The author recalls his period of deep depression and insomnia after his business failures. Watching TV one night, he saw a weight loss infomercial that encouraged people to use smaller plates to manage their portions. Michalowicz understood this as a good metaphor for his approach to business; he had always spent whatever money he had to support his business instead of trying to be consistently frugal and cut costs. He realized that he could take a reliable profit first, and make due with whatever money was left over.

He now believes there are four principles to “Profit First”: Parkinson’s Law, The Primacy Effect, Removing Temptation, and Enforcing a Rhythm. Parkinson’s Law is the phenomenon that “the demand for something expands to match its supply” (39). In other words, the more of something we have, the more of it we use up. The author believes that if people first take earnings as profit, they will find inventive ways to keep their business running on the smaller amount left over. This means that entrepreneurs must have different accounts to immediately separate money into, such as “Income, Profit, Owner’s Comp, Tax, and Operating Expenses” (45).

The primacy effect is the human bias to focus more on the first things they encounter and put less emphasis on later things. Michalowicz believes that this is the reason why many business owners focus so much on sales, since they come first in the process, to the point where they leave profit as an afterthought. In practice, people must use this bias in their favor by “Serving Sequentially,” meaning paying themselves first and then putting money into tax and operating expenses accounts. If there is not enough left over for expenses, those expenses must be considered unnecessary and be cut out.

The third step, removing temptation, means setting aside profit to ensure you cannot spend it. By keeping themselves accountable to not “stealing” from themselves, business owners can ensure they always turn a profit and do not waste it. Lastly, business owners must “enforce a rhythm,” by creating a habitual rhythm of checking and managing their business’s finances (42). The author recommends always managing pay and expenses twice a month on the same dates.

To become comfortable with this system, business owners can start small by opening a new profit account and transferring only 1% of their earnings into it. While small, this is a valuable first step to creating a new habit. The author concludes his chapter by reiterating that what is most important is to take decisive action and the small step of starting Profit First today.

In Chapter 2, the author makes his theory more concrete by offering practical examples of how Profit First works in real life. His explanation of Parkinson’s Law encourages the reader to think about how they behave in times of scarcity and times of plenty, and whether they can adopt a more frugal outlook even when they could spend more. His four steps present a clear methodology for practicing “Profit First,” however, this method is still quite vague and general. For instance, Michalowicz’s assessment that expenses must be cut if they cannot be fulfilled may be impossible for certain business owners to achieve. While he argues that many expenses are unnecessary, some businesses may have already cut costs as much as possible. However, he addresses scaling the process by acknowledging that people can begin in small, manageable ways instead of adopting his method completely overnight.

Chapter Lessons

• Set aside profit first, followed by taxes and then expenses
• Develop the financial habit of regularly sorting income into profit, taxes, and expenses
• Start small by distributing even 1% of income into your profit account

Reflection Questions

• Does Michalowicz’s explanation of Parkinson’s Law resonate with your own financial behaviors? Why or why not?
• Much of the author’s argument revolves around cutting expenses. Is this possible for your business? How?
• Which of the four principles of Profit First seems the most challenging to you? How might you overcome this challenge in order to try this method?