I do not usually post these types of articles, but after this book was mentioned several times to me by prospective and current clients, I felt it was my duty to take a look. I want to start by saying this will be more of a blog-style article, filled with opinions and emotion, so if you are looking for the “meat” of the article, please read the TL;DR.
Given that I did not go into this blind, I did have an opinion of the book before reading it. I figured I would hate the book, and that is completely accurate, I hated the book, but I think the method is great. The reason I initially hated the book (prior to reading) is that the people who spoke to me about it thought of it as a newfound accounting method, when in fact, it is not a way of doing accounting but instead a cash management method. The author does liken it to accounting on several occasions, often incorrectly. I ended up hating the book because the author appears to have great disdain for accountants and the accounting profession, save his “Profit First Professionals.” I get it; really, it is a tactic to get sales and then pump up his “Profit First Professionals” training programs. I have no first-hand experience with this program and have only read the book, so the professionals who complete this program may have a unique understanding of applying the methods that I may lack. Don’t get me wrong; I am not saying don’t use one of those professionals if you want to try this out for your business; what I am saying is that I don’t think it is necessary.
The method described in the book, and we will get to the details a bit later, are nothing new. It could be new for businesses to use this as a cash management tool, but the allocating income to buckets and only spending what is in the bucket method is as old as time (not literally), and the author does mention this in the book. His claim to fame, if you will, is to bring this into the digital age and to revolutionize it. For as long as I can remember, I have been using a similar method for my savings. I am not quite sure where I read about it or how I came to use this method, but I know I started using it before January 2014 (that is just the earliest digital copy of a bank statement that I have). What I did was figure out how much I could afford to allocate to savings each month and then figure out how much I needed to be in each bucket for the year and then take that savings amount and come up with my monthly percentages. My first paycheck would cover the savings transfer, and I would then allocate whatever amount it was to each savings account. Back then, it was Capital One 360, and then, later on, I graduated to savings accounts with better interest rates. I do not remember what all of the original buckets were back then, but now I have the following: emergency savings, vacation savings, annual expenses, investing, house, furniture, and misc. When I am ready to go on vacation, I look at what is in the vacation savings account (or what will be by the time I take the trip) and start planning.
So, what does Mike want you to do? Something very similar to what I have been doing but for your business. He says that as a business owner/entrepreneur, we are so focused on sales/revenue that we fail to pay ourselves or take time for ourselves, which is quite true for many people. He also says that if we take the profit first, we will set ourselves and our businesses up for greater success, which also makes sense. He came up with a way for people to evaluate where their businesses currently are (“Current Allocation Percentages”) and where they should be on average (“Target Allocation Percentage”) by using his instant assessment, which he also offers for free via his website. Once you have both percentages, you evaluate what needs to be adjusted between operating expenses, owner salary, profit, tax, etc. You need to open several bank accounts, one for each bucket, and then transfer funds from your income account twice a month. He also gets into how you can identify and eliminate expenses if your operating expenses are too high and lets you know how frequently to adjust your percentages to get closer and closer to the target ones. Like I said excellent cash management method that takes the guesswork out of it. I would recommend this to clients struggling with cash management or who want an easy tool to see how their business is doing.
So, with all of that, why do I hate the book? As an accountant, this book was not written for me. I also do not think the way he talks about most business owners is accurate. He is coming from a place where he was almost in financial ruin, and, to me, at least, it feels like he is projecting a lot. Within the first 16 pages, he tells us why we should not be taking advice from him, which is not to say that if you have come back from having almost nothing, there aren’t valuable lessons, but he seems so inconsistent to me. The author tells a story about selling one of his businesses and essentially thinking he was set for life. I do not know about you, but if I were in his shoes, my first call after cashing that check would have been to my tax person and the second to my financial planner. He, however, went out and bought three cars, one of which he asks the dealer for “the most expensive Land Rover.” He also decides that he must be a business savant, and with no training, experience, and most likely no due diligence, he goes out and invests in a ton of businesses. Not surprising, in the end, he has $10,000 left, which is not enough to pay the tax bill, his tax preparer, or live off of. I am not sure how many business savvy people would end up blowing through their money in that way with no regard for the future.
Less than a quarter through the book, the advice seemed like something you could pick up by watching a couple of Shark Tank episodes – mainly don’t expand services to grow or because your customers/clients think it is a good idea. I also think the idea posited that companies only focus on revenue is entirely false, at least when thinking about large companies. Revenue is a moving target and is never guaranteed, so most companies focus on expense management as expenses tend to be more controllable. I also laughed out loud to the part, “Let’s be honest, entrepreneurs hardly ever take anything close to a real salary, and good luck telling the government that you decided to skip taxes this year so that you could pay yourself.” This sentence is missing so many things; mainly, it depends on what type of business entity you have. As an S-corp, if you have profit and no salary, that is a big no-no. If you are taking an actual salary, that will reduce your profit and thus your tax liability (unless you are a CA LLC or similar entity that is taxed on gross receipts vs. net income). So you could, depending on your business, take a salary in lieu of paying taxes. He also calls himself a “boot-strapper,” which is laughable. There is a line in the book that says, “No matter how much income we generate, we will always find a way to spend it—all of it.” Who has that mindset? And then for him to also say that this is human nature to spend everything you have. Just seems so inconsistent, like he is lying to himself. Finally, on page 35, the author said what I have known since the beginning of the book “It hurts to admit this, but I was never good at money management.” This fact is screaming at you from the start, so why again are we taking business advice from this person?
The author also tries to pervert the meaning of profit by saying that it is some secret number that accountants come up with. In contrast, his definition of profit (which is actually cash flow) is “cash in the bank. Cold. Hard. Cash. For us.” which is beyond inaccurate. If you have loans, purchase fixed assets, take distributions, or anything else that shows up on the balance sheet, they all use cash and are not factored into profit. This is why instead of focusing on the profit, you should be focusing on cash management (the actual theme of the book). I also think the oversimplification of GAAP is so misleading; it is not just “Sales − Expenses = Profit,” as the author says. This oversimplification is why he was so confused as to why he was showing a profit on his books with no cash in the bank and did not account for any money he took out of the business, which by his earlier accounts were most likely used on frivolous things and I would posit, is the reason why there was no cash in the business.
On page 50, I saw a little ray of sunshine and remembered, this book is not written for us accountants “The default cash-management system for most entrepreneurs is what I call bank balance accounting. Ironically, it is what our accountants tell us not to do. “Don’t look at your bank accounts,” they say. “Look at your accounting system.”’ The author then reverts to the over-exaggeration of regular business people not being able to refer to their financials. He essentially says a business owner has to look at all of these places to figure out a clear understanding of their business. Instead, per the author, they will revert to “bank balance accounting,” which is entirely false. Yes, if you want a clear and accurate depiction of your business, you should do some calculations. If you are trying to determine the cash available to spend, you can easily take the cash balance per your books and reduce it by any current liabilities, and that will give you a quick and dirty number. Then layer in other things like AR to get a closer picture, if needed.
I could go on and on about the book's issues, but again I think this is a good and helpful tool; I just wish the book didn’t paint my profession so negatively or overgeneralize business owners. The author does include tools on how to apply this method to your personal finances, which is helpful. He also pays tribute to others in the industry, namely Suze Orman and Dave Ramsey, who have great books.
TL;DR – The book should be used as a cash management tool for busy business owners or others who do not have full accounting teams or other professionals to evaluate how their business is doing. The author includes a lot of free tools on his website to help you get started and goes into advanced techniques in the book. He also goes into how to use this as a cash management tool for your personal life. The best thing about this is that it is relatively easy to get started and does not require much maintenance once it is up and running. The author also provides tips on eliminating or reducing expenses, and the method gradually gets your business to where you need it to be (or your target percentages).
All italicized quotes “Michalowicz, Mike. Profit First Penguin Publishing Group. Kindle Edition.”