Any business or accounting book would say that profit is what comes out after you’ve taken out expenses from your sales.
In other words, Sales – Expenses = Profit.
But what if you were to flip that equation to make sure you get your profit first?
Sales – Profit = Expenses
In Mike Michalowicz’s book, Profit First (which is also a growing movement by the way), the Profit First principle removes the complexity and just focuses on ensuring there's profit stored away.
By doing that, the rest of the business comes into alignment.
Why Profit First?
When you implement profit first, which means immediately taking your profit, you will see what you can afford. So now, you actually have to make adjustments to your business. And the only way to manage that is by cutting unnecessary costs and increasing margins.
- Cut the fat, not the muscle.
You can trim a business by cutting out the fat. But if you start cutting into the muscle, you can harm the progress of your business. Cutting 10% of costs is pretty easy because there's a lot of fluff there. You need to be selective and make sure you’re cutting the cost of stuff that’s not driving results or you’re not benefitting from.
- Be selective around inventory.
Your inventory is tied-up cash that has no guarantee. You don't know when it’ll come back to you or if it will even come back to you. So start small, then see what sells and moves. High turn, high profit is usually an indicator of a product you want to continue to stock. Low turn, no profit is usually something you never want to stock again.
- Balance spending and saving.
You can actually save so much money but you're restricting future profitability because you're not pursuing opportunity. It doesn't mean you should spend every penny to pursue every opportunity. Using the profit first system, you become very selective in choosing the actions that will grow your business and drive more profitability.
- Consider part-time staff.
Compressing the time actually seems like people are more productive. There's a greater degree of urgency and there's a lower need for taking breaks.
- Destroy debt with profit
The way out of debt is through deliberate structure. Establish the profit first habit from day one. And as you accumulate profit on a quarterly basis, use a large portion of that profit to eradicate debt. You can then crush your debt month after month, quarter after quarter from profit distributions.
If you want to learn more about the Profit First movement, check out 017: Why Profit First With Author Mike Michalowicz
