Profit First and Becoming Your Own Banker
Mike Michalowicz wrote a wonderful book called, Profit First: Transform Your Business from a Cash-Eating Monster to a Money-Making Machine. It addresses what Nelson Nash in his book Becoming Your Own Banker, in part two, the Human Problem, referred to as Parkinson's law.
Parkinson's Law was the name of a book by British essayist, C. Northcoate Parkinson and in short he made the observation that, "work expands to meet the time envelope allowed." We all struggle with procrastination to one degree or another and if given three days to fulfill a task we will, most likely, take those three days to do it. Parkinson also goes on to note, that "expenses rise to equal income". It is this observation that Michalowicz's (finally spelled his name right without looking, then double, no triple checked) book seeks to remedy.
Traditional accounting's formula is sales-expenses=profit. This formula pushes entrepreneurs to foolishly chase growth at any cost, most often at the expense of their health and families. Entrepreneurs become fixated on growth as the only measure of success and coupled with Parkinson's law, business expenses always go up. Mike in his book, says the accounting formula you should use is sales-profit=expenses. This way our business can be profitable from the start.
For most of us, expenses rise to meet our income. To make matters harder, we are living in a society driven to compulsive consumerism most often led by powerful and nefarious companies that have spent billions on learning how to manipulate human behavior so that it seems to be that the most foundational human desire is to consume. Whether we are doing the consuming or our being is being consumed, I'll let you ponder. [^1]
So, Mike, in his book teaches you to take out a certain percentage of your profits from every payment you receive. He has all the formulas in his book for different revenue amounts to help you determine which percentage of profit you should take out. If you are business owner, I recommend, you read it and do it. It makes a great difference.
There is an additional step though that will be an even better thing to do and that's what I want to share below.
I started using profit first years ago when I owned a window cleaning company, which I no longer own. The first entry on this blog was about discovering the book and concept of becoming your own banker. I wanted a way to be able to put money in an account where I could loan that money out to myself and then make an amortization schedule and repay my loan back to myself with a little interest. That way the money I worked hard for would be back in an account that I owned and would be available to be used again. This would be great but it wouldn't be that special because every time I loaned out money from my account, it would go down, and I would have to replenish it.
What if though, your dollar got two uses instead of one? What if the account where I was saving my profits was being put to use by the company I stored it with and it was growing in a tax-favorable account, and all the money I stored in there was available to use if the need arose. And what if, the loan I got from this account was not considered income and so was not taxable? And what if, when I took out a loan the money that I had stored with the company still continued to compound, while I used the loan for whatever I thought I would need it for in my business? Then when I went to repay the loan, all the interest, I paid back, would go to increasing the value of the total amount of money in the account? It sounds too good to be true. I thought so when I started out. This though is what Becoming Your Own Banker is all about.
I used the profits of my window cleaning business to start funding this account so that I would continue to have money for my business to help finance anything that I might need for the business and for my personal life. If you are business owner, I recommend you read, Becoming Your Own Banker by Nelson Nash and Profit First by Mike Michawlowicz. The two combined is powerful.
[^1]If you want to read two books on this read The World Beyond Your Head:Becoming an Individual in Age of Distraction by Matthew Crawford and Gifts, Glittering and Poisoned by Channon Ross.