We've all heard it before: "The first bill you pay each month should be to yourself." Before you buy groceries or pay any other bill, bank some money for a rainy day every time you receive your paycheck. You are supposed to put this money in the bank, whether it's an IRA or an interest-bearing savings account. This has been the mantra for employees working to make a living for years but what about entrepreneurs? Business owners are always the last to get paid. Why is it that entrepreneurs must pay themselves after everything else?
The Eureka Moment
This eureka moment came to Mike Michalowicz when he developed the Profit First system. "There's something fundamentally flawed about the old accounting formula," said Michalowicz. There are a lot of business owners who aren't getting paid when they take sales minus expenses and then look for their profit. Too many will altruistically allow their profits to be absorbed by their small businesses. Michalowicz says, "It's not human nature to care about something that comes last." He says this method is counterintuitive.
"What's important to us, we put first," said Michalowicz. He says it's part of the Parkinson's Law, which states "work expands to fill the time available for its completion." Basically if you have less to work with, you'll get creative and make it work for you. "We change our use for something according to how much there is," said Michalowicz. And that includes cash flow. If there's less money to work with, entrepreneurs conserve, they get creative and become more resourceful.
Mike Michalowicz appeared on my Blab.im show, ENCORE as a special guest where he talked about his Profit First system.
I interviewed Michalowicz on ENCORE via Blab.im and he showed me how the traditional accounting formula is a trap. He said, it causes entrepreneurs to live check-to-check. As a business woman, I've personally been guilty of putting all of my profits back into my small business, paying my expenses and not having any money left to pay myself. Somehow I was satisfied with that until I had nothing to show for my efforts. Paying myself first would have limited the amount of money I could put back into my business. Would it hurt my business to do this? Probably not. The mindset of an entrepreneur is to find a way and you do.
Make A Profit
Michalowicz states that for every sale, you take a predetermined percentage of profits and use the rest for expenses. "If you put profits first you will find away to run your business off of the remaining money and you'll have a profit.".
His book by the same name as his cash management system titled, "Profit First," shows entrepreneurs the details of this method, and he ensures that it will make any business profitable no matter what size or how much debt the business currently has. What do you think of this practice?
Michalowicz launched and sold two multi-million dollar companies. He helps entrepreneurs find success with his articles on his blog with his moniker, MikeMichalowicz.com and is also the author of The Toilet Paper Entrepreneur and The Pumpkin Plan.