the least while demanding the most—you free up resources to better serve your profitable clients and find more like them. The Pareto Principle (80/20 rule) applies here: 20% of your clients likely generate 80% of your revenue, and 20% of your products or services produce 80% of your profits. The key is finding the overlap—which top clients buy your most profitable offerings? Focus your energy on these relationships and offerings while eliminating the combinations that drain your resources. Remember, selling more without efficiency is dangerous because it increases expenses at the same rate or faster. Instead, focus first on becoming more efficient, then sell more, then improve efficiencies again in a continuous cycle. This approach uncovers the hidden money in your business and transforms it into lasting profit.

Chapter 6: Build Accountability Systems That Last

The greatest enemy of your Profit First system isn't the economy, your staff, or your competition—it's you. Without proper accountability, even the best financial system can fall apart. The solution is to build accountability structures that keep you on track and prevent you from sabotaging your own success. Anjanette Harper shared a story with Mike about her experience at Camp Widjiwagan in Minnesota. The camp counselors challenged Anjanette and her fellow thirteen-year-old campers to reduce their food waste from several pounds to just a few ounces by the end of the week. The teenagers worked together, holding each other accountable by monitoring portion sizes and sharing leftovers. By the final dinner, they achieved zero waste—an outcome none of them could have accomplished alone. This illustrates why accountability partners are so powerful. When someone else depends on you, your commitment skyrockets. Shared challenges feel less painful, and regular check-ins create a rhythm that makes it easier to stay the course. This is exactly why you need accountability for your Profit First implementation. Beyond finding accountability partners, you need to avoid common mistakes that can derail your Profit First system. One major pitfall is allocating too much to profit too quickly. Jorge and José initially tried allocating 20% to their Profit account but quickly realized their business couldn't support both that level of profit and their growth strategy. They adjusted to 9%, which provided meaningful profit distributions while allowing them to pay their employees 30% above industry average—a key part of their retention strategy. Another common mistake is believing you must choose between growth and profit. Mark Cuban, the successful entrepreneur and Shark Tank investor, requires businesses he invests in to be profitable within 90 days. Profit and growth aren't mutually exclusive—in fact, profit should drive growth decisions, not the other way around. Many entrepreneurs also fall into the trap of "plowing back" or "reinvesting" profit into the business. This undermines the entire system. If your Operating Expenses account doesn't have enough money, it's a signal that your expenses are too high, not that you should raid your Profit account. Similarly, using credit cards for day-to-day operations creates debt, not bridge financing. To maintain your Profit First discipline, consider working with a certified Profit First Professional (PFP)—an accountant, bookkeeper, or coach trained in the system. Like a personal trainer at the gym, a PFP helps you reach your goals faster and with fewer mistakes. They provide the external accountability that keeps you from falling back into old habits. Remember Sir Roger Bannister's words: "The man who can drive himself further once the effort gets painful is the man who will win." Building lasting accountability systems ensures you'll continue taking your profit first, even when it feels challenging, and transform your business into the wealth-building machine it was meant to be.

Summary

Taking your profit first isn't just an accounting technique—it's a complete paradigm shift that transforms how you run your business and live your life. By flipping the traditional formula from Sales - Expenses = Profit to Sales - Profit = Expenses, you ensure that your business serves you rather than you serving your business. This simple change creates a cascade of positive effects: you become more efficient, more innovative, and ultimately more profitable. As Rick Barry proved with his unconventional but highly effective "granny style" free throw technique in basketball, sometimes the approach that seems awkward or overly simplistic is exactly what produces the best results. "Profit isn't an event," Mike reminds us. "Profit is a habit." By implementing the Profit First system—setting up the right accounts, following the 10/25 rhythm, cutting unnecessary expenses, and building accountability—you create that habit and permanently change your relationship with money. Your next step is simple: open a Profit account today, transfer 1% of your current funds into it, and begin your journey toward financial freedom. Your future self will thank you for taking this first small step toward transforming your business from a cash-eating monster into a money-making machine.

About Author

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Mike Michalowicz

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