Profit First and the Quest for Simplicity and Structure

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PrintWhen we run into something that is foreign or scary to us, we have a tendency to overcomplicate things.  We turn the daunting challenge in front of us into some kind of battle to be faced on multiple fronts with a mysterious enemy. The unfortunate result of that is that we back ourselves into a corner, unable to face this enemy.

For many solopreneurs, that scary giant beast is the finances for their business.  Since the ins and outs of business finances are foreign to most, it immediately gets over complicated.  

Books get read that outline volumes of ratios, KPI’s, metrics, and other mysterious trinkets that you supposedly need to break open the black box that is your business finances. Getting a financial plan behind your business involves having a 17 page document with 14 exhibits that you don’t even understand.

The tendency is to simply loft as many solutions and tactics as possible at your business and hope that some of it makes it all clear to you.

Thing is, though, the best way to get peace about something foreign and scary to you is to make it as simple as possible. Break it down to the most basic level you can.

Right? It’s kind of like if some vicious bear was chasing you through the woods.  You aren’t going to try and create some wacky intricate trap to save your hide.  You are just going to run as fast as you can.  Plain and simple.

It’s this need for simplicity that makes me want to recommend the book Profit First by Mike Michalowicz.

If I had to recommend one book for aspiring solopreneurs (or any business owner, for that matter), this would be it.  It’s a painless, easy read as far as financial books go.  I recommend it so strongly because it gives you a financial plan for your business and does using two key characteristics:

Structure and Simplicity

I can’t stress enough the importance of structure and systems within your business, and especially so for keeping your finances on the straight and narrow.

The system includes a very basic and easy to understand methodology for giving yourself a roadmap forward.  Michalowicz gives you some very broad and clear cut percentages to use as you divvy up your incoming revenue.  It looks simple, and it is.  Really, however, what he has you do is create a budget at a very high level.  The best part is it eliminates the confusion about what you need to devote to what.

Remember, keep it simple.

At the core of this whole Profit First philosophy, though, is an important mindset shift.  That is turning the traditional accounting formula on its head.  Accounting is generally taught, to accountants and business owners alike as:

Sales – Expenses = Profit

Seems to make sense, correct?  Problem is, you put yourself as the business owner dead last.  You work your tail off to pay the bills, not yourself.  You get the “leftovers”.  What fun is that?  Instead Michalowicz turns that formula around:

Sales – Profit = Expenses

Yes, algebra experts, it’s the same formula.  But, the way it’s presented is a major shift.  By looking at your business finances this way, you are saying to yourself, I’m getting paid first.  I’m compensating myself for all this work.  It’s a simple switch, but it makes such a difference.  

Granted, if you’ve dealt with the same growing pains that many business owners do, you might not be able to make this shift immediately.  Michalowicz gives you an easy to use “health test” for your biz that will tell you how messy your situation is. He’ll also guide you through the way back to health, one step at a time.

If you find the simple idea of your business finances gives you indigestion, check out this book.  You won’t be overwhelmed with confusing ratios or complicated methods.  Simple and structured.  That’s all you need.  You can scale and become a financial ninja as you get comfortable with the basics.

Remember complication destroys structure in your business. Lack of structure causes waste.  If you inject waste into your business, it will cost you money and time.  

Put things on autopilot with your finances, stop thinking about them 24/7 and watch your business grow to new levels.

Have you implemented Profit First in your own business? Let us know in the comments how it is working out!!

 

Note: Some of the links in this post are affiliate links. Solopreneur Accountant will be paid a small su if you decide to purchase.  It doesn’t affect your pricing in any way.

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