Book Reflections – week 5

I’m back with a conversation about debt freezing and running a lean business. I am excited to provide my readership (thank you, ENT cohort) with a process outlined in Profit First*, chapter title, ‘Destroy Your Debt.’ As Michalowicz states, he offers these instructions to eliminate debilitating debt. He recognizes that business owners still need to spend, to an extent, to keep the company propelling forward. This chapter aims to illustrate how to cut costs and not compromise the business.

Before we get into the details of eliminating business debt, thank you for following along. Many of you have tackled books that offer extensive business knowledge about mergers and acquisitions, investment tactics, and the history of capitalism. In comparison, my choice seems a little simplistic. In full transparency, at first, I was a little embarrassed with my book choice, but I have come to love this powerful little read. There have been so many great snippets on how to run an efficient and profitable business and already I am putting some of my learnings into play.

For example, we are close to bouncing back and landing (fingers crossed) some solid new business and I always tend to get ahead of myself. Immediately, I think, okay, let’s expand our office space and take over the back half of the floor we currently occupy. Thanks to this book, I made a hard stop yesterday and said, ‘No, we can’t afford an office expansion.’ I’ve learned, the high water mark must be our ‘new average’ for one year before we can increase our spending outside of what is necessary.

Here’s Michalowicz’s proposal for breaking down and wiping clean damaging debt:

• Run income statements for the last year as well as an accounts payable report, credit card statements, and any other statements that represent debt.
• Work through each line item with a P if it generates profit, an R if it replaces an unnecessary expense, and a U for all unnecessary expenses. This exercise is emphasized for every expense, including salaries, commissions, bonuses, rent, health care, etc. 
• Next, Michalowicz suggests the participants circle all recurring expenses—it doesn’t matter if they occur twice a year or twice a month.
• The next step is to summarize all expenses over the last year and divide them by 12 to determine the total ‘nut’ to cover.
• This is where I found it to be extremely interesting. Once the monthly expense average is available, the user goes back to the assessment offered in the early chapters of the book. It is there that the reader calculated their Target Monthly Expenses. Michalowicz says once you do the math, you’ll see the amount you want to cut, and then you can get to work.

The author takes this concept a step further and encourages the user to spend 10% less than their operating expense target. That’s aggressive!

I like the instruction here and believe it enables the business owner to clearly see what amounts to frivolous spending. Right off the bat, I’m thinking about the many magazine subscriptions we receive at our office. The team is not reading many of the publications, yet they keep coming month after month. My last thought (and it’s not mentioned in the book) is to encourage all new entrepreneurs to start with a legitimate accounting program such as QuickBooks. It makes all the difference in the world when you are analyzing expenses!

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*Michalowicz, M. (2017). Profit First, Transform Your Business from a Cash-Eating Monster to a Money-Making Machine. Penguin Random House