Profit First - Book Notes
July 10, 2024•393 words
How much I recommend it: 10/10
I first read this book in 2020/2021 when I was running a small business. After six months of running that business, I hadn’t paid myself yet because I was “reinvesting it all back in the business.” That changed the moment I read this book. Without changing anything else, I started to pay myself and take Profit First. From that moment on, the business was sustainable and I had a lot less stress running it.
The traditional accounting principle is that [ revenue - expense = profit ].
This book flips that so that [ revenue - profits = expenses ].
The way you do this is by setting up the following separate bank accounts:
- Operations Expenses
- Taxes
- Owner’s Compensation
- Profit
You have all revenue accumulate in a fifth account. On the 10th and 25th of each month you make distributions from the revenue account into the other accounts. The exact percentages will vary depending on the size of your business and your expenses but some suggestions are made in the book and on the author’s website.
- The tax withholding will always be 15%.
- Profit will start at 1% when first starting this system then each quarter bump it up by a percent until you reach 10%.
- Owner’s compensation and OpEx will make up the rest and vary depending on the size of the business
But the magic of this formula is that you pay yourself, as the owner, every single distribution period. And the profit is a reward that you pull out at the end of every quarter to spend on something fun.
On the other hand, you don’t make any purchases unless you have the cash to pay for it in your OpEx. If you don’t, you make do with what you have or make more money until you can afford it. This forces your business to grow at a sustainable level. No more taking on debt or plowing everything back into the business to supercharge growth and eventually crash and burn.
So, I love this method and I love this book. I recommend the audiobook because it’s read by the author and he’s a funny guy. There’s a lot of jokes that I don’t think would land as well if you can’t hear the author tell it himself.