This article first appeared in the July/August Issue of
Every year I have to take Continuing Education Credits in order to keep my CPA license active and current. Most of the time the classes I have to attend are talking about the latest changes in GAAP, the newest FASB pronouncements and updates in the tax codes (cue the yawn!). However, this past week I had the pleasure to attend an event that I actually really enjoyed!
The presenter was Mike Michalowicz, author of the book, Profit First. He discussed many aspects of growing your business, but he focused on the business diet.
We look at the income statement we get from our accountant, and what do we see?
Sales – Expenses = PROFIT
Then we all usually ask the same question – So if that is my profit – where is the cash??
Many entrepreneurs spend so much time building their business, they forget to pay themselves first. The new formula –
Sales – PROFIT = Expenses.
In the book, Mike discusses how we need to go on a “Business Diet”. We all pretty much know what we have to do, even when we have to lose weight, we all know what steps we need to take to accomplish our goal. But how do we get the discipline to do it. The key is implementing a new way of life and putting procedures in place to insure that we don’t fall off the wagon. Here are four key elements:
Eat smaller plates
Research shows that the average plate size has increased over 23% since the early 1900’s. By using small plates, you consume less calories, thus controlling your weight. In business, apply the small plate concept. Open multiple bank accounts and distribute the money you receive immediately and automatically, in predetermined percentages, into different accounts. Each account has a different objective: Profit, Owner Pay, Taxes and Operating expenses. These are the four basic accounts. In the book, Mike goes over in depth how to determine these percentages. One example would be: 15% – Profit, 20% – Owner Pay, 15% – Taxes, 50%- Operating Expenses.
If we start with our vegetables and fill up, by the time we get to the meat and potatoes, we won’t eat as much! So, always pay into profit first, then yourself, then taxes and whatever you have left over is for your expenses. If you don’t have enough money to cover an expense, guess what? No – you don’t “borrow” from another account! It means is you can’t afford that expense and have to get rid of it! Having less money triggers frugality and innovation – do you really need that expense, and is there a more efficient way to accomplish the same thing?
If the Oreo’s are not in the house you won’t eat them! So make it very difficult and painful to access your other accounts. Keep your profit account in another bank, with no online banking privileges, so you have to actually go there and get the money. Maybe have two people required to withdraw funds so there is some accountability.
Enforce a Rhythm
Don’t eat when you are hungry, it’s too late and we tend to eat way too much! Eat throughout the day. In the same vein, create a rhythm in your business. Pay your accounts payable twice a month, or each week on a certain designated day, not only when your money piles up in the bank. Stay controlled and see what is happening to your cash flow and where your money is actually going.
Dieting is not easy, and without control and discipline it is doomed. However, we need to look at dieting not as a short term fix, but rather as a change in our lifestyle.
Start thinking about your business from the perspective of Profit First, and see how you can transform what you are doing into a healthier and more profitable lifestyle.
The Mike Michalowicz book is available at