How Healthy Is Your Business?

Profit First by Mike Michalowicz is on our Top 10 business books list for good reason.  A lot of entrepreneurs struggle with profitability even though it’s an essential part of running a business.  In this book, Michalowicz shares how you can transform your business from a cash-eating monster to a money-making machine.  Daoud Kakish found this book at the exact right time.  His business was struggling with profitability, and he assumed the answer was to just sell more.  After hearing Michalowicz speak at an event, he immediately bought his book and read it over a single weekend.  What he learned, he immediately applied to his business and it had a transformational effect. 

This is what we’d like to share about this book.

Big Doesn’t = Profit

Just because sales are great, doesn’t mean your profits are.  People assume that if they sell a lot, their business will be profitable, but that’s not always the case.  Most of us know how to add, but we don’t know how to subtract!  It’s easy (and exciting) to add up all your sales, but we forget to focus on all the things we need to subtract – like payroll, rent, and other expenses.  From the outside, people might look at your business and see you have lots of employees or multiple locations and assume you’re doing well.  But the size of a business doesn’t always tells us how healthy and profitable it is.  We shouldn’t focus on how big a business is, we should focus on how healthy it is.

Paying Yourself Last?

Is this you?  Do you work crazy hours?  Are you one of the hardest working people you know?  Do you spend more time on your business than other parts of your life?  And despite all of this, are you frustrated because your business isn’t profitable? 

When Daoud Kakish became an entrepreneur, he was in a similar boat.  He would make sure his employees, vendors, and other expenses got paid before he did.  Each month, he hoped there was money to support his family and it was a frustrating, desperate feeling.  What was crazy is that while this was happening, his business was experiencing excellent growth of over 20% per year and reached the $1 million in sales for the first time.  Daoud found himself making less money personally than when he was working for someone else.

Change the Formula and Pay Yourself First

We’ve all heard that Revenue – Expenses = Profit.  That’s what we’ve been told.  But that was written by accountants, for accountants.  It wasn’t written for entrepreneurs. 

In this book Michalowicz encourages business owners to change the formula. 

Revenue – Profits = Expenses

This isn’t just mathematical magic, it’s a different way of thinking and running your business.  It encourages you to think differently about expenses and maybe finding some ways to be more efficient.

It might seem selfish to say you should be the first to get paid.  But it’s not.  Just like the oxygen masks on airplanes where you’re encouraged to put your own on first before helping someone else – you need to take care of yourself so you can continue to take care of the rest of your business. 

In a healthy business, you should technically get paid twice – once as an “Operator” of the business and once as an “Owner” of the business.

The table below is from the book and shows you an example of how profit should factor into your business.  (Please note: these examples are more applicable to a service based business instead of a product based one where you’ll have additional costs that impact your real revenue.  Also note that this is based on the US and the taxes in other countries will vary.)

If for example you have a business that has $1million in real revenue: you should have $150,000 in profit and the owner’s salary should be $200,000.  The book offers more details about these numbers and a specific formula to take where you are today to where you should be. 

Get The Book

This book will transform your perspective on how you look at profit in your business.  Check it out and connect with us on Twitter and let us know what your biggest take-away is.