Profit First
Mike Michalowicz
Profit First is Mike Michalowicz's reversal of the accounting formula: not sales minus expenses equals profit, but sales minus profit equals expenses. Every deposit is split by fixed percentages into separate accounts for profit, owner's pay, tax and operating expenses. Profit and pay are taken before the business can spend them, and expenses must fit what remains. The method is behavioural: owners spend what they can see, so smaller accounts (his 'small plates') make profit a decision taken on every deposit rather than a hoped-for leftover.
Your business makes money, and you cannot say whether it makes a profit. Michalowicz built and sold two companies, then lost most of what he had made, and designed this account structure so that profit is taken from the first deposit rather than hoped for at the end of the year.
The book in essence
Michalowicz built and sold two companies, lost most of the proceeds, and worked out that the standard formula, sales minus expenses equals profit, had been ruining him: it made profit the leftover, and in most small businesses no leftover arrives. His reversal takes profit first as a percentage of every deposit and makes expenses fit the rest. The mechanism is accounts: income arrives in one and on the tenth and twenty-fifth of each month is split into profit, owner's pay, tax and operating. Percentages start where the business can bear them, even one percent for profit, and rise a little each quarter. Tax is set aside before it is due; owner's pay is a line rather than what happens to be left; the profit account is distributed quarterly and never raided. The principle underneath is small plates: people eat what is served and owners spend what they can see, so the structure does the discipline that willpower cannot.
Published in 2014 and revised in 2017, it has a following among small-business owners precisely because it asks nothing of their character, only of their bank.
Who it's for
- Owners whose income goes into one account and who cannot say whether the business is profitable
- Anyone who has been surprised by a tax bill
- Founders who want profit to be a decision rather than a hope
Who it's not for
- — Readers wanting accounting theory; the book is a behavioural system and says so
- — Businesses with complex financing; the method assumes revenue arrives and can be split
Key lessons
01
Reverse the formula
Sales minus profit equals expenses. Take profit first as a fixed percentage of every deposit and force expenses to fit what remains. Profit becomes a decision rather than a leftover.
A baker's first split puts five percent into profit and finds the operating account alarmingly small. Within a month she has found a wholesaler instead of buying flour at the supermarket.
02
Open the four accounts
Profit, owner's pay, tax, operating. Income is split by percentage twice a month. The split is the system; nothing else is required.
Five percent profit, forty owner's pay, fifteen tax, forty operating. The profit account holds 900 lira at the end of the first quarter, the first visible profit the bakery has made.
03
Small plates
Owners spend what is in the account. One large account is a large plate; four small ones with profit and tax out of reach make the business run on the operating account because it has to.
A physiotherapist who leaves the tax account alone all year finds, for the first time, the tax money already waiting when the bill arrives.
04
Raise the percentages slowly
Start where the business can bear it and raise the profit percentage a point a quarter. If the operating account runs short, the business is telling you something about its prices or its costs, not about the system.
Profit at one percent in month one, raised a point each quarter to five percent by the end of year one, without a single month in which the operating account ran dry.
Try this today
Open the four accounts, or four labelled pots if your bank allows it, and split your next deposit by percentage: profit, your pay, tax, operating. Write the percentages down.
Quick check
What is the Profit First formula?
Why does the method work?
Selected quotes
“Sales - Profit = Expenses.”
“Profitability isn't an event; it's a habit.”