There is an age-old budgeting method that you may be familiar with: “Pay yourself first.” Essentially it means that, as soon as you receive your paycheck, you should put a certain amount straight into your savings account before using it for bills or other expenses. This is a tried and proven tactic to increase one’s personal profitability and overall net worth.
In the book Profit First: Transform Your Business from a Cash-Eating Monster to a Money-Making Machine, Mike Michalowicz takes this simple idea to a whole new level, and essentially builds a business strategy out of it.
The majority of companies are used to thinking about profitability in a certain way:
Sales – expenses = profit
Basically, what you take home at the end of the day is whatever you have left over. But what Michalowicz argues in Profit First, is that you should actually be turning this equation on its head:
Sales – profit = expenses
All too often the business owner is the one that gets the short end of the stick, which is why so many businesses end up failing in the first few years of existence. Any time that there are unforeseen expenses, or costs associated with growth, the owner is the one who takes the cut. Michalowicz argues that this shouldn’t be the case if the company is going to have any chance of a successful future.
This is particularly relevant to companies that generally have low profit margins as a result of bidding on projects. In the construction industry, for example, companies are all trying to under bid one another in order to win the job, but they often do so at their own detriment, and wipe out any chance of profit in the process.
By setting a firm figure from the beginning, you know that you either need to trim your expenses or big higher on the project in order to maintain the same level of profit.
Michalowicz also argues that businesses should seek to create wealth by opening different bank accounts for each category of profit. This is important because it ensures that savings aren’t dipped into prematurely; keeping different funding separate is essentially a fail-safe to ensure that the business remains on track and profitable.
Profit First includes a number of relevant case studies and step-by-step guides that are both engaging and easy to follow. It’s a must-read for anyone serious about growing their business, and making sure that it remains profitable for years to come.
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