PROFIT FIRST
BY Mike Michalowicz
One of the key objectives and benefits of NorthStar Strategic Partners’ 4 Points of Focus® is achieving profit optimization consistently, and to the point where a business owner can plan their exit strategy.
Profit First is a great read that enhances the NorthStar philosophy and guidance while presenting several actionable ideas on its own.
Profit First provides a simple yet effective system for business owners to take control of their finances and achieve consistent profitability. The book challenges the traditional accounting approach, which focuses on tracking expenses after revenue is generated. Instead, Profit First advocates for allocating revenue into different buckets, including profit, expenses, taxes, and owner’s compensation, before any money is spent. This approach helps business owners to prioritize profit and ensure that they are always making money, achieving profit optimization, even during tough times.
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“Profit First is a game-changer for small businesses.”
– Michael Hyatt
Michalowicz argues that the traditional accounting approach is flawed because it is based on the assumption that revenue will always be there. However, in reality, businesses can experience unexpected fluctuations in revenue, such as a decrease in sales or an increase in expenses.
When this happens, businesses that follow the traditional accounting approach can quickly find themselves in financial trouble. The Profit First guidance, consistent with the 4 Points of Focus® process, is designed to protect businesses from these fluctuations by ensuring that a certain percentage of revenue is always allocated to profit, regardless of what happens. This helps businesses to build up a financial cushion and weather difficult times.
The Profit First methodology towards profit optimization includes guidance for businesses to follow these key steps:
- Calculate the real revenue. This is the percentage of revenue that remains after your cost of goods sold and outside contractor expenses have been paid.
- Determine how much of your real revenue you want to allocate to each of the five buckets: profit, expenses, taxes, owner’s compensation and your celebration fund.
- Set up separate bank accounts for each of the five buckets.
- At the end of each month, allocate revenue to each of the five buckets according to the predetermined percentages.
- Track the balance of each bucket on a regular basis.
Helping guide you on your quest
for maximum profitability, efficient operationS, & overall success
