{"id":65285,"date":"2022-04-29T19:51:30","date_gmt":"2022-04-29T23:51:30","guid":{"rendered":"https:\/\/www.shortform.com\/blog\/?p=65285"},"modified":"2022-05-01T20:10:25","modified_gmt":"2022-05-02T00:10:25","slug":"profit-first-method","status":"publish","type":"post","link":"https:\/\/www.shortform.com\/blog\/profit-first-method\/","title":{"rendered":"The Profit First Method: The Key Tenets Explained"},"content":{"rendered":"\n

What is the Profit First method<\/a>? Why does entrepreneur Mike Michalowicz believe the traditional accounting method doesn’t work?<\/p>\n\n\n\n

In his book Profit First, <\/em>Michalowicz asserts that traditional business accounting<\/a> methods don’t align with the way people think. That’s why he put together a new method that will help business owners reach long-term success.<\/p>\n\n\n\n

Keep reading to learn about the four main tenets of the Profit First method as well as how they work in harmony with the natural ways people think and make decisions.\u00a0<\/p>\n\n\n\n\n\n\n\n

The Profit First Method<\/strong><\/h2>\n\n\n\n

Traditional accounting methods can lead businesses to failure. While traditional accounting depends on clear logic and rational decision-making<\/a>, Michalowicz believes that the way people think and make decisions<\/strong>\u2014especially when they’re losing money\u2014isn\u2019t logical or rational. <\/p>\n\n\n\n

(Shortform note: Research supports Michalowicz\u2019s claim that traditional accounting methods don\u2019t work well with the way people think. A study revealed that even professional accountants allow some of their personal, unconscious biases to get in the way of their logical, rational accounting work<\/a>\u2014often interpreting financial information in a way favorable to their clients, even if by doing so, they fail to recognize errors or fraud. Since even professionals have trouble remaining fully logical while doing business accounting, it\u2019s not hard to imagine the difficulties Michalowicz suggests entrepreneurs have with managing their finances rationally.)<\/p>\n\n\n\n

A preferable accounting system would allow an entrepreneur to use the existing ways they think and make decisions instead of depending purely on logic and reason. Michalowicz decided to develop a system that does this, and he ended up with the Profit First method. While traditional methods use the income minus expenses equals profit equation, the Profit First method uses a different equation of income minus profit equals expenses<\/strong>. <\/p>\n\n\n\n

(Shortform note: Michalowicz suggests that the Profit First method can act as a replacement<\/em> for the GAAP, but this isn\u2019t quite correct. Many businesses in the US are legally required to comply with the GAAP<\/a>, and many financial experts recommend businesses that aren\u2019t legally required to still apply these principles<\/a>. However, the GAAP don\u2019t conflict with the Profit First method, as they provide requirements for clear, ethical, and consistent accounting, but they don\u2019t require a specific method<\/em> of accounting\u2014in other words, the Profit First system can be understood as a system to reframe the way you comply with the GAAP.)<\/p>\n\n\n\n

Tenet #1: Limit Your Resources<\/strong><\/h3>\n\n\n\n

Michalowicz\u2019s first tenet is to limit your resources by giving yourself less money for expenses. He argues that this will force you to use that money more efficiently. This tenet works with Parkinson\u2019s Law<\/a>: The theory that the more resources we have available, the more resources we will use. <\/strong>This theory works the other way as well: The fewer resources we have available, the less we\u2019ll need to use\u2014in other words, we\u2019ll find ways to make do with what we have.<\/strong> <\/p>\n\n\n\n