Revenue minus Expenses equals Profit…right?
Mike Michalowicz, author and this year’s opening keynote speaker of TechTourLIVE, says putting profit last is setting yourself up for failure — because putting it last means that profit can wait, that it’s optional, that it’s less important now and more important in some distance future.
But that leads to the “one day” syndrome — one day this farm will make money. One day I’ll pay myself. One day.
Michalowicz says instead, farmers need to operate under a Sales minus Profit equals Costs — a pay yourself first model.
But, you say, I make budgets! And if I’m budgeting, I am focused on profit. Michalowicz argues that a key aspect of human nature will always trip you up, even if you’re a budgeter.
“Profit first is active management, where you pre-allocate money to intended uses, and the remaining money is what you operate your business on,” he says. When money is flowing in, we tend to get over confident and start spending more. Human nature adheres to Parkinson’s Law — as a resource expands in availability, you actually consume more of it. That resource can be time (working to deadline, anyone?) or it could be fertilizer, land, money. It applies to all resources, he says.
In a system where we channel resources, Michalowicz says, Parkinson’s Law becomes a leverage that will work in our favour. “As we constrain our resources we get to forced frugality and innovative practices, and push to get or produce more with less,” he says.
Why do business owners have such a hard time paying themselves first, anyway? Often it’s that we feel the future business will be stronger if we plough every cent back into it, but Michalowicz says the more we try and grow without profit, the more ingrained the profit-last habits set in.
Michalowicz joins the RealAgriculture team for TechTourLIVE — 4 cities, 4 days, March 12 to 15, 2019, across Western Canada. Visit TechTourLIVE to reserve your seat!