So I’m happy to announce that I finally have
Mike Michalowicz on the show today. We tried to connect a few months ago and we finally
did it. Right Mike? We did. We were back and forth on Twitter a lot. I know. You posted
my favorite picture by the way, with the book of all time, you had like the tongue you were
like “aaagh” like you were screaming. Yeah, like that, yeah. With the hashtag profitfirst,
right? Yup. Yeah so we did that. I’ve never seen that before, I like that. You like that?
Cool. So I just saw on Twitter yesterday that you came back from Hershey Park? Yes, oh yeah,
look at this, I’ve even got my little key fob still. Oh come on. Yeah, they put your
name on it, I don’t know if you can see that. Tilt it down a little bit. There we go. So
they put your name right here on these. It’s a shame because it’s such a waste of plastic.
Like you can’t reuse the keys now. What’s the key for? Well it’s for the hotel room.
But then also to get on the shuttle bus, you have to display your key. That’s why they
have the name on it. Oh I see. It’s not like the key to the city or anything. No, it’s
not even close. No, it would be a pretty awesome key because this is all chocolate. Not the
right kind of chocolate. Love me some chocolate but not that plastic. Yeah, no, that’s not
the right kind of chocolate. And Hershey’s chocolate is kind of, it’s good, but there’s
certain chocolate that just blows you away. I’ve had like dark chocolate with like salt
on it and stuff that is just like amazing. Hershey doesn’t make that stuff. Nice to enhance,
I know. I’ve been on the tour as well. It’s a cool place.
It’s nice to have you home, Mike. Yeah, well thank you. It’s good to be back.
Back here in New Jersey, been touring the country.
So I want to give you a little introduction if you don’t know who Mike Michalowicz is,
you sure will know very soon. If you don’t know who I am, like who are you. Yeah, I know.
Best-selling author, it’s crazy so. By his 35th birthday, Mike had founded and sold two
multi-million dollar companies. He was confident that he had the formula to success and he
became an angel investor and then he lost his entire fortune. Then he started it all
over again, driven to find better ways to grow healthy strong companies. So Mike created
the Profit First formula which I’m going to go into today. A way for businesses to ensure
profitability from the very next deposit forward. So he’s now running his third million dollar
venture. A former business consultant for Wall Street Journal, a former MSNBC business
makeover expert. No wonder it took months to get you on. And the author of one of my
favorites, The Pumpkin Plan. And I can’t show you this way, the Pumpkin Plan, because it’s
on audiobooks and it’s on my iPad, which actually I have my notes on for today’s interview.
So I’m having so much fun in the car travelling, listening to the Pumpkin Plan on my way to
a destination and every so often there would be just some real character ok for lack of
a better word just making me laugh and I’d be listening to this book and just talking
like this. You know. And it was so funny. So I just wanna say that your reads are really
really easy and they’re so much fun. That’s awesome. So welcome to the show, Mike.
Thank you. Thanks for having me on. Thank you so much. I’m fired up to be here.
I’m more fired up. I’m so excited to have you.
No I’m more fired up. You better watch. Do you know I’m from Brooklyn? I know you’re
from Brooklyn. That does scare me a little bit.
Alright well this is Skype so you’re safe. Yeah. Ok. Ok. So I want to ask you a question.
Because I was reading the book, ok, yeah I did, and I got your PDF download, and we’re
going to talk a little bit later on in the show about that and how people can get their
download of a piece of this book. Which is fantastic, and when I was reading through
it, I was really caught by the first chapter, actually the introduction. When you went into
how you were on CreativeLive and I’m a huge huge fan of CreativeLive. Oh, cool. So yes,
I did read your book. I know you’re probably surprised. But it’s fantastic. And I know
that education is totally something important to you. I know that you do a lot of lectures
and you’re on the student circuit all around the country. So you had an interesting story
when you opened up this book about a piggy bank. Can you tell me a little bit more about
that? Yeah, I have the hard cover here, so, you
have the pre-release copy. This is the hard cover that’s now out, so. Yeah, yours like
kind of wobbles. This is like a rock. It’s the exact same book. Same thing. So, yeah,
so my piggy bank moment I call it, was after I sold my second company, I became a millionaire.
I was 35 years old. And what happened. I sold it to a Fortune 500, and there was all sorts
of fanfare selling a company. And something changed in me which I never thought would
because I promised myself I would never be one of those guys. But I just became full
of myself. I was arrogant. I was like oh I am a genius. I know how to build companies
and sell them. I can do this over and over again. I’m Mr. Money. Look how great I am.
And started buying trophies to show how successful I was. The cars, the bigger houses moved to
an expensive town, joined the club, you know, like the private club. All this nonsense,
and also became an angel investor at the same time. An angel investor is someone who invests
in brand new start up companies. Well, it ends up I’m the angel of death at investing,
I was full of myself and it took me two years. I mean I lost everything Vickie. And I came
home to my family. I have three children. I sat down with my wife and my kids on this
day and told them I lost everything. It was something I was keeping secret from them.
I was lying by omission, I was like I’ll fix this. I just kept on throwing money after
bad, in fact. Ok. Lost everything. Told them I was sobbing, I was so embarassed and ashamed
of what I had done. My daughter while I was telling them this, she ran out of the room.
She was 9 years old. And I remember,Vickie, when she ran out I wanted to run out of the
room, too. That’s what I wanted to do. Run away. She came back, thirty seconds later
with her piggy bank. And she put it down and she slid it to me and she says, daddy, I’m
gonna help us. I’m gonna support us. And it’s a tough moment. That’s a tough moment. It
was the most humbling moment of my life. And it was the, it was the kind of the slap to
the face that I needed that I was so financially poorly prepared. I had no understanding of
financials even though my ego would say I know everything about money, how to make it,
how to keep getting it. And I really knew nothing about it. And I realized then that
profit is not an event. It’s not something that happens one time today. It’s not some
future moment when that company or that big client comes in. Profit is not an event, it’s
a habit. It’s something that has to be instilled in us that we have to live by every single
day. Profit is a series of many small small wins that happen every day as opposed to these
big moments. And then endeavored to figure it out, and that’s actually how this book
came about. This came about four years later, five years later, after having that I started
to figure out the formula, and I think I figured it out. I think you did, too, it’s a great
read. I’ve been looking at the reviews on Amazon.com and they are just insane. I have
to read you one of them. This is – Mike Michalowicz has got it right. Cash is the lifeblood of
every business and as I just read just the introduction in Chapter 1, like I was talking
a bit of Profit First, I knew Michalowicz was on is it Mihcalowicz or Mikecalowicz?
No, you’re nailing it, like you’re the first. It’s that Brooklyn accent or something. I
was reading the phonetics. Look I’m trying to control the Brooklyn accent, I’m hoping
I’m doing a good job. You’re nailing it.
Like yeah. Ok, so, I knew Michalowicz was onto something very profound. If you were
watching me read the intro, you would have seen several open-handed slaps to my forehead.
That’s pretty powerful. That’s cool. Ok, so talk to me a little bit about why entrepreneurs
struggle over making a profit. Tell me a little bit about that.
Yeah, for sure so. Here’s what blew my mind. I started doing research, I found that there’s
28 million small businesses in the U.S. These are companies doing $5 million dollars or
less in revenue. That’s what I’m doing, that’s what you’re doing. That’s what the majority
of small businesses do. $5 million in revenue or less. And of those, most of them are less
than a million dollars in revenue. And here’s what blew my mind. Out of those 28 million
businesses, 21 million are break even, meaning they’re living check by check. They don’t
know how they’re going to pay their bills next month, unless they get a lot of sales
that come in. And here’s what makes no sense. That means there’s 28 million people in the
U.S. that are smart enough, courageous enough, have the gumption to start a business, attract
customers, sell what they’re doing, manage the cash flow to some degree. Entrepreneurs
are that smart yet they’re not smart enough to make a profit. Like that didn’t compute.
How could people do 99% of the stuff right, but not make a profit. So I started researching.
What’s the common things that entrepreneurs are doing around money. And I found there’s
only one thing. There’s a formula that we use. It’s a technical term and it’s called
GAAP. Generally accepted accounting principles. The formula is this. Sales – expenses=profit.
Right, so you sell what you can, you subtract the costs you incur to run your business,
to rent your space to hire contractors or employees and then whatever is left over is
profit. Here’s the absurdity of it. The left over is profit. Profit is the final after
thought, it’s the surprise at the end of the end of the month or most often at the end
of the year when the accountant comes back and says Oh, you made $500 this year. Surprise.
Surprise, I made $500. It’s funny, and often when they say you made a small profit, we
don’t see the cash. It’s gone because profit on an accounting basis and cash is totally
different. But more often than not it’s we lost money and it’s like Oh, we lost money,
at least we don’t pay as much in taxes, but I have nothing to show for it I’m struggling.
So when I figured this out that there’s a common formula, I started studying the formula
and the formula we’ve been following is totally flawed. The formula of sales – expenses=profit
is what’s causing businesses to not be profitable because there’s things called axioms. And
what an axiom is is that there’s a commonly held belief that the world believes to be
true and therefore everyone that hears about this says well the world believes it so therefore
it’s true. An axiom used to be like the World is Flat. Right, everyone believed that because
if you go to the edge of the planet you’re going to fall off. Oh, you were getting the
book The World is Flat? Yeah, so there you go,The World is Flat. Well, we believed it
was physically flat. That you couldn’t navigate the globe otherwise you’d fall off the edge.
So many people believed it that it became a common truth and ships wouldn’t go out far
out into the ocean, it was too risky. Then someone challenged it and says the world’s
round. And people were like you’re crazy, the world is not round. They’d jail people
like that. Then enough people started saying the world was round and Christopher Columbus
proves it. The thing is we have the same problem going on with accounting. The reason that
formula sales – expenses=profit doesn’t work is because there’s a human behavioral
trait called Parkinson’s Theory. And this has nothing to do with Parkinson’s Disease.
Ok, Parkinson’s Theory works like this. Whatever is made available to you, you consume in its
entirety. It’s human nature to consume the entirety of a resource that’s made available
to us. Here’s an example. Say you and I are doing a project together and I say to you,
hey Vickie, it’s going to take me a week to get this project done, could I turn it in
next week, and you say ok. It will take me a week to do that project. If the exact same
project, same commitment between me and you, but I say it’s going to take six weeks, it
will now take me six weeks to get it done. I consume the entirety of the time made available
to me. The same thing with food. If we serve a plate of food, we fill up the plate. If
the plate’s bigger, we serve it up and we’ll eat the entire plate. If the plate is way
smaller, we’ll eat the entire plate. The entire resource that we put there we consume. Well
the final analogy is with money. That formula, sales – expenses=profit, we sell, we put
money into our bank account, we look at our bank account, there’s money there, we use
it to cover all of the expenses. Whatever money is available, Parkinson’s Law, it goes
to our expenses, and that’s why there’s never money left over. That’s why 21 million businesses
are not profitable. I gotcha, that’s like a healthy habit that
you talk about. Yeah, exactly, you get small plates, your
vegetables first, remove temptation and the rhythm. Talk to me a little bit about that.
Yeah, that last one almost sounds like it’s pornographic a little bit. Yeah, a little
bit. It sounds like kama sutra. But, those four things that you just touched on are all
elements and actually you’re fitness expert, so those four elements are from the health
industry. What they found is that most people can’t do programs that we see on TV, like
P90X or the thigh master, like all those products that come out we see an infomercials, you
see a before and after picture. But they never show the after after picture. Like what did
the person look like after they did this program. The reason most of those programs fail, I
mean they work, but they require us to change who we are. P90X requires if you never worked
out, you better start working out super intensely two hours a day every single day for the rest
of your Life. Right. Yes, you will be ripped. But for us to change our own natural behavior
is nearly impossible. If you’re a smoker, you know smoking is bad for you. Stop smoking
is not that easy. It’s really really hard. So in the fitness industry they found don’t
try to change people’s habits. You can’t. Instead change the rules around their habits.
First principle is small plates. The plates are this big. If we simply reduce the plate
size. If you cut your plate size in half, you buy smaller plates, you can continue your
habit of fill up the plate with your food, the way you always do, and eat everything
on a plate like mom says. Right. And by simply changing the plate size, less caloric intake,
less weight. The second principle from the health industry is the sequencing of food.
We all know we need to eat our vegetables, but most of us don’t. You know, the steak
comes, the vegetables are pushed to the side, we start eating the steak. They say instead,
just change the sequence. Serve the vegetables and nothing else first. Then eat what you
want of your vegetables. Once the vegetables are done, then serve the next meal. And what�s
interesting here is that if we eat our vegetables first, we’ll eat more of them. Secondly they
take up some space in our stomach, so we’re less hungry when the meat is served. And then
you’ll eat that so you’ll eat less of the meat and you’ll balance out your meal. So
just change the sequence and you’ll be able to continue your natural habit of eating.
And now relating that to businesses. Ok, so I can start tying them in. Gotcha. When it
comes to small plates in the health industry, most businesses have one large plate for their
business, it’s called their checking account. Most companies that I meet with, most entrepreneurs
have a bank account, maybe they have a second one, but that bank account is where all the
money comes in, all the deposits and when they’re paying bills, all the money comes
out of there. That is one massive plate. It is very hard to see clearly where the money
really should be allocated. We see a thousand dollars come in, in our plate and we say,
Oh, a thousand dollars for bills, but that’s not true. That money has other purposes. But
since we have one massive plate, we can’t tell. Just to really play out this analogy
because I want to drive this home. Like thing about Thanksgiving. We serve that one big
plate with the turkey on it. It would be absurd to tell the family around the table and friends
and say, just eat. Eat off the plate. Just eat off the serving tray. Because you wouldn’t
know who is a portion for who, it would just be mayhem. So what we do is we cut slices,
and we hand it to each person so everyone has their fair share of turkey. Well we need
to do the same in our business. When money comes in, the very first thing you need to
do as a business owner is to move a portion or percentage of that, a thousand dollar into
different accounts, different small plates. I suggest that there�s four core accounts
you set up, a profit account, owner’s pay account, tax account and operating expenses,
which we use to run our business. Depending on the size of your business, and actually
that free download which we’re going to share later on, has this chart, I do the percentages.
But basically if you have a business that does under a million dollars, roughly fifteen
percent of that money should be allocated into profit, so that thousand dollars comes
in,$150 goes into profit, 15%, yes, 15. Owner�s pay for most sub million dollar businesses
is upwards of 30 or 40 percent, let’s say 30 percent. A thousand dollars comes in, $300
is allocated to owner’s pay. Another 15% or so should be allocated to taxes, because ultimately
your business should be paying taxes. You should not be surprised at the end of the
year and say, Oh, I owe taxes. No, your business should pay for this with the allocated money
there. What that means then is about 40% goes into operating expenses. When a thousand dollar
check comes in, it does not mean that we have a thousand dollars for expenses, you have
40% of that. $400 goes to operating expenses to pay bills. And by pre-allocating money
is we now see the small plates. We see what money is available for what purpose. Ok. And
then you notice that I don’t have $1000 to pay bills, I only have $400. I need to cut
my expenses. I need to be more frugal. And this also, by allocating this money first,
this is the principle, “Vegetables first.” You’re first putting money where it belongs.
You’re taking care of the business and yourself first. Second step is the meat and potatoes.
The second step is to pay the bills with what’s left over in that operating expense account.
Ok, that’s great. A little scary, but it was great to have you divide up into kind of four
basic account, right, for a business, I just wanted to recap that. That was really great.
And how the owner takes their own percentage like say it’s 30 or 40% right, and you put
it into an account, rather than living off of that big serving plate with the turkey
on it. Right. That’s what most people do. We look at that account, so what it results
in are these highs and lows. Like say a big check comes in. Like if a $10,000 check comes
in, that’s a big check. $10,000 check comes into my business, I look at my bank account
I’m like whoa, I’m getting paid this week baby, big money, and then I look at my stack
of bills that have piled up and I say well, I better pay these bills. And then oh my god,
I have more due than I expected. I can�t take any money this week. And so it�s these
constant highs and lows, highs and lows. It puts us in a very reactive kind of panicky
mode, kind of survival mode. That’s a great idea to really have your accounts set up so
that you’re always dividing it up so that you’re living in reality. You’re not just
living off of the big turkey. That’s exactly right. It forces you to live in reality. And
once you realize you don’t have nearly enough money available for expenses, it’s a little
bit of a cold bucket of water in your face. It’s like whoa, but, it empowers you because
now you know what you need to make your business run, you’ve got to make your business lean
and mean and this forces that. Absolutely and I think it’s the next step, it’s perfect
like from reading the Pumpkin Plan, and you have to kind of take the little pumpkins that
we just taking all the food and the nutrients , I listened, well I read. I love it. Now
you’re progressing to show those same businesses who read that book and also toilet paper,
but that�s another story. But, it’s like a cult classic it’s ridiculous. Yeah, so this
is like the next progression and how you can stay profitable, right? Learn how to keep
those clients that are making you money and build and nurture them. And then stay in a
profitable place. Yeah. I wrote those books in that sequence because. Well first I write
toilet paper entrepreneur because I felt compelled to write it. But then I started asking my
readers, well what�s the problem you’re facing now. Toilet paper entrepreneur is all
about getting started and following who you are and exploiting yourself ,your passion
and so forth and doing it very frugally. Then people said, Mike, I got my business started,
but it’s not growing fast enough. Help me make it grow. So I wrote Pumpkin Plan. Now
here’s an interesting trap with Pumpkin Plan. You start growing your business and maybe
you hit the numbers that you always dreamed about but the business becomes kind of a cash
eating monster. So that’s why I wrote Profit First. And now that you’ve started to grow,
how do you get control of financials. Right. Otherwise become a slave to your business.
No I think it’s great and you’re listening to what entrepreneurs want and need and I
think it’s great how you came out with this book. So that you know that there’s a need
when you come out with it. Right? Yeah. To some degree I hope I’m taking my own medicine.
Identify who your best consumers are, for me it’s readers. Communicate with them, talk
with them. Learn from them. And then write or produce a product, or a book, that serves
what they need next. Absolutely. I think that’s a great business model.
So I want to ask you what TAPs are, you talk about that a little bit in the book. So are
they the starting point or the place you end up, the end game. Great question, see I love
someone who is so prepared. I love it. So TAPS stands for Target Allocation Percentages.
It’s the percentages we just talked about. You have that big serving tray, that big turkey,
that $10,000 check. That’s your income. You now need to divide it up into these different
accounts. Profit and owner’s pay. I said profit should be 15% for example. Well that’s a TAP.
A target allocation percentage. Ok. That’s where we should be targeting and try to get
to. Here’s the key. When people learn the system and basically you’ve learned the basics
already, so folks watching right now could actually start doing this. Call their bank,
set up some accounts. One mistake I see people make is they say wow, I’m gonna start allocating
15% right away. No, you know what, I’m going to do 30% because I want to be really profitable.
And there’s this excitement to do this. But it’s like saying I’m going to start working
out, and that first day you just work out so hard. And the next morning your muscles
are cramped, you have torn muscles, and you can’t move from the couch. And the program
becomes a failure because it’s way too intense too fast. So TAPs are what we are targeting
and as I said I have this is what we’ll share at the end of this interview, I’ll share in
the book all the different targets I suggest. But to get started with the program with Profit
First, don’t start at 15% that�s where we�re moving toward. Instead start at the profit
you had in the past say it�s been 1% of your income and add 1% more. So if of your
total income 2% was your profit last year, add 1% and starting now your allocation percentage
is going to be 3%. I call this CAPS by the way � Current Allocation Percent. So your
CAP is what you�re doing now, Current Allocation Percentage, and your TAP is what you�re
targeting. Then next quarter, every 90 days, there are 4 quarters a year, so every 90 days
add another percent. So do 3% profit, every deposit 3% goes to profit. Next quarter, 4%,
next quarter 5% and within a couple of years you�ll be up in the 10s, 10 or 15% so very
quickly you can ramp up. What this allows is for your business to adjust. Because if
you add 1% more in profit if you add 1% more to pay, maybe you allocate a little more to
taxes, because your taxes will go up. Usually more taxes, while it sucks, is an indication
you�re actually making money, it�s a good thing. To get those percentages there, you
must reduce your expenses so if you were doing 40% going to operating expenses before, now
it�s got to be 39, 38, you got to push that down. This adjustment of just adjusting just
a little 1% every quarter, getting closer and closer to that TAP, allows your business
to adjust in a much more healthy way. It�s not too abrupt.
Is there an individual TAP for each type of business or is just a principle?
Every business ultimately has its TAP. Every business can argue it�s unique. In the book,
I divide things out based on revenue ranges. If you�re under a million, here�s what
you should be doing, if you�re between 1 and 3 million here�s where you should be.
Three to ten.. Now this is from my study. The thing is your business may be able to
do greater on TAP, maybe it can�t but the thing that�s great about this is those are
simply targets, what we�re shooting for, our goal. But we start low and you start moving
up. At a certain point it�s going to be hard to move it up. You can�t cut expenses
any more, maybe that�s your optimal resting point. I challenge you to say, once you hit
a wall, see if there�s a way to push through it. It�s like working out. At a certain
point, you have a certain degree of fitness and you feel like you�ve hit a wall, sometimes
it�s changing the exercises and brave through it, same thing with these allocation percentages.
That�s great. Let me ask you this. What should business owners be doing every quarter,
say. I know you break it up into bite size chunks that are very easily digestible. I
know you talk about this in the book. What should a business owner be doing every quarter.
You probably heard it on the news, when you turn on the radio, at the end of every quarter,
the public companies announce their distributions. Like Ford says hey, we have 15 cents a share
and it�s kind of like grrr, I wish I owned Ford, or whatever it is. You hear distributions.
Small businesses, quarterly, must also be doing a profit distribution. So this money
is piling up. Every time you a deposit comes in you�re putting a percentage away at the
end of the quarter a small business may have a couple of thousand buck saved up in profit.
Some bigger small businesses, 20 thousand, 30 thousand bucks is not too abnormal. What
you do at the end of the quarter, is you take a portion of that money out, I suggest half
the money, half stays in as a rainy day fund cause there may be one day when someone gets
ill, the business gets hurt you need some kind of cushion. But say, just in round numbers,
say there�s 10 thousand dollars in profit that�s accumulated in there, take half of
it, $5,000 out as a profit distribution and this goes right to you. Now the rule with
this that money is profit, you�re not allowed to put it back into the business, that would
defeat the system. You can�t plow it back, you can�t reinvest, you go on vacation with
that, you celebrate with that, you take the vacation you�ve always wanted with that.
This is where your business is no longer a cash eating monster. You�re changing the
dial so that now it�s serving you. It�s a cash cow and you need to do this because
it�s a celebration. If you get five thousand bucks extra out of your business in addition
to your paying you, or whatever�s going on, as owner�s pay, the extra five thousand
bucks in profit every quarter, it�s awesome. And when Ford says we have a 15 cent per share
distribution � 15 cents? I got five thousand bucks coming out pal � it really empowers
you. It really empowers you. And quarterly is the way to do it. It�s what big companies
do. Small companies can and should do it. That�s great. I want to ask you about the
system Profit First. Is there a risk of businesses doing it alone, how should they approach it?
There is a risk of doing it alone. Many entrepreneurs say this is great. You have the whole system
now, I hope you start doing it immediately, but there�s a problem. There�s going to
come a day when you can�t pay your bills. Or you had a quiet sales month or 3 consecutive
months. And it�s really tough. That�s when, if we�re by ourselves, it�s easy
to say I�m going to stop doing this profit thing. I�m going to put it on hold, I�m
going to borrow from myself, and we start defeating the system. You see, when you don�t
have enough money to pay bills, that�s your business screaming at you and shaking you,
saying you can�t incur these bills any longer, you gotta stop doing this. It�s easy to
borrow from ourselves. So when we�re doing this by ourselves, it�s easy to break our
own rules. We need accountability partners. It�s like working out at the gym. If you
want to get the best workouts.. A partner.
A partner, someone who�s going through the experience with you. If you really want to
crank it up, get a partner and a trainer. A trainer knows the process, been through
it with hundreds of other people, can tell you how to do it without getting hurt, can
get you past the plateaus. A workout partner is someone that�s in the game with you and
they�re gonna work. When you don�t want to work out, they�re calling you and saying
Hey, you showing up? I�m at the gym waiting for you. And it�s like ugh, yes, I�m showing
up. In our business, get an accountability partner. I suggest two types. Get one, another
entrepreneur or group of entrepreneurs that are in the profit game too. That want to maximize
their profits and support each other. In fact, on my website, mikemichalowicz.com, I have
a resources section. I set up a guide there for how you can run meetings with peers. It�s
totally free, just do it and you can support each other. The second thing is get a trainer.
Your accountant or bookkeeper should be helping you guide profitability. And if you have an
accountant or bookkeeper who does your taxes or does your books and doesn�t help you
maximize your profitability, they�re not a trainer. There are folks out there, I call
them Profit First professionals, these are people who understand the necessity for businesses
to be highly profitable and help guide you. I have a resource for that too on my website.
Check it out on the resources section. I can hook you up with an accountant or a bookkeeper
that does that, if your bookkeeper doesn�t. You should have a professional that�s helping
you drive profitability. I�m interested to know. This wasn�t a
planned question, but I�m very curious because you speak very passionately about accounting
and the importance for businesses to really understand where their profit rests before
they just keep going out and getting more and more business and not turn a profit. Do
you have a background in accounting, I�m just curious.
No, no accounting. Actually, I was a D student in college and I was a Finance major. I struggled
most with accounting and I think here�s the deal. I think accounting sucks, I still
do. I think it�s too complicated I think there�s way too much going on. The system
I�m telling you, it supports accounting but it�s really a cash management system.
Ironically, just getting the small simple stuff right that I�m sharing now, all the
accounting stuff on the back end, takes care of itself, you don�t have to worry about
accounting. So these small steps takes care of everything. That�s why it�s been so
successful for me, because I hate the accounting. Income statement, balance sheet, cash flow
statement , tie them all together, understand them. Inventory turn, all this stuff, makes
my mind want to explode. I had to find a better way, that�s why I did this.
So you�re more the strategy and then you hand it off to your accountant when you do
these simple steps and take your money and put it in these smaller accounts and just
have a way to go through it. Right? Right, I do this every single day myself.
The natural tendency of myself and I think most entrepreneurs is to log into our bank
account every day. Every morning I log in and see what my balance is. I do not go into
my accounting system and print out my income statement and tie it to cash for the day.
So this system you�re learning is what we naturally do. Our natural habit is to log
into our bank account. You set up these accounts, you set up these percentages, it all takes
care of itself. And once a quarter I meet with my accountant � he helps me enforce
profitability. I taught him the system and he�s helping me now. He runs the books,
he does the reconciliations, all the accounting stuff. It�s funny, I have a meeting with
him next week, it�s my most profitable quarter ever. Last quarter when I met with Keith,
my accountant, he goes �Mike, I don�t know how you�ve done this, what a turnaround.
Your business has been so profitable. Five consecutive years of profitability, he�s
never seen this in any business. Now the thing about that. Logically, accounting all makes
sense and it works, it�s just the way entrepreneurs behave, we don�t sync up with it. Not most
of us. Therefore by doing this system, it forces profitability and the result for me
has been five consecutive years of profitability. For everyone that�s actually used the system
and stuck with it, all of them have increased their profitability. Because it just forces
you to, there�s no alternative, if you follow the system, you have to be profitable.
Sure. I�m interest to know, and again, this is not a planned question, but I�m so intrigued
by your responses, you have a profitability, consecutive, of five years, has your business
been profitable in the same way or have you increased your services or offerings? How
has that happened? This is the weirdest thing, I�m doing less
stuff � I mean, I offer less services but I�ve gotten better and better at it and
it�s resulted in a premium. Here�s a better explanation of that � when people hear of
Profit First at first they say Wow, it sounds like I�m really going to drive profitability
but I can�t grow, I mean my business, all I�m going to try to do is squeeze out every
single dollar, I can�t grow like that. The irony is actually you�ll grow faster and
my business has grown faster too. The reason is this � Profit First means you have less
money available for expenses, less money available for expenses means you�ll need to be way
more efficient. The same things being done with less money means you�re more efficient.
It also forces you to drop kind of the losing things. So if you offer in your business 5
or 6 different offerings, I can do web design, I do logos, I can do brochures, I can do packaging,
all these things � a large offering. Well, package design, I�m not really that efficient
at it, it takes a lot of effort and costs me a lot of subcontractors, I�m gonna dump
that. So Profit First, because there�s less money, you start dumping things that aren�t
your core efficiency. Then you get more and more focused on the things you do really well.
Say it�s web design, just picking something. Now I�m saying, well I�m betting on web
design, I�d better become better and better at it and you start becoming really capable
at that category. When that happens, clients are more attracted to you and willing to pay
a premium. It�s the old general practitioner doctor versus the heart surgeon. A general
practitioner can diagnose a lot of situations when they figure out what�s going on, they
then refer you to the specialist. So a general practitioner makes very little money. Those
doctors, I hate to say it, but are struggling. Cause we go in, something is wrong with my
chest, I�m coughing. Doctor checks it out and says that�s indications of a heart attack,
go to the heart attack specialist who�s going to charge you a thousand times more
but know what they are doing on aspects of the heart. And of course, me, I want the specialist.
When I have a real need, I want the specialist. So customers with the real need for web design
or whatever, will go to the specialist. The folks who don�t care so much or are doing
the initial checkup, will go to the generalist. So it�s interesting, Profit First makes
us more focused, to do fewer things, but to do it at a better level and that attracts
the best customers who pay a premium. So for my own business, just to wrap up, (I am getting
kind of fired up, I love this stuff) for me, my thing is my books and speaking, that�s
the two things I enjoy the most, I�m the best at and are most lucrative to my readership.
Well, sure enough, as I�ve committed myself more and more to public speaking, I get paid
like $20,000 for a speaking engagement today, where rewind four or five years ago when I
was starting out and trying to do consulting and all these different things, I was doing
zero for speaking engagements, I wasn�t getting paid a dime. I was getting maybe $500
for travel reimbursement. So by becoming more and more focused, I�ve gotten a little bit
better and a little better, I�m trying to get to the heart surgeon level as a speaker,
and sure enough customers are coming with bigger and bigger offers because they recognize
that and they want a specialist. Right.
It�s true for my books and that�s basically the two things that I do. The one thing too,
I have different venues going on, I hire a partner with a specialist in that category.
So I have a consulting group around Profit First � I don�t run that, I do a lot of
speaking about it but I don�t run it. I have hired a guy and he�s actually an equity
piece of business, that�s his exclusive job. He�s a specialist in that category.
So for me to expand my businesses into other areas, I bring someone on board that that�s
their specialty, that�s the exclusive thing they�re gonna do. And I just feed it from
the stuff that I�m doing. So you�re outsourcing the help and letting
the specialists run the show. Yeah, always hire specialists. It�s part
of Profit First that you always have to do that, there�s no alternative.
I see. Is there a special size of a business that is going to benefit from Profit First
or is it really for any size business? It�s for any size and the proof is that
I�ve been engaged by a public company, they�ve brought in a Profit First team, there�s
a desk over there. Wait, point again, I didn�t see it.
Pointing that way, I�d have to pick up my camera and move it, but if you go around the
corner, maybe I can swing you around a bit, I don�t know if you can see, nah, you can�t
make it. It�s down the hallway. You have a board just like mine on the wall
behind you but you can�t see it. Just like that one.. What was the question
again, I can�t remember.. What size do businesses have to be?
Oh, size. So, I�ve found this works for companies of any size. So I had a public company
that engaged our services and they�ve implemented Profit First in their budgeting effectively
up front and they�ve become more profitable. Countless startups have approached me and
say I don�t have any business coming in yet, should I wait? No, start immediately.
Cause you want your profit habit to be in place from day one. If you can be profitable
off of, say in a year, you do $10,000 in business over the entire year, and you can be profitable
on that, you�ve set such a good habit up to be profitable off of one hundred thousand
or a million or a hundred million. So no matter what size you are, you have to implement this
today. You can and you have to. A question that you raise in my mind is what
if a company has a lot of debt that they need to work off? They want to be profitable, do
they need to work off that debt first? What has to happen?
Yes and no, yes you have to work that debt off immediately, no you don�t do that first.
Which is kind of a weird answer but here�s how you do it. If you have debt, we have to
eradicate it but you have to establish this profit habit. Too many people say I�m going
to pay off my debt first and then I�ll worry about profit first later. And then profit
first never happens. By the way, when people say that, I�m like, haven�t you already
been doing that? Haven�t you had this debt for a while? Haven�t you been saying you�re
going to be paying this off first anyway? And you haven�t, so it�s not working.
Here�s what you do. Set the same system, put your 10 or 15% of profit, let it accumulate,
forces the efficiency cause there�s less money for expenses, then, on a quarterly basis,
when you do your profit distribution, that money that comes out, the vast majority 95%
of that $5000 check that comes out, four thousand nine hundred bucks goes towards hitting that
debt. A few dollars, a hundred dollars, is still left to celebrate. Cause we still need
to be in that celebratory mode. You�re not going on vacation now but you took a big chunk
of debt away and you have a real nice dinner on a hundred bucks. So you have to keep the
profit habit going, no matter what, you have to implement this immediately. And then the
debt will be wiped out every quarter you�ll be hitting it really hard.
This is fantastic. This has been so inspiration to myself, this is something that I want to
learn for myself, my business, absolutely. And I want to let you all know that there
is a hashtag profitfirst and you�ll see one of the pictures that kind of got us connected
starting out, right Mike? Yeah, yeah
It�s #profitfirst and you�ll see tons of people that have been already jumping in
on the conversation. It�s a real motivational and inspiring book and I highly recommend
that you pick it up. And where can people get that book?
You can get the hardcover if you want or the kindle version or the audio version, all on
Amazon. Amazon has the best price going on right now so that�s where I suggest you
pick it up. That�s great. And this is going to be available
on YouTube so if you�re watching it right now, that�s probably where you are or on
my blog where the video is embedded but it will also be podcast #40. I�m actually at
40 now. When we connected, I was at the beginning of when I started out my podcast, so we�re
at episode 40 now. So all of the resources and everything discussed in this interview,
including a download for all of our viewers and listeners. And what is that?
It�s like the best download ever, it�s like half the book. It�s five chapters of
Profit First so if you read that you�ll have enough stuff to implement the entire
system. It�s what we discussed now. The second half of the book, that�s the one
you have to buy, that�s the advanced concepts, how to take this to another level.
The How The How, yeah. But it�s a great download,
you can�t get it anywhere else. You can�t even go to my website and get 5 chapters,
it�s only with Vickie. Just here, right here folks. Thank you. So
how can people get in touch with you Mike? If you want to check me out, go to mikemichalowicz.com.
I know it�s hard to spell, Vickie I know you�ll put up a link, but give your best
stab at spelling it. The one blessing is I�m the only Mike Michalowicz in the world so
I get the best SEO. Give your best stab at it, you�ll find me. My website has this
book, my other books too, free chapters from there, the blog, tons of free resources and
a newsletter that�s pretty killer so you can sign up for that too.
I love it. And I love the visuals because I�m into visual marketing, so I always look
at websites and see how the flow goes and see where my eye kind of tracks and you have
these great visuals so if you mouse over, you do something.
Yeah, I might write my next book about that, I�m a big fan of marketing, but particularly
behavioral marketing, how the psychology of the mind works and so I employ that in my
website and maybe sharing details of the �tricks� of the trade.
Absolutely, that�s great. I�m actually working on my first book. I know that you
have 3 now Nice
So I�m working to go towards best seller status, I�m aiming high.
I have a feeling you�ll do it. I hope so.
I think so. Thank you. So if you want to check out this
podcast, go to saywowmarketing.com/itunes or saywowmarketing.com/stitcher, if you use
Stitcher on an android. SayWOWmarketing.com is my website, I�m also on Twitter, you
are too Mike, we�re on Google Plus, Facebook, we�re all over the place.
All over. So I look forward to connecting with you,
if you have any questions, or comments, please reach out to us and we�ll be happy to answer
them. Mike, thank you so much for this interview today.
Thank you, thank you so much Peace
Peace out. Take care.