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Profit First by Mike Michalowicz – Book Club Pick

About Profit First

Serial entrepreneur Mike Michalowicz has developed a behavioral approach to accounting to flip the formula: Sales – Profit = Expenses. Michalowicz shows that by taking profit first and apportioning only what remains for expenses, entrepreneurs will transform their businesses from cash-eating monsters to profitable cash cows. (Source: Amazon)

Sarah’s Favorite Quotes

“Growth is the battle cry of nearly every entrepreneur and business leader. Grow! Grow! Grow!… Growth is only half the equation… Most business owners try to grow their way out of their problems…but the result is simply a bigger monster.”

“Profit is not an event. Profit is not something that happened at the year end or at the end of your five-year plan or Sunday. Profit isn’t something that waits until tomorrow. Profit must happen now and always. Profit must be baked into your business. Every day, every transaction, every moment. Profit is not an event. Profit is a habit.”

“Give yourself more joy when you choose not to spend money than do you do when you choose to spend it…Celebrate every time you save – whether it’s 10 bucks or 10,000.”

Shaunae’s Favorite Quotes

“Money problems happen when: sales slow down, sales speed up (expenses go up too)”

“Bigger is NOT Always Better: more revenue does not mean you are more successful”

“Growth is only half the equation, Let the right size business find YOU!”

“Profit must happen now and always, profit is not an event, it’s a habit.”

“Revenue is vanity, profit is sanity, and cash is king”

Helpful Links Mentioned in This Episode

Purchase Your Copy of Profit First: https://amzn.to/318yVRS

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Podcast Transcript

Sarah Schrader 0:00
You’re listening to The Creative Legacy Podcast, a podcast for creative entrepreneurs to build their business while leading a life of intention, joy and adventure. I’m Sarah, a brand strategist and designer helping entrepreneurs craft their brands to speak boldly and reach their ideal client. I’m joined by my friend and co host Shaune, a wedding photographer and educator that helps photographers creatives and small business owners cultivate intentional lives and build their most abundant business.

Sarah Schrader

Profit First is described as the profoundly simple yet shockingly effective accounting plugin that will transform your business from a cash eating monster into a money making machine. In the book author Mike Michalowitz explains why the gap accounting method or generally accepted accounting principle, which is sales minus expenses equals profit is contrary to human nature, trapping entrepreneurs in the panic driven cycle of operating check to check and reveals why this method of flipping the formula to sales minus profit equals expenses is the easiest and smartest way to ensure your business becomes wildly and permanently profitable from your very next deposit forward. We read this book for our book club, and we’re here to talk about it today.

Shaune Teske 1:29
Yeah, it is definitely a book that we’ve heard a lot of people recommend. Or when we reached out about books, that people really loved it for their business that changed their business, or they think of as their business Bible, this was definitely one of them. And yeah, it was really fun to dive into and kind of look at a different way of moving your money around and treating your money a certain way. I feel people really love his work and this method. Kind of a Dave Ramsey, of some people do the Total Money Makeover Method, I do all this and now I do Profit First too. So it’s really fun to get into it and learn more about what it’s all about.

Sarah Schrader 2:20
Right? and how good does it feel to actually be able to pay yourself versus, oh, shoot, I just spent all this money on my expenses. And now I have nothing to give myself.

Shaune Teske 2:30
Right. So that’s kind of what the whole thing with Profit First is about if people have not read this, and are just hearing this podcast episode first. We highly recommend, go read the book and then listen. But if you haven’t, that’s really what he’s talking about is dividing your money into these different bank accounts. And one of them is your profit account. And automatically, you’re putting 1% of what you make right into that profit account. And then he talks about changing the percentages and stuff, but ultimately, it’s paying yourself in that profit account first.

Sarah Schrader 3:04
Mm hmm. Yeah, definitely. I’m gonna jump into one of the quotes that I pulled from the book that I think describes, the mindset that many entrepreneurs have. And that is, “Growth is the battle cry of nearly every entrepreneur and business leader, grow, grow grow, growth is only half the equation. Most business owners try to grow their way out of their problems, and Gen salvation and the next big scale or customer or investor. But the result is simply a bigger monster, a $300,000 cash eating monster is much easier to manage than a #3,000,00 one.” And he gave an example of a Chicago pizza restaurant that grew too fast and had to close. So basically, we have this thought that if we need more money, it’s make the sale get more income, but then when we have that it’s often equates to more expenses. So if actually, a better example would be later on in the book he talks about. I think it was a lawncare company and I might be getting this backwards a lawn care company that was, “Oh, we can do your roof too because we see that that’s wrong, but a lawncare company doesn’t have the equipment to fix a roof so then they have to buy the equipment and all the materials for that and that becomes more greater expenses. So yes, they’re getting more income but what they’re actually making isn’t profitable.

Shaune Teske 4:30
Exactly, it’s that, you know, more money, more problems type thing that you hear a lot is just because you’re trying to expand or bring these things in doesn’t always mean that you’re going to be more profitable because then your expenses go up as well. He has a it’s not a direct quote. I listened to this one. I’m not usually a big audio book person, but I listened to him read the book. So there’s an audible and it was really kind of fun to hear, how animated he is about this system, he obviously believes in it. And everyone that’s done this believes him as well. So it was fun to hear him, really amped up. But he talks about that bigger is not always better, that more revenue does not mean you’re going to be more successful. So I think that we always look at that as business, oh that’s the problem, I just need to add on more and more things and more customers or more sales, and that’s gonna solve my problems. And really it’s about getting your finances on track first, and then growth is great, because then you have these things in place. But growth does not mean more money always.

Sarah Schrader 5:44
And I’ve definitely gotten caught in that trap of, oh, I can invest in this now. And, no, I shouldn’t have I didn’t have enough. I wasn’t tapping my profit. It was just I had the money there. But then I wasn’t paying myself. I was like, oh, okay.

Shaune Teske 6:00
Right. Yeah. I think it takes, especially for entrepreneurs, it takes you a few years to really be like, okay, I can give myself a paycheck. And his method is you should start giving putting aside that profit right away. And I love he talks about celebrating the small wins when you do that. It was really fun to hear, it’s okay not everything is take it out, use it for your business, and put it back into the business. You have to have those wins, or you’re not going to do this.

Sarah Schrader 6:32
I think so on that point, too. He also mentioned, yes, celebrate the wins, but don’t dwell on them. We have to move forward and move on to the next thing, which I thought was a very smart thing to point out.

Shaune Teske 6:43
And I loved that he talked about celebrating the savings you would the spending. So we usually, we love to go and purchase things and that celebration, but we need to start glorifying saving, or cutting expenses, he talks a lot about cutting expenses, getting out of debt. And it’s about, you know, celebrating that part to choosing not to purchase this new thing for your business because you don’t have the money yet or choosing to cut this expense, because it’s not really serving you was really great. And that’s something that I did maybe about, two, three years ago now of okay, I’m going to go through it and how can I cut as many expenses without having my my business suffer? But do I really need these things? Or do I really need to be doing it that way to this point, now it does not take a lot of money each month for me to run my business is really low actually. And if I thought I was bringing in, I remember one quarter I was like, oh, I think I’m bringing in less profit. And I checked with my accountant. He’s like, but you spent less so actually, it’s the same as if you took more money this quarter last year, but you spent more and so your profit was the same. So it was really interesting. Just cutting the expenses down and really looking at what do you really need what’s essential can also help drive your profits.

Sarah Schrader 8:17
Yeah. So another quote that I pulled that I think really resonates with this is, “Profit is not an event. Profit is not something that happened at the end of the year or at the end of your five year plan or someday. Profit isn’t something that waits until tomorrow, it must happen now and always. Profit must be baked into your business every day, every transaction every moment. Profit is not an event profit is a habit.”

Shaune Teske 8:40
Yes, I have that marked as well.

Sarah Schrader 8:44
It was a good one.

Shaune Teske 8:46
Yeah.

Sarah Schrader 8:47
But yeah, I think that’s another thing it’s like we could start up like oh, I just need to spend this now do this now. And I will bring in the profit in a year when it’s all going well for me. But I mean that that mindset like it can put you into a difficult situation of like we said the beginning the need to make more so you can spend more.

Shaune Teske 9:11
Right exactly I love right after that quote, there was a quote that I loved and kind of goes into that about that, “revenue is vanity, profit is sanity and cash is king.” So he talked about just getting into that mindset of that, okay, if I think about it like this, then it will keep me on the right track. You know, any this whole method, if you just can simplify it down to those core things, then you’re gonna be set with whatever type of profit you’re bringing in.

Sarah Schrader 9:46
I’m sorry, I got distracted for a moment when you say cash is king, I was like, who do I know that from? I’m pretty sure Dave Ramsey says that.

Shaune Teske 9:57
I just see Dave Ramsey, Mike Michalowitz and Donald Miller hanging out, and I just want to be there.

Sarah Schrader 10:05
That’d be a good crew to hang around.

Shaune Teske 10:08
I think they’ve all been on each other’s podcast and they are three really awesome guys that are just, they get it, you know. And so I really, I definitely recommend, I feel like now being in business for, you know, nine years. And then reading this book, it’s like, yes, this is great. And definitely some things I want to incorporate, or some things that I realize I’m already doing, like I do already do this kind of this method with profit. First, I do not do the 10th and the 25th that he recommends, like, you know, paying your bills, paying your expenses to get into that routine, because I already have my own routine of doing it the first Monday of every month, and that works for me. But some of those, I think if you’re starting out, and you want to start making money right away with your business, these books are super important to read. And to start with, I think it’s a little if you’re struggling, again, I would come to this, but when you’re like I feel successful, and I feel like I already have a method in place that works for me, you know, that’s great, especially like this. I love this book, but I don’t feel the need to do this, if that makes sense. Because it’s me, and maybe I’ll get to a point where I want to go for it and try it and you know, go down that route. Because you hear about the stories of people doing this and going I’m never looking back. But money has never been that issue for me, it’s been easy for me to pay myself to pay bills, to have a flow. I’ve had, you know, flow charts and graphs and all those special things for a long time. But I definitely think this is a system that you should try. If you are new to business, and especially for creatives that go well, I want to be the creative part. But the business money part is really hard for me, then I highly suggest doing this. I love that part. I think sometimes the creative part for me can be hard because I’m very much more business and money document minded. So this is definitely a great start, if you don’t know. But he kind of talks about, the different pillars, the four pillars of where this came from. And he talks about in the beginning of the book, kind of his journey, how this came about. And it’s really funny listening to him talking about how this started and how he owed all this money, and he’s feeling sorry for himself. So he’s watching these infomercials and he just keeps telling us about eating his Doritos, and it was just cracking me up. But how this came to be. So he has these four pillars, using small plates, serving sequentially removing temptation and forcing a rhythm and the book goes into all those things, and then how profit first came from that, which is really neat. But how everything started from those four pillars.

Sarah Schrader 13:04
Yeah, you’re making me want to download the audio book because I kind of want to hear him talking.

Shaune Teske 13:09
It’s great. It’s so fun, and I don’t know if when he would say side note in an audio tape, if that was in the book, if that was just for the audio thing. Because he would just like kind of go on some of these little tangents and I’m like, is this a book or is this just for us because it feels like it’s just for us.

Sarah Schrader 13:29
I would imagine that it was because I don’t remember reading any side note things okay. And I do know that other audio books that I listened to you have done that as well and I would be reading along in the book and that would be there so I wouldn’t be surprised if it was an added bonus.

Shaune Teske 13:45
It was really fun. I started this book when I was taking a walk on the trail. And one of the first thing he gets into is doing the profit first. So he talks about breaking down your bank accounts into five different bank accounts profit income, taxes, owner’s comp and operation expenses and then he talks about two other accounts and it gets way more into it. But in the audio book the first thing he says is you need to, right now whatever you’re doing like stop. Stop listening and make that separate bank account and title it profit and start by putting that 1% of your income in every time. Just do it right now. He’s like stop and he says if you’re in the car pull over. If you’re walking I’m like, Whoa, is he calling me out? He knows I’m walking and he gets like, I’m so fired up about this, he just gets so into it and very excited. So it was really cool to you know, hear that and I did stop when I was walking. I’m like, should I? Like I feel like I need to sit down and do this. Have like multiple banks I already kind of do something similar. I don’t have it labeled like this, but I feel like it I should. But I do pay myself and do do the profit. So first, so it was really funny like, wait, okay, yes, I do this. Okay, keep moving, I can do this.

Sarah Schrader 15:10
Yeah. I mean, as with anything we recommend, getting an account and doing the thing that’s right for you. But the principle of splitting it all up is making sure you’re taking care of the necessities first. And the idea of the expenses being kind of the almost last thing that you do, is that you’re minimizing so much of those that you can. And he explains it as kind of like Parkinson’s Law of how you rationalize to reduce margins with less cash flow available for expenses. And that sounds like a half a sentence right there. But he does have kind of a picture of this as like, a toothpaste tube, right. So if you’re extracting your profit and remove it from site, you’ll be left with nearly an empty toothpaste tube to run your business is what he said. So when you have less money available to run your business, you’ll find ways to get that same or better result with less kind of like you did a few years ago, you said Shaune. But by taking your Profit First, you’ll be more focused to think smarter and innovate more so that the toothpaste references kind of like getting that last little bit out of the tube.

Shaune Teske 16:27
Exactly. And I loved the point. And it would make so much sense of like, you can run your business for less and he talks about with doing the Profit First thing, even if it because you start with 1%, that if you run your business on $10,000, you can certainly run it on you know, nine thousand nintynine hundred, you know. He breaks it all down like you can do this. So there’s no, there’s nothing bad about starting to just starting to get into that mindset of doing it by taking the 1%. Right away, you start building that rhythm up of how you’re going to do this. And then into the book, he gets way more into all these different steps, different bank accounts, and then how to go through and do this. He has the whole process you have like make sure you’re telling your people he goes into you should have an accountant and a bookkeeper or whatever for your business. And then you can you should tell your accountant that you’re doing this, you share that you’re doing Profit First. He was like if they don’t understand what you’re doing that give them the book and have them read it and say this is what I’m doing. And if they don’t like it hes like, well tell them see you later. And there’s a whole resource thing on his website to find accountants, find bookkeepers that are Profit First economists like they know this, they believe in it. And you can hook up with them to make sure that Profit First is happening in your business, if you’re struggling, that this accountant knows what’s going on, which is really cool. And he’s like, and then send him a big like poster of my face like it was, you know, for the people that like don’t believe in it, or whatever, it was really funny. So he goes through all the processes, which I really appreciate. If you’re going to start doing this, make sure people are informed, make sure account knows, organize all your accounts. And then he walks through the percentages, we talked about the five different bank accounts you should have. And he has two other accounts, too, that he talks about. And he walks through all the percentages of where your money will go for each of them and how that can change and different things like that he goes into cutting expenses when you’re paying your bills on the 10th and the 25th. So it’s really nice that he breaks it all down and gives examples in the book. And it just keeps reiterating here are the steps, it’s not this hard thing. All the steps are right here.

Sarah Schrader 18:58
Yeah. And he goes even further to have you start with this kind of basic system, this five accounts and you start with the 1%. If that’s what you can do you start with the 1%. But he also in the book will explain beyond that, you can also open up more accounts if you want to dedicate certain things in your business to other expenses, getting very, very, very specific with each of the accounts. I think he had quite a few accounts if I remember reading all of the ones he had.

Shaune Teske 19:30
Oh yeah. And some other resources. Wait, you can just go to his website and he has a whole area of free resources. And he shows us examples of how many counts he has and what they’re named and different things and he’s serious, which is good. I mean, this is his method, but it’s really fabulous. And he has this great part about again, you know you’re breaking it down, how you set everything up, and then he breaks down daily things you should be doing. And then every 10th and 25th, you’re paying your expenses, you’re paying any of your bills, everything’s like that. And then every quarter that you should take money, 50%, from your profit account, and give that to yourself, because again, you celebrate those wins. And then I shouldn’t feel like it’s all this work all the time, everything is broken down into, here’s what you do every month, here’s what you do every quarter and then every year, then it’s not a big deal. Or when tax time comes around, it’s not a big deal that you just have everything for you, you know, your financials, it’s right there. And I really appreciate that I love knowing the numbers. And he talks a lot about that, okay, it might feel like you’re not making enough money, or oh my gosh, all my money is going to these expenses. But it is super enlightening to know what your numbers are. And we’re huge advocates of that, you know, hear the podcast of knowing your numbers, being very upfront with yourself and where you’re at your business, not just like, putting it off and hiding and not knowing what’s actually in your account where you’re actually spending just being very open and honest. And then planning a quarterly from there.

Sarah Schrader

Yeah, I will say in all this, he explained this idea kind of coming from an envelope system. I believe it was his mom.

Shaune Teske

Yeah. So it was.

Sarah Schrader 21:28
Just explaining, how she would work very hours, depending on if she went on a school field trip with him or not, or went to school with them. But if she worked more hours, there would be opportunity, she knew she could spend more on oh, gosh, what was it is a certain kind of meat me, but he didn’t like.

Shaune Teske 21:49
Yeah, cause she’s from Germany, I believe. Yeah.

Sarah Schrader 21:54
I forget what it is. Go read the book and find out.

Shaune Teske 21:57
Like, liverwurst or something liverwurst. Yeah.

Sarah Schrader 22:03
But, she always no matter what had like an emergency fund too. There was things in place. And this is kind of the idea that inspired it. And I had to like, Dave Ramsey and him have to be friends because I think of Dave Ramsey with us too.

Shaune Teske 22:16
With the envelopes yeah.

Sarah Schrader 22:18
I also think of, there was a I think it was a TLC show called to debt do us part. And it reminded me of that as well, there was this, I think Canadian is a Canadian financial expert came into the homes of a husband and wife who were at each other’s throats and on the brink of breaking up because finances weren’t good. And would do this whole envelope system with them too. And you have this much for spending on groceries, this much for expenses, this much for gifts and going out in entertainment. And they would only have those envelopes and what was in those envelopes to spend until they could get back on track. So it’s not a relatively new idea by any means. But the way that he explains it, and kind of just flips the idea of making sure that you are always getting a profit, I really appreciate that. I think that’s a great takeaway from this book.

Shaune Teske 23:19
Definitely. And I really love he goes into, debt and trying to you know, bring down debt and that there is no quick fix, and just taking these different steps to make sure you’re paying off your debt. So it touches on, which is nice, not just this process, but also debt. If you’re worried about that, and your expenses down. He has a whole chapter about, how we can cut expenses and how you don’t need all those things to run your business successfully. So he’s just full research full of wonderful resources for everyone and is super passionate about it speaks all over talking about this method. And he has a bunch of other books too. So I’m a big big fan.

Sarah Schrader 24:06
Yes. Have you read any other any of his other books?

Shaune Teske 24:10
I have not. But I feel like I’m going to now or I’m going to just get them all on Audible and have him talk to me all the time. I appreciate that. He loves Margaritas, he keeps talking about she loves Margaritas. So that cracks me up.

Sarah Schrader 24:29
Yeah. So yeah, I think definitely go check this out. Take a look at the system. See if it’s right for you. You can take away from it because it’s got some very good valid points in it.

Shaune Teske 24:41
And then let us know if you have gone through the Profit First method already, and you’re loving it and you’re like Shaune, Sarah, you need to start doing this now. Because it will change your life. You know, whatever that may be, let us know or if you’re going to start that would be really fun to hear about that too. This episode may be over but we want to keep the conversation going. Find us hanging out over on our Instagram account @thecreativelegacypodcast and interact with us there to let us know your perspective and questions on today’s topic.

 

 

 

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