Profit First

Profit First explains why traditional business finances are upside down and how, by focusing on profit first and reasoning up from there, you can grow your business to new heights more sustainably, all while being less stressed about money.

There are endless businesses out there, each with differences. One thing in common, though, is that their owners all want profit.

The usual pattern that executives try to follow looks something like this:

Sell a ton of products Minus out expenses Keep the rest!

If this really worked, then why did a survey by Global Entrepreneurship Monitor find that 80% of surveyed businesses closed between 2013 to 2015? The problem is the formula, which is backward.

For one, Parkinson’s Law gets in the way. Discovered by Cyril Northcote Parkinson in the 50s, this law states that how long it takes to finish anything depends on how long you have to get it done.

In simpler terms, if you have three days to get something done, it’ll take you three days. The same works with money. If you know how much is available, without subtracting profit first, you’ll find ways to spend it all.

The Primacy effect also affects income. It states that you tend to pay more attention to what comes first and ignore everything else. So that means when profit is last, you don’t account for it, and thus, don’t get enough.

Instead, begin by finding out what you want to earn and taking that out from your estimated sales. You’ll work with what you have left and always end up with your profit when all is said and done!

Parkinson’s Law also affects your ability to eat healthy portion sizes. When you get a big plate of dinner, for example, you naturally fill it completely full, right? Your business finances are the same way. The author had a big aha moment when he learned about this. He realized that he was using just one account for all of his money and ended up spending it all every month. Spending less, he figured, required him to work with smaller amounts. To do this he recommends setting up five different accounts for these purposes: Main income Profits Owner’s salary Taxes Operating expenses When the company makes money it goes straight into the main income account. From there, you can transfer it as you need into the other accounts, beginning with the one for profit. Make sure to use each account for only the purpose you’ve set it aside for. Pay your bills from the operating expenses one, and make sure taxes only come from that account. If you feel tempted to break your rules, just keep certain accounts out of sight!…