Book Summary: Profit First

While my businesses developed rapidly, I continued to run them on a check-to-check basis, unaware that this was an issue. Isn't it true that the goal was to grow? Isn't it true that if you increase sales, the profit will take care of itself?

One of two things can lead to financial difficulties:

  • Sales have slowed. When you operate on a check-to-check basis and sales stagnate, the problem is obvious. If your one large client goes out of business or that big deal you were counting on falls through, you won't be able to meet expenditures.
  • The pace of sales has increased. This issue is not readily apparent, yet it is pervasive. As your income rises, so do your costs. Large deposits are satisfying, but they are sporadic. It's difficult to maintain consistent incoming cash flow. A strong quarter might deceive you into thinking your firm is on the mend, and you begin to spend as if this is the new normal. Droughts, on the other hand, strike fast and unexpectedly, producing a significant cash-flow deficit.

This is unrelenting development with no regard for one's health. And if that big sale, customer, or investor doesn't show up, you'll collapse to the ground and sob like a baby.

What is the ideal size for your company? When you take your profit first, it will come organically. You'll reverse engineer every aspect of your company, and "the right size will find you," as Fried puts it.

My friend, here's the deal: profit isn't an event. Profit does not appear at the end of the year, the conclusion of your five-year plan, or sometimes. Profit isn't something that can be put off until tomorrow. Profit must be made now and in the future.

Profitability must be built into your company model. Every single day, every single transaction, every single minute. Profit is not an occurrence; profit is a way of life.

First, you must make a profit, and then you must expand. You need to figure out what makes money and get rid of what doesn't. When you focus on growth, you'll eventually find yourself in a race to expand at any cost.

When you put profit first, you'll naturally find out how to earn a steady profit. Profitability, stability, and sanity are all important factors. Always.

Profit is defined differently by accountants and businesspeople. They point to a made-up number at the bottom of a financial statement. Profit is easy for us to explain: money in the bank. We need money.

The Core Principles of Profit First

A successful business man holding money and doing a profit business.

Only when my salary increased, and I didn't have time to spend at the same rate, did I make a profit (point A).

However, I would swiftly increase my costs to satisfy my "new level of sales" (point B).

Then sales would level out or decline, while my new level of costs remained higher (point C), implying that I began to lose money. This drives me to sell more and sell quicker at any cost (which could, in turn, further increase my expenses).

When you have less money to operate your firm, you'll figure out how to obtain the same or better outcomes for less. You will be pushed to think smarter and develop more if you put your profit first.

Profit is the priority, and it is never disregarded when profit comes first.

You'll employ the tremendous force of "out of sight, out of mind" as you execute Profit First.

You'll withdraw the money from your immediate access as you make a profit (which, remember, starts today). You won't be able to access it since you won't be able to see it.

You must be the best at one thing you do to grow the largest and fastest. And the only way to become the greatest at anything is to figure out what you're good at and improve on it.

To get there, you must first maximize your profit, and then the solutions to being the best at anything will emerge.

The New Accounting Formula

You now have a clear understanding of how you operate. The next step is to establish a routine around your usual behavior. And we'll begin with a basic new Profit First approach:

Sales − Profit = Expenses

The majority of small businesses fail because of their excessive cost structure. To succeed, you need a strong company culture that promotes savings and facilitates good cash flow.

Eliminating waste in your business will lead to better health than you can ever imagine.

Do your payables and allocations twice per month (on the 10th and 25th day).

After you've opened this new checking account with your bank, give it the moniker PROFIT. Then, transfer 1% of each deposit you make into your regular checking account to your PROFIT account.

Setting Up Profit First For Your Business

A man is holding a pencil and write list to do.

We conduct collection calls and sell aggressively when our balance is low. We invest in equipment and expansion when our credit is good. It's effective, kind of.

The following are the five checking accounts you'll need to open:

  • TAX
  • Operating Expenses

Create two additional external savings accounts with a bank different than the one you use for day-to-day banking.

Your no-temptation profit hold account will be one of them. Your no-temptation tax hold account will be the second. Set them up with the ability to withdraw money straight from their primary bank's checking accounts.

Allocation Percentages

The higher your profit allocation %, the more efficiently you operate your firm and the lower your operational expenditures.

As a result of having a greater PF %, you not only have more money saved, but you also spend less, giving you even more time.

Simply use 35 percent for firms located in the United States.

Set your CAPs 1 percent "better" than you have in the past for the balance of this quarter — that is, raise your profit, owner's compensation, and tax all by 1% while cutting your operating expenses by 3%.

Putting Profit First Into Action

A man doing a nice presentation about profit of the company.

There are just two options for doing so: boosting revenue or lowering costs.

Increased sales are quite feasible (you read The Pumpkin Plan and Surge, right? ), and they are the key to massive profitable growth. However, it will take time and will not happen immediately. Cutting costs is usually a simple and painless procedure.

Add up the full profit in the account (don't include any quarterly payout percentages from deposits you got today) and take half of it as profit. The remaining 50% is kept in the account as a reserve.

The perfect three-month cash reserve for your business, where you have sufficient cash saved to keep your firm running for three months if all sales stopped and no new money came in?

Well, this reserve is held in the PROFIT account specifically for that purpose.

Destroy Your Debt

You will rapidly run out of cash if you make decisions based on your greatest revenue month. Debt will begin to grow.

You'll return to your old mantra, "Sell more — grow, grow, grow!" One certain method to keep yourself trapped in the Survival Trap is to act as if your greatest month is the norm.

Begin the Debt Freeze today. Stop any automatic payments and get rid of everything you don't need. Make every effort to reduce your "monthly nut" to 10% less than your Instant Assessment indicates it should be.

Find Money Within Your Business

I'd like for you to establish a lofty aim for yourself.

Examine every aspect of your business to see how you can achieve twice the results with half the effort. That's a biggie, so let me repeat: how can you gain double the outcomes with half the effort?

Profit First Advanced Techniques

Your firm should produce Real Revenue of $ 150,000 to $ 250,000 for each full-time member (ideally more, but this is the minimum).

The Profit First Life

Paying for a discount item.

I'm saying that for Profit First to have a long-term influence on your life, you need to create as large a difference between what you make and what you spend as feasible.

Here are five guidelines to assist you to stick to your current way of life for the next five years:

  • Always seek a free option first.
  • When you can obtain the same thing secondhand, never buy new. (It'll be used as soon as you buy it, anyway.)
  • If at all possible, avoid paying full price.
  • First, negotiate and look for alternatives.
  • Major purchases should be postponed until you've jotted down 10 different options and considered each one.

Save your extra cash for profit. The first quarterly payments have been made! Wedge's concept is to enhance your lifestyle gradually (and carefully) as your income rises.

Every time your income rises, you set away half of the gain as savings to avoid expanding your lifestyle to "use all available resources," as Parkinson's Law recommends.

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