In his entertaining book, “Profit First”, author Mike Michalowicz shares a new approach to business accounting which will help business owners to maximize their profits. Mike is the author of “The Pumpkin Plan”, a book which we recommended in one of our blog posts a few years ago. In this new book, he encourages owners to look at their business and accounting practices in a new way which could provide a substantial boost in profits.
Mike (I am using his first name, not because I know him, but because his last name is so hard to spell!), says that the traditional accounting practice of INCOME minus EXPENSES equals PROFITS, is the problem. A very, very basic summary of his recommendation is INCOME minus PROFIT leaves EXPENSES TO WORK WITH.
His recommendations are based on human behavior, such as the Big Plate Theory. Example, if you go to a buffet, you will fill up that plate with all the food you can fit onto it. Start with a big plate, and you eat more. Start with a smaller plate, and you eat less. He says that most people operate by the bank account method of accounting; if they see a lot of money in their account, they spend it. He removes this temptation by removing large chunks of cash from the operating accounts immediately when it comes in. Owners are encouraged to set up separate bank accounts for all major categories (Profit, Taxes, Operating Expenses, etc.). Then whenever any money comes in, it is immediately placed into each of the accounts based on ever-growing percentages. It is kind of like applying the old fashioned “envelope system” to bank accounts.
This is a very simplistic summary of his book. But the real work comes in when you take the profit off the top and then have to figure out how to make the remaining funds pay for all expenses. Naturally this leads to a lot of cost-cutting, and reconfiguring of the way the business is run. And this is not all bad. He makes the case that most businesses could cut in various places and not hurt the business. In fact, he would argue, that when you force yourself to run lean, the end result is not only a more profitable business, but a business that focuses upon the main thing. Too often extra spending leads to chasing rabbits down various new ventures that are not core to one’s business.
Whether you agree with him or not, his book will provoke you into looking at your business in a new way. It may even result in you making more profit!
[wpforms id=”7435″]