Profit First Summary Chapter 2 - How Profit First Works

The way to make your business profitable is the same as losing weight.

I don’t mean going on a fad diet and then slipping back into your bad habits after a month.

I mean by building solid, healthy habits that you can stick to for the long term.

In Chapter One, you learned the GAAP formula and why it is flawed.

Sales - Expenses = Profit.

The Profit First formula flips this around:

Sales - Profit = Expenses

The profit first formula is akin to eating all the vegetables on your plate first, whereas in the GAAP formula you are eating all the bread first and have no room left for vegetables.

Just to make the analogy super clear, vegetables are your profit, because profit is good for your business and vegetables are good for your body.

When you use money for expenses before profit you are more likely to spend all your profit. Instead, put aside profit first and use what is left over for expenses.

Here are four principles that you can (and should) apply to both your business income and your eating habits.

When you have less food on your plate, you’ll naturally eat less.

To apply this to your business, set up four separate bank accounts.

1. Profit

2. Owner’s pay

3. Taxes

4. Operating expenses

Profit and taxes are accounts that you will put money into and then not look at. Once money goes into them, it is untouchable until it is time to pay your tax and take dividends.

Owner’s pay can be your personal bank account to use just like you would when you get paid a salary from any other job.

The operating expenses account is for day-to-day business expenses. This can be your incoming payments account as well, or you can have a separate account for that instead.

Eat your vegetables first.

The order in which you dish out income is as follows:

1. Profit

2. Owner’s pay

3. Taxes

4. Operating expenses

If there isn't enough money leftover for all your expenses, then get rid of those expenses.

The best way to prevent yourself from eating junk food is to throw away all your junk food and stock your fridge with healthy snacks instead.

Do the same thing with your Profit and Tax accounts. Put them in a separate bank and make them hard to access.

You want to create as much friction as possible. Don’t look at the balance. Transfer money into them and forget it’s even there.

If the first thing you do in the morning is 30 minutes of exercise, then it just becomes routine, like brushing your teeth.

The same goes for money management.

Do your payables two times a month. This is when you look at all the income that has come in and disperse it into the separate accounts.

Read the next chapter here.

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