The Dangerous Lie You've Been Telling Yourself
"Profit is what's left over after everything else is paid."
This is the fundamental lie that keeps most small and mid-size businesses broke, stressed, and stuck.
You prioritize:
- Payroll (gotta pay your team)
- Rent (gotta keep the doors open)
- Suppliers (gotta keep production running)
- Marketing (gotta get more customers)
- Taxes (gotta stay compliant)
- Profit (whatever's left, if anything)
This is Profit Last. And it's killing your business.
Profit Last treats profit as optional—a luxury for "successful" businesses. The reality is: profit is the oxygen that sustains your business. Without it, you suffocate.
Profit First flips this equation. Literally.
The Profit First Revolution (Mike Michalowicz's Framework)
Mike Michalowicz's Profit First system is simple but radical: take profit first.
Traditional Formula
Sales − Expenses = Profit
Profit First Formula
Sales − Profit = Expenses
How It Works in Practice
- Revenue comes in → Goes to your main "Income" account
- Immediately allocate percentages to separate bank accounts:
- Profit (5-10% initially)
- Owner's Pay (your reasonable compensation)
- Tax (government's share)
- Operating Expenses (everything else)
- Live off what's left in Operating Expenses. If you run out, cut costs or find efficiencies.
Key Insight: This creates behavioral change. You force profitability by making expenses fit the remaining budget, not hoping for profit after expenses.
Why Profit Last Fails (The Psychology Behind It)
Profit Last doesn't fail because of math. It fails because of human psychology.
🧠 Parkinson's Law
Expenses expand to fill available revenue. Give yourself a $100K budget for expenses, and you'll find $100K of expenses. No matter how "lean" you think you are.
🍰 The Dessert Effect
People eat dessert first because it ensures they get it. Do the same with profit—take it first or it disappears.
💰 Mental Accounting
Separate bank accounts create psychological compartments. Money in "Profit" stays profit. Money in "Expenses" stays expenses.
Result: Profit First forces discipline. You live within your means. Profitability becomes habitual.
The 5 Core Profit First Accounts (And What Goes In Each)
1. Revenue Account (100%)
All revenue lands here first. Transfer out according to your percentages. Never spend from this account.
2. Profit Account (5-10%)
Untouchable. This is your business's reward for good performance. Use quarterly for:
- Owner bonuses
- Debt reduction
- Business reinvestment
- Emergency reserves
3. Owner's Pay Account (30-50%)
Your reasonable compensation. What you'd pay yourself if you were an employee. Covers personal living expenses. Transfer to personal account monthly.
4. Tax Account (15-25%)
Government's share. Quarterly transfers to tax reserves. No surprises at tax time.
5. Operating Expenses Account (50-65%)
Everything else: Payroll, Rent, Marketing, Supplies, Utilities.
If you run out of Operating Expenses before the end of the month, cut costs or find efficiencies. No dipping into other accounts.
Example Allocations (Service Business)
| Profit | Owner's Pay | Tax | Operating Expenses |
|---|---|---|---|
| 10% | 40% | 20% | 30% |
Every $10,000 revenue = $1,000 profit, $4,000 owner's pay, $2,000 tax, $3,000 expenses.
Why Most Businesses Fail at Profit First (And How to Avoid It)
Mistake #1: Setting Unrealistic Percentages
ProblemYou read Profit First and immediately try 30% profit allocation.
RealityMost businesses start at 1-5% profit. Gradually increase as you get leaner.
FixStart with Current Allocation Percentages (CAPs) based on your actual numbers. Then set Target Allocation Percentages (TAPs) and bridge the gap quarterly.
Mistake #2: Treating It Like Accounting
ProblemYou set up accounts but don't change behavior.
RealityProfit First is behavioral finance. The separate accounts create psychological discipline.
FixRitualize allocations. Every 10th and 25th of the month (or weekly), allocate revenue. Make it non-negotiable like brushing your teeth.
Mistake #3: Ignoring Cash Flow Cycles
ProblemYou allocate the same percentages every month, regardless of revenue patterns.
RealityService businesses have seasonality. Manufacturing has production cycles.
FixQuarterly reviews. Adjust percentages based on cash flow cycles. Some months allocate more aggressively. Others less.
Mistake #4: Not Cutting Expenses Ruthlessly
ProblemOperating Expenses run out, so you dip into Profit or Owner's Pay.
RealityThis defeats the purpose. Expenses must fit the allocation.
FixQuarterly expense audits. Ask: "Is this expense generating 3x return? Can we negotiate better terms? Can we eliminate it?"
Mistake #5: Solo Implementation
ProblemYou try to implement alone without accountability.
RealityProfit First requires discipline. Accountability accelerates success.
FixGet a Profit First coach or accountability partner (at least initially). Or join a mastermind. External perspective keeps you honest.
The Profit First Mindset Shift
Profit First isn't just accounts. It's a mindset.
Old Mindset (Profit Last)
- Revenue comes in → "How much can we spend?"
- Profit is optional
- Expenses justify themselves
- Cash flow is unpredictable
New Mindset (Profit First)
- Revenue comes in → "Profit first. Then pay ourselves. Then taxes. Expenses last."
- Profit is non-negotiable
- Expenses must prove their worth
- Cash flow becomes predictable
This shift creates:
- Behavioral discipline (separate accounts)
- Profitability habit (regular allocations)
- Strategic spending (only what's budgeted)
- Business confidence (known profit margins)
Common Objections (And Why They're Wrong)
"My business isn't profitable enough to take profit first."
Wrong. Start at 1%. Even unprofitable businesses can allocate 1% and force expense discipline. Profitability follows behavior change.
"I need all the cash for growth."
Wrong. Growth without profit is expansion of losses. Profitable businesses grow sustainably. Unprofitable businesses grow until they die.
"My accountant will hate this."
Wrong. Good accountants embrace Profit First. Bad ones defend outdated thinking. Find one who supports profitability-first mindset.
"This is too complicated for my simple business."
Wrong. 5 bank accounts. 4 transfers. Monthly review. Simpler than QuickBooks reconciliation.
Your First Step (Today)
- Download your last 3 months P&L
- Calculate CAPs (current profit %)
- Set TAPs (target profit %)
- Open 5 bank accounts (online banks make this free/easy)
- Allocate today's revenue (start the rhythm)
Week 1 commitment: 2 hours total. Lifetime impact: profitability.
The businesses that thrive treat profit as priority #1. The businesses that struggle treat it as leftovers.
Which business will you build?
The Bottom Line
Profit Last keeps small and mid-size businesses broke, reactive, and stressed. Profit First flips the equation: take profit first, live off what's left. This behavioral system—5 bank accounts, regular allocations, quarterly reviews—forces profitability by making expenses fit your budget, not hoping for profit after expenses. Implementation starts with calculating current vs. target allocations, opening separate accounts, and ritualizing transfers. Profit First creates predictable profitability, strategic spending discipline, and business confidence.
Discover Where Your Financial Gaps Are
Comprehensive business health assessments—tools like BizHealth.ai—can help you identify exactly where your financial gaps are, calculate your real profitability potential, and build a roadmap that transforms reactive cash flow management into intentional, profitable business growth.
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