Supplemental Training 1 (Behavioural Basics)

Summary

The speaker challenges the traditional formula of 'sales minus expenses equals profit,' highlighting its limitations due to the priming effect. The priming effect leads businesses to prioritize sales and expenses over profit, which can hinder profitability. Instead, the speaker introduces a 'profit first' approach, where businesses prioritize profit before covering expenses. This strategy forces companies to operate within their means and ensures profitability becomes a habit. The key takeaway is that prioritizing profit reshapes business behavior, leading to sustainable success by reverse engineering expenses around profitability.

Takeaways

• 💼 The traditional business formula (sales - expenses = profit) is based on generally accepted accounting principles (GAAP).
• 🧠 This formula is considered an axiom, a belief passed down from previous generations and widely accepted as true.
• 💡 The priming effect makes people put more significance on what comes first. In the traditional formula, sales are prioritized, which can lead to businesses focusing too much on growth and neglecting profitability.
• ⚖️ Sales growth, while important, can increase stress on a business due to growing obligations to deliver on those sales.
• 💸 Profit must be a priority, and a new formula suggests: sales - profit = expenses. Profit should be taken out first before dealing with expenses.
• 🔄 The new approach encourages reverse-engineering profitability, ensuring businesses operate within the remaining resources after taking profit.
• 🚨 If a business can't pay its bills under this model, it indicates that the business cannot afford its expenses.
• 🛑 Common resistance includes believing that profit cannot be prioritized until the business becomes profitable. The new approach argues that taking profit first is essential for establishing a path to profitability.
• 📉 Another point of resistance is believing that expenses must stay the same while sales grow, but this is also counterproductive. Growth must come with a consistent cushion of profit.
• 📊 Prioritizing profit from the start forces businesses to cut unnecessary expenses and operate more efficiently, challenging the old growth-focused mindset.

Q & A

What is the foundational formula mentioned in the script, and why is it significant?

The foundational formula mentioned is 'Sales - Expenses = Profit.' It is significant because it is a traditional formula taught in accounting, and most businesses operate under this assumption, focusing heavily on sales and expenses to determine profit.

What is the priming effect as explained in the script?

The priming effect is the cognitive bias where we put more significance on what comes first. In the script, the speaker demonstrates how words shown first (like 'evil') affect our judgment more than words that come later (like 'love'). This concept is applied to business thinking, where sales and expenses often take priority over profit due to their placement in the traditional formula.

How does the traditional formula lead to poor business practices according to the speaker?

The traditional formula focuses on increasing sales and covering expenses without prioritizing profit. This creates a cycle where businesses continually grow sales, but often at the expense of profitability. The speaker argues that this can lead to businesses going bankrupt despite high sales because profit isn't intentionally built into the operations.

What does the speaker suggest as an alternative to the traditional formula?

The speaker suggests reversing the formula to 'Sales - Profit = Expenses.' In this new approach, businesses prioritize taking profit first, and the remaining funds are used to cover expenses. This ensures that profit becomes a habitual part of the business model.

How does the new formula reverse engineer profitability?

By subtracting profit first, the new formula forces businesses to operate within the limits of what remains for expenses. This approach encourages businesses to be more mindful of their spending and ensures profitability is baked into every transaction.

What is the main behavioral lesson from the priming effect in the context of business?

The main lesson is that what comes first in our thought process becomes a priority. In the traditional formula, sales come first, which makes businesses focus on growth at the expense of profitability. The speaker argues that by putting profit first, it becomes a priority, ensuring sustainable business practices.

Why does the speaker say that businesses can’t wait until they are profitable to start taking profit first?

The speaker argues that waiting for profitability before implementing the 'profit first' approach is flawed. Businesses must take profit first to force the business model to reveal which expenses can be sustained. This helps businesses become profitable sooner by adjusting to their financial reality.

How does focusing solely on sales create stress on a business?

Focusing solely on sales increases the obligations a business must fulfill, as each sale comes with costs and delivery responsibilities. As sales grow, the pressure to manage these obligations increases, potentially leading to operational stress and financial strain if profitability is not prioritized.

What is Parkinson’s Law, and how does it relate to business expenses?

Parkinson’s Law states that work (or in this case, expenses) expands to fill the available resources. In business, if revenue grows but expenses grow at the same rate, profitability will never be achieved. The speaker argues that controlling expenses while consistently taking profit is essential to break this cycle.

What is the core message of the speaker regarding the importance of profit in business?

The core message is that profit must be a priority from the beginning. By taking profit first, businesses ensure that profitability is integrated into every decision and transaction, rather than treating profit as something that will happen 'one day' after enough sales.