Coral DarbyI love this quote from the book: ‘The dream all entrepreneurs have is that their business will improve our quality of life, not destroy it. We do not serve our business; our business serves us.’
This section of the book is all about the tactics for achieving success. Michalowicz suggests that entrepreneurs reallocate 1% to profit and build towards TAPS (target allocation percentage). He also offers a formula for calculating what goes into the management buckets: owners’ compensation, tax, and operating expenses, which should increase every quarter. The suggestion is to start with manageable amounts so the process doesn’t feel daunting. The author adds, and I agree, ‘If your business can’t set aside 2% of revenue, it’s probably not a business worth pursuing’.
From a financial standpoint, everything about this book has been a big wake-up call for me. I understand how seeing the money grow can genuinely change behavior. This approach seems like it would help many entrepreneurs increase their odds of winning. The Profit First system is designed to help business owners see what money they have and what purpose it is being used for, which is an excellent tool for making informed decisions.
One of my favorite parts of the book thus far was the discussion about cutting expenses. The author claims that all businesses can cut 10 – 20% of costs overnight! This is ambitious, but I agree that most can eliminate at least 10%. As Michalowicz states, the business should be run on what can be afforded today rather than tomorrow.
Here are the tips for cost-cutting!
- Look at recurring expenses for the last twelve months.
- Cancel what you don’t need.
- Negotiate every expense
I like all these pointers except for ‘negotiate every expense.’ We’ve been routinely coached to invoice our worth, and I fully agree with that approach. So, if I try to receive the maximum payment from our clients, than who am I to ask our vendors to make concessions to favor our profitability? This feels like hypocrisy. However, I get the approach when dealing with mega-corporations like Verizon and Charter, which have excessive earnings.
Another great suggestion I gleaned from my reading is to adjust to paying expenses twice a month—the author suggests the 10th and the 25th. A rhythm makes you less reactive and helps you feel in control. By adhering to this method, the book suggests that business owners will see patterns and trends and will be able to identify unnecessary expenses better. I’m going to start giving it a try.
Finally, the recommendation is to get your bookkeeper and accountant on board with the program. Here is a resource list of professionals who have been trained in the Profit First way: https://mikemichalowicz.com/free-resources/
Coral,
Great work this week! Your opening quote supports the feedback from my recent SME interview with Steve Amedio, where he shares what all entrepreneurs should be seeking by founding a business, which is to benefit their lifestyle through a passionate means of earning a living. While the monetary gains are important, it is about the lifestyle flexibility and autonomy that really drives many entrepreneurs. I find this very true in my own journey, as my career handcuffs continue to loosen, I find myself yearning for that autonomy even more. I would tend to agree with the author’s sentiment of holding back 2% of revenue, as if you don’t have that bandwidth, the business is operating on razor thin margins to begin with and some serious questions need answering.
The idea behind visualization is interesting and I can only surmise it helps to build confidence, much like a retirement or savings account where watching those funds grow tends to boost morale, experience, and confidence. In this regard, I think there is something to this philosophy, even if only bypassing mental blocks. The only thing I might challenge is paying expenses twice monthly, which seems a bit like overkill and extra work to me. A well run and efficient business should be fine handling expenses monthly and allowing any cash holdings to continue working for the business. It also provides cash flow flexibility in case of unforeseen challenges. That said, I am excited to hear your feedback on the advantages of this method and how it works out, as perhaps I am overthinking things here!
Cheers,
Zane Breeding
Coral,
The opening quote you used is very great and has a very profound message for all entrepreneurs and budding entrepreneurs. I really like how the author further enhances this claim that businesses should serve an entrepreneur and improve their quality of life by stating that if a company cannot set aside two percent if its revenue, it is not a business worth having. This, I agree, I a great way to think because running a business should go deeper than simply wanted to generate revenue and make money for oneself. It should be a goal to strive for impacts beyond just that.
The other profound claim, that business can all cut out ten to twenty percent of expenses over night is surprising to me. As I have minimal personal business experience, I find this very interesting. This idea reminds me of ideas shared within a financial entrepreneurship course I took during undergraduate, ENT 401. Dr. Cagle worked, aside from teaching, to help businesses and entrepreneurs financial. The course and her own lessons focused on cost reductions, as many business owners are spending money in unnecessary places, and they don’t even realize they are doing so.
Furthermore, the book I have read, “Company of One” by Paul Jarvis, explains the importance of staring small and truly minimizing startup expense, as well as ongoing expenses. He believes that scaling is not always necessary because with growth and increased revenue, comes increases spending and losses.
-Maddie
Maddie,
Thank you for your comments, I really appreciate your feedback. After reading some of your entries on “Company of One” and my book, “Profit First”, I think there are a lot of parallels. It is about finding the path that supports and brings joy – not constant stress and the concern of having to sell, sell, sell to cover each month. That’s just not sustainable.
Dr. Cagle sounds really interesting. I hope we get a chance to take a class with her over the next year!
Coral
Dear Coral,
I am happy to hear that Profit First has had such a positive impact on your perspective! The emphasis on businesses serving us, not vice versa, is one that rings true. We must remember that without our clients, no revenue is generated, and we are here to serve their needs.
Learning how to cut expenses kind of goes back to what I said in my last response to your previous blog. It is about separating the needs and the wants, but it is harder than it sounds because sometimes the things we want are viewed as needs. Learning how to cut expenses dramatically overnight is invaluable and thank you for sharing!
Paying expenses twice a month is something I’ve never thought about, but it makes sense. For my personal finances, I pay all my bills on the 1st of the month no matter when they’re due. I like to get them out of the way so I can see what I have for the rest of the month. I feel like it gives me a clear picture so there are no unexpected “surprise” expenses.
Kindly,
Shawn