Michalowicz uses a tool called the “Instant Assessment” to quickly understand the financial health of a business. He warns the reader that facing these numbers can be upsetting, as it is difficult to face one’s own delusions and failures. However, it is a necessary step to righting one’s business for good. First, gather your balance sheets and tax returns from previous years. Plug in the information into the Profit First Instant Assessment form (available for free online). This will determine the business’s “Real Revenue,” which Michalowicz defines as “total revenue minus materials and subcontractors utilized to create and deliver the service or product” (64). This is more revealing than the “Gross Profit” number accountants tend to use, which the author feels can obscure, rather than clarify, the main financials.

The author provides a chart of healthy financial numbers to aim for in running a business. For a small business, this may be something like 5% profit, 50% owner’s compensation, 15% tax, and 30% operating expenses, totaling 100% of the real revenue. He provides a brief overview of how companies may differ; for instance, companies earning less than $250,000 per year are likely to have one worker (the owner) and lower operating costs, while larger businesses have many employees and higher operation costs.

Instant Assessments can quickly reveal whether a company will be able to stay afloat during a bad sales period. The author points to an example of a law firm, arguing that the owners should lower their salaries (and thus their lifestyle expenses) in order to put more money into their business’s profits, ensuring that their law practice will survive a sudden dip in business instead of going bankrupt. Moreover, they should lower their operating expenses to limit money waste and support their savings. While these would be tough changes, they would ensure a consistent profit for the business. The author recalls how he had to go through this process himself. After recovering from his business failures, he began a new business and cut his costs as low as possible, asking his subcontractors to work from home and doing much of his work in a low-cost space. Since then, he has always evaluated how to cut costs wherever possible. The author concludes this chapter by reassuring the reader that it is normal to feel angry or overwhelmed at this stage of learning Profit First, and they can take a break from learning the system if needed. He encourages them to make their necessary bank accounts and start small, building this new habit a bit at a time.

The Instant Assessment method adds to Michalowicz’s argument that traditional accounting is too confusing and unintuitive for the average business owner. This discussion prompts the reader to wonder whether, as Michalowicz believes, a lack of financial skills may be a key factor in the failure of so many small businesses. This argument is weakened somewhat by his instructions on completing the Instant Assessment. This assessment is quite thorough (and therefore far from “instant”), and some business owners may still want the support of an accountant in generating these figures. Nevertheless, the author’s consistent recommendation to entrepreneurs to reckon with the real numbers of their business grounds his argument in realism rather than motivational platitudes.

Michalowicz takes on a supportive tone at this stage, addressing the reader directly: “If you are having trouble facing the rest of this book right now, that’s okay. Stop now and come back to it when you feel ready to face it” (74). His suggestion to take a break, or make tiny beginning steps in creating a Profit First system, establishes Michalowicz as an understanding and realistic financial mentor.

Chapter Lessons

• Complete the Instant Assessment to understand your business’s “Real Revenue”
• Consider how your own salary or operating expenses might be cutting into the business’s profits
• Do not dwell on self-blame or frustration, instead take small steps of progress today

Reflection Questions

• What did you learn from the Instant Assessment on your business?
• How does the Instant Assessment compare to your usual methods of checking your business’s financial health and profitability? Would you recommend it?
• Did this exercise make you feel more or less confident in the Profit First system? Why?