I was surprisingly surprised when I noticed that there is a certification body for accountants that specializes in implementing profit first philosophy. I didn’t make any attempt to understand what the whole certification process (so I might be surprisingly wrong) but I bet you would be as surprisingly surprised as I was by the time you get a hang-on on the answer to the question ‘what is profit first?’
The aim of this article on what is profit first is not to in anyway undermine the work of another but rather to educate people on the fundamentals behind the phrase ‘profit first’ as invented and popularized by Mike Michalowicz – the author of Profit First (A Simple System to Transform any business from a cash-eating monster to a money-making machine). In my usual way of thinking like an accountant, I have decided to do a 200 feet high summary of what I understand from reading the book.
200 feet high overview of the profit first methodology or philosophy
Let me start by saying that profit first is all about budgeting, being disciplined and paying yourself first in whatever you do for a living – be it small business management or personal finance management.
Ten (10) key points from the book titled ‘Profit First’
- Operating separate bank accounts for different things: the author of profit first strongly recommend that individuals and entities operate separate bank accounts for different reasons. This appeared unreasonable at first looking at it from the perspective of an accountant who is worried about the amount of energy and resources that will be required to do a traditional bank reconciliation of the different bank accounts. This in my opinion should not be a major as one can easily use excel formula to perform bank reconciliation. The real deal here is that having multiple mini accounts helps small businesses and individuals get quick insight into the various expense heads and then make plans to optimize the operations responsible for the expense head.
- Starting the journey from the end: this is like performing a reverse engineering on all your business processes. This is a rather unusual way of encouraging business owners to embrace the technique of target costing for example. The authors’ idea is that entrepreneurs should always start with a profit figure in mind at the very beginning of a project or business venture. The only major danger that I see here is that great business or investment opportunities might be lost applying this technique if care is not taken.
- Being frugally frugal in order to survive your quest of staring a journey from the end: this follows from the above point. According to the book, in order to meet the target profit that the business owner has set from the beginning, high level of frugality in encouraged
- Managing your inventory as leanly as possible: it is a well know fact that inventory (stock) can tie down your cash that can easily be used in other profitable ventures. The author of ‘Profit First’ really hammers on keeping as few inventories as possible. Again, one should keep an eye on the cost of stock out when implementing this advice. This is probably one of the areas that qualified accountants will be of help – now I get why a professional body is set up to guide businesses implement the concept of profit first.
- Properly appraising your projects before venturing into it: projects and investments can easily go bad if not properly planned and implemented. Investment appraisal techniques have been around for a long time. So, this book just re-echoed its importance.
- Prudently managing your working capital: a hidden gold mine that has long been discovered by successful businesses is that proper working capital management unlocks financial haven. One area of working capital management that the author of profit first emphasized on is the area of debt management – my comment here is that traditional corporate finance teaches us that debt is usually a cheaper source of finance, just saying!
- Building a leaner workforce: it is really sad and unfortunate that many books on business management lay emphasis on reducing workforce in their bid to save cost. Profit first also took this approach. My standard advice is that businesses should optimally manage their most prized asset – its human resources.
- Cutting more costs: yet more emphasis is laid on cutting more cost. Cost management is an area that is greatly misunderstood. People always confuse cost reduction and cost savings to be same thing. This book throws more light on this and of course the hyperlinked article above.
- Application of Pareto ratio principle: most people that have read Richard Koch’s classic (The 80/20 Principle – the secret of achieving more with less) will agree with me that this is a very useful practical way of managing time for maximum result. I love the way Profit first dissects this concept in a very simple language.
- Paying attention to continuous process improvement: there is always room for improvement even in the uppermost room. There is no gain saying that a business that does not continuously seek ways of improving its operations quickly joins the list of failed businesses. Profit First clearly and succinctly provide guide on how to go about making little incremental improvements. Recent discovery includes the fact that proper application of lean six sigma improves a company’s financials.
Profit first is a great book that anyone who is really serious about his or her financial independence campaign must read. It is not a voluminous book, you can finish reading it in two nights – I used four nights to read it because I am a super-fast reader 😊 ☹.
Personal financial management journal is a venture that no individual can completely delegate without consequences. I urge you to start taking profit first before taking anything else.
Please note that what you have just read about Profit First is not a book review rather my insights and what I think I understand that the book is saying. I also do not make claims that I have summarized the entire book in one accounting blog post. To answer the question posed in the title of this post, I do not honestly think that accountants need certification in order to implement profit first philosophies.