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The Profit First Backstory
Profit First came out of Mike’s own desperation. It’s a solution he needed for himself, and it’s a solution you can use for your very own business. Being an entrepreneur ever since university, Mike had some “successful businesses,” but only on the outward parameters – fast revenues, fast acquisitions, but they were never profitable.
His third business failure was his turning point and where he discovered the idea that birthed Profit First, which was the simple envelope pay-yourself-first system. He decided to translate it to how he does business, which was tremendously successful that he was compelled to share it with others. After he wrote about it in his Wall Street Journal column, hundreds, if not thousands, of entrepreneurs started emailing him to ask about the system, so he decided to turn it into the book.
The core fundamentals of Profit First are this: when you take in revenue, whatever the amount is, take a percentage amount and put it to the profit account. This reduces the amount of money available for operating expenses.
Mike has over 350,000 businesses doing Profit First, and they consistently outpace their competitors in growth. Businesses taking Profit First say, “What is actually historically working for us? Let’s invest our money there because every pound I put in, I want £2 coming out.”
It also forces focus and efficiency, causing businesses to grow faster. “I can’t say you’re guaranteeing faster growth, but it will force you to concentrate, and therefore you’ll likely experience faster growth,” Mike says.
Profit First is reverse-engineering the profit. So when people say “I have to be profitable first before I take my profit,” they’re misunderstanding. If you take your profit first and hide it away, then you’ve constrained the money, and you’ll work on those parameters.
For instance, if you want to post a 20% profit in your business, take 20%. Then, you’ll have less money available to operate the business. You’ll have to discover and innovate how to make a 20% profitable business. It’s that simple.
The Profit First Effect
The Profit first method will grant you the power of constraint, where you’ll find ways to deliver your service more efficiently, more effectively, and more innovatively.
Mike talks about Parkinson’s Law which says “the more available something is, the more we consume.” For instance, if you go to a French restaurant and they serve a single pea in the centre of the plate, you very carefully cut that pea into 5 slices, and you slowly enjoy the unique flavours. You wouldn’t behave that way in say, an American restaurant, where what matters is how much and how fast you can eat.
The behavioural change is fascinating. This is true for any resource. It’s true for money. You can apply it in how you handle business finances as well.
The human mind is extremely powerful. Innovative thinking is spurred by constraint. When you have less to work with, the only way to supplement that is through thinking outside the box. That’s another wonderful asset. As you restrict operating expenses, you become far more innovative. You get to find ways to get the same marketing benefit with no spend, such as partnering with others for exposure instead of running ads. You’ll discover things that are unexpectedly different and profitable.
The Profit First Step
Start with the result in mind. What’s the result you want? How are you going to get there? Declare your profit and then figure out the pathway to get there.
And if you want more practical business ideas such as this one, make sure you go around our website, and connect with us on social media. We are on Facebook, Instagram, iTunes and Youtube. See you there!