Skip to content

Creating a profit-first business with Mike Michalowicz, author of Profit First

💡There is power in knowing your numbers and how you can use that data to create a profit-first business.

What does it look like to create a profit-first business? Mike Michalowicz, the author of Profit First, joins us on the show to talk about the financial strategies we need to be implementing to create a successful and sustainable business. Throughout this episode, Mike reminds us that there is power in knowing your numbers and how you can use that data to create a profit-first business.

The Independent Business podcast is powered by HoneyBook, the all-in-one platform for anyone with clients. Book clients, manage projects, get paid faster, and have business flow your way with HoneyBook. Use the code PODCAST to get 20% off your first year as a new member.

Follow the Independent Business podcast


Defining a profit-first business

Simply put, a profit-first business is a business that takes its profit first. While it sounds simple, it’s actually hard to build a profit-first business.

With traditional businesses, we’re taught that our profit equals revenue minus expenses. While this makes logical sense, it doesn’t make behavioral sense. It’s human nature that when something comes last, it’s not a priority. Most businesses wait until the end of the year to prioritize their profits.

A profit-first business flips the formula. In this model, sales minus profits equals expenses. Every time revenue comes into the business, you take a predetermined percentage of it and hide it away from the business, and then run the business off of the remainder. 

By doing this, you reverse engineer your profit. Your business will adjust to run on the remainder, just like US employees adjust to living off of their net incomes instead of gross incomes.

The psychology behind building a profit-first business

There is a behavior propensity called loss aversion, which is when we incur more expenses as we incur more income. The second that our income starts to dip, a theory called Parkinson’s law sets in, which compels us to continue spending at our new lifestyle. We try to sustain our spending habits despite our income decreasing, which leads to debt. 

The vast majority of small business owners experience this pattern because our income is volatile. Flipping the paradigm and operating with a profit-first business model is the way to get out of this pattern and see success in your business.

Common resistance points to a profit-first business

Some independent business owners resist building a profit-first business because it feels opposite from what they’ve been taught and doing in their business. You have to overcome thinking that this model is wrong before you can make the switch, and part of that process is noticing the flaws in the bottom-line business model.

The next resistance is the fact that you have to change your own behavior to move to a profit-first business, and behavioral change is hard. You have to break out of your regular routine and be disciplined enough to do things in a new way. 

Lastly, business owners don’t want to interfere with their bank to set up a profit-first system. Many say they would rather keep track of their profit themselves in a spreadsheet. However, setting up the system at the bank level is the best way to establish a profit first business that you don’t have to think about. 

Creating profit-first systems

Set up a bank account called Income Account that you only use for deposits. Set up an automatic transfer so that every time your business receives revenue, a portion of it goes to your income account. This income does not pay any bills or expenses, but it has multiple purposes. It pays your taxes and compensation.

Once or twice a week, check your income account. Have a number in mind that you expect it to be on a weekly or biweekly basis. If the account balance is lower or higher than that number, you need to investigate it. If you have a bookkeeper, ask them to explain what happened.

The four principles of a profit-first business

  1. Set up your envelope system so that your profit is automatically taken from your revenue before your expenses.
  2. Sequence matters.
  3. Remove temptation — make your profit account inaccessible to your business so that you aren’t tempted to pull from it to cover your bills. 
  4. Get into the rhythm of checking your balance every week or every two weeks. 

The biggest differentiator between the businesses that succeed and the ones that fail

Mike believes that the biggest differentiator between the businesses that succeed and the ones that fail is that entrepreneurs who care for themselves, physically and mentally, have healthier businesses. 

Important sections of the conversation

  • [1:40] Defining a profit first business
  • [5:45] The psychology behind building a profit first business
  • [8:54] Common resistance points to a profit first business
  • [15:48] Creating profit first systems
  • [21:18] The four principles of a profit first business
  • [26:30] The biggest differentiator between the businesses that succeed and the ones that fail

Connect with the guest

Related posts