Profit First

The idea of profitability since the first day of business sounds like a scam. First, it's necessary to invest, then, re-invest the profits into the business to make it grow, and eventually, in a promising future, collect the profit and live in the Phi-Phi island.

The problem is that about 50% of small businesses fail in the first 5 years. Among many reasons, owners burn the business in debt and reach the end of the year with no leftovers. Instead of living a comfortable life, they’re slaves to what they managed to build.

The author of Profit First presents a different route to the aspiring entrepreneur: taking profit first, then paying the expenses. This will force you to run a business with less money, and ideally, fewer expenses. You'll have to innovate and be creative in the way you do things.

If you're familiar with the Parkinson's law, bear the brief explanation. This law made its first appearance in The Economist as the first line of an essay: "work expands to fill the time available for its completion". This short sentence explains why students with more extracurriculars, have, on average, higher grades. When the only task I have is studying for a test, it takes me twice as much time to start. If instead, I’ve got much more on my plate, I’m able to accomplish different tasks, in the same amount of time.

You can apply this law to a diversity of situations, businesses included. The more money you have, the more you'll spend. But, if you get into the habit of taking your profit first, then you'll have to make it work with what is available. The author recommends separating your profit into different bank accounts and committing to not touch some of them (e.g. taxes).

Profit is not an event happening at the end of a year, or semester. But instead, a daily habit. Next time you make a 1000$ transaction, transfer 1% to your bank account — yes, 10$. This is a great way to prove yourself you can make it work with less money available.

During the business activity, you actively separate the money in different accounts: income, profit, taxes, owner compensation, and operational expenses. Because you have less money in the “main account”, you’ll be forced to reduce the expenses and come up with creative ways to do business with less money.

What is the problem of waiting until the end of the year to transfer your "profit"? There is no profit! Accounting profit might exist, but you'll have to search the bottom of the vault to find any cash.

The idea is simple: take your profit first, and only then pay the business expenses. If you apply this rule, your business will be profitable from day one. The equation is the same, you only change the order of its parts. Instead of (Sales – Expenses = Profit), you’ll have (Sales – Profit = Expenses).

Don’t let your business become an eating-cash monster!