By Mike Michalowicz
Many entrepreneurs work hard and long hours in their business, often at the expense of their personal financial goals.
The word “profit” sometimes has a negative connotation, but it doesn’t have to. If you are anything like me, your goal is to have a successful business so that you can do good for others with your time and money that you get from being a profitable business. Remember: “When good people make good money, they can do great things.”
The traditional formula for determining profit is:
Income – Expenses = Profit.
In Profit First, Mike turns the accounting world upside-down and shows us a different way.
Income – Profit = Expenses
When you take your profit first, it guarantees your business will always be profitable. It is then your job as the entrepreneur to be creative and figure out how to manage your income and expenses to make your business work. Throughout the book Mike gives many examples of how, when forced to make it work by taking their profit first, business owners innovate creative solutions and succeed.
So how much do you set aside for profit, income, and expenses? Mike provides recommendations for each level of business. For those businesses with $200,000 or less in revenue he suggests the following split:
- 5% Profit
- 50% Owner’s Compensation (your salary)
- 30% Expenses
- 15% Taxes
These numbers are for use after subtracting cost of goods sold, if you are making a physical product.
I recommend checking with an accountant to make sure you are setting aside the right amount for taxes. If you need to increase this percentage, be sure to take it from the expenses and adjust accordingly (for example if you need 18% for taxes your expenses goes down to 27% and your salary and profit stay the same.