This and other business spending questions were answered for me in a book written by Mike Michalowicz in his book, “Profit First”. This is a review of a book that has completely changed the way I run my business and it will for you too.

Read More Below or Watch This Video

Confidently Manage Business Finances

Until I read the book Profit First, I had never found a confident way to know how much I should pay myself, how much I should spend on “business expenses”, or how and when I could say that I was profitable. I generally knew how much to put away for state and federal taxes, but I didn’t know about the other questions.

Before Profit First

This really came to a head for me when my old laptop was on its last leg. Fortunately for me, I had just landed my largest client. Although I didn’t know how to divide up this single large income, I felt justified to use a portion of it to buy a new laptop. But, I really didn’t know how to responsibly divide up the rest of the money in my business.

Podcasts Come To The Rescue

I listen to a lot of podcasts, and I started hearing more and more about the book “Profit First”. I first heard about the book on Jeff Brown’s “Read to Lead” podcast, then again on Ray Edwards’ “The Ray Edwards Show” podcast and a handful of others.

The interviews with Mike were so content-rich, I knew I had to buy the book. Now, I recommend this book so much that I needed to create a video to make it easy to share why I think you should buy, read, and implement Profit First.

Key Takeaways

The book is an easy read (which for someone like me who is not a strong reader is a big endorsement).

Even in the intro to the book, Mike drops value bombs like the ridiculously wide range the Small Business Administration defines small businesses. And, the commonly accepted formula for a profitable business. Sales – Expenses = Profit. You may recognize that formula.

Myths and Reality

Mike reveals the myths behind ‘making money’ and ‘making a profit’. He then introduces baking profit into your every business transaction. He described me to a T when describing how many businesses (including mine) look at their business bank account and make a gut decision based on that balance.

The Core Principles

He does a great job connecting Parkinson’s Law to the foundational principles of the book. As Mike puts it,

“The demand upon a resource tends to expand to match the supply of the resource.”

This is also where Mike explains why the order in which you think of your business finances is so important. Put Profit First.

The Five Profit First Accounts

I have set up the 5 accounts proposed in the book for my business and it has completely changed my confidence that I know exactly where I stand in my business financially.

No need for a spoiler alert: The five accounts are

Income – All money coming into your business comes here.

1. Profit – This is the first account to fill with a percent of your income.
2. Owner’s Compensation – This is where an allocation comes from that will pay me.
3. Tax – Put away to pay quarterly taxes.
4. Operating Expenses – A portion set aside to spend in and on my business.

Mike goes into detail about how to handle these accounts.

Targets for Any Size Business

Next is where the real answers came to me because I am not Microsoft, or Amazon, or even Bill’s Donut Shop.

Mike explains the target allocations for the 4 non-income accounts dependent on your business’ current revenue.

Even these target allocations can be hard to jump right in to, so Mike provides a plan for how to graduate toward these ultimate targets in a way that feels achievable (even if your business is brand new).

But if you have an established business with millions in revenue, Mike provides targets and plans for you and everything in-between.

The rest of the book goes on to explain how to put Profit First into action once you have set-up your business for Profit First.

My Business Financially Now

Since implementing Profit First in the winter of 2018, I have a clear picture of exactly where I am in my business financially.

• When I spend money on my business, I look at how much I have in Operating Expenses and make a more confident business decision.
• When I pay myself each month, I feel good that I am paying myself what my business can support.
• When I pay my taxes each quarter, I am confident that I am paying what I should be paying and the money is sitting there ready for me to pay without stress.
• At the end of each quarter, I feel good about withdrawing the “Profit” I have made that quarter to spend however I feel is best.

Profit First Does Not . . .

This book does not replace the need for a bookkeeper or an accountant but will enhance your effectiveness working with them.

• Do you wish you had a better system to confidently know your business’ financial health?
• Have you read Profit First?
  If so, how has it changed the way you run your business?
  Let us know in the comments below.

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