Today I’m happy to share this conversation with one of my very favorite bearers of light for small business entrepreneurs, Mike Michalowicz. Mike hardly needs an introduction having been featured prominently in the media for his business success, small business advocacy, and best selling books, including The Toilet Paper Entrepreneur, The Pumpkin Plan, and now, Profit First for over a decade now.
I’ve personally been a student and fan of Mike’s pretty much from day one, because he’s an advocate for the small business entrepreneur who knows how to make complex and otherwise boring topics simple, interesting, and supremely entertaining. Also, he’s irreverently funny, and has both feet planted firmly on the ground in spite of his incredible success.
Beyond that, if you haven’t heard of him, here’s what else you need to know about Mike Michalowicz: At 24, with no money or experience, Mike bootstrapped a multi-million dollar technology company, which he subsequently sold. He went on to launch a new business the next day, and in less than three years, sold it to a Fortune 500. Next, he launched his current multi-million-dollar business venture, Provendus Group, in which he and his team foster explosive growth in businesses that have plateaued. If all of that isn’t enough, Mike is a also prolific writer, frequently contributing to publications like The Wall Street Journal, and Open Forum. He’s been featured on a number of television shows, and even hosted his own show, Bailout! (think Restaurant Impossible for Small Business). He’s also a frequent guest lecturer for business associations, entrepreneurial groups, professional business associations, and ivy league collegiate entrepreneurial programs. Taking a breath now…
So with that, here is my recent conversation with Mike Michalowicz about his entrepreneurial journey, how he balances family and work, and his new book, Profit First: A Simple System to Transform Any Business from a Cash-Eating Monster to a Money-Making Machine. Friends, if you run a business, you need to read this book! It drops July 8th, but you can pre-order your copy from Amazon today.
If you prefer to listen, here’s the Audio:
If you prefer to read, here’s the transcript:
NM: Welcome Mike, How are you doing, today?
MM: I am doing very well. Thanks, Norma.
NM: So yesterday was Father’s Day, and I know you’re a Dad. Did you get a chance to do anything special with your family?
MM: Yeah yeah, so we had a little celebration at our house here. We had a cookout. And somehow I got cornered into cooking. Actually I enjoy it, so I’m not complaining.
You know, one things my kids did, Norma, which was just beautiful, is each one of them came to me and they wrote–instead of a card or something–they just wrote reasons that they love me. And it was just beautiful and touching. It was my favorite Father’s Day ever.
NM: Oh that’s awesome. I love hearing stories like that.
MM: It was just really cool and unexpected. It’s how the day wrapped up. My wife–I wanted to hustle down to the home office and get some stuff done–and she said, “No, no, no, you can’t go down there yet, the kids want to say something.” And then they all came over, one at a time, read off what they wrote for me and gave it to me, so I’ve got it now hanging in my office.
NM: Oh that just beautiful. I love stories like that. So how old are the kids now?
MM: Believe it or not, I have a 21-year-old, whose back from college. I have a 15–she’s turning 16 next month, and a 12-year-old.
NM: Wow…I don’t know why in my head I had your kids younger.
MM: Well I think everyone would. I’m 42 years old, so I got a very young start on the adult part of life. And my wife and I–we call it the reverse honeymoon–once the kids are out the house, that’s when we’re actually going to take a honeymoon and do all the stuff we didn’t do when we were younger.
NM: Hey, and you’ll be young enough to enjoy it.
MM: Yeah, yeah, yeah.
NM: I started late with my kids. I had my first son–I was 37 years old when he was born. And he is ten years old now. So, now you know how old I am.
MM: Yeah. I just figured it out.
NM: Time goes by quickly.
So something that’s interesting to me is that whenever you hear interviews with successful women entrepreneurs, often the discussion of work/life balance comes up. Especially when it comes to having kids. But you don’t often hear that question asked when talking to successful male entrepreneurs. So want to ask if you’ll just share about how you manage that with your schedule. You know, you’ve got this stratospheric success, so how do you balance that with being a husband and father?
MM: Yeah, so, well first of all I have an amazing wife, and I think the key is to have a partner that is really behind the scenes managing all the stuff that I’m not managing. You know it’s a working relationship. Krista, my wife, will do things that I just don’t have the availability to do because I’m so devoted to my work and so that’s the trade off.
But you know, I don’t know if I’m a believer in work/life balance as much as work/life integration. So I have a home office. I have an office office, but I also have a home office. I work from my home office almost exclusively, I go up to the other office occasionally. Because this way when the day ends I can be here. I have breakfast with my children every day, and we’ll have dinner every day because I’m working from home. But then I can pop down back to work.
But the other trade-off too, is working a lot. So, instead of me going out with my children and riding bikes–are they willing to help me maybe package up some stuff that needs to ship out? So the time we spend together is different as opposed to the traditional stuff–and I’m not saying it’s the best in the world to do, but that’s the reality of how I get to spend more time with my kids.
NM: Yeah, I think that’s one of the things that inspires people to become entrepreneurs in the first place, is they think they’re going to have more control over their schedule–you know to work from home as a case in point–but then the struggle, I think, comes in with being able to turn that off. I know for me working from my home office, that’s always a big challenge, you know: stop working.
MM: Yeah. No I hear you there. I struggle with that too. I think–actually, I’m convinced now, I’m a workaholic. And at first, used to wear that like a badge of courage, Norma, which is bizarre. I would be proud that I could work longer and harder than my contemporaries or my friends. And then one day it struck me, I was like, “oh my god,” it’s like any other addiction. It’s not healthy, and working all the time is not something to be proud of. It means that I’m really good at being really inefficient and that it it takes me more time than the normal person to get stuff done. And that realization kind of woke me up. Like, workaholism is just a cover up for being inefficient and ineffective, and unable to delegate well. And with that realization–I’m not saying it’s cured my problem–but it’s made me much more cognizant of it, and I’ve improved, and the efficiencies have grown: much better systems, surrounding myself with really qualified and talented people that can get stuff done.
Actually right before our call, one of my colleagues, Ron–he sits right across from me–yelled over and said,
“Hey can you take care of someone?”
And I said, “Yeah, of course.”
That’s the workaholic in me.
Then he said, “Hey, if you can’t, you can say, you can’t.”
And I said, “You know what, I can’t. Why don’t you take care of it.”
So right now he’s on the phone and he’s taking care of it. You know us workaholics, we seem to say yes to everything and then compromise everything as a result.
NM: Well, yeah. You’re preaching to the choir. In fact, I need a Ron sitting across from me, I think.
So I was spending time looking at the Provendus Group a little bit–did I say that right?
MM: Pro-Ven-Dus, yeah.
NM: That’s one of the things I would love to talk with you about today–but I don’t think we’ll have time because I want to make sure and talk about Profit First–your new book coming out.
But I like that Provendus Group is addressing those issues with entrepreneurs. And I think a lot of the people that I network and associate with need that kind of direction and help in particular. With the Internet and information coming at us all the time, it’s so important to have systems and processes in place so that we can actually manage our businesses effectively. So–I may have to schedule another interview with you just so we can talk about Provendus Group.
MM: Yeah, sure, I’d love to do that. Just the one little tip I’ll share about that is one of the things we say, is the first thing we’ll do when we start working with a company is schedule your 4-week vacation. And that’s terrifying for people. The response is, “my business will go under…I can’t survive…four weeks gone, I can’t do it.”
But if a business can be developed so that you can be away for four weeks–that’s typically for most businesses a full cycle. It’s a month time period. It represents gathering prospects and converting them to customers, collecting revenue and so forth. So the whole objective of our company should be getting to a 4-week vacation. Because if you can take a 4-week vacation and your company grows in your absence, then it can grow perpetually without you.
NM: That’s difficult for me to even fathom at this stage in my business, but that sounds awesome and appealing. So we need to have more of this conversation!
NM: So we were talking about your awesome kids, and something I’m curious about is what you were like when you were a kid? Did you have this entrepreneurial bent to you from the time you were young and out there with a lemonade stand, or is this something you developed later in life?
MM: It was something that came later in life. I actually had no aspirations to be an entrepreneur. I never even knew what it was about, because there is no one in my immediate family that’s an entrepreneur, so I didn’t really ever aspire or want it.
I wanted the corporate gig for the entirety of my life. I thought that’s how you made money and stuff. My situation was, I just couldn’t get a job–after college–I couldn’t get a job like that. So I worked for a small business, and then one night after kind of a bizarre confluence of events–one night I went out for drinks and with the fifth or sixth beer in me, I was like, “You know what? I want to start my own business!”
It took some liquid courage–and I burned the bridges–another thing they say you shouldn’t do, but I did. I called my boss and said, “I’m out of here. I’m done. I’m going to compete against you.” I said all the wrong things, and so when I tried to beg for my job back, forget it, I couldn’t get it. So, I was off and starting my own business, and learned a couple things at a very young age. How to build a business and to be a father. You know by 23 I had a 2-year-old son now, and was building a business simultaneously. So it was either make it, or I’m done. So, I made it.
NM: Yeah, well I’m really glad you did.
MM: Me too! Thanks makes two of us.
NM: So from where you started to where you are now, that’s quite a journey, and of course if anybody wants to learn more about that journey, definitely read Toilet Paper Entrepreneur and The Pumpkin Plan as well–but Toilet Paper Entrepreneur in particular I think gives more back story on you.
That’s sort of the book that when I read, your whole message and even your irreverence, and everything you talked about in that book really resonated with me because when I graduated from college there were not jobs for techs. At least at that point shortly after 9/11 and people were just being laid off in droves. And so what really resonated with me was the whole message of, “you know it doesn’t matter where you are, you can do it,” and “you can start with nothing.” I just loved that rebel approach, and so for me that was really helpful and inspiring.
MM: Oh well, thank you. You know I think we all have our story, and it’s important we just circulate and share it because you know the stuff you think is humbling or embarrassing is ultimately the thing that connects with other people, and shows how human the experience is for all of us.
NM: Definitely. I think you are very, very relate-able, and that’s one of the reasons you have such a following, for sure.
So what are three things that you know now, that if you known when you started out it would have made your life ten times easier?
MM: If I had know the riches are in the niches I would have grown much faster. I thought I had to serve everyone I could. I remember my first company–I was in computer networks–and I would say that I service any kind of small or medium-sized business. Which is the most generic, broad term in the world, and I thought that made sense. And then I realized the broader the group I was trying to serve, I was actually serving less and less people. I couldn’t become a specialist. So, I wish I knew riches were in the niches back then. I would have moved much faster.
I wish I knew how–actually maybe I’m happy I don’t–how challenging entrepreneurship could be, because with all the highs that we experience, I think there’s ten times more lows. Yet on Fast Company, and Inc. and all these different entrepreneur magazines, you only see the successes. You see these amazing companies that have grown so successfully, and I don’t think that’s the reality. But now that I’m saying it, maybe I’m happy that I didn’t know that because maybe I wouldn’t have started.
And then perhaps another thing I wish I knew was that really I am in business to serve a purpose. And you know, it could be God-given or self-defined. I’ve defined this purpose for myself that now that I’m crystal clear about it, all my decisions in business are very easy. You know, “am I doing something that’s consistent with what my life’s purpose is as I’ve defined it?”
I wish I knew early on that that’s the essence of business. Don’t go into business to get rich or make money, because those won’t sustain you through those dark periods. You’ll leave and abandon what you’re doing because you’re not making money. But if you’re doing it because you love to do it, and your true passion is there and there’s true purpose there–there’s a reason you’re doing what you’re doing and it resonates with you–then you can see a business through all the dark periods and tough times, and the great times. And ultimately the business that sticks around is the one that’s the most successful. It’s a long-term game.
NM: I love that. That’s one of the best things I’ve heard you say.
MM: Ha! The rest kinda sucked.
NM: Yeah, the rest kinda sucked–just kidding! No, but would you mind sharing…did you come up with a vision statement for yourself? Do you want to share that, or is it something you want to keep private?
MM: Yeah! So I have what I call the Big Bang. Maybe you’ve heard of the term BHAG which is Big Hairy Audacious Goal. Jim Collins wrote about that in either Good to Great or one of his books, and he talks about the Big Hairy Audacious Goal and says everyone needs to have it. And I always liked that idea, but there was something missing. And then I heard of a different way of pitching it, and it’s called the BIG BANG and I like this better. It stands for Big Bold Audacious Noble Goal–and the noble part is what resonated with me.
So once I had clarity on that–I think we all need to set these big, crazy goals for ourselves, but there has to be a noble drive in it–then it became much more powerful. So let me tell you what mine, is–and talk about big–this is what it is. I wake up every morning and I say this:
“I am Mike Michaolowicz,” and I always say my name just because I want to mirror back to myself. It’s like an affirmation that I’m defining myself. And then I say,
“I am the most prolific business author of this century.”
Which is a HUGE goal. Statistically, it’s beyond unrealistic, but for me, my mission is to be that person. Not because of selfish purposes, because I want this for me to be famous or something. I want it because I believe I have a message that is important for the world. And the only way I’ll know that I’ve carried it out properly, is if I become the most prolific business author of this century. So that’s my big goal.
Then, to qualify it, I say, “and the world is learning it now.”
Because if I just say that, it sounds so unrealistic, I won’t even believe it myself, but if I say, “and the world is now learning it,” it means yes, I am that person, I just haven’t played it to the level that the entire world recognizes it yet. But I recognize it, so I add that caveat.
And then I say in my statement, “It’s my life purpose to empower entrepreneurs to express their authentic self via entrepreneurship.”
And that is what that goal of being the most prolific business author of the century is–that’s how it play out. By empowering people to express their authentic self through their business.
So that’s basically it, and I say it to myself every morning, and every night before I go to bed. I’m repeating this over and over and over again, and now I believe it to my core. My next job is to make sure the rest of the world believes it too.
NM: I love that. You know you’ve got your work cut out for you because I was thinking of John Maxwell–my husband has read everything John Maxwell has ever written and our bookshelf is full of John Maxwell books. He’s the most prolific business author that I can think of off the top of my head. So you’ve got a good 30 books you’ve got get crackin’ on–I’ve got some ideas for you though.
MM: Oh good!
NM: I’ll send you an email on that! I’ve got some definite questions you can answer with your books. I’m sure some other people do too. That might be an idea! You can just get people to start sending in their most painful questions for you.
MM: It’s so funny, that’s exactly what happens. So when I wrote Toilet Paper Entrepreneur, the questions came in and said, you know, “…loved the book, AND, I have another question for you. Now that I know my life’s purpose expressed in my business…” –that’s really what The Toilet Paper Entrepreneur was about– “…how do I know sell and grow this business?” So The Pumpkin Plan came about.
And then, the questions came in and said, “Yeah, I know my business is growing and sales are strong, but I’m still not making a profit. I don’t have any money left over at the end of the day. How do I make my business profitable?” and that spawned Profit First.
NM: Good, you answered one of my questions! So let’s just jump right into Profit First because I really want to give you a chance to talk about this book. Now, it’s going to drop in July, what date in July?
MM: July 8th.
NM: So talk about Profit First. What I found interesting about Profit First–and I actually haven’t read it yet because it hasn’t dropped yet, but from what I have been reading–is that you’ve really narrowed in on one business process which is interesting in light of your previous books which more broad in terms of business.
NM: Will you talk about what inspired Profit First and you to focus on this more narrow business topic.
MM: Sure, so what inspired it was those questions coming in from people in business who passed their first million, but still haven’t made a profit. Business that were starting up saying, “I don’t know how long I can keep feeding this business cash before I go under.”
And even bigger business, 20-50-million dollar businesses, that started reaching out saying, “Hey, you know we are seen as a big player, but we’re barely surviving. How do you make money at the end of the day?” And as these were coming in, I’m like, “Wow, this has been my experience too.”
I grew two multi-million-dollar companies, sold them both–which at face-level sounds so successful. But no. These companies… I was barely making it. I was barely surviving on a check-by-check basis. I remember on certain days just panicking to get big deposits in and doing collection calls and stuff just so I could cover next month’s payroll. And for myself I had to figure out how to become profitable.
And what I believe is that often when there is a challenge or a problem that is experienced by a lot of people, it’s hard for me to believe that it’s the people themselves that are wrong. It’s probably some pattern or something they’re following. You know, if all of a sudden all these people come down with a disease, it’s hard to say, “you know, it’s the people.” No, it’s probably the disease that spreading. What’s causing it to spread?
So in business, you know, 80% or so of businesses struggle. They’re check-by-check, never making a profit, going out of business because of cash flow. So I’m like, what’s the disease behind this? It can’t be everyone’s consistently getting it wrong. And what I pinned it on, Norma, is what’s called GAAP Accounting.
And that’s the standardized accounting, it stands for Generally Accepted Accounting Principles. All large businesses are mandated by law to use this. Small businesses electively can follow. Ninety-nine-percent of small businesses use GAAP Accounting and the foundational formula is this: Sales – Expenses = Profit. I suspect you guys, Norma, and everyone listening–that’s what we do. How do you find your profit? You take your sales, you subtract your expenses, and then whatever is leftover is profit. But here’s the absurdity of it. Profit is a leftover in that formula. It’s the afterthought.
We sell as much as we can. We spend money to keep our sales going. And then the last thought at the end of the month or the year is we look and say, “hey, was anything left over?” I suggest that formula is the flawed formula. While logically it makes sense, it doesn’t fit into our natural behavior.
The natural behavior of an entrepreneur is–you know, I look at my bank account every single day–logged in this morning to see what my balance is, and then based upon what money I see in my account, I’ll then say, “okay that’s my sales money that I’ve collected, now I can spend money on my piled-up bills.”
Maybe if there’s a little extra cash leftover, I’ll say, “oh good, I can make that investment I want.” In more cases than not, there’s no money left over, and then panic ensues and I start making collection calls and selling stuff. Basically I’m in business to pay expenses.
What I suggest in Profit First is to flip the formula and have it be this:
Sales – Profit = Expenses.
And logically it’s the same as the GAAP formula, but behaviorally, it’s completely different. Now what we do is we sell, money goes into our account, we look at our account like we do everyday, and we first extract our profit–10%, 15-20%, whatever the number is–extract that percentage and reserve it, tuck it away so its inaccessible. And then, the remainder is left over to pay expenses.
What happens here, is that we see that we have less money than we did in the past to pay expenses, and it will put downward pressure on our expenses. It’ll force innovation. It’ll force us to look at our expenses in a different way, not incur unnecessary expenses, find ways to negotiate better deals–find the same thing at a lower price point–squeeze the juice out of everything that we invest in. Basically, it’s the pay yourself first principle, applied to entrepreneurship.
That’s the first step. In the book I have more steps you can take to really ensure the profit, but the essence of the book is this: take your profit first, tuck it away so its inaccessible, and then if you can’t pay your bills, that is your business screaming at you, saying, “You can’t afford these bills. Find a new way. Find a different way.”
NM: I think that’s great, because it’s all relative depending on the size of your business. You’re spending the bulk of your money running your business. That’s the mentality, that everything has to go back into the business. So for me, this is actually a much more motivating formula. Because I know that if I’m going to be paid and my profit is going to be safely tucked away, then I’m going to be a lot more motivated to come up with those innovative ways to make sure the expenses I have are #1 going to be covered, and #2 I’m going to eliminate expenses that I really don’t need.
MM: Right. It’s far more motivating. That’s kind of the funniest part, perhaps about this. The old formula: sales – expenses = profit. I call it the Frankenstein Formula, and the reason I call it that it really builds a cash eating monster, you know? Like, just like Frankenstein. He brings the dead to life. It’s an amazing miraculous moment, but almost immediately he discovers that he’s created a monster. And it’s the same thing with our business.
We start this business and it’s exciting, it’s thrilling, it’s inspired the day we open the doors. But very quickly we see this thing is a hungry beast, and it keeps on eating more and more money. And the irony is the more we feed it, the bigger the monster gets and then consumes more.
So in the old formula, we are driven to pay expenses, pay expenses, and there’s never any profit left over. It’s demotivating. Conversely, this new formula, you know Profit First where sales – profit = expenses, you now capture the strength of your business and kind of put reins on it, and it starts pulling you along like a Clydesdale workhorse. It’s no longer a monster, but it’s working for you.
And when you start taking your profit–and in the book I suggest quarterly profit distributions just like large companies do–when you start taking, on top of your regular salary also that you take out of your business, a profit distribution every quarter, well now this business becomes not a monster, but just a beautiful cash cow. It re-motivates us and makes us fall in love with our business again.
NM: I cannot wait to read this book –and it’s interesting too that I would even say that because as a creative entrepreneur, typically anything that has to do with the money-end of business is something I wouldn’t choose over dental work any more than I absolutely have to–but I think this is a really exciting new concept.
And that’s one of the reasons why I’m glad to hear that you’re going to continue writing because you can take these business topics that can feel very complex or boring–and you actually make them really fun an interesting. And also you break them down. You take the complex and you make it accessible. And so that’s something that I really appreciate, because my degree is in computer science, not business.
MM: Oh, wow, thank you. No, I believe that’s my life’s purpose, to simplify complex stuff. And I think I need to do it because I’m really a simple guy. I can’t grasp complex accounting, so I work really hard on taking these down so I can understand it. And I have the exact same experience, Norma. If I had to print out a cash flow statement–first of all, I don’t even know how to find it in my quickbooks–and then I print it out and have no idea what this means. Then my accountant would say, “Mike, it’s not just your cash-flow, print out your balance, and income statements and link them together and run these analysis.” I’m like, “Whoa, No.”
But what I did notice in my own behavior, was everyday I looked at my bank account, and based on how much money I saw there, I was making gut calls, like, “oh we have enough money to buy something, let’s do it,” or “I guess there’s not enough money, let’s not do it.” So if that’s the way I naturally behave, I said to myself, “I’ve gotta find a way, then, to leverage my natural behavior.”
That bank balance accounting of checking our bank account everyday, if we just leave it with one bank account where all the money comes in and goes out, that’s actually the harmful behavior. But asking people to change their behavior is impossible. So then I said, “well, if this is the way I naturally behave, how do I set up a system where I can still check my bank account balance every single day, and then be able to make realistic decisions about my business?” And that’s what Profit First does.
All your accounting–you don’t need your accounting system anymore–your accountant should still do that. I’m not saying don’t do your accounting, you have to. But your accountant or bookkeeper can do that behind the scenes. But as the entrepreneur, now we have the ability to just look at our bank accounts every single day because the money gets divided up into buckets: a profit bucket, an owner’s pay bucket, a tax reserve bucket–and we can make an instant assessment of what money is available for what purpose and then act accordingly. It removes our gut instinct, which sometimes, or in many cases is wrong, and puts the money allocated to it’s proper purpose right from the get-go, and then we can go and continue our same behavior of checking our bank account every day–which was bad before, now becomes good.
NM: Yes, definitely, and I think a system like this also seems like a lot more fun–not only a lot more doable, but a lot more fun. I can see myself doing something like this whereas with the GAAP accounting that we talked about before, No. That’s not really for me. I’m not going to do that.
In the past I’ve hired people to take care of my financials for me, and it turned out to not be a good situation. What I’ve learned is that as a small business entrepreneur, I need to be hands-on with the money and where it’s all going. So as much as I dislike it, if I choose to be in business, it’s just something I’ve got to find a way to embrace. So this book is not only going to help me, but also a lot of entrepreneurs who might also struggle with the same issues around money.
MM: Yeah, so you know I’ve had the same experience. Working with an accountant or bookkeeper can get real expensive, and they were giving me information that I can’t digest, and I was superseding that anyway by looking at my bank account. So when I started the system for myself–five years ago by the way, I started it and tested it with about 100 companies before I ever started writing about it–I met with my bookkeeper and said I’ve got this new approach to doing things and I want to run it by you, and he said, “nope, I’m not going to do it.” And I said, “okay, you’re not my bookkeeper anymore.” I found another bookkeeper. Her names Deborah Courtwright, and started using the system. And she not only took it, she took it to the next level. And we started doing this together.
And what I’ve found is that there’s certain accountants and bookkeepers that when they hear the system, they say, “nah, this is unnecessary,” or “it’s not consistent with how I do my accounting,” and there’s other accountants and bookkeepers that say, “I love this. This flows right into what we’re doing, and it makes it so easy for the entrepreneur to digest, we’re going to take this on board.”
So I actually set up a program. I call it Profit First Professionals, and even have a website now for it, where we’re certifying accountants and bookkeepers that get this, so they can do the stuff that we hate to do–the reconciliations and stuff–behind the scenes that has to be done but we don’t want to do it but that allows the entrepreneur very quickly, at any instant, assess where their business stands by looking at their bank account. So there are accountants and bookkeepers that are getting it, and I’m out there finding them and registering them in our database so that if your current accountant or bookkeeper doesn’t work with this, you can find someone that does.
NM: That’s great because you do reach a point in business where you do need to have that accountant or bookkeeper. So you said this is going to be online?
MM: Yes. ProfitFirstProfessionals.com is the website for financial gurus that can support you with Profit First. And they also get that the entrepreneur has to have their pulse on the numbers and this system will allow you to do it. You’ll still look at your bank account every day. You’ll still have the pulse and the numbers, but the dirty work behind the scenes that we don’t like to do and that we put off until the last minute and then there’s a panic to pay bills and stuff–your bookkeeper or accountant can take care of all that stuff for you.
NN: That’s great to know about. So I had read about an analogy in Profit First where you talk about the four core methods derived from the healthy lifestyle habits. Do you want to talk a little bit about that and share how you came up with the idea for this analogy?
MM: Yeah, I’d love to talk about that.
So, one story I didn’t share with you yet, is when I sold my second company I achieved millionaire status. I was 35. I became a millionaire. I couldn’t believe it. This was like my dream come true. But, I just want to qualify that millionaire status for me is that I was a millionaire for about a day because then the next day taxes came. I had just reached into a million, and then taxes came and the next day I was back out of millionaire status. So, I’m the one-day millionaire. But my ego, now, was, “oh, I’m permanently a millionaire. I’m this wealthy guy, and I need to show the world how wealthy I am just did stupid thing, after stupid thing, after egotistical thing, after egotistical thing. Buying cars and all these things. And I also became an investor. A really sucky investor, by the way. I’m really a bad angel investor I found. And I now call myself the Angel of Death by the way. That’s how bad I was.
And so I lost every penny, Norma. And on February 14th–it was Valentines Day–2008, I had lost my last penny doing stupid investment things, and I was back to zero. And I came home, in tears, embarrassed, ashamed, in front of my family, and had to beg for forgiveness. I didn’t even tell them what was going on–how much I was wasting money. And my children and my wife were just staring at me, and I was just sobbing, trying to explain that it was all gone, and my daughter runs out of the room. And when she did, I was like, “oh, I want to run away so badly myself.” But then she came back, about a minute later with her piggy bank, and she put it down in front of me and she said,
“Daddy, I’m gonna help us.”
And that moment–that moment was an eye opener. A painful realization that wealth is not an event, it’s a habit. Profit is not something that’s going to happen one day, somehow with a big moment, it’s something that needs to be a daily habit. And that moment gave me that realization. It was a cold slap to the face, waking me up that I had to make this part of a lifestyle, not a moment.
But it didn’t happen instantly. I didn’t instantly figure out this was the solution. I actually experienced what’s called functional depression. A very dark period in my life. I was still functioning and I was still able to work and stuff, but I removed myself from many social settings. I watched tons of tv, started drinking more than I should drink. And I remember watching tv, in this somewhat pathetic state just drinking a beer with Cheetos on my t-shirt at 2:00 in the morning, and watching these health fitness experts.
This guys comes on tv and says, “all those quick fixes–the thigh master and the ab electrocuter and all those things–he says, “they work momentarily, but they don’t work with our natural habits, so they don’t work permanently.” To work permanently, he said we need to find something that works within the way we already behave. And this guy went onto explain that with our diets, if we simply reduce the size of the plates at our house, we’ll start to lose weight. Because our natural habit is to fill up our entire plate and then as mom said, eat everything that’s on our plate, that’s what we naturally do. But he said our plates are too big, they’ve grown so much. Simply buy smaller plates for your house. That’s how you lose weight.
And that was kind of the “aha” moment, saying, “wow we just change the guardrails and continue to behave the way we normally behave–if that works in health, it can work in business.” So that was the first principle: reduce the plate size which was the checking account. Don’t have one checking account–one massive plate where all the money goes on and we eat off this one plate. When the money comes in, divide it up into small plates: a profit plate, and owner’s pay plate, an expense plate which becomes a smaller plate now so we consume less.
The other three principles I learned–just kind of rapid fire here: he said, “eat your vegetables first.” Most of us eat the meat and potatoes first, dig into dessert, and the vegetables are pushed aside so we lose out on all these nutrients plus we overeat on the bad stuff. So if we eat our vegetables first, we get the most important nutrients and vitamins, and it reduces our hunger for the dessert.
So with Profit First, the core principle is this: take your profit first. The most important thing are those vegetables. We get the most energy from our business by doing what we love to do and being financially rewarded by our business for it. Yet, most of us are punishing ourselves at the end of the day, at the end of the year, there’s no profit. We’re actually punishing ourselves.
So following this principle: when the money comes in, you first allocate your money percentage-wise to your profit account. Then you allocate to your owner’s pay account–pay yourself. You allocate to your taxes–your business should be paying your taxes for you. You allocate the remaining money to your expenses. And when you don’t have enough money to pay expenses, like I said earlier, it doesn’t mean you can steal from your profit account. You can’t borrow from your owner’s pay. It simply means your business can not afford these expenses you’re incurring and you have to find a way–and innovative way–to get the same things done with less money. So that’s the vegetables first principle.
Two more real quick principles. To remove temptation, and what he says was if you like soda, don’t have soda in the house. There’s only so much willpower to go around and at a certain point you’re going to be drinking a soda–something you don’t want, or don’t need to have. So the biggest thing is remove temptation. If there’s no soda in the house, chances are you’re not going to hop in the car and rush out to the supermarket to buy a soda.
So with business, we need to remove our temptations. And what the temptation is, is once we reserve money for our profit, for our own pay, for our taxes, we need to tuck that money away with another bank. I suggest setting up accounts with another bank so the money is not easily accessible. And that way, when you do have a period where you are desperate to take money to pay expenses, you can’t be tempted with stealing from your profit account. It forces innovation. So remove that temptation so you don’t borrow from yourself.
And the final principle was eating frequency. What I discovered, was with a healthy lifestyle, is that most people don’t follow a healthy lifestyle and we eat too infrequently. We try to eat three meals a day, we usually skip one, we end up eating two meals a day and end up being gorged at breakfast or lunch or dinner just because we’re missing another meal, so we’re always in hunger mode. Or some people eat too frequently, constantly snacking all the time. Too many calories, we end up gaining weight. What I learned in the healthy lifestyle is you eat five meals a day, small portions. You never have these severe hunger pangs and then you eat a much more balanced caloric intake.
Well how this translates into business is that most of us don’t pay our bills frequently enough. We don’t take care of our accounting frequently enough. We do it toward the end of the month, or we do it when panic ensues, or the collection call comes in. And then we kind of gorge, and eat up all the money we have available. I found the best way to manage bills and cash flow is to do it twice a month. Pay bills twice a month. I found the 10th and the 25th–I can share details why–but the 10th and the 25th are the best days to do it. And when we pay our bills, and we disperse our money through different accounts on every 10th and 25th, we start seeing a cash flow rhythm. We see money accumulate–the income money. The incoming money piles up, we allocate it to the different accounts on the 10th, pay our bills, then we do the same thing on the 25th and you start getting very aware of how your cash is flowing through your business.
It’s kind of like the waves coming in from the ocean. If the waves are coming in higher and higher up your legs, you know the tide is coming in and you’ve gotta move your chair back. Where if the waves aren’t reaching you anymore, the tide is going out, you move your chair forward. We start experiencing the same kind of awareness with our business as we allow money to come in, pile up, and then disperse; come in, pile up, and disperse twice a month.
And that was kind of the rapid, rapid fire of the four principles of Profit First.
NM: That was so good. If that didn’t whet everybody’s appetite, I don’t know what will. So friends, if you are running a business, you want to reserve your copy of Profit First today. And Mike, thank you so much for taking time out today and just sharing all this information with us. It’s been just a pleasure talking with you.
MM: Oh, Norma. I appreciate you having me on. And I hope it inspires some folks to start following the process. I think every business in the world has the right to be profitable, deserves to be profitable, and if you’re making some form of income, if you’re bringing money in, the profits are already there–you just need to take them. You just need to take that profit first.
NM: Yep! And with that, we’ll talk again soon. Next time, we’ll talk about Provendus Group.
MM: You’ve got a deal!
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