Profit First: Game-changer or just another business book?

April Fool’s Day seems like an appropriate time for an in-depth review of Profit First by Mike Michalowicz. 

After all, it promises a radical departure from traditional accounting and will change the trajectory of small businesses in America. So, is it real or just another business book trying to trick readers into buying? 

Today, we’ll provide the good, the bad, and the ugly of Profit First so you’ll know if it’s worth your time on your hectic entrepreneurial calendar. 

Let’s go! 

What is Profit First, and who is it for? 

Profit First is a system created by Michalowicz after he struggled to maintain control of finances in his first two small businesses. 

The main premise is to flip the traditional accounting system so that your business pays itself first before it pays any vendors or creditors. 

To do this, it advocates for a system of “small plates” and multiple bank accounts to manage cash flow. 

Sounds like the recipe for a personal finance system, right? Exactly. 

That’s why Profit First is best for a small, independent business owner who can handle the rigors of behavioral finance principles. 

Profit First uses those principles as a foundation for building a business designed to be profitable from day one. 

Strengths of the Book

Simplicity and relatability are the genius of Profit First. There are no unfamiliar accounting terms, just a series of actionable steps layered in real-life experiences of failure and success that Michalowicz either experienced in his own entrepreneurial journey or witnessed in others. 

The steps make sense, and the stories serve as a catalyst for actions because, hey, if he and others can do it, why can’t you? 

That sense of empowerment is driven by how the system works because it allows the owner to always have money in the bank and always know how much. 

It eliminates the annual meeting most entrepreneurs have with their CPA, fingers crossed, hoping everything will be okay, and replaces it with the following simple approach. 

How the system works

Profit First requires the user to pay themselves first, setting aside a percentage of revenue for profit before they pay anyone else. 

Then (and only then) does the user dole out the remaining revenue for other expenses. If there isn’t enough money, Michalowicz views this as a sign of waste that is unneeded at that point in your business life cycle. 

Michalowicz insists this is the strength of Profit First. It forces wasteful spending and poor allocation to the surface, where it can be skimmed off and eliminated, allowing profit to remain. 

All this is done by setting up separate accounts for profit and other costs, like an envelope system for business. The dollars are appropriated to each account at regular intervals based on predetermined percentages. 

Sounds great, right? You may even be eyeballing reviews on Amazon right now as your cursor hovers around the “Buy Now” button.  

Before you click, understand that, like most things in accounting, there’s another edge to this blade.

Potential Weaknesses

Profit First is designed for any business that generates annual revenue under $25 million. That’s most of us. 

It’s also designed for very disciplined people who really follow behavioral finance. If we are honest, that’s a minority of us. 

If you aren’t ready to fully embrace and sustain a mindset shift that advocates critical thinking over spending, Profit First simply won’t work. 

And if you’re hoping to completely ditch traditional accounting, forget about it.  Profit First tracks income well, but it’s no replacement for accounting software or a CPA when the IRS comes for an audit. 

The Bottom Line

Profit First is worth a look if you own a business, even if it’s only for Michalowicz’s engaging and hilarious writing style. 

But you’ll have to be the final judge if it works for your personality and your business. 

Whatever you do, don’t just dive in head first. Talk to others who have tried it and get some advice from a tax professional because the only thing better than making a profit is taking the time to plan for it.