There are a few positives that have come from living in the midst of a pandemic. I’ve got back to doing things that I love, that I haven’t done in years. Despite having brought so much richness to my life in the past; cycling and playing the guitar is something that has helped to reinvigorate passion in my life over the past 9 months. I’ve completely retooled my business to be completely online, affording me greater flexibility, operational efficiency and profitability. I’ve integrated elements of my personal life, namely advocating for mental health, into my business model, to help support entrepreneurs’ with their mental health challenges. Also, I’ve done more walking during the pandemic, than I have ever done before. During my walks, I listen to audiobooks. Since March, I have listened to 25 audiobooks! That amounts to almost 160 hours of material that I’ve listened to. That doesn’t even include the five books that I’ve listened to twice or more.
Of the 25 audiobooks I’ve listened to, 80 percent of them I’d give a thumbs up. I try to get at least one takeaway, from every book I’ve listened to. With a few books, I’d find a half dozen or so great ideas and somehow try to incorporate them into some aspect of my life.
But one book stood apart from all the rest. Not only did this one book, impact me greatly, but I’ve incorporated many of its core elements into how I run my business today. The book’s concept is not complicated, in fact, its core simplicity is its greatest appeal.
The book I’m referring to is “Profit First” by Mike Michalowicz. I highly recommend the audiobook version, as Michalowicz takes a light-hearted approach to address what causes more than 50% of start-ups to fail within the first five years: profitability or rather, lack of profitability. Michalowicz purpose is simple, “completely eradicate entrepreneurial poverty”.
So why have I decided to share my findings? I’ve never given a book review before, but this is a ringing endorsement for its thought-provoking material, entertainment value, but also its ease of implementation. The other reason, my primary audience is entrepreneurs and business owners.
If the failure rate of small business is greater than 50%, that means half of my target audience won’t be in business within 5 years. In essence, if my target audience has a greater success rate, my business’ success rate increases as well. The other factor is financial stress affects the mental health of entrepreneurs significantly more than any other element in their professional and personal lives. So there is a little selfish motivation in it for The Finish Line Group.
Profit First, as the name indicates, is about taking your profit first, as opposed to accounting principles that takes it last.
The Accounting formula for Profit is:
Revenue – Expenses= Profit
The Profit First formula for Profit is:
Revenue – Profit= Expenses
Some will ask, ‘what’s the difference”? The answer is rooted in psychology and not mathematics. But the difference is significant. Here’s the rationale. By taking profit first, we have a better sense of how much potential profit escapes because of how we look at expenses. Being mindful of expenses to bolster profits is a much different approach, than spending in spite of profit. A subtle difference, but a monumental shift in thinking. Also, it promotes an environment of operational efficiency and excellence. We will think of better ways to conduct our businesses because of profit, not in spite of it.
Michalowicz encourages us to set up five primary bank accounts: an income account, an owner’s compensation account, a profit account, a tax account and an operating expenditure account. He then recommends setting up two additional accounts at a different, less accessible bank: a profit hold account and a tax hold account.
The income account is the account in which all revenue comes into the business. From there you divide monies into the four other accounts. To start, you base the amounts upon historical reference from your company’s financials and determine the percentages for each. This helps you establish your CAP (Current Allocation Percentages) and gradually over time you are working towards your TAP (Target Allocation Percentages). The most significant shift in percentages will likely come from a reduction in the OpEx account and redistributed to the Owner’s Comp, Tax and Profit. The Income account is a temporary holding account where all money flows in and out of. Twice a month, all the money in the Profit and Tax Accounts are transferred to the Profit Hold and Tax Hold Accounts in the other bank. The intent for this is ensuring these accounts are not borrowed from as a supplementary source for the other accounts.
This is about breaking the mold in how we looked at running our business in the past. It’s about creating new disciplines, different perspectives and renewed purpose. I’ve found it’s completely changed how I look at my business today and the new possibilities that exist. It’s helped to renew vigor in how and why I run my business today.
I’d recommend Profit First for anyone whose business is struggling to turn a profit, for a business that is on verge of going under or any business owner that is curious to see how much waste happens within their business. The last point was eye-opening for me. It showed me the frivolousness in which we can spend money within our business and call it Operating Expenses.
There are many other hidden gems within the subtext of the book, presented anecdotally and humorously. This book has completely transformed how I run and feel towards my business, and hopefully it will change the way you look at your business.
Chris Coulter is the Founder and President of The Finish Line Group. He works with business owners to leverage their businesses to increase their wealth, reduce corporate and personal taxes, create viable succession strategies, enable employee retention strategies and allow them to exit their businesses on their terms.
Chris’ passion for what he does evolve from the mistakes he made in his first business; by not diversifying his risk and not utilizing many opportunities within his business to create significant wealth. Chris found out the difficult way and now educates business owners on avoiding many of his former oversights, and ultimately controlling where their finish line ends.