In 1955, modern philosopher C. Northcote Parkinson came up with the theory that the demand for an economic good expands to match its supply. In economics, this is called “induced demands.” It’s why, for example, expanding roads never actually reduces traffic congestion—more drivers show up to fill those extra lanes.
The same is true for work. Work always expands to fill however much time you have available to complete it. For example, if there are six months available to complete a project, you’ll spend six months working on it. Give yourself only one month, however, and you’ll get exactly the same amount of work done in one-sixth of the time.
The same is true for anything: food, time, even toothpaste.
Think about it: How much toothpaste do you use when you have brand new tube? You open the cap and squeeze a nice, long bead of blue gel on that brush—some of which inevitably falls into the sink as you start brushing. But who cares? It’s a new tube. You put more on and go about your evening brushing routine.
But when you open that cabinet door and find a nearly empty tube, the game changes. You squeeze, twist, roll, smoosh, anything to get just one more dab. Turns out, that dab is just as effective as the long bead. But isn’t it funny how your behavior changes based upon what’s available?
Brushing Up on Profit
Parkinson’s Law triggers two behaviors when supply is scant. First, you become frugal. When there is less toothpaste available, you use less to brush your teeth. Second, you become more innovative, finding more ways to extract more toothpaste from the tube. So what happens when you intentionally use less to accomplish the same task? You will have to learn how to innovate.
Profits and expenses work under the same principle. When profit is at the end of the equation, all the money coming in is up for grabs. The ‘time’ factor in Parkinson’s Law is replaced by the money factor— if you have X amount of money available, your expenses are free to expand into that space. Flip it around, though, and the amount of money available for expenses is suddenly reduced. It’s finite. The amount you want to earn in profit simply isn’t available to spend, but you manage to get the job done without it.
And it’s not a magic trick. It’s not at the expense of quality or sanity. Rather, is forces us to stick to what is actually available—this much money, no more. We hustle a little harder, think a little deeper, and come up with new ways to do things, or create new methods that don’t require as much capital to be spent on expenses.
We surprise ourselves. We do that which we perceived to be impossible.
The Cost of Growth
Growth is a big buzzword in the business community, and for good reason. But it’s easier said than done, right?
Here’s a common problem a lot of businesses face: they devote years of effort to consistently increasingly sales. Year on year, their numbers go up, and they continually invest in new technology, methods, staff, and other things that seem vital to their continued efforts at growth.
They have a goal in mind. Maybe it’s $100,000, maybe $1 million, maybe more. But somewhere there’s a magic number. If they can reach that number, they’ll have “made it”. They’ll be successful.
Yet, the questions so many businesses fail to ask are, “What’s it going to cost to get there?” And, “What will we have to show for it when we finally arrive?”
Take, for example, a business owner we met at a networking group. He recently shared that his company hit $50 million. Sounds impressive, but that same person was also looking for investors, and said his business would be finished in just six months if they didn’t find one. Despite a huge amount of very fast growth and an enormous volume of revenue every year, his business turned zero profits, accrued equally large debts, and had no way to cover their running costs.
This is an extreme example of a common problem. Businesses invest so much in growth that they have little or even zero profits to show for it, and while business is booming and turnover is skyrocketing, profits never grow at all.
In traditional accounting models, sales and/or growth is what leads to profit—you have to spend money to make money. But what actually happens is you sacrifice profit for the sake of growth.
Paste and Profit
Profit First uses Parkinson’s Law to flip the script: profit leads to growth. It seems counterintuitive, but Profit First founder Mike Michalowicz points out that it’s actually a very growth-friendly model.
“More growth actually happens when there’s less money,” he says. “When there’s less supply available, we become more innovative in extracting more value of what remained. So, by taking our profit first and having less money available for operating expenses, it actually facilitates growth because it forces us to be innovative.”
When you are creating real profit in your business, you’re in a position to invest in true growth opportunities when they occur. And you’re able to do it without putting your current business and the success you have achieved in it at risk. Six months down the line, if it proves to be less than profitable, your existing profit margin will still be there. You may have failed to increase it that time, but you’ll still have it.
It’s natural to want to put all your profits back into your business, thinking you’re planting the seeds for growth. What you’re actually doing is sowing a future disaster.
You can still hit your magic number, and you can still grow, but with the Profit First system you have a little extra left in the tube to protect your business and ensure that every stage of growth is sustainable. Now that’s something to smile about.
