Many new start-ups failed because the entrepreneurs began with the wrong expectation, which is reminiscent of the famous novel Frankenstein. For those who are not familiar with the story, Victor Frankenstein was a brilliant scientist who dreamt of bringing back the dead to life. Convinced that his discovery would make him the greatest scientist ever, he devoted his life to the study of resurrecting the dead. Finally, he succeeded. However, he soon discovered that he had created a monster who later killed his brother and his love.
This is exactly a situation in which most start-ups find themselves. The entrepreneur thinks that he is going to start a great business, so he devotes a lot of time and energy to bring it into existence. Unfortunately, he has completely underestimated the dedication required to keep his business running, let alone to get ahead of his peers. As a result, instead of creating a business that serves his purposes, the entrepreneur becomes a slave to his creation which drains all his life away from him.
To tackle this, Michalowicz advocates the virtue of starting small with a realistic expectation of what one hope to achieve. He says, “Profit is not an event. It is a habit.” Building a business is not about hoping for some one-off event that will improve your life dramatically. It is about doing small things in your everyday operation so that your business will get more and more competitive over time. It is like the practice of fitness training. Contrary to the rumours in the body-building industry, there is no magic routine or supplement which can help you to lose weight in a very short time. Different routines and diets work equally well, as long as you put it into practice and stick to it for a long time.
More importantly, an entrepreneur must learn to control his expenses by reversing the usual accounting formula. The general accounting practice states that revenue minus expense equals profit. It implies that profit is the leftover in one’s pocket after spending away all he wants to spend. How wrong is the concept! Consider that every expert in personal finance always preaches the opposite: if you are serious about saving money, you should pre-determine a minimum amount of money that you want to save, so that every time after you get paid, you first lock away that amount to be saved, and only consider spending whatever that is left over. In this way, you never spend more than what you have planned for.
This concept of “paying yourself first” should also be implemented in a healthy practice of book-keeping. Many business owners cannot resist the temptation of unnecessary spending when they have a lot of cash in hand, like moving into a bigger office or hiring new people. While there is nothing wrong with these things per se, an entrepreneur very often just do those things for the sake of looking good (i.e. “trophy collection”) instead of really increasing productivity. Worse yet, having spent money into things that do not matter, he will be unable to invest in things that can really make a change in the business. Therefore, Michalowicz suggested businesses to set up different accounts for different purposes, like one for taxes, one for payrolls, one for rents, and so on. The idea is not just to keep your expense in check, but also to make those funds difficult to access, so that they are less likely to be spent away for unnecessary reasons.
At first, this idea of budget tightening may frustrate an entrepreneur, as he is left with so little cash when there is so much that he wants to do. However, this is exactly the marvellous thing about the “profit first” practice: it forces him to concentrate his resources on things that really matter. A great business does not have to be good at everything, but it has to be very good at one thing. It is like a general practitioner versus a brain surgeon. A general practitioner knows everything, but he only knows a little about each. A brain surgeon only knows how to operate the brain, but he knows a great deal of it. Could you guess which profession earns more?
There are many similar business books in the market, but this is a rare one that really gets to the heart of good book-keeping. Of course, the core idea of the book is borrowed from personal finance and is nothing revolutionary, yet the lucid explanation and practical implementation of the same idea in the business world is certainly one of a kind. This book is well worth your investment with a minimal cost and time you will spend reading it.
Reference: Michalowicz, M. (2014). Profit first: a simple system to transform any business from a cash-eating monster to a money-making machine. United States: Obsidian Press.
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