Mike Michalowicz explains why Profit First requires separate bank accounts, not just spreadsheets. The system works because entrepreneurs check balances constantly, and physical separation prevents you from accidentally spending money earmarked for taxes or profit. Five accounts handle revenue, owner's pay, profit, taxes, and operating expenses.
Hi, I'm Mike Michalowicz, the author of Profit First. And what I want to do in this video is answer a very common question I get about how the Profit first system works. And is there a shortcut? Specifically, can I, instead of setting up these multiple accounts at my bank, can I instead do it on a spreadsheet or maybe in my accounting system? And the plain flat answer is this, Absolutely not. You have to set this up at your bank. Question, of course, is why? Well, Profit first is a behavioral based system. What we're trying to do is take your established behaviors and habits and not change who you are, but actually create a system that channels your existing habits to get you where you want to go, achieving profitability, consistently paying yourself, never worrying about taxes again, operating your business within the confines of what it needs to operate in your true operating expenses. Here's a question I have for you, and I just ask that you are totally candid and honest with yourself. How often do you log into your bank account and check what your bank balance is? Even if your accountant or bookkeeper says, never look at your bank account, log into your accounting system, you know, look at your budget, tie into your KPIs, know your balance sheet, know your in your cash flow, do all those things and you'll know where you stand. And your bank account balance isn't even representative of where you stand. There could be interim transactions going on, there could be payables that are booked out. But do you do that? And what I found is for most entrepreneurs now, I've had the privilege of speaking with over a hundred thousand entrepreneurs. I found for most entrepreneurs and I surveyed every single event. So the next time you're at a Profit first event, I'll survey you too. I ask people how many people circumnavigate that and actually look at their bank account balance. Because they're entrepreneurs. After all. We trust our gut, we see what's in the bank account, and if we have money, we can spend it. If we don't have money, a little bit of a panic ensues. And I find that easily 90% or more of entrepreneurs log into their bank account balance and do what I call bank balance accounting. Based upon what we see there, we make a judgment of what we can do and we take an action. Now, Profit first, again, is based upon capturing existing behaviors, not making you change, but changing a system to channel your existing behaviors. So if you are like one of most entrepreneurs and myself included, I log into my bank account multiple times a day. But even if you do it once a month whenever you log into your bank account what Profit first does. By having the bank account set up at your bank, you instantaneously know what money has been pre allocated to what purpose. If all your money is in operating expenses, you can't take that as a profit distribution or pay yourself. If money is in the owner's pay account, you know that specifically to pay the owners and your tax reserve, you'll know what's exactly there. Now, Profit first starts off with five foundational accounts and over time you may set up more. Be prepared, your banks won't get it. Many accountants don't get this concept. They've been trained in the traditional sense, which is totally logical for Spock. Totally logical to do everything in an accounting system. But if that's not where you spend your time, it's a mistake to do it. It's funny, I learned this principle when it came to exercising. I used to never exercise and my coach gave me a very simple process. They said, put your gym shoes right outside your bed, so when you turn, you step right into them. That was the game changer. Instead of all the excuses building in my head and going down the hallway to get my gym clothes, now it's right there. And the second they're on, it starts the momentum. You must intercept your natural behavioral path. That's how I design Profit First. Sadly, I've gotten emails and calls from people that say Profit first failed me. And I said, why? And they said, well, I put in the spreadsheet and I didn't have time to track it. I don't use a spreadsheet. I don't do my accounting system. I don't check in there how all the GL accounts and stuff are set up. And they said Profit first failed me. They didn't follow the system. So to implement Profit first, make the effort of setting up those bank accounts. Then work with an accountant or bookkeeper, maybe a Profit first professional, someone who specifically knows how to do the accounting component. Profit first does not replace your accounting. It's an umbrella over it and it captures your natural behaviors. I am wishing you tremendous profit in your future.
