Profit First is a book by Mike Michalowicz about how businesses should think and go about earning profit. In this review I suggest we think of ourselves as individual-person businesses, because it’s an interesting and revealing exercise of the imagination. What is a business but a group of people with a common cause, and what’s an individual but a business of one?
And by doing this I don’t mean to oversimplify the human experience, but if you don’t recognize that modern life revolves around work and money you’re either blessed, naive, or ignorant.
And this isn’t to say that there isn’t so much more to life than our work and income, but those two things underly the foundations of Maslow’s hierarchy of needs.
Our wage secures our physiological and safety needs, and our job builds into the whole pyramid, with greater focus in the top three levels of belonging, self-esteem, and self-actualization.
A Profit and Savings Mindset
When it comes to individual profits, we want to think about how much our checking our savings account grows (or decays) month-to-month. If we see a gain of 200 USD in our account from one account statement to the next after all bills are paid, that savings is that month’s profit.
No matter how much money I make in a year, I am no wealthier if my account statement doesn’t grow from one month to the next. If my account or net worth doesn’t grow, my salary is more of a badge for the ego than it is to show how much I earn. If that doesn’t make sense to you, please read my article on growing wealth from the bottom line.
Now when it comes to businesses, the classic formula for Profit is Revenue - Cost:
Revenue - Cost = Profit
What Micalowicz points out is that businesses typically emphasize revenue and cost, and then do the math to see if there is profit. For all you math buffs out there, they’re treating revenue and cost as independent variables, and then profit is the dependent variable calculated off of the other two variables.
For all of you who slept through math class, you’re boned.
Just kidding, mostly. What Micalowicz is pointing out is that businesses usually think about profit as something that is not directly controllable. This is because they believe their revenue was as high as it could be, and especially because they think their costs were all necessary: “it was the cost of doing business.”
This is Micalowicz’s critique: that line of thinking is hoping or praying for profit. It’s a fallacy that can lead to year after year of no profit. As an individual, that means year after year without additional savings! (blegh, right?)
Instead, Micalowicz suggests we make a specific goal of profit, and then organize our business practices around that goal. What this entails is adjusting our costs to make profit, normally, because revenue is often constant or less adjustable.
In other words, we have to seek effective means of substantially cutting costs to make profit or increase our savings.
This isn’t to downplay the importance of seeking increasing revenue, or getting raises. But we all know the infrequency and potential relative insignificance of raises. (A whole 1 percent?! lol)
For businesses, reducing costs includes lowering overhead like rent and utility fees, and assessing and then organizing businesses around only essential employees. Businesses and individuals share some costs like rent and utility fees, but for individuals there is also the cost of food and one-time luxury expenses like vacations and festivals to account for.
Instead, we should think like:
Profit = -Cost + Revenue… so we emphasize the goal of profit, and then the importance of reducing costs.
Or -Cost = Profit- Revenue… so we really focus on reducing costs to maximize profit (or savings)!
A common mistake of new business is to chase after revenue and growth, expecting profit to trickle out from those. The corollary to that for individuals would be allowing living expenses and lifestyle costs to creep up proportionally with new salaries or a raise without consciously recognizing that is keeping savings from accruing.
For businesses, the concept of the start-up is common. Start-ups work off seed and angel investments, emphasizing the potential for growth often by carving out a large portion of a pre-existing market or creating a new market for a product or service altogether. Profits may or may not happen, but are often not prioritized, because the realized gains are expected to come from a buy-out from a larger business.
The comparable circumstance for an individual would be to take a job that hardly if at all allows for savings, but improves skills and experience to then allow for promotion or a different position altogether.
Micalowicz insists on organizing the flow of money by setting aside cash for profit distributions (for individuals, savings), taxes and costs. We should determine preset target percentages for minimum profit or savings and maximum costs for a given time period then track them. Determining a specific profit or savings goal is important, and if you are interested in or unsure of why, I suggest you look into SMART goals.
Once we start tracking, we can enjoy making the profit or savings accumulate or adjust our costs accordingly.
To minimize our costs, Micalowicz strongly suggests we play on our human tendencies. As an example, it is common to eat all the food in front of us, and a common dieting principle is to limit portion sizes. Some studies show going even further with smaller plates and bowls helps too. This suggests our perception of the amount of food is a factor in satiating hunger, as opposed to the sheer physical amount alone. And just as it’s a human tendency to eat everything in front of us, it’s a human tendency to spend all that’s available to spend. So within reason we should limit our adjustable costs like our amount spent on restaurants and food. Of course we should eliminate unnecessary costs. For instance, why pay (minimum) bank account fees if there are options without any fees? And of course we definitely need to limit our luxury expenses like vacations, music festivals, car and phone upgrades both in frequency and price.
Another analogy with healthy dieting comes from the suggestion of starting with what’s healthy and good for us to eat less of the unhealthy food; we should eat vegetables first, and dessert last. For profit and savings, we should distribute to the profit/savings cache first and the unnecessary and luxury costs last (if at all).
Setting defined percentages of income or revenue to costs makes our businesses and our finances lean. Micalowicz makes an analogy with this, too. Think about the way we use our toothpaste, from a new tube to its end. At the start of the tube, we are liberal in the amount we apply, and less careful with our placement on the toothbrush. But at the end of the tube we start becoming much more careful and frugal.
If we can do this with our toothpaste, we can do this with our money! If we sensibly limit our cost funds allocation, we can get creative with how to save on costs.
And when we save on costs, we save more money!