"It's Your Business. Your Profit Should Come First"
Profit-First Your Business
- A cash-flow method for business
- Know what your numbers should be
- Control expenses
- Unlock the secret to a healthy business
- Sustainable growth
- Download the book's core chapters
THE PROFIT FIRST FORMULA
The GAAP (Generally Accepted Accounting Principles) formula for identifying a company's profit is:
Sales - Expenses = Profit.
It is pretty simple and clear. Sadly, it's a lie. The formula, while rationally accurate, does not account for human behavior. In the GAAP formula profit is a leftover, the last consideration, something that is a nice surprise at the end of the year. Sadly, for a lot of businesses, the profit is hardly ever there, and the business continues on its payroll to payroll survival.
When a business implements Profit First they flip Expenses with Profit and the formula changes:
Sales - Profit = Expenses.
Realistically the math is the same; however, from the perspective of the business owner's behavior, it is drastically different. This small shift in behavior has big effects.
Here’s why we say, “Where’d All the Money Go?”
Author and historian C. Northcote Parkinson theorized that our demand for a resource increases to meet the supply of it. That is why when we are given two weeks to do a project, it takes two weeks, and when we are given eight weeks to do the same project, it takes eight weeks.
That is why when given $1,000 to complete our work, we get it done with $1,000, and when given $10,000 to complete the same work, it takes $10,000.
Profit First makes Parkinson’s Law an asset.
By taking profit first the money available for expenses lessens, and we are forced to find ways to get the same things done for less money.
BANK BALANCE ACCOUNTING
Most entrepreneurs don't have the time or desire to read the different accounting statements necessary to manage the financial aspect of their business.
Theoretically, you should review and understand your Income Statement, Balance Sheet, and Cash Flow Statement at least monthly, but few entrepreneurs do.
Most resort to "bank balance accounting," where we check our bank balance every day and make financial decisions based upon what we see.
Per Parkinson's Law, we consume what we see in our bank account.
Profit First encourages the entrepreneur to continue "bank balance accounting" by first allocating money to profit (and other accounts) so that the entrepreneur sees the actual portion of deposits that are available for expenses and they automatically adjust their spending accordingly.
Reviewing the Financial Statements and a cash-flow forecast brings tremendous insight and fosters a proactive leadership style. Implementing Profit First brings structure and control over expenses.