Executive Summary

“Never Split the Difference” by Chris Voss, a former FBI lead international kidnapping negotiator, fundamentally challenges traditional negotiation theories, particularly those advocating for rational problem-solving and compromise. Drawing from decades of high-stakes experience, Voss argues that effective negotiation is deeply rooted in human psychology, emotional intelligence, and active listening. The book introduces a system of “tactical empathy” and practical psychological tactics designed to gain the upper hand by understanding and influencing the emotional, often irrational, drivers of counterparts. These methods, proven in life-or-death scenarios, are presented as universally applicable to business, career, and personal interactions, emphasizing that “Life is negotiation.”

Main Themes and Key Concepts

1. The Primacy of Emotion Over Logic

Traditional negotiation, often taught in business schools, emphasizes rational problem-solving and logical arguments. Voss, however, vehemently argues that this approach is flawed because humans are fundamentally “crazy, irrational, impulsive, emotionally driven animals.”

• Rejection of Pure Rationality: Voss contends that theories built on “intellectual power, logic, authoritative acronyms like BATNA and ZOPA, rational notions of value, and a moral concept of what was fair and what was not” are based on a “false edifice of rationality.”
• System 1 vs. System 2 Thinking: Drawing on Daniel Kahneman’s work, Voss highlights that our “animal mind” (System 1) is “fast, instinctive, and emotional” and “far more influential” than our “slow, deliberative, and logical” mind (System 2). To influence System 2 rationality, one must first affect System 1 feelings.
• Emotional Intelligence is Key: The FBI’s shift in negotiation strategy, after failures like Ruby Ridge and Waco, moved from problem-solving to focusing “on the animal, emotional, and irrational.” This made “Emotions and emotional intelligence… central to effective negotiation, not things to be overcome.”

2. Tactical Empathy: Listening as a Martial Art

Tactical Empathy is the cornerstone of Voss’s approach, described as “listening as a martial art.” It’s not about agreement or sympathy, but about profound understanding.

• Definition: Tactical empathy is “the ability to recognize the perspective of a counterpart, and the vocalization of that recognition.” It involves “understanding the feelings and mindset of another in the moment and also hearing what is behind those feelings so you increase your influence in all the moments that follow.”
• Core Premise: “It all starts with the universally applicable premise that people want to be understood and accepted. Listening is the cheapest, yet most effective concession we can make to get there.”
• Benefits of Feeling Understood: Psychotherapy research shows that “when individuals feel listened to, they tend to listen to themselves more carefully and to openly evaluate and clarify their own thoughts and feelings. In addition, they tend to become less defensive and oppositional and more willing to listen to other points of view.”
  

3. Key Tactical Empathy Tools

Voss introduces several practical techniques to implement tactical empathy:

• Mirroring: This is “the art of insinuating similarity.” It involves repeating the “last three words (or the critical one to three words) of what someone has just said.” This triggers a neurobehavioral instinct to copy, establishing rapport and encouraging the counterpart to elaborate, revealing more information.
• Example: In a bank robbery, Voss mirrored a kidnapper’s statement: “We chased your driver away?” which led the kidnapper to “vomit information.”
• Labeling: Giving a name to a counterpart’s emotions or perceptions. It almost always begins with “It seems like…”, “It sounds like…”, or “It looks like…”.
• Purpose: Labeling “disrupts its raw intensity” by applying “rational words to a fear.” It’s used to “neutralize the negative, reinforce the positive.”
• Accusation Audit: A proactive form of labeling where you “list every terrible thing your counterpart could say about you” and say them first. This disarms negative dynamics and can often lead the other person to deny the accusation, thus revealing common ground.
• Example: In a Harlem standoff, Voss repeatedly stated, “It looks like you don’t want to come out. It seems like you worry that if you open the door, we’ll come in with guns blazing. It looks like you don’t want to go back to jail,” leading to the fugitives’ surrender.

4. Mastering “No” and Striving for “That’s Right”

Voss radically redefines the significance of “Yes” and “No” in negotiation.

• “No” as an Asset: Contrary to common belief, “No” is “pure gold” because “it provides a temporary oasis of control” for the speaker. It often means “I am not yet ready to agree,” “I do not understand,” or “I need more information,” rather than outright rejection.
• Strategy: “Great negotiators seek ‘No’ because they know that’s often when the real negotiation begins.” It offers safety and control, making the environment more collaborative.
• Example: Asking “Is now a bad time to talk?” is preferable to “Do you have a few minutes to talk?” because it offers the counterpart an easy “No” or full focus.
• Beware of “Yes”: There are three types of “Yes”: Counterfeit (a polite dodge), Confirmation (a simple affirmation without commitment), and Commitment (the real deal). Most people give counterfeit “yes” to end an uncomfortable conversation.
• “That’s Right” as the Breakthrough: The “sweetest two words in any negotiation are actually ‘That’s right.'” This signifies that the counterpart feels truly understood, leading to a subtle epiphany and genuine behavioral change.
• How to Achieve: A good summary, combining paraphrasing and labeling, is the best way to trigger a “That’s right.”
• Contrast with “You’re Right”: “You’re right” is often a dismissive phrase meaning “just shut up and go away,” leading to no real change.

5. Bending Reality and Leveraging Cognitive Biases

Voss advocates for understanding and using predictable human irrationality, particularly cognitive biases like loss aversion and framing effects, to one’s advantage.

• Don’t Compromise: “Compromise is often a ‘bad deal'” because it satisfies neither side and can lead to absurd outcomes. “No deal is better than a bad deal.”
• Deadlines as Allies: Deadlines are “the bogeymen of negotiation, almost exclusively self-inflicted figments of our imagination.” They often make people rush into bad deals. By revealing your deadline, you reduce impasse risk and speed up concessions from the other side. Understanding the counterpart’s hidden deadlines (e.g., kidnappers wanting “party money” by Friday) provides significant leverage.
• “Fair” is a Weapon: The word “Fair” is “a tremendously powerful word that you need to use with care.” It’s often used defensively (“We just want what’s fair”) or manipulatively (“We’ve given you a fair offer”).
• Counter-Tactic: If accused of unfairness, ask, “Okay, I apologize. Let’s stop everything and go back to where I started treating you unfairly and we’ll fix it.” To preempt, state early, “I want you to feel like you are being treated fairly at all times. So please stop me at any time if you feel I’m being unfair, and we’ll address it.”
• Anchoring Emotions: Emotionally “anchor them by saying how bad it will be” (an accusation audit) to prepare them for a loss, then make your offer seem reasonable.
• Extreme Anchors & Ranges: When talking numbers, letting the other side anchor first can be beneficial. However, if you must anchor, set an extreme anchor to shift their perception or use a range where the low end is your desired price (“bolstering range”).
• Odd Numbers: Use “precise, nonround numbers like, say, $37,893 rather than $38,000” to give offers “credibility and weight.”
• Loss Aversion: “People will take more risks to avoid a loss than to achieve gains.” To gain leverage, “persuade them that they have something concrete to lose if the deal falls through.”

6. Calibrated Questions: The Illusion of Control

Calibrated questions are open-ended questions designed to subtly guide the conversation and encourage the counterpart to develop your desired solution.

• Mechanism: They “remove aggression from conversations by acknowledging the other side openly, without resistance.” They start with “What” or “How” (and sometimes “Why” strategically).
• “How am I supposed to do that?”: This is a powerful, gentle “No” that invites collaboration and forces the other side to “expend their energy on devising a solution” to your problem.
• “Art of letting someone else have your way”: These questions give the “illusion of control” to the counterpart while you “are framing the conversation.”
• Guaranteeing Execution: Asking “How will we know we’re on track?” and “How will we address things if we find we’re off track?” forces the counterpart to articulate implementation in their own words, making them more invested in the solution.
• Red Flags: Beware of “You’re right” and “I’ll try,” as they often signal a lack of buy-in or an intention to fail.

7. Finding Black Swans: Uncovering Unknown Unknowns

Black Swans are “hidden and unexpected pieces of information—those unknown unknowns—whose unearthing has game-changing effects on a negotiation dynamic.”

• Definition: Unlike “known knowns” (what we know) and “known unknowns” (what we know we don’t know), Black Swans are “pieces of information we’ve never imagined but that would be game changing if uncovered.”
• Leverage Multipliers: Black Swans provide the most potent forms of leverage:
• Positive Leverage: The ability to give (or withhold) something the counterpart wants.
• Negative Leverage: The ability to make the counterpart suffer (based on threats, but used carefully and subtly, e.g., “It seems like you strongly value the fact that you’ve always paid on time”).
• Normative Leverage: Using the other party’s “norms and standards to advance your position” by showing inconsistencies between their beliefs and actions.
• “Know Their Religion”: Delving into a counterpart’s “worldview, their reason for being, their religion” (their deeply held beliefs, values, and motivations). This provides normative leverage.
• Example: In the Dwight Watson standoff, uncovering his identity as a “devout Christian” allowed negotiators to use the concept of “the Dawn of the Third Day” to facilitate his surrender.
• Overcoming “They’re Crazy!”: What seems irrational is usually a clue. Counterparts might be “ill-informed,” “constrained” by unstated factors (e.g., internal politics), or have “other interests” (hidden agendas).
• Method: Get face time, observe unguarded moments (before/after meetings, during interruptions), and relentlessly ask questions to uncover these underlying realities.

8. The Negotiation One Sheet: Preparation for Agility

Voss proposes a simplified preparation tool, the “Negotiation One Sheet,” contrasting it with traditional methods that can lead to rigidity.

• Rejection of BATNA as a Primary Focus: While BATNA (Best Alternative To a Negotiated Agreement) is useful, obsessing over it “tricks negotiators into aiming low” and “sets the upper limit of what you will ask for.”
• Focus on High-End Goal: Instead, set an “optimistic but reasonable goal and define it clearly,” writing it down and discussing it to commit.
• Dynamic Preparation: The one-sheet includes sections for:
• Goal: Best-case scenario (optimistic but realistic).
• Summary: Known facts leading to the negotiation.
• Labels/Accusation Audit: Anticipated negative perceptions or accusations from the counterpart.
• Calibrated Questions: To reveal value, identify deal-killers, and influence behind-the-table players.
• Noncash Offers: Ideas for valuable non-monetary concessions.

Most Important Ideas/Facts

• Negotiation is primarily emotional, not rational. All decisions are ultimately governed by emotion (Kahneman’s System 1).
• Tactical Empathy is the core skill. It’s about profoundly understanding, not necessarily agreeing with, the other side.
• “That’s right” is the ultimate goal, not “Yes.” “That’s right” signals genuine understanding and buy-in, while “Yes” can be a counterfeit or confirmation without commitment.
• “No” is not a failure; it’s the start of the negotiation. It provides safety and control for the counterpart, opening up the dialogue.
• Calibrated Questions (starting with “How” or “What”) give the illusion of control. They subtly guide the counterpart to solve your problems, leading to solutions they “own.” “How am I supposed to do that?” is a powerful, gentle “No.”
• Compromise often leads to bad deals. Never “split the difference.”
• Loss aversion is a powerful motivator. People will take greater risks to avoid a loss than to achieve an equal gain.
• Black Swans are “unknown unknowns” that are leverage multipliers. Uncovering these hidden pieces of information—often related to underlying motivations, constraints, or “religion” (worldview)—can be game-changing.
• “Fair” is a highly emotional and manipulative word. Use it with caution or strategically to disarm or set boundaries.
• Preparation should focus on anticipating emotional responses and crafting flexible questions, rather than rigid scripts or aiming low (avoiding BATNA as a primary focus).
• It’s crucial to influence the “behind the table” players. Few negotiations are solo; many hidden individuals can be deal makers or deal killers.

This briefing highlights the transformative power of a psychological and empathetic approach to negotiation, emphasizing that by understanding and addressing the emotional landscape, one can achieve superior and lasting outcomes in any interaction.

Contact Factoring Specialist, Chris Lehnes

A Study Guide to Chris Voss’s Never Split the Difference

This study guide is designed to help you review and deepen your understanding of Chris Voss’s negotiation principles as outlined in Never Split the Difference.

I. Quiz: Short Answer Questions

Answer each question in 2-3 sentences.

1. What is the core difference between the FBI’s approach to negotiation and the traditional Harvard Law School approach, as described by Voss?
2. Explain the “Late-Night FM DJ Voice” and its primary purpose in a negotiation.
3. How does Voss define “Tactical Empathy” and what is its goal?
4. Why does Voss advocate for striving for “That’s right” instead of “Yes” in a negotiation?
5. Describe the concept of an “Accusation Audit” and why it is an effective negotiation tactic.
6. According to Voss, why is “No” often considered “pure gold” in a negotiation, rather than a negative outcome?
7. What are “Calibrated Questions” and how do they create the “illusion of control” for the counterpart?
8. Explain the “Rule of Three” and how it helps a negotiator guarantee execution.
9. What is an “extreme anchor” in the context of bargaining, and what psychological effect does it aim to achieve?
10. Define a “Black Swan” in negotiation and explain its significance.

II. Answer Key

1. What is the core difference between the FBI’s approach to negotiation and the traditional Harvard Law School approach, as described by Voss? The FBI’s approach, rooted in experiential learning from high-stakes crisis situations, emphasizes emotional intelligence, psychology, and crisis intervention to understand and influence irrational human behavior. In contrast, the traditional Harvard approach, exemplified by “Getting to Yes,” focuses on rational problem-solving, logic, and intellectual power to achieve mutually beneficial outcomes.
2. Explain the “Late-Night FM DJ Voice” and its primary purpose in a negotiation. The “Late-Night FM DJ Voice” is characterized by a deep, soft, slow, and reassuring tone, often with a downward inflection. Its primary purpose is to convey calm, control, and authority without triggering defensiveness, thereby making the counterpart feel safe and encouraging them to open up.
3. How does Voss define “Tactical Empathy” and what is its goal? Tactical Empathy is defined as the ability to recognize and vocalize a counterpart’s perspective and underlying feelings in the moment, and to understand what drives those feelings. Its goal is to increase influence by acknowledging emotions, creating trust, and guiding the conversation toward a desired outcome.
4. Why does Voss advocate for striving for “That’s right” instead of “Yes” in a negotiation? Voss argues that “Yes” can often be superficial (“Counterfeit Yes” or “Confirmation Yes”) and doesn’t guarantee genuine agreement or action. “That’s right,” however, indicates that the counterpart feels truly understood and has assessed and confirmed the negotiator’s summary of their world, leading to a deeper level of buy-in and a breakthrough in the negotiation.
5. Describe the concept of an “Accusation Audit” and why it is an effective negotiation tactic. An “Accusation Audit” involves proactively listing and vocalizing all the negative things the counterpart could say about the negotiator or their position before the counterpart can voice them. This tactic disarms the counterpart by addressing their fears and potential criticisms head-on, reducing defensiveness and fostering a sense of empathy and trust.
6. According to Voss, why is “No” often considered “pure gold” in a negotiation, rather than a negative outcome? “No” is “pure gold” because it gives the speaker a feeling of safety, security, and control, allowing them to define their boundaries and true desires. It’s often a temporary decision to maintain the status quo, opening the door for clarification, reevaluation, and further negotiation, rather than ending the discussion.
7. What are “Calibrated Questions” and how do they create the “illusion of control” for the counterpart? Calibrated Questions are open-ended questions, typically starting with “How” or “What” (avoiding “Why”), that force the counterpart to think deeply about the problem and articulate solutions. They create the “illusion of control” because the counterpart feels they are providing the answers and driving the conversation, while the negotiator is subtly framing the discussion and guiding them toward the desired outcome.
8. Explain the “Rule of Three” and how it helps a negotiator guarantee execution. The “Rule of Three” is a tactic to ensure genuine commitment by getting the counterpart to agree to the same thing three different ways within the same conversation. This helps to uncover any hidden objections or insincerity, as it’s difficult to repeatedly lie or fake conviction, thereby increasing the likelihood of successful implementation.
9. What is an “extreme anchor” in the context of bargaining, and what psychological effect does it aim to achieve? An “extreme anchor” is a deliberately high or low initial offer made at the beginning of a monetary negotiation. Its psychological effect is to “bend the reality” of the counterpart, unconsciously adjusting their expectations and moving their perceived range of possible outcomes closer to the extreme anchor, making subsequent, more reasonable offers seem highly attractive.
10. Define a “Black Swan” in negotiation and explain its significance. A “Black Swan” is an unknown unknown—a piece of game-changing information that was previously unimagined or thought impossible, and whose discovery fundamentally alters the negotiation dynamic. Its significance lies in its power to unlock breakthroughs and provide immense leverage, transforming seemingly intractable situations.

III. Essay Format Questions (No Answers Provided)

1. Compare and contrast the influence of emotional intelligence and logical reasoning in negotiation, drawing on specific examples or theories presented in the text to support your argument.
2. Analyze how the different bargaining styles (Accommodator, Assertive, Analyst) impact negotiation dynamics and what strategies Voss suggests for effectively dealing with each type.
3. Discuss the critical role of “listening as a martial art” and “Tactical Empathy” in information gathering and relationship building. How do these concepts challenge traditional notions of negotiation?
4. Examine the psychological significance of “Yes” and “No” in negotiation according to Voss. How does understanding these words, particularly the power of “No,” transform a negotiator’s approach and potential outcomes?
5. Explain the concept of “bending their reality” through various tactics like anchoring, loss aversion, and the strategic use of numbers. How does this approach leverage human irrationality to achieve desired results?

IV. Glossary of Key Terms

• Accusation Audit: A proactive negotiation tactic where you list and verbalize all the negative things your counterpart could say about you or your position to disarm them and build trust.
• Accommodator (Bargaining Style): A negotiator type primarily focused on building and maintaining relationships, often prioritizing agreement and harmonious exchange of information over concrete outcomes.
• Ackerman Model: A structured, six-step offer-counteroffer bargaining system (65%, 85%, 95%, 100% of target price) that incorporates psychological tactics like extreme anchors, reciprocity, and diminishing increments to achieve a desired price.
• Active Listening: A core component of tactical empathy, involving intense focus on the other person, observing verbal, paraverbal, and nonverbal cues, and demonstrating a sincere desire to understand their perspective.
• Analyst (Bargaining Style): A methodical, diligent negotiator type focused on minimizing mistakes, thorough preparation, and data. They are typically reserved, less emotional, and hypersensitive to reciprocity.
• Anchoring: The psychological tendency to rely heavily on the first piece of information offered (the “anchor”) when making decisions. In negotiation, it refers to setting a strong initial offer or statement to influence the perceived value of a deal.
• Assertive (Bargaining Style): A negotiator type driven by winning and achieving results quickly. They are direct, candid, and often aggressive in their communication, focusing on their own goals rather than primarily on relationships.
• BATNA (Best Alternative To a Negotiated Agreement): (Coined by Fisher and Ury) Your best option if a negotiation fails. Voss critiques its overuse as it can lead to aiming low by becoming the negotiator’s psychological target.
• Behavioral Change Stairway Model (BCSM): A five-stage model (active listening, empathy, rapport, influence, and behavioral change) developed by the FBI’s Crisis Negotiation Unit to guide negotiators from understanding to influencing behavior.
• Black Swan: An “unknown unknown”—a powerful, unexpected piece of information or event that, if discovered, fundamentally changes the entire negotiation dynamic and provides significant leverage.
• Calibrated Questions: Open-ended questions, usually starting with “How” or “What” (and generally avoiding “Why”), designed to make the counterpart think and articulate solutions, giving them the “illusion of control” while subtly guiding the conversation.
• Certainty Effect: A concept from Prospect Theory stating that people are drawn to sure things over probabilities, even when the probability is a statistically better choice.
• Commitment “Yes”: A genuine agreement from the counterpart that leads to action and a signed deal.
• Confirmation “Yes”: A simple, reflexive affirmation in response to a black-or-white question, without a promise of action.
• Counterfeit “Yes”: A “yes” given by the counterpart who intends to say “no” but uses “yes” as an easier escape route or to gather more information.
• “Chris Discount”: A personal tactic where the negotiator uses their own first name in a friendly, humanizing way to establish rapport and potentially secure a small concession.
• Deadlines: Time constraints that can create pressure and anxiety in negotiations. Voss argues many are arbitrary and negotiable, and revealing your deadline can lead to better deals.
• Extreme Anchor: A deliberately high or low initial offer intended to psychologically shift the counterpart’s perception of value and range of possible agreement.
• “Fair”: A highly emotional and often manipulative word in negotiation. Voss advises caution when using or encountering it, suggesting strategies to either preempt accusations of unfairness or deflect them.
• “Forced Empathy”: A dynamic created by calibrated “How” questions, where the counterpart is implicitly made to consider and understand the negotiator’s situation, often leading them to offer solutions.
• Framing Effect: A cognitive bias where people respond differently to the same choice depending on how it is presented or “framed.”
• “How Am I Supposed To Do That?”: A powerful calibrated question used as a gentle way to say “No” and force the counterpart to consider the negotiator’s constraints and propose solutions.
• “I” Messages: Statements using the first-person singular pronoun (“I feel X when you Y because Z”) to set boundaries or express a viewpoint without escalating confrontation.
• Isopraxism (Mirroring): The unconscious or conscious imitation of another person’s speech patterns, body language, vocabulary, tempo, or tone of voice. Consciously used as a negotiation tactic to build rapport and encourage elaboration.
• Labeling: A tactical empathy technique where you verbalize the emotions or assumptions you perceive in your counterpart (“It sounds like…”, “It seems like…”, “It looks like…”). This diffuses negative emotions and reinforces positive ones.
• Late-Night FM DJ Voice: A deep, soft, slow, and reassuring vocal tone used to project calm, control, and authority, making the counterpart feel safe and open.
• Loss Aversion: A psychological principle (from Prospect Theory) where people are statistically more motivated to avoid a loss than to achieve an equal gain. Effective negotiators leverage this by framing proposals in terms of what the counterpart stands to lose.
• Mirroring: The act of repeating the last one to three critical words your counterpart has just said to encourage them to elaborate and build rapport.
• Negative Leverage: The ability of a negotiator to make their counterpart suffer, often based on threats of negative consequences. Used with extreme caution.
• Negotiation One Sheet: A concise preparatory document used by negotiators to outline their goal, summarize known facts, prepare labels/accusation audits, formulate calibrated questions, and list noncash offers.
• “No”: Voss argues that “No” is a powerful word in negotiation, signifying autonomy, safety, and a desire to maintain the status quo. It often marks the beginning of true negotiation, clarifying boundaries and paving the way for creative solutions.
• Noncash Offers: Non-monetary items or terms that can be valuable to one party in a negotiation, offering a way to create value without directly adjusting the price.
• Nonround Numbers: Specific, precise numbers (e.g., $37,263) used in offers to convey thoughtfulness, credibility, and firmness, in contrast to rounded numbers (e.g., $38,000) which can feel like temporary placeholders.
• Normative Leverage: Using the other party’s norms, standards, or moral framework to advance your position, highlighting inconsistencies between their beliefs and actions.
• “Paradox of Power”: The phenomenon where the harder one pushes in a negotiation, the more likely they are to be met with resistance from the other party.
• Paraphrase: Restating what the other person has said in your own words to demonstrate understanding and clarify meaning.
• Pinocchio Effect: A linguistic indicator of deception, where liars tend to use more words and more third-person pronouns to distance themselves from the lie, and often more complex sentences.
• Positive Leverage: The ability of a negotiator to provide or withhold things that their counterpart wants.
• Positive/Playful Voice: The default voice tone recommended for negotiators, characterized by an easygoing, good-natured, and encouraging attitude, often accompanied by a smile, to promote collaboration and mental agility.
• Prospect Theory: A theory by Kahneman and Tversky describing how people choose between options involving risk, highlighting biases like Loss Aversion and the Certainty Effect.
• “Religion” (of your counterpart): A metaphor for your counterpart’s worldview, their reason for being, their core beliefs, values, and what truly matters to them. Understanding this helps uncover Black Swans and build influence.
• Rule of Three: A technique to ensure genuine commitment by getting the counterpart to affirm an agreement or idea three different ways in a conversation (e.g., “Yes,” “That’s right,” and a “How” question about implementation).
• 7-38-55 Percent Rule: Albert Mehrabian’s rule stating that in communication, 7% of a message is conveyed by words, 38% by tone of voice, and 55% by body language. It emphasizes the importance of nonverbal cues.
• “Sixty Seconds or She Dies”: An introductory exercise Voss uses in his negotiation classes to highlight the urgency and difficulty of high-stakes negotiations and the need for learned skills.
• Similarity Principle: The psychological tendency for people to trust and like those they perceive as similar or familiar to themselves. Negotiators can leverage this by finding common ground.
• “Slow. It. Down.”: A crucial negotiation principle advocating for deliberate pacing to calm the situation, allow for thorough listening, and prevent impulsive decisions.
• Strategic Umbrage: A well-timed expression of (real, controlled) anger directed at a proposal (not the person) to make a counterpart realize their offer is unreasonable and shift their perspective.
• Summarize: A powerful active listening technique combining paraphrasing and labeling to rearticulate the meaning of what was said and acknowledge the underlying emotions.
• System 1 Thinking: (From Kahneman’s Thinking, Fast and Slow) Our fast, instinctive, and emotional thought process.
• System 2 Thinking: (From Kahneman’s Thinking, Fast and Slow) Our slow, deliberative, and logical thought process. Voss argues System 1 often guides System 2.
• Tactical Empathy: The ability to understand and verbalize the feelings and mindset of another person in the moment, and to hear what is behind those feelings, to increase influence. It’s empathy as a deliberate tool.
• “That’s Right”: A powerful affirmation from the counterpart indicating that they feel truly understood and have embraced the negotiator’s summary of their perspective, signifying a breakthrough in the negotiation.
• Ultimatum Game: A game theory experiment demonstrating human irrationality and the powerful role of perceived fairness in decision-making, where responders often reject offers they deem unfair, even if it means getting nothing.
• Unconditional Positive Regard: A concept from Carl Rogers, suggesting that real change occurs when a person feels completely accepted and understood, without judgment or conditions. In negotiation, it fosters trust and openness.
• “Unbelief”: (From Kevin Dutton) Active resistance and complete rejection of what the other side is saying. The goal in negotiation is to suspend this unbelief to open the path to persuasion.
• “Wimp-Win” Mentality: A negotiation mindset where individuals set modest goals to protect their self-esteem, leading to easily claimed victories but ultimately mediocre outcomes.
• “You’re Right”: An affirmation from the counterpart that Voss identifies as generally ineffective, often used as a polite way to dismiss or shut down the negotiator without genuine agreement or commitment to action.
• ZOPA (Zone of Possible Agreement): (Coined by Fisher and Ury) The overlap between the buyer’s and seller’s acceptable price ranges in a negotiation. Voss downplays its importance in real-world “bare-knuckle bargaining.”

Executive Summary

“Profit First” by Mike Michalowicz introduces a revolutionary approach to business financial management that flips the traditional accounting formula. Instead of the common “Sales – Expenses = Profit,” the “Profit First” formula is “Sales – Profit = Expenses.” This system leverages human behavioral tendencies, rather than fighting them, to ensure businesses are profitable from the moment of their next deposit. It emphasizes a “small plate” approach to managing money, creating separate bank accounts for different purposes (Profit, Owner’s Pay, Taxes, Operating Expenses) and allocating funds in predetermined percentages, with profit being taken first. The book argues that many businesses, even seemingly successful ones, operate in a “check-to-check” and “panic-to-panic” cycle due to a sole focus on revenue growth and the inherent flaw of GAAP (Generally Accepted Accounting Principles) when it comes to human behavior. “Profit First” aims to empower entrepreneurs to achieve permanent financial health, reduce debt, and live a life where their business serves them, not the other way around.

II. Main Themes and Core Principles

A. The Flawed Traditional Accounting Formula and its Impact

• Traditional Formula: The prevalent business financial management approach, “Sales – Expenses = Profit,” leads entrepreneurs to treat profit as an afterthought or “leftovers.”
• “Simply put, the Profit First system flips the accounting formula. To date, entrepreneurs, CEOS, freelancers, everyone in nearly every type of business has been using the ‘sell, pay expenses, and see what’s left over’ method of profit creation.”
• This often results in businesses barely surviving, accumulating debt, and never reaching true profitability, regardless of their revenue size.
• “Most entrepreneurs are just covering their monthly nut (or worse) and accumulating massive debt. We think bigger is better, but so often all we get with a bigger business are bigger problems.”
• GAAP’s Misalignment with Human Behavior: While logically sound, GAAP (Generally Accepted Accounting Principles) goes against human nature by encouraging a focus on sales and expenses first.
• “Logically, GAAP makes complete sense… But humans aren’t logical… Just because GAAP makes logical sense doesn’t mean it makes ‘human sense.’ GAAP both supersedes our natural behavior and makes us believe bigger is better.”
• This leads to spending whatever is available and justifying all expenses, often in pursuit of growth without concern for health.
• “No matter how much income we generate, we will always find a way to spend it—all of it. And we have good reasons for all of our spending choices. Everything is justified. Everything is necessary.”

B. The “Profit First” Formula and its Behavioral Foundation

• The New Formula: “Sales – Profit = Expenses.” This simple reordering fundamentally changes behavior.
• “The math in both formulas is the same. Logically, nothing has changed. But Profit First speaks to human behavior—it accounts for the regular Joes of the world, like me, who have a tendency to spend all of whatever is available to us.”
• Leveraging Human Nature: The system works with natural tendencies, not against them, by creating the experience of having less cash available for expenses than actually exists.
• “The solution is not to try to change our ingrained habits, which is really hard to pull off and nearly impossible to sustain; but instead to change the structure around us and leverage those habits.”
• The “Small Plate” Metaphor: Inspired by diet psychology, the core idea is to allocate money into separate, smaller “plates” (bank accounts) for specific purposes, preventing overspending.
• “When we use smaller plates, we dish out smaller portions, thus eating fewer calories while continuing our natural human behavior of serving a full plate and eating all of what is served.”

C. The Four Core Principles of Profit First

1. Use Small Plates (Account Allocation): Immediately disperse incoming revenue into different bank accounts with predetermined percentages for:

• Profit Account: For owner’s profit distributions and cash reserves.
• Owner’s Pay Account: For consistent, realistic owner salaries.
• Tax Account: To reserve money for tax obligations.
• Operating Expenses Account: For all other business expenses.
• “When money comes into your main operating account, immediately disperse it into different accounts in predetermined percentages.”

1. Serve Sequentially (Prioritize Profit): Always move money to the Profit Account first, then Owner’s Pay, then Tax, and then whatever remains to Operating Expenses.

• “Always, always move money to your Profit Account first, then to your Owner Pay Account and then to your Tax Account, with what remains to expenses. Always in that order. No exceptions.”

1. Remove Temptation (Separate Bank Accounts): Keep Profit and Tax Accounts at a separate bank, making it difficult and inconvenient to “borrow” from them.

• “Move your Profit Account and other accounts out of arm’s reach. Make it really hard and painful to get to that money, thereby removing the temptation to ‘borrow’ (i.e., steal) from yourself.”

1. Enforce a Rhythm (Bi-weekly Allocations): Implement a consistent schedule (e.g., 10th and 25th of each month) for allocating funds and paying bills. This creates control and clarity over cash flow.

• “Do your payables twice a month (specifically, on the 10th and 25th). Don’t pay only when money is piled up in the account. Get into a rhythm of paying bills twice a month so you can see how cash accumulates and where the money really goes.”

D. The “Survival Trap” and the Illusion of Growth

• Crisis-Driven Decisions: The traditional revenue-focused approach often leads entrepreneurs to make short-term decisions that pull them away from their long-term vision.
• “The Survival Trap is not about driving toward our vision. It is all about taking action, any action, to get out of crisis.”
• “Bigger is Not Always Better”: Constant growth without financial health only creates “a bigger monster” with “bigger problems.”
• “Most business owners try to grow their way out of their problems, hinging salvation on the next big sale or customer or investor, but the result is simply a bigger monster.”
• All Revenue is Not Equal: Some revenue is highly profitable, while other revenue sources (e.g., bad clients, unprofitable offerings) can actively generate debt and pull a business down.
• “Never forget: All revenue is not the same. Some revenue costs you significantly more in time and money; some costs you less.”

E. Importance of Efficiency and Focused Operations

• Efficiency Drives Profit: True profitability comes from increasing efficiency, meaning achieving more results with less effort and cost.
• “If you want to increase profitability (and you’d better friggin’ want to do that), you must first build efficiencies.”
• This includes focusing on serving “great” clients with consistent needs using refined solutions, like McDonald’s focusing on a few core products.
• “The fewest things you can do repetitively to serve a consistent core customer need—this spells efficiency.”
• Firing Bad Clients: Unprofitable clients drain resources and dilute the profits generated by good clients. Eliminating them frees up time and money to clone ideal clients.
• “The top quartile generated 150% of a company’s profit… the bottom quartile, the one that generated 1% of the total revenue, resulted in a profit loss of 50%!”
• “Just One More Day” Game: A tactic to delay unnecessary spending, encouraging frugal behavior and fostering alternatives.
• “He challenges himself to go just one more day without the item. Every time he passes up an opportunity to buy whatever he needs, he gets pumped. He gets a high from going without for one more day.”

F. Debt Destruction and Lifestyle Management

• Debt Freeze and Snowball: Stop accumulating new debt immediately and systematically pay off existing debt, starting with the smallest, to build emotional momentum (following Dave Ramsey’s “Debt Snowball” principle).
• “You need to get your Debt Freeze on. And then destroy debt, once and for all.”
• “It is getting to tear up a statement—any statement, because it is fully paid off—that gives you a sense of momentum and gets you charged up to tackle the next one.”
• Quarterly Profit Distributions: Regularly celebrating profit (e.g., taking 50% of the Profit Account balance as a personal distribution quarterly) reinforces the positive habit and shows the business is serving the owner.
• “Your business is serving you, now. You are going to take a distribution check every quarter. Every ninety days, profit will be shared to you.”
• “Lock In Your Lifestyle”: Resist the urge to increase personal spending as income grows. Create a significant gap between earnings and expenditures to build wealth and achieve financial freedom.
• “You will not expand your lifestyle in response. You need to accumulate cash—lots of it—and that means no new cars, no brand-new furniture or crazy vacations. For the next five years, you will lock it in and live the lifestyle you are designing now so that all of your extra profit goes toward giving you that ultimate reward: financial freedom.”
• Personal Application: The Profit First principles extend to personal finance, promoting financial freedom and teaching children sound money management.

G. The Role of Accountability and Continuous Improvement

• Accountability Groups: Joining or forming “Profit Pods” or “Profit Accelerator Groups” is crucial for maintaining discipline and consistent implementation of the system.
• “The worst enemy of Profit First is you… This is why it is imperative that we join (or start) an accountability group… immediately.”
• These groups provide support, shared learning, and external pressure to stick to the plan.
• “The action of enforcing a plan or system with someone else ensures that you are more likely to do your part. You are accountable to the group, and therefore integral to the group, which means you are less likely to drop the ball.”
• Continuous Tweaking: The system is not static; entrepreneurs should constantly look for ways to improve efficiency, adjust allocation percentages (TAPs – Target Allocation Percentages), and refine their processes.
• The Power of Small Actions: Big transformations are the result of consistently applied small, repetitive actions.
• “Small wins lead to big wins.”
• “Momentum builds slowly but relentlessly. Small, repetitive, continuous actions, chained together, build momentous momentum.”

III. Key Facts and Ideas

• New Formula: Sales – Profit = Expenses.
• Core Accounts: Profit, Owner’s Pay, Tax, Operating Expenses.
• Allocation Rhythm: Twice a month (10th and 25th).
• No-Temptation Accounts: Profit and Tax accounts should be at a separate bank.
• Instant Assessment: A quick method to gauge financial health and identify “bleeds” (areas of overspending). Uses Target Allocation Percentages (TAPs) based on Real Revenue.
• “The Real Revenue number is a simple, fast way to put all companies on equal footing.” (Real Revenue = Total Revenue – Materials & Subcontractor costs).
• Expense Cuts: Aim to reduce operating expenses by at least 10% initially to cover initial profit allocations and build reserves.
• Debt Freeze: Immediately stop incurring new debt and implement a Debt Snowball to pay off existing debt.
• When paying down debt, 99% of quarterly profit distribution goes to debt, 1% to personal reward.
• Efficiency Goal: Double results with half the effort.
• Client Management: Focus on cloning “best clients” (those who pay on time, trust you, and buy profitable offerings) and firing “bad clients” (who drain resources and generate losses).
• Owner’s Pay: Should reflect what it would cost to hire a replacement for the work the owner actually does, not just a CEO title.
• “My business serves me; I do not serve my business. Paying yourself next to nothing for hard work is servitude.”
• Tax Account Naming: Change the Tax Account name to “The Government’s Money” to mentally deter “borrowing.”
• The Vault: A low-risk, interest-bearing account for short-term emergencies and eventually a source of income, with clear rules for withdrawal.
• Drip Account: For managing large, upfront payments for services rendered over time, ensuring consistent monthly income recognition.
• Employee Formula: Real Revenue should be $150,000 to $250,000 per full-time employee. For tech businesses, Real Revenue should be 2.5x total labor cost; for “cheap labor” fields, 4x total labor cost.
• Financial Freedom: Achieved when accumulated money yields enough interest/returns to support one’s lifestyle.
• Loss Aversion & Endowment Effect: Psychological principles explaining why people cling to things they possess and resist letting go, even when financially detrimental. The system encourages ripping off the “Band-Aid” quickly.
• Accountability: Join or form Profit Accelerator Groups (PAGs) or Profit Pods to ensure consistent application of the system.
• “The fastest way to screw up Profit First is to start sliding back into old belief systems that got you into trouble in the first place.”
• Bring printed Profit Account statements to meetings to ensure honesty.

Contact Factoring Specialist, Chris Lehnes

Profit First: A Comprehensive Study Guide

This study guide is designed to help you review and solidify your understanding of the “Profit First” system as presented in Mike Michalowicz’s book.

Quiz: Short Answer Questions

Answer each question in 2-3 sentences.

1. What is the core difference between the traditional accounting formula and the Profit First formula? The traditional formula is Sales – Expenses = Profit, making profit an afterthought. The Profit First formula, Sales – Profit = Expenses, prioritizes profit by allocating it first, forcing businesses to operate on the remaining funds.
2. Explain the “Recency Effect” and how it applies to an entrepreneur’s financial decisions. The Recency Effect is a psychological phenomenon where individuals place disproportionate significance on their most recent experiences. For entrepreneurs, this means making financial decisions based on their current bank balance, leading to cycles of overspending during good times and panic during lean times.
3. How does the author relate the concept of “small plates” in dieting to the Profit First system? The “small plates” concept suggests that using smaller plates leads to smaller portions and, consequently, less consumption, without requiring a change in the habit of cleaning one’s plate. In Profit First, this translates to immediately dispersing revenue into various smaller accounts, forcing the business to operate on a reduced “plate” of funds for expenses.
4. What is the “Survival Trap” and why is “just selling” a dangerous part of it? The Survival Trap is a cycle where businesses focus solely on generating revenue to escape immediate crises, often taking on any sale regardless of its long-term fit or profitability. “Just selling” is dangerous because it can lead to increased expenses, inefficient operations, and taking on bad clients, moving the business further from its vision rather than towards it.
5. Describe the author’s “piggy bank moment” and its significance in his development of the Profit First system. The author’s “piggy bank moment” occurred when his young daughter offered her savings to help him after he lost his fortune. This humbling experience taught him the importance of saving money and securing it from oneself, highlighting that cash is king and true financial security comes from disciplined saving, not just making money.
6. What are Target Allocation Percentages (TAPs) and why are they important in Profit First? TAPs are the predetermined percentages of income that are allocated to different accounts (Profit, Owner’s Pay, Tax, Operating Expenses) in the Profit First system. They are important because they provide a structured goal for how money should be distributed, helping businesses move towards financial health and efficiency over time.
7. Explain the “10/25 Rhythm” in Profit First and its benefits. The 10/25 Rhythm involves paying bills and allocating funds twice a month, specifically on the 10th and 25th. This rhythm helps entrepreneurs gain control over their cash flow, identify spending patterns, and manage bills on time, reducing reactive financial decisions and fostering a more controlled, predictable financial flow.
8. How does the Debt Freeze strategy combine with the Debt Snowball method to address business debt? The Debt Freeze involves aggressively cutting unnecessary expenses to operate at a leaner level, preventing new debt accumulation. This is combined with the Debt Snowball, which prioritizes paying off the smallest debt first to build emotional momentum, then using the freed-up funds to tackle the next smallest debt, systematically eradicating all debt.
9. What is the “Just One More Day” game and what psychological principle does it leverage? The “Just One More Day” game is a technique where an individual challenges themselves to delay a purchase for one more day, finding joy in saving money. It leverages the psychological principle of deriving pleasure from saving rather than spending, helping to foster frugality and uncover alternatives to unnecessary expenses.
10. According to the author, why is joining an accountability group (like a PAG or Profit Pod) crucial for sticking with Profit First? Accountability groups are crucial because human willpower can falter, and internal justifications for straying from the system are common. These groups provide external support, shared commitment, and a rhythm for consistent action, making it easier to maintain discipline, share best practices, and overcome challenges in implementing Profit First.

Answer Key

1. Core Difference: The traditional formula (Sales – Expenses = Profit) treats profit as what’s left over, often leading to an empty plate. The Profit First formula (Sales – Profit = Expenses) flips this, ensuring profit is taken first, forcing the business to operate efficiently on the remaining funds.
2. Recency Effect: The Recency Effect causes people to make decisions based on their most recent experiences, like a high bank balance. For entrepreneurs, this can lead to overspending when funds are plentiful, only to panic and scramble for sales when the balance drops, perpetuating a check-to-check cycle.
3. “Small Plates” Analogy: In dieting, small plates encourage smaller portions without changing the habit of cleaning the plate. In Profit First, this translates to immediately allocating portions of incoming revenue to different accounts, creating a “smaller plate” for operating expenses and forcing more efficient spending.
4. Survival Trap: The Survival Trap is a cycle where businesses prioritize “just selling” to escape immediate crises. This is dangerous because it often leads to taking on unprofitable clients, expanding services unsustainably, and incurring unchecked expenses, ultimately moving the business further from true profitability.
5. “Piggy Bank Moment”: The author’s “piggy bank moment” was when his daughter offered her savings to him after he lost his fortune. This experience was a humbling wake-up call, emphasizing that true financial security comes from saving and protecting money, leading him to develop a system that prioritized profit and disciplined allocation.
6. Target Allocation Percentages (TAPs): TAPs are the target percentages of Real Revenue allocated to different accounts (Profit, Owner’s Pay, Tax, Operating Expenses) in the Profit First system. They are essential as they provide a clear roadmap and measurable goals for how a business should distribute its income to achieve and maintain financial health.
7. 10/25 Rhythm: The 10/25 Rhythm is the practice of allocating funds and paying bills twice a month, on the 10th and 25th. This routine fosters consistent cash flow management, reduces financial anxiety by providing regular check-ins, and helps identify spending patterns and unnecessary expenses.
8. Debt Freeze & Debt Snowball: The Debt Freeze involves aggressively cutting all non-essential expenses and stopping new debt accumulation. The Debt Snowball, then, focuses on paying off the smallest debt first to build emotional momentum, subsequently rolling those payments into the next smallest debt until all are eliminated.
9. “Just One More Day” Game: This game involves intentionally delaying a purchase for “just one more day” to cultivate a sense of pleasure from saving. It leverages the emotional satisfaction of frugality, often revealing that the item wasn’t truly necessary or leading to the discovery of cheaper alternatives.
10. Accountability Groups: Accountability groups are crucial for Profit First because human nature often leads to self-sabotage and backsliding on financial discipline. A group provides external motivation, shared commitment, and a platform for discussing challenges and celebrating wins, helping individuals consistently adhere to the system.

Essay Format Questions

1. Analyze the psychological underpinnings of the Profit First system, specifically discussing how it leverages human behavioral traits like the Recency Effect, Loss Aversion, and the desire for instant gratification, rather than relying solely on logical accounting principles.
2. Compare and contrast the author’s personal journey from being a “King Midas” with a focus on revenue to a proponent of “Profit First.” What key lessons did he learn, and how did these experiences shape the core principles and practical advice offered in the book?
3. Discuss the concept of “efficiency” as presented in “Profit First,” including its relationship to profitability and the author’s challenge to “get two times the results with half the effort.” Provide examples from the text to illustrate how businesses can achieve this, both by eliminating “bad clients” and “cloning good ones,” and by making operational changes.
4. Evaluate the role of debt in the entrepreneurial journey according to “Profit First.” Explain how the “Debt Freeze” and “Debt Snowball” strategies, combined with the continuous application of Profit First, offer a permanent solution to debt rather than a temporary fix.
5. Beyond business, how does the “Profit First Lifestyle” extend the system’s principles to personal finance and family life? Discuss the strategies for personal financial freedom, including managing income, savings, and teaching financial literacy to children, and consider the underlying philosophy that connects business and personal financial health.

Glossary of Key Terms

• 10/25 Rhythm: A key operating rhythm in Profit First where a business allocates funds and pays bills twice a month, on the 10th and 25th.
• Accountability Group (PAG/Profit Pod): A group of entrepreneurs who meet regularly to provide mutual support, share best practices, and hold each other accountable to the Profit First system.
• Analysis Paralysis: The state of over-analyzing a situation or problem so that a decision or action is never taken, crippling progress.
• Angel of Death: A term used by the author to describe his failed investments, where he unknowingly caused the downfall of the businesses he invested in due to his arrogance and poor financial management.
• Assets: In the context of “Profit First,” things that bring more efficiency to a business by allowing for more results at a lower cost per result.
• Bank Balance Accounting: The common, yet flawed, practice of making financial decisions based solely on the current balance visible in a bank account.
• Cash Cow: A term for a business that consistently generates a steady and reliable profit, often used to describe the ideal outcome of applying Profit First.
• Cash Flow Statements: One of the three key financial reports in GAAP, providing a detailed breakdown of how cash is generated and used over a period.
• Debt Freeze: A strategy in Profit First to immediately stop accumulating new debt by drastically cutting expenses and making a commitment to only pay for purchases with cash.
• Debt Snowball: A debt reduction strategy where debts are paid off in order from smallest to largest, regardless of interest rate, to build psychological momentum.
• Drip Account: An advanced Profit First account used to manage retainers, advance payments, or pre-payments for work that will be completed over a long period, releasing funds into the main income account incrementally.
• Endowment Effect: A behavioral theory stating that individuals place a higher value on something they already possess compared to an identical item they do not own.
• Employee Formula: A guideline in Profit First suggesting that for each full-time employee, a company should generate $150,000 to $250,000 in Real Revenue.
• Frankenstein Formula (Sales – Expenses = Profit): The traditional accounting formula criticized in Profit First for making profit an afterthought and leading to inefficient spending.
• GAAP (Generally Accepted Accounting Principles): The standard framework of guidelines for financial accounting, criticized in Profit First for being complex and working against human nature by focusing on sales first.
• Gross Profit (Gross Income): Total Revenue minus the cost of materials and subcontractors directly used to create and deliver a product or service.
• Hedgehog Leatherworks: The author’s one surviving investment from his earlier business ventures, which successfully implemented Profit First.
• Income Account: An advanced Profit First account where all incoming deposits are collected, providing a clear picture of total revenue before allocation.
• Income Statement: One of the three key financial reports in GAAP, summarizing a company’s revenues, expenses, and profits over a period.
• Instant Assessment: A quick method provided in “Profit First” to gauge the real financial health of a business and identify areas of financial “bleed.”
• Just One More Day Game: A psychological tactic to cultivate frugality by challenging oneself to delay a purchase for an additional day, finding joy in the saving.
• King Kong: A metaphor used to describe the overwhelming, hidden financial problems that many businesses face, larger than a mere “elephant in the room.”
• Labor Costs: The expenses associated with employing staff, including salaries, commissions, and bonuses.
• Loss Aversion: A psychological tendency where the pain of losing something is felt more strongly than the pleasure of gaining an equivalent item.
• Material & Subs: Costs associated with materials for manufacturing/retail or subcontractors for service delivery, subtracted from Top Line Revenue to calculate Real Revenue.
• Materials Account: An advanced Profit First account specifically for funds allocated to the purchase of materials, distinct from general operating expenses.
• Monthly Nut: A term for the total amount a business needs to cover its expenses each month, criticized in Profit First for focusing on expenses over profit.
• Operating Expenses Account: The primary account in Profit First used for managing day-to-day business expenses after profit, owner’s pay, and tax allocations.
• Owner’s Pay Account: A dedicated account in Profit First for the regular salary or distributions paid to the business owner(s) for their work.
• Parkinson’s Law: A principle stating that work expands to fill the time available for its completion, or, in a financial context, expenses rise to meet available income.
• Pass-Through Account: An advanced Profit First account for income received from customers that is not considered true revenue for profit allocation, such as reimbursements for travel costs.
• Pareto Principle (80/20 Rule): An observation that roughly 80% of effects come from 20% of causes, applied in Profit First to clients and product profitability.
• Petty Cash Account: A small bank account, often with a debit card, for minor day-to-day purchases like client lunches or office supplies.
• PFP (Profit First Professional): A financial professional (accountant, bookkeeper, coach) trained and certified in the Profit First system, who helps clients implement it.
• Profit First Formula (Sales – Profit = Expenses): The core accounting formula in the system, prioritizing profit allocation before expenses.
• Profit Account: A dedicated account in Profit First for the allocated profit of the business, often held in a separate bank to remove temptation.
• Profit Leader: An entrepreneur who starts and leads a voluntary Profit Pod, helping others with accountability and implementation of Profit First.
• Profit First Lifestyle: The application of the Profit First principles to personal finances, aiming for financial freedom and a disciplined approach to spending and saving.
• Plowback/Re-invest: Terms used to justify taking money from profit accounts to cover operating expenses, which Profit First identifies as “borrowing” or “stealing” from oneself.
• Real Revenue: Total Revenue minus the cost of materials and subcontractors, representing the true income the company generates from its core services or products.
• Recency Effect: See above in Quiz.
• Recurring Payments Account (Personal): A personal finance account for fixed, varying, and short-term recurring household bills.
• Required Income For Allocation (RIFA): A Profit First metric that calculates the minimum business income needed to cover desired owner’s pay, taxes, and operating expenses after allocations.
• Sales Tax Account: A dedicated account in Profit First for collecting and holding sales tax, emphasizing that this money is not income but funds collected for the government.
• Secretly Spoiled: Laurie Udy’s company, an example of a business successfully implementing Profit First.
• Serving Sequentially: A Profit First principle from dieting, meaning to allocate money to accounts in a specific order (Profit first, then Owner’s Pay, then Tax, then Expenses).
• Small Plates: See above in Quiz.
• Stocking Account: An advanced Profit First account used to save for large, infrequent purchases or to stock inventory parts over time.
• Survival Trap: See above in Quiz.
• Tax Account: A dedicated account in Profit First for setting aside money to cover tax responsibilities, often held in a separate bank.
• The Government’s Money: A renaming tactic for the Tax Account to psychologically deter “borrowing” from it, emphasizing it’s not the business’s funds.
• The Vault (Business & Personal): An ultra-low-risk, interest-bearing account for short-term emergencies and long-term savings, with strict rules for its use to prevent cash crises.
• Top Line Thinking: A revenue-focused approach to business management, prioritizing sales growth above all else, often leading to profitability issues.
• Wedge Theory: A personal finance strategy to gradually upgrade one’s lifestyle as income increases, setting aside half of every income bump into savings to build wealth.