Chapter 1: Defining Your Business Landscape

How can you tell if you truly own a business or if you’re merely engaged in a high-paying job? Two crucial factors to consider are the amount of time you devote to your business and the income you derive from it.

This brief overview will concentrate on your personal compensation, summarizing the core ideas from "Profit First" by Mike Michalowicz.

Before diving into the details, let's address a prevalent misconception among entrepreneurs regarding finances. Continuously reinvesting all profits back into a small or medium-sized business (SMB) should only occur temporarily. Avoiding personal profit for more than a year or two often indicates inadequate financial management and a lack of innovation.

This principle primarily applies during three key phases in a business’s lifecycle: the startup phase, unexpected market downturns (black swans), or after an acquisition when additional funds are necessary for integration stability.

Here’s a succinct one-page summary of the "Profit First" approach:

Traditionally, the business equation is framed as Sales - Expenses = Profit. However, the more effective model is Sales - Profit = Expenses.

Your primary income account should be divided into four distinct bank accounts, or "buckets": (1) profit, (2) owner's compensation, (3) taxes, and (4) operations.

The sequence is essential as it reflects reward, reward, protection, and provision:

1. Profit (10%): This serves as a reserve fund for the business or capital for urgent growth opportunities. Each quarter, you can withdraw 50% of this profit to either reward yourself or settle company debts.
2. Owner's Compensation (10%): This represents your personal earnings for the risks associated with business ownership.
3. Taxes (15%): Setting aside this amount ensures you remain compliant with tax obligations and avoid potential legal issues.
4. Operations (65%): This is the remainder allocated for running the business. If you can’t manage within this budget, you must adopt a more frugal and creative approach!

Make use of tools like Lucid Charts to create your own diagrams and workflows.

It’s critical to maintain the allocation and order of these buckets. Transferring funds between them disrupts the system!

Each of these four buckets should have its own separate bank account. Make the profit and tax accounts less accessible—consider a one-hour drive away with no online access.

Allocate funds from your main income account to the four buckets on the 10th and 25th of each month.

For example, a business generating $2 million in annual sales would allocate as follows:

1. Profit: $200,000
2. Owner's Compensation: $200,000
3. Taxes: $300,000
4. Operations: $1,300,000

While this discussion centers around business, the principles in this book can also be applied to personal finances.

No matter how many businesses you manage, adopting the Profit First methodology can significantly reduce the stress of entrepreneurship and enhance your overall satisfaction.

Now, returning to the central inquiry: do you possess a business or simply a job? "Profit First" by Mike Michalowicz serves as a vital stepping stone toward becoming an effective business owner.

For a PDF version of this overview, you can obtain it here.

Chapter 2: Video Insights on Profit First

The first video presents "The First Principle of Entrepreneurship: Profit First!" featuring Mike Michalowicz. This video delves into the foundational aspects of the Profit First framework and its application in entrepreneurial ventures.

The second video addresses "How do you calculate bonuses with Profit First?" This provides practical insights into applying the Profit First model in determining compensation structures.