A Simple System to Make Your Business More Profitable | Buffini Podcast Blog
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Mike Michalowicz’s Profit First system is used by companies worldwide to drive permanent profit. On a recent episode of “It’s a Good Life,” the bestselling author and entrepreneur shared his transformational guide for business profitability.
It’s a responsibility to be profitable
It’s estimated that only 20% of people who start a business will actually do it profitably. Most will shut down within five years, and half of those who remain will struggle. The fact is, if you take the risk of starting a business you not only deserve to be profitable, you also need to be profitable so that you can support your employees and dependents. It’s your responsibility!
Flip the formula
Traditional accounting formula says sales minus expenses equals profit. However, with many small businesses surviving check to check, it’s clear that this formula has limitations. Profit First is all about flipping the formula mathematically. Logically, it’s the same, but behaviorally it’s different: it becomes sales minus profit equals expenses. In practice, what this means is that every time revenue comes in, you take the profit, hide it from your business and work with the expenses you have left. It’s all about the ‘pay yourself first’ principle.
Set up multiple bank accounts
Mike advises setting up five foundational bank accounts: income, profit, owner’s compensation, taxes, and operations. The income account is where the money comes in. The profit account is your recognition and reward for starting a business and taking a risk. The owner’s compensation is payroll for the work that the business does. The final two accounts are for your tax responsibilities and the operations of the business. Having multiple accounts for different purposes is, in essence, an envelope system for your business that will help it weather any challenges that may arise.
For more practical advice and to learn how this system can transform your business from a cash-eating monster to a moneymaking machine, listen to the latest episode of “It’s a Good Life.”
