Profit First Principles

Profit First is a cash-flow management system using bank accounts with specific purposes, just like the old envelope system. The beauty of it is simplicity and how it leverages human behaviour.

Parkinson’s Law states that given a day or a week to complete a task, it will take that much time. Or given a $100 or $1000 budget for the same task, the money will be spent. Humans are innovative and when we are given less, we work with less.

The first principle of Profit First leverages Parkinson’s Law to use smaller amounts of money to run your business.

The Primacy Effect is when we place increased significance on what we first encounter. I love the example Mike uses in the book on page 41.

Now look at the two sets of words below and determine which one describes the sinner and which one the saint.

1. EVIL, HATE, ANGER, JOY, CARE, LOVE
2. LOVE, CARE, JOY, ANGER, HATE, EVIL

These are the exact same words but when placed in a certain order, they conjure different meanings.

This is why we focus on Profits First. I know you get it!

Next is removing temptation. Think of anything that you will always eat when it is placed in front of you. There are certain things I just don’t buy because if it is there, I will eat it (umm, Ben & Jerry’s maybe…). Your Profits are no different. If they are just sitting there, you may be tempted to use that money. That is why we use a secondary bank to hold funds. They are out of sight and out of mind to the daily running of your business which helps keep them safe.

As James Clear outlines in Atomic Habits, any new habit has to have a consistent schedule. Managing your cash-flow is no different. The final principle of Profit First is enforcing a rhythm. Instead of the hamster wheel of reactivity, we deal with our allocations to the purpose accounts and expenses on set days. If you want to know how much money you have on hand, you can easily look at your bank balances in each of your purpose accounts to know what you have set aside for specific expenses.

Following these behavioural principles will help you to implement the Profit First system into your business and set you up for remarkable long-term success.