Profit First: Transform Your Business from a Cash-Eating Monster to a Money-Making Machine

Book Preface

am a fool.”
I’ll never forget the day Debbie Horovitch stood before me and cried. Through her tears, she kept babbling “I’m a fool” over and over again.
Debbie, the entrepreneur behind the Social Sparkle & Shine Agency—a Toronto, California, firm that specializes in social media services—had approached me at a CreativeLive event in San Francisco. I was there to teach business growth strategies from my second book, The Pumpkin Plan. During one of the event sessions, I explained the basic concept of the Profit First system. One of the tools of Profit First is the Instant Assessment, a way to quickly gauge the real financial health of your business. When I ran the assessment on a volunteer attendee, the Profit First system clicked for everyone in the room.
All CreativeLive presentations are simultaneously broadcast live online, and eight thousand viewers had tuned in for my event. Tweets and comments started flying in from all over the world. Because the Instant Assessment is so fast and easy, I wasn’t totally surprised to see the many comments from online viewers saying that they had assessed their business right then and there. Entrepreneurs, CEOs, freelancers, business owners—everyone shared how relieved they were to learn this simple method. It was as though they had each experienced a sudden total clarity, an instant jolt of confidence about the money side of their businesses.
Then Debbie found me during the break and said, “Could we put my business through the Instant Assessment?”
“Sure,” I said. “It only takes a minute or two.”
Pen in my mouth, people bustling all around us, I ran through it right then and there, as if Debbie and I were in a world of our own. I scrawled her annual revenue number on the board. We ran the percentages. Debbie looked at the results and started to shake with sobs. She couldn’t bear to look at where she was, or where the Instant Assessment said she should be.
“I’ve been a fool,” she said, tears streaming down her face. “Everything I have done over the last ten years is wrong. I am such a fool. I am a fool. I am a fool.”
Let me admit it right now: I’m a co-crier—when people cry, I go there with them. As soon as Debbie started, my eyes welled up with tears and the pen in my mouth dropped to the floor. I put my arm around her to try to comfort her.
For ten years, Debbie had put her soul into her business, giving it everything she had, sacrificing her personal life in order to give her business life, and yet she didn’t have a dime (or a successful business) to show for it. Of course she knew the truth of her struggles all along, but she had chosen to dance around that truth and continued to live in denial.
Putting your nose to the grindstone is a really easy way to cover up an unhealthy business. We think that if we can just work harder, longer, better—if we can just hold out—something good will happen one day. Something big is just around the corner, right? Something just like magic will wipe away all of the debt, financial stress, and worry. After all, don’t we deserve that? Isn’t that how the story is supposed to end?
No, my friend, that’s only in the movies—nothing like what we experience in real life.
After Debbie ran the Instant Assessment, she had to face reality: her business was sinking—for the prior ten years it had been a struggle to stay afloat—and it was taking her down with it. She kept saying, “I am a fool; I am a fool.”
Those words tore into me because I’d been there. I understood exactly how it felt to face the naked truth about my business, my bank account, my strategies, and my hard-fought success.
I first designed Profit First to fix my own financial problems. It worked. Actually it more than worked: it was a miracle. Years of struggle and financial troubles were fixed, not overnight but in hours. I wondered whether Profit First would work just for me and my flawed brain or whether it would serve others.
So I tried it with another business I co-own, a small leather manufacturer in St. Louis. It worked. I tried it with others businesses, large and small. It worked. I wrote about it in my first book, in a small, easily overlooked paragraph in The Toilet Paper Entrepreneur. And then something happened: I started getting email from other entrepreneurs who said they’d tried it and seen results. I wrote about it in the Wall Street Journal, and more success stories rolled in.
After I wrote my second book, The Pumpkin Plan, I included the Profit First system in my speeches. It was after I met Debbie at the CreativeLive event when I realized entrepreneurs needed more than just a paragraph or a chapter on the subject. Too many business leaders lived and worked in tormented servitude to their businesses. If I wanted to make a real difference for the Debbies (and Mikes) of the world, I knew I had to write a book about Profit First.
Profit First was first published in 2014, and since then tens of thousands of entrepreneurs have implemented the system and transformed their businesses. They are not only generating a serious profit; they are growing their businesses big-time. Two birds, one stone.
As I write this updated version of the book, I am thirty-five thousand feet up in the air flying somewhere over Pennsylvania or Texas, or maybe it’s Russia. I travel so much these days that I rely on the pilot to tell me where I am. My fellow passengers are watching a movie they’ve already seen four times, catching up on work, or “resting their eyes” with a gaping mouth and occasional snort. A few are looking out the window at the clouds below. Me? I’m thinking about all of the businesses we are flying over. There must be thousands of businesses below us at any given second.
The Small Business Administration (SBA) states that there are 28 million small businesses in the United States alone. The SBA defines a small business as a company that generates $25 million or less in annual revenue. That includes my business, and I suspect it includes yours. Shoot, that even includes Justin Bieber’s (his “small business” music sales pulled in only $18 million last year). So that’s 28 million of us entrepreneurial “weirdos” in the United States alone. When you look at the full size of our global entrepreneurial family, you’ll see that the number of small businesses soars past 125 million.* That’s a lot of entrepreneurs, a lot of people with guts, smarts, and determination who decided they had something of value to offer the world and took a shot at building something out of it.
That’s you, buddy, an entrepreneur. You might be in the early start-up phase, your plans and dreams written on a cocktail napkin (or toilet paper—you know who you are my TPE peeps!). If you’re just getting started, props to you. You’ll be focusing on profit from Day One, which will save your sanity, your bank account, and your ass.
Maybe you’ve built a business or are managing one. Maybe you read the first incarnation of my book, and you want to kick your Profit First system up a notch. Regardless of your entrepreneurial status, you are a miracle worker, so to speak. You convert ideas into reality. You find customers; you make stuff for them; you deliver a service to them; and they pay you for it. You keep selling; you keep delivering; you keep managing the money. All of us are smart, driven people. Really smart. Really driven. But there is one really friggin’ nagging problem: eight out of ten businesses fail, and the number one reason they fail is lack of profitability. According to a Babson College report, “A lack of profitability is consistently the major reason cited for business discontinuation.”* Are you surprised? Probably not. I wasn’t. It’s true, and it makes me want to drown my sorrows in Margaritaville. The majority of small businesses, and medium businesses and even some big ones, are barely surviving. That guy driving the new Tesla whose children go to private school via chauffeur and who lives in a massive house and runs a $3 million company, is one bad month from declaring bankruptcy. I should know; he’s my neighbor.
The entrepreneur who says “Business is great” at the networking event is the same woman who, because of her tears, later tries to ask me an indecipherable question in the parking lot—she’s crying because she hasn’t been able to pay herself a salary for almost a year and will soon be evicted from her home. It’s just one of many similar conversations I’ve had with entrepreneurs who are afraid to tell the truth about their financials.
The SBA Young Entrepreneur of the Year award recipient who is changing the world, who is lauded as a member of the next generation of genius, who is destined to be on the cover of Fortune magazine because of his business acumen, is taking out bank loan after bank loan and racking up credit card debt to cover payroll behind the scenes. I should know; that was me.
How can that be? What’s wrong with us? I mean, we get basically everything else right, or damn close. We made something out of nothing. And yet why aren’t most businesses profitable?
I used to brag about the size of my business. I patted myself on the back for hiring more employees, for moving into a fancy-schmancy office space, for making big sales. The truth is, I used all that as an excuse to cover up one ugly fact: my business had never once posted a profit. The reality was, my business (and I, as a result) was drowning, and I kept trying to make it grow bigger to keep my head above water. I would say, “I don’t want to post a profit, of course. I just want to break even. That way I’ll save on taxes.” In other words, I’d rather lose $10 than have to pay the government $3. I continued to sink month in month out. Year after year. Constant stress.
In fact, I survived check to check from the day I started my business until the day I sold it and cashed in. Man, I was relieved! My business had been dragging me down, and I’d finally gotten rid of it. But that relief came with a bitter aftertaste. When I started the business, my goal wasn’t mere survival. I mean, survival is the goal for POWs and refugees, certainly not what a businessperson would aim for. I was convinced I was the problem. For the longest time, I thought I was flawed, that my brain was messed up. It took me a long time to ask, what if I’m not the problem? What if the system I have been told to follow is flawed?
Profit First works because it doesn’t try to fix you. You work hard, you have good ideas, you already give 100 percent to your business. Profit First is a system designed to work with who you are already. You don’t need to be fixed. The system does.
Imagine that you were told you could fly if you simply flapped your arms, and then you were encouraged to jump off the nearest cliff. That’s right. Just flap your arms, and you’ll not only survive the bajillion-foot drop, you’ll soar. What’s that? You’re plunging to your death? Quick! Flap harder.
Flapping your arms in order to fly is crazy because humans can’t fly. Following a financial formula that isn’t designed for how humans are naturally wired is like asking you to flap your arms harder and harder until you take off. Sorry, pal, it ain’t gonna work no matter how hard you try.
The system for profitability we have been using since the beginning of time is totally stupid. Actually, it is horrible. Yeah, sure, it makes mathematical sense, but it surely doesn’t make human sense. While some businesses succeed by following the old system, they are the exception, not the rule. Relying on traditional accounting methods to grow profitability is the equivalent of telling you to jump off a cliff and flap the living crap out of your arms. Maybe two or three of the millions of people who try it, by some miracle, live. But pointing to the miraculous survivors and saying, “See? This works!” is ludicrous. Millions die and a few survive, yet we blindly say the arm-flapping, cliff-jumping system is the best way to fly. Absurd.
If you aren’t profitable, the natural assumption is that you haven’t grown fast enough. I have news for you, people. You’re completely fine. You don’t need to change. The old formula to profit is what’s wrong. It needs to change.
You know the formula I’m talking about: Sales − Expenses = Profit. That crusty, bifocal-wearing, old-person-smelling formula at first blush makes total sense. Sell as much as you can, then pay the bills, and what is left over is profit. Here’s the problem: there are never any leftovers. Flap. Flap. Flap. Splat.
The old profit formula creates monsters of businesses. Cash-eating monsters. But we stay loyal to the formula, and things get worse.
The solution is profoundly simple: Take your profit first.
Yeah, it is that simple.
What you are about to learn is so simple, so obviously effective that you may hit your head and say, “Why the hell didn’t I do this earlier?” But it may seem hard at times because you haven’t done it before. It will challenge you because you will be required to stop flapping your arms. You will be required to stop doing what wasn’t working. (It is very hard to stop doing something even though it isn’t working out for you. Remember that last nasty hangover, when you said, “I’m never drinking again”? How long did that last?)