What do a website, social media and email all have in common? They are marketing tools that a business can use to generate sales.
That’s all well and good. But how do you grow a successful business and generate a profit?
The traditional GAAP (Generally Accepted Accounting Principle) formula is:
Sales – Expenses = Profit.
That’s what I’ve been following since I started my business in 2009. There’s just one problem with this principle. Even though I’m making money, I don’t have much to show for it.
That’s because I’ve been making the mistake a lot of other small business owners make. I’ve been reinvesting my profit back into my business. I’ve spent money on courses to improve my social media marketing skills. And I’ve been working with a coach to improve my speaking and marketing skills.
Investing in your business is important. It’s how you grow. But I’m following a new strategy that is allowing me to enjoy the fruits of my labor, as I grow my business. And I have author and entrepreneur Mike Michalowicz to thank for this revelation.
He has written a new book called, “Profit First: How to Transform Your Business from a Cash-Eating Monster into a Money-Making Machine.”
New Money Making Formula: Take Your Profit First!
Mike’s main premise is that the old formula of Sales – Expenses = Profit is flat out WRONG! He encourages business owners to follow a new formula:
Sales – Profit = Expenses
Why? It’s human nature to spend all of what we make or “reinvest” it in our businesses. And since business owners and entrepreneurs follow the GAAP formula, they rarely take a salary. That’s because after deducting expenses, employee payroll, taxes and any owner distribution, there’s rarely much money left over for a salary.
The solution therefore is to take your profit first, and then spend the remaining money on expenses.
But there’s more to the Profit First concept than just paying yourself first. It’s about turning your business into a money-making machine. And that means following these core concepts:
1. Use Small Plates – As soon as you deposit money into your main operating account, move it into four other accounts – one for profit, one for owner pay, one for taxes and another for operating expenses.
2. Serve Sequentially – Always move money to your profit account first, then owner’s pay, then taxes and finally, whatever is left over goes for expenses.
3. Remove Temptation – Use a different bank for those four accounts so you won’t be tempted to borrow from yourself.
4. Enforce a Rhythm – Do your payables on the 10th and 25th of the month. This will help you see how cash accumulates and where the money is going.
As Mike explains in the book, using real-life examples, this concept can have a transformative effect on your business – making you profitable from day one – even if you’re carrying a debt load.
Don’t be concerned that this is some dry accounting book. On the contrary. Mike’s writing style is casual and friendly. But he also doesn’t pull any punches. So be prepared for some tough love.
Profit First has certainly changed the way I do my accounting. I’m now taking a paycheck – for the first time in 5 years! It’s a gratifying feeling, knowing that I am contributing to my family’s finances.
If you’re ready to turn your business into a money-making machine, grab a copy of Profit First today. It will be the best investment you’ll make all year!