Michalowicz remembers his early success in developing businesses. After he sold his second business for over $300,000, he felt certain that he had a knack for business and would make money easily in the future. Though he had been very frugal and sensible while developing his business, he spent much of his new wealth on cars and lavish vacations. In hindsight, he recognizes that he had become arrogant and didn’t really understand how to manage money.

Thinking he was a business expert, he used much of his money to invest in start-up companies, expecting to guide them to success. While he poured plenty of money into them and tried to mentor their founders, all 10 of the companies failed, and Michalowicz lost over $500,000 dollars. Panicked, he realized he could not pay his taxes for that year and all his income streams had dried up. He went home and broke down, admitting to his family that he had lost everything. His daughter got her piggy bank and brought it to him, telling him they would get through it.

The author explains that while many entrepreneurs may seem successful, behind the scenes, many are sinking in debt. Many business owners believe that they must increase spending to achieve growth, and that growth is the way to increase their profits. However, when a business’s spending increases and its sales experience a dip, this can create huge problems quickly. Michalowicz laments that many business owners try to “grow their way out of their problems,” and argues that, contrary to popular belief, “bigger is not better” (18-19). Companies can grow but accumulate more problems in the process; their income and spending might increase, but profits may not. Rather than perceiving profits as an event that occurs only after growth, routine profits must be baked into the day-to-day operations of the business itself.

By always responding to bills and debts by frantically trying to sell more, entrepreneurs get caught in the “survival trap” (23). This might include doing too much work themselves, taking on difficult clients, or otherwise overextending their capacities. This process distracts people from becoming excellent at their specialized skill as they exhaust themselves and spend more trying to offer things they cannot. Being in the survival trap gives entrepreneurs a false sense of safety, as they think they’re making necessary sacrifices to move closer to their goal, but they are really on a treadmill of effort. The author uses the example of his landscaper, Ernie, as a small business owner who offers too many services—including roof repair and chimney cleaning—to try to generate more revenue.

Michalowicz blames GAAP (generally accepted accounting principles) for the survival trap, noting that entrepreneurs are too fixated on revenue and their short-term bank balances and do not think enough about their own salary. GAAP tells entrepreneurs to make their sales, minus their expenses, and then take the remainder as their profit (sales - expenses = profit). The author believes it is foolish to leave profit as an afterthought. While mathematically logical, this thought process “goes against human nature” (27), as it encourages people to focus on making sales and assuming that this will grow their profits. GAAP is also very complex and makes people rely on accountants to help them understand if they are even making a profit.

While entrepreneurs could review their operating cash ratios and key performance indicators every week, most do not, and many struggle to even make sense of those documents. The Profit First system helps people focus on how much profit their company is really making so they can make informed decisions that actually maximize profit. The author promises to teach the reader this simple and life-changing process.

In this chapter, the author tries to convey the problems with typical accounting methods and how they affect the average entrepreneur. His diagram and explanation of the “Survival Trap” adds substance to his argument that many entrepreneurs have dysfunctional finances, which they try to fix with flawed methods. By illustrating how these methods actually hinder entrepreneurs from reaching their long-term vision, the author makes a strong case that these common reactions keep business owners on a frustrating treadmill of earning and spending, rather than saving. However, he does not consider successful businesses that use GAAP, and how they may be using traditional accounting methods more effectively. For Michalowicz, the method itself is to blame rather than the business owner’s ineffective accounting.

His anecdote about Ernie, his landscaper, gives his analysis a human face, helping the reader see how the trap plays out in real life. By shifting from lawn care to roof and chimney services, Ernie took on too many tasks outside his area of expertise in an effort to chase bigger revenue in the short term. Michalowicz believes that this example is representative of how many entrepreneurs operate, since people are easily focused on gaining more short-term income while forgetting about the increasing expenses these new projects require. He notes that, “most of the time, we can’t discern profitable income from debt-generating income” (24).

The author’s argument about the Survival Trap and GAAP convinces the reader that many entrepreneurs are not well-equipped to track and manage complex expenses and profits. However, he does not consider that some people and businesses may actually thrive using these methods, and that it may be more of a personality issue rather than a fact of “human nature” (27). Nevertheless, Michalowicz’s first chapter highlights common pain points for business owners who struggle to use traditional accounting methods and presents them with a workable solution.

Chapter Lessons

• Increasing sales does not necessarily increase profit
• Entrepreneurs must consider how taxes and business expenses will cut into their profits
• Avoiding the “Survival Trap” by not pursuing expensive methods of gaining clients or offering new services at the expense of the core business

Reflection Questions

• So far, do you agree with Michalowicz’s assessment of GAAP? Why or why not?
• Look at the diagram of the Survival Trap. Have you ever found yourself in this position? How did it happen? What might you have done differently?
• Michalowicz believes that many entrepreneurs are overly focused on growth. What are your beliefs and goals about your company’s growth? Has growing your company generated more profits for you so far? Why or why not?