The author fondly recalls meeting Jorge and Jose, two business owners who were among the first to adopt the Profit First method. In doing so, they ensured that their businesses served them—not the other way around. They managed to grow their profits and expand their business without ballooning and unmanageable costs.

On Day One of Profit First, business owners should inform their accountants of the changes they will be making and collaborate with them to understand how to reorganize the accounts. The idea may be new to the accountant, so some explanation may be necessary. Owners can also look for a “Profit First” professional who is familiar with this method.

The second step is to set up the necessary accounts for allocating funds. Third, the business begins to shift CAPs towards TAPs. For instance, on Day 1, you can add 1% to profit, 1% to owner’s compensation, and 1% to taxes. Then, deduct 3% from your operating expenses. Most companies have never been profitable, and their day zero profits will be zero, and so Day 1 will yield a meager 1% of profit. While this is not a huge difference on its own, it is the beginning of a healthy financial routine.

Michalowicz explains that these numbers do not have to be accurate to the penny (it is not a tax return). Rather, it is about having a good estimate of your revenue and where to allocate it. This process continually shifts money from operating costs to profits, taxes, and owner’s compensation, forcing business owners to make due with less money left over to operate their business. Michalowicz believes that most business owners will be able to be flexible and inventive to make this decrease work.

As you make your allocations, your “Income” account always goes to zero as you allocate money to different accounts. Seeing how profit, compensation, and taxes are often way lower than operating costs can motivate people to change and become more frugal about how they run their businesses. The author urges the reader to vigorously cut costs, trimming out everything they don’t truly need to run the business. Then, look at the remaining expenses and try to renegotiate them as much as possible. Soon they will embrace being a frugal entrepreneur.

Always pay bills on the 10th and 25th of each month, taking time to understand each of them and what can be cut in the future. Pay bills on time as much as possible, always withdrawing the money from the operating expenses account. Similarly, do income distribution on the 10th and 25th as well. If you do not have enough money to pay the company’s bills or your own salary, this is a red flag that the business needs to change. The Profit First system did not create this problem, it is exposing it and thereby giving you an opportunity to fix it.

At the end of each quarter, divide the money in the Profit account, taking half of it as a bonus for yourself, and leaving the other half in the account for emergencies. By regularly using profits for your own interests and rewards, you will love your work and feel more invested in it. The end of each quarter is also the ideal time to move CAPs closer to TAPS, further shrinking the Operating Expenses and adding to Profits and other percentages. The only time it is appropriate to use Profits for anything other than personal reward or emergencies is if you are short on money to pay taxes. Leftover profits are a valuable back up fund, but when the fund becomes excessive (over three months of operating costs), this is an opportunity to reinvest it in your business. The author ends by telling the reader to make a list of how they would spend their profits in order to feel motivated and stay on track.

In this section, the author walks the reader through implementing the Profit First system. His repeated advice to begin with small adjustments and slowly build on them is a reminder that using the Profit First system is a slow transition for most business owners. He writes, “Start slow. Real slow. Put the percentages at a level where there is no excuse not to try” (96). This gradual approach makes trying Profit First feel feasible and virtually risk-free.

Another repeated bit of advice in this section is Michalowicz’s recommendation to become as frugal as possible. His emphasis on cutting operating costs reminds the reader that this is the only way they can increase their profits and salary. While the Profit First strategy may work for many entrepreneurs, Michalowicz fails to address the possibility that some business owners are already as frugal as possible and may not be able to cut their operating expenses anymore—not even by the recommended initial 3%.

Chapter Lessons

• Begin by taking away 3% from your Operating Expenses and redistributing them to your Profit, Taxes, and Owner’s Compensation accounts
• Always redistribute everything in your Income account into your other accounts
• Be inventive and disciplined about managing your business on its new decreased operating funds

Reflection Questions

• Does the 3% change on Day 1 sound manageable and rational to you? Why or why not?
• Do you consider yourself a frugal entrepreneur? Could you in any way become more frugal? Would this help or hurt your business?
• Would your financial professional be supportive of the Profit First method? Why or why not?