Profit First: Transform Your Business from a Cash-Eating Monster to a Money-Making Machine
46 pages • 1-hour read
Mike MichalowiczProfit First: Transform Your Business from a Cash-Eating Monster to a Money-Making Machine
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Index of Terms
GAAP (Generally Accepted Accounting Principles)
The author uses the acronym GAAP to stand for Generally Accepted Accounting Principles, or traditional accounting methods. Michalowicz presents these methods as needlessly complicated and unhelpful to the average entrepreneur. He believes that when people use these methods, they become overly focused on making sales, at any cost. He explains, “GAAP both supersedes our natural behavior and makes us believe bigger is better. So we try to sell more. We try and try and try to sell our way to success” (26).
Profit First
Profit First is the name of the system the author describes in the book. It is founded on the idea that profit should be a habit, not an afterthought, and that business owners should prioritize paying themselves first. The system is based on four principles: Parkinson’s Law, The Primacy Effect, Removing Temptation, and Enforcing a Rhythm.
Real Revenue
The author describes real revenue as “your total revenue minus materials and subcontractors utilized to create and deliver the service or product” (64). Michalowicz believes that assessing your real revenue is a more reliable way to understand your company’s financial position than focusing on gross profit.
Parkinson’s Law
Parkinson’s Law refers to the phenomenon in which demand expands along with supply. The author’s simple version of this law is “…the more we have of something, the more of it we consume” (39). He claims that Profit First uses this phenomenon to people’s advantage by redirecting some of their expense budget to their Profit and Compensation accounts, forcing them to be more frugal and inventive in how they spend to support their business.
Primacy Effect
The Primacy Effect is the human bias that makes people focus more on things that they encounter first. This is relevant to accounting because traditional accounting methods present sales before expenses, and leave profit as the last consideration. Profit First flips this equation, helping people use the Primacy Effect in a constructive way by nudging them to focus more on their desired profits.
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