Profit is historically way low it restaurants. That makes this concept is even MORE important for you & your pocketbook.
As an owner, you get Paid with Profit
This is a book review of the book “Profit First” by Mike Michalowicz. Now, this book is very popular these days. Mike Michalowicz has written about four amazing business books, and he’s a very popular author. But in a lot of entrepreneurial circles, this book is becoming very famous, because it really is very simple and it taps into something very important which is, making sure that you as the business owner get paid.
A lot of business owners, take their profit and they plow it back into the business. And Mike makes the case that the reason why you started a business was to make a profit. The profit is what you’re in it for, right? And it’s very easy to get confused about how much profit you’re making, and we kinda talk about that in another book review, but the profit that you make is yours.
The Profit is for YOU
That’s the money for you to keep, for you to spend, for you to do what you want with. You have to make sure that everything else is taken care of. And if you want to put the profit back into the business, it’s helpful to be able to do that very intentionally. So, Mike Michalowicz in his book “Profit First”, he makes the case that you really should take your profit first, and he’s got a whole process for how to do that.
So I’ve got a book summary here on my computer and I’d like to show you that, and let’s go through it really quickly.
So here’s the basic idea of “Profit First”. It is that you are going to take your profit first every month and put it in a separate bank account where you’re literally not looking at it every day, and you’re going to run your business with everything that’s left over other than that.
Set up 5 Bank Accounts
So here’s how you do that. The first step is, you’re gonna wanna set up three bank accounts with your current bank, we’re gonna call that bank one. That’s income, owners pay and operating expense. These are three different bank accounts. Now, you may need to work with a credit unions do this, they’re sometimes more helpful for setting up multiple accounts. Because ultimately, you’re gonna set up five accounts. Or, you’re gonna set up three at one bank and two at another. So you might set up three at the bank that you currently work with.
You probably already have one or two of these accounts. But here’s the three you need: income account, that is the gross income that’s coming in. Owners pay is your money that you take for your salary. And then, operating expenses is the other bank account.
And then, at a different bank, bank two, you’re gonna set up two different accounts. You’re gonna set up profit and taxes. So you need to pay your taxes every month. You know, that’s really important. It’s a really easy thing to do to just wait until the end of the year to do that. It always screws everybody up. So you wanna have a separate account for your taxes, estimate what your taxes are gonna be every month and put the money in for those.
But then, you’re also going to put your profit into one of these bank accounts in bank two. And then you’re gonna determine the target allocation percentage of how much profit you’re going to put into the bank every month. And you do that right off the top.
So, many restaurants have got a lowish profit margin. Often it’s 2 to say, 8%. Often, 6% is kind of the average. But you don’t have to start by putting 6% of the profit or 6% of the gross revenue in the bank every month. That can be difficult for owners, that can be kind of scary. So you can literally start with 1%. But what I want you to do is, if your restaurant is doing a million dollars a year, that comes down to about $850 a month that you’re going to put into the profit bank account before you do anything else.
Operations & Getting Paid
Then, every month you’re going to run your operating expenses out of your operating bank account. You’re going to take your owners draw out of your owners bank account. The idea with this is that it actually gets the profit out of the operating account. So you’re not looking at the operating account saying, oh, we’ve got $20,000 in there, I can go spend it. You’ve got maybe $15,000 in there and you’ve got $5,000 in your profit account. And having that profit bank account at literally another bank probably means that you’re not gonna login every single day and look at it, and you won’t have the perception that you have that money to spend on the business.
And then, on a quarterly basis, you’re gonna pay your taxes.
That profit is going to accumulate in the second bank account. And that’s basically the whole story.
So, you’re taking your profit first every month, you start with the target allocation percentage of say, 1%, you can build that up to as high as you want, the more the better, and move it into another bank where you’re not looking at it every day, and then run your business out of the account that it should be run out of, which is the operating account.
I highly recommend you get this book “Profit First” by Mike Michalowicz, you can find it on Amazon. It’s also of course, on Audible on Amazon, so you can buy it and just listen to it. It’ll have some charts and graphs, but you can download those, put ’em on your phone or your iPad.
This book has absolutely changed our business, it’s chanced many businesses, and I highly recommend it.