What is Profit First?
Profit First is a book by Mike Michalowicz, which talks about flipping the traditional accounting. Usually, most businesses will have their income minus expenses and then, they’re left with the profit. However, we do see a lot of businesses that aren’t so profitable.
So, this book speaks about the strategy to reverse engineering what profit you would like to start with. It talks about what you would like to aim or to achieve. Then, take that off from your revenue targets, and what is left would be for your expenses.
In behavioral psychology, we have this so called Parkinson’s Law. It says that work expands to fill the available resources, e.g. time and money, for its completion. Mathematically, the traditional formula is the same with the Profit First formula. But it has behavioral difference.
So, in relation to the Parkinson’s Law, if you take your expenses first, you’ll consume it all, and you’ll be left out with whatever is left out, and sometimes, close to nothing. But, with the Profit First formula, if you set aside first your desired profit, then utilize the remaining as your expenses, your entrepreneurial innovation will be put in good use.
As a business owner, you want to do things sustainably and profitably, so that you can employ a team, then, continue to grow, and then also serve your own needs as a business owner.
In this article, I’m going to talk a little bit more about the Profit First Strategy and how you could apply it in your clinic.
What’s wrong with profit first?
The book is brilliant generally, however, it lacks the nuances that are required of a health clinic. If you’re a clinic owner, in physio, podiatry, naturopathy, or psychology, there are subtleties to what we do that just can’t be covered in a book that is sold all around the world.
So, inside the business academy, we applied some of the principles of Profit First. Then, costumize those to match not just industry benchmarks, but high performance benchmarks.
Most small businesses don’t survive. Most health clinics aren’t profitable if they are at below ten percent. I hate to say it, but that’s not what I want for my clinic. I want massive impact and as a reflection of that, a healthy income. And profit inside the business academy, we have hugely profitable clinics not because profit is the end goal, but because it’s a reflection of value and impact.
Profit First Principle speaks about separating your business bank accounts into a number of different accounts. Before those accounts though, the clinic owners pay themselves a commercially viable salary arrangement for their work done. Profit, then, is what their income is for work they don’t do. That’s their reward for owning an income generating asset. Otherwise, they’re just another employees.
So, in short;
- pay off the proper commercial market salary
- then set up a couple of different bank accounts.
And normally they don’t all come at once, they come step-by-step at the right time relevant for your clinic.
How can Business Academy Help You Apply Profit First
The book was actually written in an American framework or context. And so, in an Australian context, Business Academy helps clinic owners set up accounts that are relevant to their trading accounts, their tax accounts. Breaking it down so that you’ve got enough set aside for your PAYG, monthly bill, or your quarterly BAS, or income assessment statement. So that you’ve got enough set aside for your super contributions requirements and also prioritize profit.
Business Academy will guide you to the following:
- Pay off a market salary
- Set up different bank accounts
- Get your P&L in functional clinic-relevant categories
- Extrapolate your current percentages and your goal percentages
- Translate these percentages into actual dollars
In picture, you need to pay off a market salary first, and set up some different bank accounts get your P&L in functional clinic relevant categories. Then, export that out to extrapolate what your current percentages are and what your target percentages should be. And then, we translate those percentages into actual dollars.
So, it’s often 6 to 24 months of partnership with us to ensure sustainability specifically to your personal and/or clinic situation.
Investment vs Expense
If clinics are trying to lower their expenses to match the profit target, the next question is:
How do you weigh up the balance of what might be an investment and what might be an expense?
There are a number of different levers that we can pull to end up with a profit goal at the end or that you start with profit first. You can reduce your expenses or you can increase your revenue. That’s in the simplest version of that formula.
We also know that the profit formula within a clinic is to help more people, help them more often or add more value. And so, there’s a couple of other levers that we can pull.
But what I would like to say is that an expense that directly helps you generate more revenue is not an expense, that’s an investment. For instance, a marketing that works, marketing that converts, although it’s an expense, is actually an investment. Don’t turn that off, you want to up on that one. Likewise with mentoring.
Whether it’s an expense or investment, it will all depend on your lens. How do you see the world? And what impact are you trying to have on the people around you? It’s definitely a perspective on things. Run them through your own filter and get a few different perspectives, and then make some decisions with some quality people.
But, make sure especially in an accounting world that your accountant is able to translate that into health specific. Make sure your accountant, your advisors understand the industries and the specifics of that because then, you’re going to get a better result as well.