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Profit First: A Life-Changing Book Every Real Estate Investor Needs

CEO Khai Intela
Profit First by Mike Michalowicz has had a profound impact on my life. It's not just another self-help book; it's a game-changer. Having read a myriad of books, I can confidently say that Profit First...

Profit First

Profit First by Mike Michalowicz has had a profound impact on my life. It's not just another self-help book; it's a game-changer. Having read a myriad of books, I can confidently say that Profit First belongs in the top three most influential books I've ever come across.

As a real estate investor, I feel compelled to share this book with anyone who will listen. It's a must-read for not just real estate investors, but for every student graduating high school. The lessons it imparts go far beyond the realm of real estate, touching on the universal struggle with financial stress and the elusive pursuit of profit.

The Struggle with Ego in the Real Estate Industry

In the real estate industry, ego is pervasive. We often flaunt our gross revenue and deal count, projecting an image of success. However, many of us are grappling with financial challenges behind closed doors. It feels like there's a hole in our pocket; no matter how much money comes in, it inevitably flows right back out.

While we may be experiencing growth, doubling our deal flow from the previous year, are we actually keeping any money? Unfortunately, for most of us, the answer is no. We find ourselves no better off financially than when we first started in the real estate business.

This is simply not right, and Profit First offers a solution.

The Priority of Profit

Accountants have misled us with the equation "Revenue - Expenses = Profit." In Profit First, Mike introduces the correct formula for profit:

Revenue - Profit = Expenses

Mathematically, these equations are the same, but psychologically, they have opposite effects. What we prioritize, we place first. When we prioritize profit and allocate a certain percentage of our gross revenue to it, we are forced to run our business on what's left. This limitation breeds creativity and ingenuity, leading to better financial outcomes.

Profit must become the priority for any business. If we leave profit as an afterthought, behind revenue and expenses, it will always be eaten up by other financial obligations.

Embracing Parkinson's Law

Profit First also explores the power of Parkinson's Law in maximizing profitability. Parkinson's Law states that work expands to fill the time available for its completion. Similarly, as supply grows, demand grows to meet it.

By applying this principle to our business, we can identify and eliminate unnecessary expenses. Just as we squeeze every last drop from a tube of toothpaste, we can squeeze our expenses to improve profitability.

Budgeting Business

Profit First and the True Goal of Business

In the tech and startup industry, the mantra of "growth at all costs" prevails. However, this approach is not relevant to most businesses. For real estate investors, the ultimate goal is not unlimited growth but rather using real estate as a vehicle for wealth creation and financial freedom.

Profitability must take precedence over growth. When we prioritize profit, the right amount of revenue and deal flow will naturally follow.

The Practicalities of Profit First

Profit First provides a practical system for managing finances through bank accounts. It modernizes the envelope system by creating dedicated accounts for specific business purposes. The five foundational checking accounts are:

  1. Income
  2. Profit
  3. Owner's Compensation
  4. Tax
  5. Operating Expenses

Two additional savings accounts, Profit Hold and Tax Hold, are held at a different bank for added discipline.

By cyclically allocating predetermined amounts to each account, based on the company's goals and needs, we ensure that profit remains a priority. The income account serves as a central landing place for revenue before it is distributed to the various accounts.

The Difference Between Profit and Owner's Compensation

It's crucial to differentiate between profit and owner's compensation. As a business owner, you are not only an important employee but also an owner working on the business. The owner's compensation account ensures that you receive a salary for your role as an employee, while profit represents the earnings from working on the business.

Why Two Savings Accounts at a Different Bank?

Setting up two savings accounts, Profit Hold and Tax Hold, at a separate bank may seem tedious. However, it safeguards against the temptation to dip into these accounts for other purposes. By keeping profit and tax allocations out of sight and difficult to access, we preserve their intended use.

Choosing Profit First-Friendly Banks

To implement Profit First effectively, you need a bank that meets specific requirements:

  1. No minimum balance or monthly service fees
  2. Unlimited checking and savings accounts
  3. Ability to nickname accounts

One example is 1st Internet Bank, which offers these features and competitive interest rates. Other options include First Financial Bank, First American Bank, and Regions Bank.

In Conclusion

Profit First has revolutionized the way I manage money and has filled a crucial gap in my real estate investment journey. It has shown me that success in real estate requires not only mastery of the craft but also mastery of financial management.

I encourage every real estate investor and anyone aspiring to financial freedom to read Profit First. It will empower you to prioritize profit, strategically allocate your resources, and ultimately achieve long-term success in your business.

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