Profit First is a book written by Mike Michaelwicz, and is also a method of cash management.
The Profit First system has 4 core principles which I will outline below.
But one important thing to remember is focusing on Profit First, does not mean that you don’t also put service at the centre of your business — Profit First is about the way you manage cash.
The first principle comes from the health and diet industry there was a fitness expert speaking about quick fix cures…you know — the lose 15kg in 5 hours plan
He explained that many of them do in fact work — but they are not sustainable because they require us to change our habits, to behave differently and that is not too hard to do for a short period of time.
But to sustain it…that is much harder.
It takes more than willpower, it takes a change in who we are and for most of us — that just doesn’t happen. He went on to say that the best system to get healthy and lose weight is not to change your habits.
But to leverage them!
This is the healthiest system for our bodies.
Doing that and leveraging habits is also what we can do to have a healthy system for our businesses too.
Here are the 4 core principles of Profit First:
Principle one: use smaller plates. In the diet industry we, of course, know, that the fewer calories consumed means the less weight gain we have and if you consume less than you burn you, of course, lose weight.
The fitness expert explained that it is our natural habit, when we are dishing up our meals, to fill up our plates and then, since it’s usually drummed into us from childhood we eat everything on the plate.
So the technique in the diet industry, that we can use to leverage this habit — is simple to reduce the plate size at home.
So now you’ll be filling up the plate as you have always done and finishing everything as you have always done — but you’ll be doing it with a smaller plate.
Your habit stays the same but the guard rails around it changes.
This principle applies to our businesses too because most businesses have a single plate and in terms of the money in our businesses is our banks current account (or checking account for those in the US); we may also have a savings account too but the business is run through the bank current account and it’s one or two big plates.
The second Principle again from the health food industry.
A typical diet they usually say to eat your vegetables first whilst most peoples tendency is to leave them till last or not take them at all!
But the health expert explained that if we eat our vegetables first and then eat the remainder of our meal we’ll eat less of the remaining meal and we’ll have got all of our nutrients and vitamins since we had our vegetables first.
They won’t be ignored.
Our businesses need and are the health, the nutrients, and the vitamins and that my friend is the profit!
A profitable business is a healthy business! So we must pay ourselves first, take the profit first.
The third component of a healthy diet is removing temptation.
My vice is chocolate! If there is chocolate in the house I will eat it all — none left for anyone else! I’ll try using willpower to prevent it and that will work for a while. But then…BANG! I’ll eat all the chocolate!
We all give into temptation
Willpower is like a muscle — it wains over time so the easiest thing for me to do is not have any chocolate in the house — to not test my willpower — to remove the temptation.
The same is true for our businesses
When we allocate money for our profit the profit must immediately but put into another bank account that is not easily accessible — because there is then a temptation to “borrow” — so we need to remove that temptation and then the likely-hood of “borrowing” is vastly reduced.
And the fourth and final step to a healthy diet is frequency!
Most people eat too infrequently. Eating 2–3 meals a day and getting very hungry in the lead up to those meals then you overeat.
The health industry teaches that actually the optimal is 5 meals a day! Eat small amounts 5 times a day then you don’t feel the hunger pangs — you don’t go into starvation mode then overeat.
Well the same is true with our businesses
Most of the time we do our cash management too infrequently. we pay bills when we can…maybe once a month (maybe even longer than that) and we pay everything out immediately and we are in starvation mode and our business needs to then survive in that mode until the next deposit comes in.
The method that I am going through in this blog series on Profit First will teach you to manage you cashflow twice a month — on the 10th and 25th which are the 2 optimal days and by managing cashflow on a regular rythms was can see how money is flowing in and out of our businesses and not go into starvation mode.
So the action items.
We need to make your subconcious behaviours and the concious ones. This does not require you to change your habits since that is nearly impossible — but one thing that will help you leverage your existing habits and make you even more profitable is simple being aware of them.
So as we go through these next few days — just be aware of the voice behind the voice — the thoughts in your mind — your subconcious guiding you — then when you are aware of your habits you can use them as leverage go make the most profits to your business.
The same is true for our businesses!
When we allocate money for our profit the profit must immediately but put into another bank account that is not easily accessible — because there is then a temptation to “borrow” — so we need to remove that temptation and then the likely-hood of “borrowing” is vastly reduced.
