Profit First Chapter 6 Summary: Destroying Debt

Being profitable is not rocket science.

All you need to do is consistently make more money than you spend!

Make More + Spend Less = Wealth

It’s a simple formula, but doesn’t often align with human nature.

We humans often run from pain and towards pleasure.

It’s easy to see how making money gives us pleasure. The problem is that, for most of us, spending money also gives us pleasure. It’s not until later, when we are in debt, that we feel the pain.

So in order for the equation to work, both sides of it need to feel good, which means you need to get more enjoyment from saving money than you do spending it.

You must celebrate when you opt not to spend money. And when you must spend it, reward yourself for getting the best deal you can.

Challenge yourself to go “just one more day” without whatever it is you think you need to buy.

This has two positive effects.

First, you will keep money on your operating expenses for longer.

Second, after a few days you may realize you don’t actually need it.

You must align the Owner’s Pay with what the business can afford.

Average your slowest three months. That is the lowest your revenue will likely ever go. Now determine the percentage of this income that will be allocated for your Owner’s Pay account.

Next, set the owner's salary. It must be below the Owner’s Pay allocation.

At the end of each pay cycle you pay the set Owner’s Salary. The difference stays in the account and accumulates.

This way, when a slow month happens, you still have money to pay yourself. If there isn’t enough, you can’t take it.

Every quarter you can adjust the owner's salary based on how much money is in the Owner's Pay account. If it is accumulating, give yourself (and other owners) a pay rise that the business can afford.

Your goal is to cut all expenses except what you absolutely must have to generate profit and deliver your product or service.

You need to operate at 10% below your Instant Assessment target.

In the book, Mike gives a step-by-step plan for cutting costs. Here is a simplified version of it.

1. Gather your income and expenses for the last 12 months.

2. Highlight expenses that generate immediate revenue or that are absolutely necessary to keep business open.

3. Circle any repeating expenses, such as subscriptions.

Labor costs are usually the most expensive part of any operating business.

1. Determine which roles are actually needed—not the people, the roles.

2. Determine who your underperforming employees are.

3. Eliminate unneeded roles and then shift needed roles from underperforming employees to yourself, other employees, or outsourcing them.

4. Get rid of underperforming employees. Talk to your attorney first and have a witness present when you make the layoffs.

5. Look for other ways to lower or eliminate unnecessary labor costs, such as cutting bonuses. DO NOT cut salaries.

6. Explain to the rest of your staff why you did what you did and take responsibility.

Call your bank and tell them to stop all direct debits, apart from things that will kill your business.

Call your credit card company and get new cards with new numbers. Cancel your old card and ensure recurring expenses don’t get automatically swapped over.

Cut every recurring expense that you can.

Renegotiate any recurring expenses you can’t cut. Start with the smallest expenses and work your way up. This will help build your negotiation skills.

Before you begin, find less expensive alternatives and be prepared to use them.

Ask for 25% reduction with the hope of 10-15% savings.

Use 99% of your profit distribution to pay off debt. The final 1% stays in your Profit account. This is an aggressive strategy to pay off debt while continuing to build that Profit First habit.

1. Sort all your debt from smallest to largest. If two debt amounts are similar, then put the highest interest rate first. Other than that, ignore interest rates.

2. Pay the minimum on all debts, except the smallest one. Use 99% of your profit distribution to pay that debt.

3. Once that debt is gone, use the freed-up money to tackle the next smallest debt.

4. Repeat this process until all debts are wiped out.

Read the next chapter here.

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