Can profit-first principles work for your practice?

In his recent book, Profit First, Mike Michalowicz makes a compelling case for re-focusing your business on the bottom line. This might work for business, but can it help your practice to save money?

Profit First dispenses with the kind of technical jargon that can dog management handbooks. It may sound a bit twee, but Mike Michalowicz relates saving money in business back to a simple metaphor – that of eating less. There are four key principles within the book that businesses can use to take control of their finances and save money. Here’s how Smallbiztrends describes them:

  1. Small plates: the idea here is to work with your innate need to finish everything on your plate. The solution is to reduce the size of the plate, thereby reducing the size of your portion. Translated to your business, when money comes into your business, immediately send portions of it out to the following accounts – profit, tax, salary and operating expenses.
  2. Serve sequentially: when eating your smaller portions, start with the vegetables first; they fill you up with good stuff. In business, when dispersing the money that comes in across those accounts, pay profit first.
  3. Remove temptation: if you want to lose weight, get rid of the cookies, the junk food and any temptation that will take you off track from healthy eating. In your business, get that profit account out of easy reach. Move it to a different bank, automate the deposits, don’t look at it and just make it hard to steal from yourself.
  4. Enforce a rhythm:don’t eat when you’re hungry. The idea is to munch a few calories every couple hours. The same holds true for your business; don’t pay bills when you have money – pay them regularly (Michalowicz recommends the 10th and 25th of the month).

The book is, obviously, more complex, exploring these components in greater detail. However, the fundamental, principle of the idea is the familiar ‘pay yourself first’ approach.

Does it work?

To be successful, self-help books need readers who are motivated to help themselves; such books can point you in the right direction but, in the end, it’s up to you to put in the effort.

This particular self-help publication found a willing supporter in Dr MJ Rowland-Warmann, of Liverpool-based dental practice Smile Works. She explains how she has used ‘profit-first principles’ to benefit her practice.

Our practice, Smileworks Liverpool, is one of the largest and fastest-growing independent dental practices in the UK. We have learned from medicine, dental, overseas, here at home – and, basically, take all the advice about running a business that is applicable and use it.

We found that the fastest way to improve the profitability of your practice is by cutting costs. The way our business operates financially, £1 saved is equivalent to £7 earned so, rather than perks and systems for sales and booking patients, it makes more sense for us (and you) to undertake activities where costs and expenses are concerned.

We’ve implemented a system where each member of the team is allocated a cost centre from the profit and loss (P&L) account; examples include telecoms, computers, payroll, taxes and insurance. Individuals are given a small – but very specific target – with a positive outcome associated with it.

We’ve implemented a system where each member of the team is allocated a cost centre from the profit and loss account.

So, one of my team is told, ‘Reduce our utilities bills by 5% over the next 6 months and I’ll buy you an Apple watch.’ Most business owners would think, ‘What does she know about how to negotiate an energy bill for a big company?’  Well that’s the first mistake.

People on £15 per-hour, typically, work very hard for their money and are extremely good at managing household bills and expenses for themselves; they can do just the same for your business.  So, the employee in this example is straight on the ‘phone, switching suppliers, learning what we need and don’t need and becoming a little expert in her field of utilities bills.

If you do similar things across all expenses lines on the P&L, and make it a challenge, you might be amazed at how well your team will do. In some cases, employees have saved up to 50% in their areas. The aggregate effect on expenses is massive, adds real cash to the bottom line and improves the financial ratios of the business.

What is more, cost cutting (unlike sales) has the effect of compounding savings so the impact on the bottom line is astronomical. The staff get perks, you get money; it’s distributed, beautifully-delegated and works.

What final piece of advice would Dr MJ Rowland-Warmann give? “Trust your people. They manage their own bills, so let them manage yours!”

You can buy a copy of Profit First by Mike Michalowicz at Amazon.

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