Profit First

Takeaways:

The formula income – expenses = profit makes logical sense, but it doesn’t make human sense. When profit comes last, after all expenses are paid, you only get leftovers. Because there are always more expenses — another purchase, another investment to “grow” the business.

Parkinson’s law — resources used tend to expand until all resources available are used. It’s just human nature.

Balance-based accounting. On a day-to-day basis, we don’t use the principles of accounting to make financial decisions, because it’s just too hard. We look at the balance on our bank account, and if there’s money, that means we’re good, and we can spend it. And then profit never comes. (And we get in trouble for not paying on time, having to scramble to get money for taxes, etc.)

You have to allocate profit first

Make seperate bank accounts for:

Income — all income comes here, but no payments are made from here
Tax reserves
Profit
Operating expenses
Compensation

Allocate by category. Figure out the % you need for each category ONCE, then twice a month, move money from the income account to these accounts.

Change the system, not yourself. You can continue making decisions under balance-based accounting. But now you don’t have to worry about tax or profit, because you can ONLY spend from the Opex account. If the balance is low, it means the business can simply not afford and expense. (You must never draw from profit or tax accounts)

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