So I’ve got a beef with Profit First. For the uninitiated, Profit First is a book written by Mike Michalowicz, and his basic theory is that all businesses can and should be profitable from the jump.
The secret sauce for this is his method of allocating your income, as it comes in, to different bank accounts labeled: Income, Profit, Tax, Owner’s Compensation and Opex (operating expenses).
So, let’s say the business receives a check for $1,000. You would first deposit it into the Income account, and then you would distribute that $1,000 among the other four accounts based on percentages (he provides recommendations in the book).
Profit: $100 (10%)
Taxes: $150 (15%)
Owner’s Comp: $300 (30%)
Opex: $450 (remainder to be used for expenses)
With his method, you allocate profit first, then make sure you set aside enough for taxes and to compensate yourself. What’s left, is what you truly have to pay for expenses. (Of course, this allocation is for illustration purposes only. You decide for yourself what you want your allocation percentages to be.)
Most business owners, he says, tend to pay expenses first and then have nothing left over. And their expenses grow as their income grows, so they will never be profitable unless they limit their expenses.
While I absolutely LOVE the idea of using your bank accounts to help you track and allocate your resources, I disagree with Michalowicz about the wisdom being “profitable” right out of the gate. Why? Because profitability is the reward for creating, growing and sustaining a successful business. It’s earned over time, and just because you are saving money in account labeled “Profit” doesn’t mean you have created a profitable business. What it creates is a false sense of profitability.
I’m in Gary Vaynerchuk’s camp. Gary Vaynerchuk, known to his millions of fans and followers as Gary V, is the author of several books, including, most famously, Jab, Jab, Right Hook. He made
his fortune taking the family wine business to the internet and his wine to the masses, and now he advises entrepreneurs around the world about how to use the internet to amass their own fortunes. (Google Gary Vaynerchuk and you’ll find more videos than you can watch in a month if not a year.)
In one interview, Gary says his goal when he creates a business is to focus on gaining market share—to invest in growth and getting yourself in front of as many of your prospective clients as possible. He doesn’t worry about profitability for years. Why? Because he likes to get out in front of his competitors, generate a ton of revenue (which he can use to continue to invest in growth), and then, once he has captured a significant share of his market, everyone in his target market knows his name, and people are tripping over themselves to pay for his goods and/or services, he starts thinking about “profitability,” i.e. tightening up those expenses to create bigger margins.
To use our $1,000 example and apply Gary V’s approach, our income allocation might look like this:
Payroll (for team including owner if the owner is billable): $500
Marketing/Growth Investment: $200
Other Opex: $150
Of course, the key difference with Gary’s approach is that the $1,000 “Income” likely would be $2,000. Why? Because he is investing in gaining market share and growth so he is going to create much more revenue, which will allow him to allocate more real dollars to growing his team, creating systems to support growth, and creating a personal income so he can support himself and his family while he is growing the business.
Now, five or ten years down the road, he has built a business that is significantly more profitable because it is larger, has more equity, has proven sustainability, and likely is a business he can sell if he so desires.
What both of these approaches have in common, though, is intentionality. Successful business owners don’t just take the clients and money that cross over the threshold and then pay bills in a reactionary manner as they roll in. Successful business owners are intentional. They create and follow a plan. They develop methods and systems based on a philosophy of thought. They are strategic.
If you want to be successful, you need a well-considered strategy, an approach to doing business that shifts you from reactionary to intentional. Otherwise, you’ll find yourself being
pennywise and pound foolish, focusing on all that you lack (expenses, bills and fees, of my!) instead of all that you can create.
My recommendation for solos who desire to transform into CEOs of high-impact, high-revenue-generating, profitable businesses is to create a plan for how you intend to get there.
Consider all the needs of the business. Start by taking a few minutes to think about and answer these questions:
* How are you going to attract ideal clients month after month without fail?
* How are you going to support the needs of those clients in a way that also serves the needs of the business?
* How are you going to work as efficiently as possible?
* What is the highest and best use of your time as CEO?
* How will you be adequately compensated as you grow the business?
* How will you create the team you need to support you as you grow?
* What are the best systems to put in place to support growth and profitability?
* How will you lead your team to success?
* How will you create real value for the shareholders (even if that is just you)?
* What is your ultimate goal with this business?
* How can you create true wealth for yourself as you are growing your business?
* How will your business support your wealth-creation goals?
If you don’t know the answer to these questions—or haven’t even considered them—then we should talk. Commit to a complimentary consultation with me by clicking here, completing a brief business assessment form, and then scheduling a time on my calendar for a video chat.
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