Coral DarbyI’ll use this space to blog about the book I am reading for ENT 640—Entrepreneurial Feasibility Analysis. My book is Profit First* by Mike Michalowicz.
The Agency Management Institute (AMI) membership base recommended Profit First to me. AMI is dedicated to the health and success of professional service companies, most specifically branding, marketing, and PR firms.
The book’s premise is about rethinking the adage that revenue minus expenses equals profit. Only a couple of chapters into the book, I am intrigued by what appears to be a different approach to money management. This bingo statement caught my attention, ” this book explores the difference between making money (income) and taking money (profit)”. The author is working towards abolishing the mindset that ‘increasing sales means that the profit will take care of itself.’ According to Michalowicz, this is the wrong approach, and money problems occur (and they always do; it is the nature of entrepreneurship) when two things happen:
*Sales slow down, and it is time to hurry up and sell more. This is a problem when a business operates on a payment-to-payment basis or, like in my case, when a big client goes away and the profit margin plummets.
*Sales speed up. As the author states here, ‘the problem is not apparent, but it is insidious’. The increased revenue is exhilarating, but it’s hard to sustain, and as soon as you get to a new threshold, expenses grow, often significantly. As I usually say, this is the new high-water mark, and all sales must be north of this new lifestyle baseline. The cycle begins with having to keep selling to sustain. I know this cycle and it is exhausting!
What’s next? Michalowicz furthers the literary journey by teaching us how to rethink accounting. He challenges the conventional thinking of GAAP (General Accepted Accounting Practices) and flips the profit model upside down. Treating this as a behavioral approach and relating it to weight loss, he encourages the reader to think about money management buckets as small plates. His theory is that revenue minus profit equals expenses. This is getting very interesting!! Next up for me is taking the ‘Instant’ financial assessment. I’m nervous – stay tuned for the update!
*Michalowicz, M. (2017). Profit First, Transform Your Business from a Cash-Eating Monster to a Money-Making Machine. Penguin Random House
Wow, your summary of the book is really compelling! The idea of flipping the traditional profit equation is fascinating and makes a lot of sense. The distinction between making money (income) and taking money (profit) seems crucial, especially for those of us considering entrepreneurial ventures.
I completely relate to the issues you’ve mentioned about sales fluctuations. It’s easy to think that more sales will always solve financial problems, but as Michalowicz points out, it can actually lead to more stress and unsustainable growth. Your description of the “new high-water mark” resonates a lot; it’s like chasing an ever-moving target.
I’m curious to hear how the ‘Instant’ financial assessment goes for you. The concept of treating profit as a priority rather than an afterthought is intriguing. It reminds me of the principle of “paying yourself first” in personal finance. Looking forward to your update on this new approach to accounting!
Thanks for sharing this—I’m definitely putting this book on my reading list!
Your insights into the book’s premise are quite intriguing, and it seems like you’re finding a lot of value in Michalowicz’s approach to money management. I’ve also been captivated by the idea of rethinking the traditional profit model. The distinction between making money (income) and taking money (profit) is something I hadn’t considered in depth before, but it makes a lot of sense.
The scenarios you mentioned about sales slowing down or speeding up resonate with me. It’s true that relying on increasing sales to drive profit can be a risky strategy, as it doesn’t account for the inevitable fluctuations in business. The idea of continuously having to sell more to sustain a new baseline is, as you said, exhausting and unsustainable.
I’m particularly interested in the concept of flipping the profit model and treating it as a behavioral approach. The analogy to weight loss, with the idea of using smaller plates (or in this case, smaller financial “buckets”), is a unique way to think about managing expenses and ensuring profitability.
I’m looking forward to hearing about your experience with the ‘Instant’ financial assessment. It sounds like a practical tool to gauge where we stand financially and how we can implement these new strategies effectively. Keep us updated on your progress and any new insights you gain from the book!
Thanks Curtis!
I appreciate your comments and I am glad you liked the analogy of weight-loss and small plates. That perspective resonated with me as well.
Coral,
Thank you for sharing! Interestingly, much of this resembles our recent interview, where we discussed the difference between revenue and profit! I continue to hear many executives and business owners tout their revenue figures, though if I am someone interested in purchasing or running that company, I want to understand what the owner discretionary earnings actually are. Meaning, what type of profit is the business actually generating that can either be put into my own pocket or invested back into the business? Much like the author, I have seen through my own experience that while revenue and profit can correlate, that is not always the case. In fact, some of our largest revenue customers were not profitable at all due to mismanagement of expenses and other factors. In this regard, I believe it is critically important for entrepreneurs to understand how to use their management skillsets to appropriately monitor not only sales, but operations. Understanding costs affixed to any client and/or project is fundamental to ensuring you are profitable (and furthermore, are pricing work appropriately)!
The “too fast” scenario is also something I have seen, particularly with startups that grow so rapidly, they believe that revenue will never slow down and accordingly, they ramp up expenses and payroll to accommodate the new demand. The challenge becomes sustaining that growth cycle and what happens once the business/product begins to level out? In many instances, this can lead to layoffs, downsizing, or even businesses closing their doors because the infrastructure wasn’t designed to facilitate. Finally, I would tend to agree with “revenue minus profit equals expenses” premise. While this may sound eerily similar to “revenue minus expenses equals profit”, the difference in my own mind is that we MUST pay closer attention to our operational expenses. Revenue is often heralded as the “cure all” for business woes, though more often I have found that proper operational management and efficiency is how ventures reach sustainability. Thanks for sharing and looking forward to more reflections!
Cheers,
Zane Breeding
Zane,
Thank you for taking the time to comment, I appreciate it. You are right, we did talk about revenue being somewhat of a vanity metric. The true assessment of a company’s health is net profit. I am a big fan of slow, sustainable growth. The hamster wheel of needing larger revenues YoY to cover increased costs seems like a true recipe for burnout.
Coral,
Thank you for giving us an early glimpse of the premise of your book selection! It was great to get a general sense of the stance in which the author, Mike Michalowicz, is taking. It is very interesting to see that the author is flipping the profit model upside down, as he challenges the conventional thinking of GAAP (General Accepted Accounting Practices). One of the typical equations that serve a staple in accounting practice, that can be found on the income sheet, is that profit (or net income) is equal to revenue minus expenses. In your reflection you note that Michalowicz upholds by the concept that “revenue minus profit equals expenses”. Although you recognize this is similar to the typical equation that determines profitability, I like how you likewise not the shift in focus, as Michalowicz’s equation draws further attention to a company’s operational expenses.
This is interesting to me, as one of the elements in business literature and reading that I enjoy most is the varying perspectives and ways in which one can analyze business feasibility, success, and profitability. Thus far, based on your inciteful and timely analysis, it appears this book will take a refreshing stance on a widely taught subject area. In previous courses I have taken that dealt with the financial attributes of entrepreneurship, we were taught the standard practices in relation to accounting (for the sake of aiding in understanding, making teaching uniform, and allowing general communication across these subject matters).
Madelynn,
Thank you for your comment. I agree with you that it’s fascinating to read another perspective on a traditional business model, especially when it’s based on accounting principles. The different formula is helping me see another way to financial success.
Coral,
This book has a very challenging approach to traditional accounting methods. It highlights that many business owners are tirelessly running their business with out reaping the fruit of their labor, and viewing their success through the exaggerated lens of “revenues”. I like how the text points out that “profit should not be an end of year event,” but rather a habit that happens everyday. By focusing on sales and expenses only during the year, we are unable to hone in on what matters the most to us as entreprenuers which is tangible cash in the bank. The text pointed out that even “Enron was able to post profits, even as they were going bankrupt.” Somehow , we need to find profibility while growing rather than growing with the hopes of turning a profit on paper by year end. We need to scrutinized our spending habits, and debt generating income, so that we can experience a profit now. The text states that “when you focus on profit first, you inevitably figure out how to make a profit consistently.” The idea to advert using your investments and savings towards a hopeful profit in the future; especially when 50% of businesses shutter within 5 years. The book urges readers to focus on sales minus the profit that they want to see and the figure that is left should equal sensible expenses. I notice that alot of companies focus on projection. Projection is heavy in the world of data analyitics right now. However, “projectons are an opinion, and cash is a fact.”
Coral,
I was so excited to read your posts due to your professional nature. Already being established can provide some great insight to those of us who are not.
Sales Speed Up! This section really hit home with me. As you already know my own consulting business was doing insanely well with over 20 clients at one time in previous years. This amount of work was unmanageable and I saw myself more exhausted and hating what I was doing.
My ability to slow down and truly focus on what I wanted has allowed me to create a better, more manageable service for my clients.
It truly is not all in the numbers!
Hi Ivan,
Thank you for reading my blog! I love that you are really enjoying your marketing work again, that’s so important. The numbers are super important but they don’t always tell the full story.
Best,
Coral