Clarification on Profit First

I picked up Profit First by Mike Michalowicz again after it entered my sphere a few different times recently. If you’re not familiar with it, the subtitle of the book is “Transform your Business from a Cash-Eating Monster to a Money-Making Machine” and that is an accurate description of this book’s purpose. Through personal experience as an entrepreneur and many real-life examples, the author lays out a plan for your business to be profitable from the get-go.

In Chapter 3, he talks about folks having a hard time accepting the idea of the plan, since profitability is not something they’ve experienced in their business up until now. I can see that – people are not quick to adopt something that seems so different than what they’ve been told to do for years. The author then adds in a parenthetical note, almost a throw-away comment, that it’s regular accounting that is tricking you. He actually uses the word “trickery” on page 55 to describe the method of regular accounting.

I admit, I got fired up for a hot minute. As someone who values honesty in life and especially in my work, my first reaction was, “Fuck you, man. You don’t know a thing about accounting.” Thankfully my critical thinking and more mature side kicked in, gifting me the opportunity to ponder on it. The author doesn’t expand on what he means by the word trickery, as in what aspect of accounting he believes to involves tricks. Based on the context of the page, though, I’m going to guess it’s around the idea of how accounting traditionally presents and the emphasis on expense reporting. What does this mean for a small business owner and her accounting? Let’s dig into it.

He’s not wrong. It’s excellent to look at things differently. The main point I want to make clear, though, is that this author’s plan and standard accounting are used for two very different things.

Accounting has been around for centuries and although it has evolved from tick marks on stone tablets, it has settled into a standard system of rules and guidelines today. And that’s really the point – it’s a standard set of standards so any business can offer a standard set of reports. Someone can take an income statement from a five-person handmade ceramics company and lay it next to an income statement from the nations largest producer of ceramic dinnerware and get an idea of where both companies are at. Because the reports are standard. And by someone, I mean an investor, a loan officer, a person interested in partnering with a creative business, etc. One of the main points of accounting in my opinion is to present a company’s financial information in an honest and standard way for growth opportunities. (The other main point of accounting, quite parallel, is that the financial info is accurate and understood by company leadership in order for them to make and reach goals for the company).

Let’s use a volleyball match as an example. (I played volleyball in high school so that’s my choice but feel free to insert any sport you prefer in here). A team can use the bump-set-spike method, can focus solely on setting, can rotate new people in at every opportunity, can wear space suits, whatever. There are many ways for a team to show up and play but they all have to follow the standard rules – six people on the court, the ball can’t touch the ground, all those other rules (high school was many years ago, forgive my spotty memory of vball rules). Without standard rules, we don’t know how teams rank amongst themselves. So the rules are accounting and the methods of how a team shows up is a plan like Profit First, or Zero-Based Budgeting, or Pork and Beans. I made that last one up.

I encourage you to dig in to Profit First or any financial plan that sounds appealing to you. Explore them all and create a hybrid new plan for yourself! How you want to run your finances day-to-day is up to you. Profit First suggests having five different bank accounts and allocating revenue starting with – you guessed it – profit, and then different categories cascading from there. Go for it – just know that all that activity will need to be presented to the outside world in a standard way, meaning you and your accountant take the numbers and craft them into the financial statements using those pesky accounting rules. You know, like tax guidelines and rules for your industry and such.

I think people default to the classic way of keeping books – categorize expenses first, then accept your net profit after regular business activity – because it’s been around the longest. And if you don’t know where to start with your books, hiring an accountant is an easy way to go, since they know the rules and can just get the monthly activity where it needs to be. It’s true that the accounting industry lacks in creative ideas (and I don’t mean “creative” to mean “illegal”) and personalized client service. I definitely think we can all work on helping our clients thrive, not just report information. Any system that’s been around for a long time should be looked at critically. With all its flaws, accounting at its heart is meant to help businesses grow and make smart decisions with their finances. At least that’s what I believe. No trickery involved.

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