The full title of this book by Mike Michalowicz is
Profit First: A Simple System to Transform Any Business from a Cash-Eating Monster to a Money-Making Machine
In my review posted on Amazon.co.uk, I gave the book Four Stars. This means I think it is Good and Well Worth Reading.
Here is my book review.
An interesting approach but you need to understand when it is and is not appropriate
I made a mistake and didn’t try the kindle sample before buying. I didn’t like the writing style.
The book argues that the way we look at profit is to look at it first.
It shouldn’t be revenue minus costs equals profit but revenue minus profit equals costs. You force costs based to be what they need to be.
In many ways, it’s an extension of the personal financial planning idea that you should save x% of your income because it’s so easy to spend everything you earn plus a bit more. I don’t think it’s that simple in business because of the different balance between must-have and nice-to-have expenses. Wishing x% profit doesn’t make it happen.
I believe the way people look at profit in owner managed businesses is wrong and can encourage them to accept lower and lower expectations but I have problems with the idea of taking out profit and cash out first.
Too often, I have seen directors of companies over-pay themselves in terms of salaries and fancy benefits (like sports cars) so that the company loses money and its future is seriously threatened. It’s also not tax efficient as UK income tax and national insurance is at much higher rates than corporation tax.
Too be fair to the book, it does tackle this issue in a later chapter.
On the other hand, I believe too few businesses plan and manage their businesses for profit proactively and this book is very worthwhile if it gets that message through to you.
I encourage you to become financially aware and the book Financial Foreplay by Rhondalynn Korolak is excellent. Financial discipline is essential and I agree with the Profit First author that it’s easy to spend money when you think you’re flush, only to be surprised later by something you’ve overlooked.
The book wants you to ignore sales revenue and focus on “real revenue” which is after deducting direct variable costs like materials and sub contract costs. I agree that this is a much better measure.
It then wants you to crunch other numbers further down to identify where you are “bleeding money” but I found that there was confusion between profit & loss account items and cash flow.
That’s because of the definition of profit in the book, Here it is the increase in money in the bank plus money withdrawn by the owners over and above any salaries.
Using this means that you get timing differences between profit and cash flow as revenue and expenses work through debtors and creditors respectively. It then sets target percentages for various items of your real revenue and creates a gap between desired and actual.
I originally returned this book because of the writing style at the start of the book and then I accidentally bought it again (because I buy books with the word profit in the title). The second time around I thought the style was less irritating and I persevered with it.
I find that I agreed with much of the sentiments in this book about establishing financial discipline but not with the execution.
Perhaps that’s because it’s different from the way that I work which is on a tailored one to one basis for individual companies. I worry that the book will inspire people to try to do the impossible and it may lead to decisions that harm rather than help the business. However used carefully, this book will challenge you and your business to deliver the profit you want.
The book has been updated since I read it. You can get either version from Amazon.co.uk and Amazon.com
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