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Episode Host: Henry Lopez is a serial entrepreneur, small business coach, and the host of this episode of The How of Business podcast show – dedicated to helping you start, run, grow and exit your small business.

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Resources:

Books mentioned in this episode:
[We receive commissions for purchases made through these links (more info)].

• Profit First: Transform Your Business from a Cash-Eating Monster to a Money-Making Machine by Mike Michalowicz
• Fix This Next: Make the Vital Change That Will Level Up Your Business by Mike Michalowicz
• Rejection Proof: How I Beat Fear and Became Invincible Through 100 Days of Rejection by Jia Jiang

Other Related Podcast Episodes:

Episode 532: Is Your Business Model Broken?

You can find other episodes of The How of Business podcast, the best small business podcast, on our Archives page.

Transcript:

The following is a full transcript of this episode. This transcript was produced by an automated system and may contain some typos.

Henry Lopez00:12

Mike. Welcome to the show, Henry.

 

Mike Michalowicz

Thank you so much for having me.

 

Henry Lopez

I’m excited to have you. This is a great opportunity for me. I’m a big fan of your work, and so today we’re going to focus on is this challenge. You know, many business owners often confuse about what do they need to do, what do they need to work on, or fix next, and that leads us to a lot of busy work, exhausting hours working in your business, but not much to show for at the end of the year in the way of profits. So Mike is going to share some valuable insights from his latest book, and from a previous book on how to determine what to fix next. Often it’s about achieving predictable and consistent profitability. That’s often what I find most business owners are challenged with. So we’re also going to explore some of the key concepts from the other book I referred to, which is called Profit First. It was a huge impact on me. I’ve implemented a lot of the philosophies in that book in the way that I manage my businesses. So, Mike McCullowitz is an entrepreneur, a speaker, an author, and a podcaster. His podcast is called The Entrepreneurship Elevated Podcast. He’s the author, like I mentioned, of several top-selling and influential books, including Surge, Profit First, the Pumpkin Plan, and his latest book, Fix This Next. He’s a founder of Profit First Professionals. The Profit First Professional organization is designed to support accountants, bookkeepers, and other financial professionals to substantially differentiate themselves in the market by introducing a significant service differentiator, which is helping their clients with these tools and techniques to maximize profitability, which again is what so many of us are challenged with. He previously founded, built, and sold two technology service companies. His second company, PG Lewis and Associates, was sold in a public transaction back in 2006 His first company, which we’re going to chat about, how he got to in the conversation, was acquired by a private equity group, so once again, Mike McCulloch, it’s welcome to the show.

 

Mike Michalowicz  02:05

Henry, it really is exciting to be here. Thank you for having me.

 

Henry Lopez02:08

Thanks for taking the time, I appreciate it. I always like to start back in the early days when you were at university, I think you then went into technology sales right after school, did I get that right?

 

Mike Michalowicz  02:20

Yeah, and that was not my intention. I thought I’d leave school and go off to work for one of the big six accounting firms. That’s what I thought was my destination, doing consultative work, but I couldn’t get a job to get hired. I made two rounds of interviews, and then got kicked out the door. So I started at a local small business. It was a computer store, basically. They sold integrated systems networks, and that became the inception, ultimately, for my business. I started a few years later, based upon what I knew. I knew how to set up computers and decide to start my own computer business.

 

Henry Lopez02:52

So, it sounds like it came out of out of that need that you, when you were in college and first looking for a job, did you think you’d start your own business at some point?

 

Mike Michalowicz  02:59

Yeah, never had the intention. It’s interesting, how we’re, you know, our history, our life’s experience dictates what we do in the future. I grew up in a family where my father had one job for his entire life. Wow, and I thought that’s the way you work, so I was looking for that one job where I’d work forever. I never.. there’s.. there’s not an entrepreneur in my immediate family, I’m sure, in the lineage of my family, in all families, there’s probably entrepreneurial history, but I couldn’t find any, so I had no basis for it. But when, when it happened, well, it was inspired by drinking too much one night, I was lamenting the place I worked at, and said I could do more on my own, and you know, a few bottles of liquid courage, and I set out on my own, but I fell in love with the process very quickly. As scare as it is to have no control in regards to where your next dollar is coming from, I should say no control, but that you’re at the beckoning of clients, they determine when they’re gonna use you or not. You also have full control that you can get results, and something’s not working, you can adjust, you don’t have to, you’re not beholden to the requirements of a boss, right? So it was this interesting kind of yin and yang of no control and control that I kind of fell in love with.

 

Henry Lopez04:14

Did you pretty early on feel like, okay, this is what I was meant to do, or was it a temporary thing until I can get that consulting job. What was your mindset back then? If you can recall,

 

Mike Michalowicz  04:24

yeah, what article you know, once I did it, I was like, oh, I’m all in for life,

 

Mike Michalowicz  04:28

but I was scared. It wasn’t like, you know, like, oh my gosh, this is going to serve me financially. It was terrifying. I met the first few years, I got married very young, my wife and I had a son right from the beginning, and wow, we, we were living like hand to mouth, but my wife’s like, ‘Hey, we’re gonna have peanut butter and jelly for lunch and dinner, and sometimes breakfast, and that’s how we’re going to be. And we moved into a really, really inexpensive apartment, and that’s how we fueled this. It’s interesting how, when you have no money coming in, or very little, I should say, you can throttle back your lifestyle accordingly. And we were not, we were living hand to mouth, but also there was a comfort and joy of that control over time, that fear of not having enough money was a great motivator to keep me going, but over time it converted into confidence, saying, “Oh, if I do stick with this, entrepreneurial success doesn’t happen overnight, but if I do stick with it, I start, I started to see some wins here and there and started to compile or pile on each other, and I started to gain momentum, and it was probably after a few years that I was like, this, this is a massive opportunity I’m sitting on, I just got to figure out how to do it right now, but I’m definitely all in for the rest of my life.

 

Henry Lopez05:31

Yeah, that’s fascinating. I got to think that then those early struggles managing the money very carefully has got to be what led to that, that, that approach, and what ends up being in the Prophet first book, it’s got to be leave that influence that

 

Mike Michalowicz  05:45

I greatly influence it. So there was a turning moment. I remember it distinctly. I remember the day, I remember the hour. It was February 14, 2008 530 at night, early evening, and we were just Valentine’s Day. We celebrated at home with my kids. We always have it’s like a Thanksgiving dinner for us, and my accountant had called me that morning. I had sold, now built and sold two companies. One was acquired by Robert Half International, they were Fortune 500 Another one was acquired by a private equity group, and I was full of myself, to be honest. Henry, I got this all figured out. I know everything about entrepreneurship now. I’ve been an entrepreneur at that point for approaching 15 years, and I had become a self-made millionaire. It’s amazing, Mark. 10 years in my early 30s, and my third business, which I conveniently leave off my resume, was a calamity. I was an angel investor, I had no idea what I was doing. I actually call myself the angel of death. I was so bad at it, I was losing money, and I evaporated all of our wealth and ran this business so poorly. Well, on that day, my accountant told me I should declare bankruptcy, or he gave me a choice. He says, ‘Declare bankruptcy or vacate your house, liquidate every asset you have, you’re broke. And I chose option two. I liquidated everything. We lost our house 30 days later. We lost our cars. Everything we bought, the only thing we get for is beat up rusted Durango was our only car. And that moment became a seed, if you will, for change. I was, I was devastated. I realized that my paradigm of what made an entrepreneur successful was wrong. I had to reinvestigate this, and I struggled with it. It wasn’t like next morning I woke up and say, “I got to figure it out. I went through depression, but it was a seed, and over time I started to investigate how things would work, like profit, and I was always told that profit was the bottom line. It’s the year end, and I’m like, oh my gosh, that’s wrong, because when something is year end or bottom line, it means it’s last. And we’re told the formula: sales minus expense equals profit. I’m like, oh my gosh, we’re told don’t worry about profit until the end, it should come first. So that’s how I discovered for myself the profit first formula. It’s the pay yourself first formula applied to business, and when I started applying, it’s like this is a game changer. It changed my life financially. In fact, every book I’ve written, in part or in whole, has been something to fix around my own misunderstandings about business to improve my journey. Yeah, and hopefully improve the journey of my readers. Is

 

Henry Lopez07:55

part of what led to that failure was part of that mentality, where it’s all about growing revenues, all in, put in all the cash in. You were so overconfident. I got to think that you said, well, this can’t fail. If I apply the same things I’ve been doing, which is that hard work, and let’s just grow revenues. Was that part of it? Because I see that happen often. I mean, that’s happened to me, certainly.

 

Mike Michalowicz  08:15

Oh, yeah, yeah. I bought into, you know, it takes money to make money grow, and the profits will come. I believed all of that stuff, and was trying to live accordingly. What I found, Henry, is that sales translates actually to stress. If sales is necessary, it’s absolutely necessary. It’s the oxygen of a business. If you have no money coming in, your business is suffocating. So, sales is necessary. It alone, though, is not sufficient sales does not cure everything. What I believe I know now, at least for myself, is that the more sales we have, the more obligation our business has. The more I sell, the more I’m responsible now to deliver on why I sold. So sales translates to obligation, and in a small business, the owner carries a business on their back. They’re the do-it-all. They’re the superhero for the company, so more sales, more stress, more responsibility on the owner means more stress on the owner. Many businesses sell themselves, sell their way into a business they can’t stand, and they can’t sustain. They’re working all the time to keep up with the sales. What we need is adequate sales to drive profit, but then we need a profit formula. That’s where profit first comes about. Once that’s satisfied, we got to focus on organizational efficiency, that I wrote about in Fix This Next. We were talking off air about that, but it’s a sequence of events we must go through to kind of level up our business.

 

Henry Lopez09:28

Okay, great stuff. Well, we’re going to dive into that, but I think the other common denominator there, as you tell that story, is the support that you had from your spouse.

 

Mike Michalowicz  09:35

Yeah, she is. She’s remarkable in a couple ways. She does not have an entrepreneurial bone in her body. She is anti-risk. She’s scared of a failure. I embrace it, and I wonder if, as individuals, that her fear of risk would put her, would compromise her and me. My acceptance of risk would compromise me if I would take too bold of risks. So she comes to. Balance for us, like Mike, are you sure that’s a good idea, and in the moment I may stop my feet and sense of course it’s a good idea, but as I think about what she shared, I make better decisions. The second thing is, but she’s also a cheerleader for me, so behind the scenes she’s like, I’m proud of you, I’m proud of you. And when I wrote my first book, so I come home with this crazy idea, hey, you know, we, I built two multi billion dollar businesses. I failed with this third one. I’m going to leave business in the traditional sense, and I’m going to become an author. And I think that’s a great idea, and we can, we can do very well financially doing this. And she’s like, I don’t think authors make money, are you sure? And I said, yeah, this is what my dream is. She goes, well, if it’s your dream, you have to do it. So she supported something that, if you look at logically, an author is a really risky business to get into financially. Very few people are successful at a lot of percentage wise, a lot more people fail at that type of business than many others. But she also realized there’s a passion and calling that that was my, that was my pursuit of happiness. And so she cheerleaded me into something that wasn’t logical, that’s powerful, that she can bring that balance, but also bring that inspiration.

 

Henry Lopez11:03

Yeah, yeah. And it’s interesting that even after that failure, there was that was there anything in you that said, you know what, I’ve done this business thing, let me go get one of those jobs and and be more stable. Did that cross your mind?

 

Mike Michalowicz  11:14

No, never crossed my mind. That, but conversely, it crossed my spouse’s mind. I, when I first became an author, it was a struggle, and I guess it’s my wiring. I’m so excited about what I’m doing, even though no one was buying it in the beginning, I was all in on this. Now, listen, by a point, I have three children, my wife, a dog, there’s mouths to feed, right? I get blinded by, I’m like, I just kind of go, baby, go, this will work, this will work, illogically optimistic. And my wife came to me, the same, my same, my wife, who said just a year or two earlier, ‘Pursue your dream, you got to write books, said Mike, ‘We can’t afford to live. Period. I mean, we can’t afford it. You’ve got to get a job. To me, and I consider authorship entrepreneurial, and I own multiple businesses too. I have a membership organization, a training company, artificial reality company. I’m still an entrepreneur. Getting a job is like a dagger through the heart.

 

Henry Lopez12:06

Yeah, that’s

 

Mike Michalowicz  12:06

why you get around, like hearing those words. It was, it was, it knocked the wind out of me. And she wasn’t wrong, she was totally right. So I started to look for a job, but really not in earnest. It was a.. I was trying to placate her. I didn’t realize it was subconscious. I was like, okay, I’ll look for a job. Oh, I can’t find a job while continuing to pursue my dream by pursuing my dream harder and stronger and more businesslike, and then start getting traction. And then the day came when it was very clear that authorship was the best choice I’ve ever made.

 

Henry Lopez12:32

I see, I see. Wonderful, thanks for sharing that. All right, let’s segue into the topic here that I want to dive into with you, and it’s related to the latest book, what to fix next. As you talk about in that book, you know you’ve, you’ve connected now with millions of entrepreneurs, either directly or through your organizations, or through your books. And what you’ve come to in this book is that you’ve identified this challenge, which is, we don’t know what to work on next. We get stuck, we’re spinning our wheels, and we don’t know what to do next. Right?

 

Mike Michalowicz  12:59

Yeah, it was very clear. I sent an email out to my readership, and I’m very blessed. Over the years, now I have more and more readers that follow me and are kind enough to respond and give me their insights. Cajun sent out emails asking, what challenge do you face now, because that is insights on why I need to write about next.

 

Mike Michalowicz  13:16

So, I sent out an email out about five years ago. It takes me about five years to write a book. I’m working on three books right now, so one will come out in about a year, another one that’s gonna come out three years, and another one that’s five years down. So I’m always working on, but five years ago I asked, what’s the biggest challenge you’re facing in the year ahead, because I wanted to get the big picture challenge. Well, I’m not the most technically savvy guy, I was a triple click or something, because I got multiple responses, because it’s the same email multiple times the same day, I got multiple responses from the same people with different answers for the biggest challenge for the year. Like, in the morning, some guys like, I got a sales problem. In the afternoon, it was, I believe, a hiring problem. In the evening, it was a systems problem. The next day, it was a financial problem. It was very clear that the biggest challenge entrepreneurs have is knowing what their biggest challenge is. We try to fix everything, and therefore we fix nothing.

 

Henry Lopez15:00

And we’re just in firefighting mode every day, and it seems like that’s that’s what we, and that’s how we get sucked into only working in the business, and we, you know, we get up at the end of the year and like, what was it worth? I’m stressed, I’m exhausted, and I got not much money left over. I think a lot of firefighters, as they try to grow their business, they make a hire or two. I think sometimes we move on from a firefighter to a few employees. Now we’re a fire chief. It really is maybe a more glorious title, but it’s the exact same problem. Yeah, yeah, you’re right. You’re right. That is a good way to put it. Right, you talked about in a recent podcast an exercise that you have people do where you put an A in the middle of the page. I was hoping you could walk me through that, because I think that that was helpful for me, that they kind of understand it and explain

 

Mike Michalowicz  15:43

Yeah, I think it’s a powerful illustration. So, this is the, I call it the survival trap, and you can do in your mind, or if you have a piece of paper in front of you, you can do it, but it’s three steps, and it shows why we get stuck. And so, what you do is, you draw the letter A in the middle of a piece of paper and put a circle around it, and what A represents is where your business is right now, in this moment, you know, the starting point, point A. And for many businesses, it’s the current challenge, or the current crisis, or maybe there’s an opportunity presenting itself, but it’s where our business is right now. The second step is, I tell people to draw three or more, but you know, three hours away from A, in any direction they choose, so a short distance, an inch away from the A, starting A, going out, and they can be in the same direction, they can be in different directions, whatever directions you choose, and what those arrows represent are decisions we can make right now in this moment to get out of a, to get out of the crisis, to get away from the challenge, to grab on the opportunity, but we have multiple arrows, so you can go in multiple directions, the final, but the power of course is any direction you go that gets you out, a at least gets you out of A, but the final step, the third step is draw the letter B in the bottom left corner of that piece of paper and put a circle around that. What B represents is what your business needs from you next. So A was the now, B is the next, and the question is how many arrows from A point to B. And in many cases, when I do this illustration with a live audience, no arrows point to B. The question is why. The answer is very obvious, because I didn’t know where B was. How can I draw toward B if I don’t know where B is?

 

Henry Lopez17:05

Right, that was my thing, is how do I even know how to identify B?

 

Mike Michalowicz  17:09

Yeah, so because we don’t identify B, so what we need to do is we need a tool, and that’s why Teach and Fix is next to find our B. We have to first ask ourselves, what does the business need from us next before we start resolving it? What we’d say, what we do is we only analyze the now, and we try to get out of it, but when you leave a, you end in a new a, there’s a new now, so we leave crisis of today for crisis of tomorrow, and tomorrow we leave that crisis for the crisis of the next day, so we move in this circuitous pattern of crisis to crisis, fire to fire, but there’s one more scenario, which is actually the most insidious and dangerous, my days with live audiences, sometimes people cheer for themselves, or they drew an arrow toward B, like, hey, I got an arrow pointing there, or even two, and I tell them, well, that’s the worst case scenario, because that’s called happenstance, and happenstance happens, you didn’t know where B was going to be, but you drew an arrow toward it, and how it manifests in business is, you know, business day in, day out, it’s a struggle, and it’s a struggle, but then one day this magical experience happens where everything clicks, client pays on time, employees are happy, everything’s wonderful, big project rolls in. You’re like, this is the day I’ve been waiting for, I’ve been working so hard, finally it’s happened. And then the next day you return to work and it’s a total disaster again, you’re back into survival. Why does it only happen for a day? Those are the days when we’re in alignment with what the business needs, but we’re ignorant of what the business needs. We just happen to do what’s consistent with it, so we get that relief. So, the problem, and why it’s so insidious, is you move toward B without knowing B is, you end up in a new now, a new A, and you start moving another securities pattern. In fact, no replicate what you did before, because didn’t work, but you didn’t think it worked, because you didn’t know where B was. So, the first thing is we need to know what our business needs from us, then move from A toward that B, what the business needs, and resolve it. Once we’re B, then we identify what the business needs next, that’s the C, and move toward it. And then those days that are clicking isn’t just happenstance once every couple years, now it starts happening more regularly, once a month, twice a month, weekly, and then it becomes routinized as your business moves from a to b, b to c, and so

 

Henry Lopez19:04

part of what you talk about also is that to understand that, to be able to identify that, we have to understand this hierarchy of needs for a business, right,

 

Mike Michalowicz  19:12

that’s right, so that’s a translation from Maslow’s hierarchy of needs, and what I identified is that there is a sequence of needs for all humanity, and that the genetic makeup of all humanity is 99.5% the same. Henry, if you and I are standing next to each other, people would distinguish us based upon our height, our weight, if the male, female room is the gender, if our skin color is different, our skin color, we judge people on these external factors, but when you peel back the skin of humanity, the internal makeup is the same, like you and I are identical inside. And if I was rushed to the hospital because I’m having a heart attack, and the doctor looks at me and says she would not say, “Hey, Mike, your heart, before we do this, where do you keep your heart? Is it in your foot? I mean, the heart’s in the chest, it’s always in the same spot, the biological. Functions are the same, and in business I realize we judge our businesses on the skin, the external. All pizza shops, nothing like an accounting firm. Accounting firms, nothing like a manufacturer. Manufacturers

 

Henry Lopez20:10

look at, look at how busy they are. They must be doing great,

 

Mike Michalowicz  20:13

right? Right, but, but they, but they’re, they’re identical on the inside, they’re identical on the inside. The biological makeup, and that’s where I developed business. Heart give needs. Maslow talks to the human makeup and our needs structure. The business heart give needs speaks to the business structure so very quickly. Foundationally, every business – pizza shop to accountant to entertainer – we need sales, source of incombound revenue. That’s the option for business. The next level is profit. Profit is the retention of cash, it brings stability to an organization. It’s the absorption of that oxygen to the bloodstream of a business. That’s why somebody started my sales earlier. You can sell a ridiculous amount of stuff, but if you’re not retaining the cash, your business is at jeopardy. It has a high degree of stress with no stress relief, which is profit. Once profit satisfied, we have order. Orders the creation of efficiency, that’s the next level of needs, once those needs are satisfied adequately, we can focus on impact. Impact is the creation of transformation, it’s transforming clients’ lives. Highest level is legacy, it’s creation of permanence, where a business is designed to live into perpetuity for generations well beyond the owner. Now, the key is, this is not a ladder, you don’t just climb up to the top, this is a hierarchical structure, one supports the other. They all live or function at all times, you know. Just like you and I, right now, as we’re going back and forth around this concept, we’re both breathing. It’s subconscious. Well, now it’s conscious, because I mentioned it, but it was subconscious, automatic in our business. All those elements of profit and sales, order, impact, and legacy, they’re all playing at all times. There’s a subconscious kind of automatic stream on that. The question is, where do we need to concentrate the fix? What’s the foundation needs to be strengthened next? Once we identify that and resolve that, then we elevate to the next hierarchical element, fix that, and then bounce around to another. We keep moving around to apply fixes.

 

Henry Lopez21:56

Okay, makes a lot of sense. And what I find, and I think you find as well, is most of us with as small business owners are stuck at two or maybe three, in other words, getting it to be consistently profitable, which is what I want to segue into next, and then maybe if you’ve kind of conquered that, then it’s, you know, that lack of organizational efficiency, that lack of systems, you’re it’s still you that has to do it all, but I want to do the deeper dive on profit, because that then is the focus of the book that you wrote that I really appreciated, and that I’ve tried to apply. So, let’s talk about that. If we could, let’s segue into the profit first formula. I was hoping you could introduce that, and we have several questions for you about that.

 

Mike Michalowicz  22:34

Sure, sure. So, the foundational formula for profit is that profit comes last, it’s sales minus expenses equals profit. And I heard a statistic that really opened my eyes to a problem with profit, came from US Bank. They conducted a study of small business and identified that 83% of small businesses are surviving check by check with cash flow problems. They don’t have substantial sales coming in today, deposits coming in today from sales, they don’t have enough money to pay their bills tomorrow. There’s this constant check to check survival, and I validated this. I have an organization, we’ve over 450 accountants and bookkeepers that work in our organization, and they’re collectively working with 10s of 1000s of clients, and we validated that this number is actually on the conservative side. It’s more like 90% businesses are surviving check by check. Well, the question came about to me is, how come swim businesses are struggling with profit if that’s the primary reason we start a business? Most owners I met start their business for financial freedom and personal freedom. I want to do what I want when I want, that’s personal freedom, and I want to not ever worry about bills, that’s financial freedom. And yet, those are two things we don’t get. We work our butts off, we’re beholden to the business, and we have no money to show for it. Well, the foundational formula of sales minus expense equals profit, I believe, is the problem, because entrepreneurs can do so many elements: we can do sales, we can do marketing, we can serve our clients, we can deliver our products and goods, we can have them raving about experience. We just miss this one component, and I am now convinced it’s because the formula of sales minus expense equals profit is flawed. It makes logical sense. It does not make behavioral sense. It is human nature. When something comes last, it means it’s insignificant. If I believe that health is important, I never say I’m going to put my health last. If I love my family, I never say I love them so much, that’s why I put them last. That all those things mean insignificant, don’t consider that as the manana syndrome,

 

Henry Lopez24:24

right? And it’s also that it leads us to thinking, well, it’ll come, the profits will come,

 

Mike Michalowicz  24:28

you’ll come, oh, come, right? We put them off and put them off and put them off, and hope that one day it’ll just fall in our lap, right. So the new formula is sales minus profit equals expenses, and what this means is that in practice every time I have a sale in my organization, I take a predetermined percentage of that money, allocate it toward profit, and then run the business off the remainder. It’s the pay yourself first principle applied to business. By the $1,000 comes in today, and I want to take a 10% profit. $100 goes toward profit. I don’t have $1,000 to operate my business, I have $900 operating.

 

Speaker 4  25:00

Business,

 

Mike Michalowicz  25:00

that’s how this concept works. Pick your profit.

 

Henry Lopez25:03

Here’s the thing, Mike, though. I think that the challenge here is for people that are listening to this, and I’ve been guilty of this, is that we might have a business that from the start we never validated that the business model works, and if the business model is broken, in other words, what we’re doing, what we’re offering, I can’t make a profit on I continue to bury my head in the sand, and hope that somehow that’ll change if I sell more of it.

 

Mike Michalowicz  25:25

Yeah, that’s sadly very common. Is we think we can sell our way out of it, or we don’t understand our model works, or we think that takes money to make money, or we think we can, we can invest in one day that profit switch will just happen. To your earlier point, by taking our profit first, it then forces us into the consideration, is this a viable business? Because if I want to achieve 10% profit and I take that 10% first, then I have to find a way to work up 90% and in many cases I can. In many cases, I was being dumbed down by the access to money that reduced the access to money. Now I define more innovative ways to run my business. If I still can’t do it, I don’t have a viable business, and I’d rather know I don’t have a viable business today before I accumulate tons of debt than later on when I’m beholden to debt.

 

Henry Lopez26:11

Absolutely, absolutely. So spot on. And I think that I think the mistake I see people doing is they don’t do that hard analysis or math upfront, and I get it, it’s hard sometimes because you’re dealing with projections, but you got to validate at least upfront that it might work, at least, and then prove it, like you said, and then decide very early on, do I need to adjust my model, do I need to change my product mix, what do I need to do so that this does work?

 

Mike Michalowicz  26:36

Yeah, exactly, exactly. So it’s funny, so one of the things we do with our clients who are doing profit first is we first have the core system, five accounts, you allocate much for profit, allocate money toward other purposes like tax reserves. Actually, the biggest bill associated with the operation of a business that a business owner is least prepared for is taxes, so we reserve for that and reserve money for operating expenses. Then we do is we say, okay, well, you used to think you have $1,000 available for operating business, it’s more like $400 now we have $40 we say, you know, we have an idea of something that may serve our business, but we don’t have much money, so we start testing, so to your point, the validation isn’t let’s go all in on an idea, it’s like let’s validate our idea is really a good one that engages clients the way we want, or that it attracts opportunities the way we want. So, you start testing on a smaller basis, and that’s far more effective, because then once it’s working and you’ve proof, we amplify it. If it’s not working, you just can try something different.

 

Henry Lopez27:36

Yeah, and I found that it got better and better as I had more history, because then I could look at last year, I knew what my allocations needed to be to all the different operating expense budgets, I did the math, you know, the what’s left over from expenses, and then I allocated and then worked on those budgets, and we measured it, you know, at least on a quarterly basis to make sure we were on target for those budgets, but it’s to your point, it is amazing that psychological power of when you have more limited resources, or at least when you’re keeping track of it, you’re less likely to waste it.

 

Mike Michalowicz  28:06

So, there’s there’s a philosopher, a behavioral psychologist, maybe his name is Northcote Parkinson, was his name, Parkinson. He developed what’s called Parkinson’s Law, and Parkinson’s Law was a study of resources. He actually challenged the classic supply and demand curve, saying as demand increases, supply increases to meet demand. It’s an economic model, but he argued from a behavioral aspect as reverse. As supply increases, our demand for supply increases. Class example is, if you put one – I like chocolate chip cookies – one chocolate chip cookie in front of me, I’ll eat it. My daughter enjoys every so often putting 15 in front of me, and I cannot stop myself. I eat all 15. The supplies increases my consumption. Well, this model applies to uses of all resources. Parkinson’s work was mostly in time. If we’re negotiating a contract, Henry, and I say I’ll get that deal to you in one week, it’ll likely take me a week to prepare that contract. If the same people, the same conversation, about the same parameters, but I say I’ll get you in one day. I’ll likely get you one day. Less time, more efficient, faster movement. Well, applies to money too. As money expands its availability, we consume more. So, with profit first, we extract out that expanding money and hide it from ourselves, so that we work within the constraints. And it’s because of Parkinson’s Law why we have that uncanny experience. So many businesses experience that growth curve of income over time, year in and year out, over time. In general, there’s an increasing, albeit bumpy, path of income, but uncannily, expenses run at the exact same rate as income increases, expenses increase. It seems like we can never get ahead of the expenses. You land that big deal, you’re like, finally, I’m here, and it’s like, oh, all those big expenses come along. Well, that’s not it’s not like some kind of super magical, supernatural phenomena. It’s Parkinson’s Law. It’s simply, as we see more money, we spend more money, and that’s why businesses are almost always on the brink, up or down in income. They always seem to be on the brink. It’s Parkinson’s Law. So we’re gonna insert a gap there by taking your profit. Out first, reducing your amount of operating expenses, and now Parkinson’s Law works to your advantage.

 

Henry Lopez30:04

Yeah, I love it. I love the.. I downloaded the guide that you have on this on your website, and it walks through that and explains that, and it’s got some tips. And so I’ll wrap it up on this topic with this question: when you are working with a client, they’ve not applied any of this, where do you guide them to get started with managing their business this way?

 

Mike Michalowicz  30:25

Yeah, so the first thing I do is I acknowledge they potentially have some skepticism, and I acknowledge that, because I have skepticism, I think

 

Henry Lopez30:33

it’s counterintuitive, really counterintuitive.

 

Mike Michalowicz  30:34

Yeah, exactly,

 

Henry Lopez30:36

especially if we took any accounting classes in college, right? I mean, it’s just not..

 

Mike Michalowicz  30:39

there’s 1000s of books that say profit comes last. It’s our vernacular, bottom line, year end, final take. I hook line sinker, I believed it myself, and I think I’m ground zero for profit first. You know, I started 12 years ago, I’ve had 46 or 47 now consecutive quarters of profit distributions. I’m, I can’t believe I’m saying this, because 12 years ago I would never believed a business could have more than a quarter of consecutive profit distributions, it seemed the key was this: start slow and let it grow. If you’re skeptical, you’re normal, and you’re human. I just challenge you to try something new and just dip your toe in the water. What I tell people is just go set one account, set up a savings account at your bank, and call it profit, then allocate 1% of your income, so $1,000 comes announcing you only take $10 because if you can run your business off $1,000 you can run off $990 The impact is inconsequential, but now you have $10 in your profit account, and you’ll start experiencing this increasing cash in your profit account. That’s when it starts becoming a game changer. That’s when you start realizing, oh my gosh, that $10 at 1% can become 2% 3% We have now Henry over 350,000 businesses have implemented Profit First. We’ve lots of case studies, lots of them, and we’ve discovered that consistently the businesses that are successful in implementing and sticking with Profit First started slow and developed over time. They did not go in full throttle, they went slowly. So that’s how

 

Henry Lopez31:58

that makes sense. And I think you just have to have, as the owner, what I call a ruthless approach to profitability. It has to be the thing, and it drives in, as you just articulated, what do I do next? And I think it also, for a lot of business owners, is about part of what I think you have to do next is to critically analyze your products and services to see the ones that are not profitable and jettison those things, and focus where the profitability is. Does that make sense?

 

Mike Michalowicz  32:23

Yeah. Oh, totally. It totally is. Yeah, you start reverse engineering profit, right? So, once you take your profit out first, you will have that situation where you can’t pay your bills.

 

Henry Lopez32:31

Yeah,

 

Mike Michalowicz  32:31

we actually have a saying here: if you can’t pay your bills, you can’t afford your bills. If you want to achieve, say, 10% profit, and that’s what you’re taking out now, and you can’t pay your bills, your business is speaking to you, it’s saying your bills are not in alignment with that profit. Need to cut costs or increase margin, or in most cases, you got to do both. How do we increase margins while controlling costs, enforce innovation?

 

Mike Michalowicz  32:50

reverse engineer profit, and that’s where the clarity comes from, very clearly where you’re spending in excess and where you’re devaluing your offering and need to increase its value, therefore margin.

 

Henry Lopez33:03

Absolutely great stuff. All right, tell us a little bit more about the services you’re offering today, and I think you’ve got a special download that offer, so please tell us about that.

 

Mike Michalowicz  33:12

Yeah, thank you. So my focus right now is is focus helping businesses determine where to get started with Profit First, but, but in any element of their business, because we are, as you shared earlier, those firefighters. So, I set a site, it’s totally free, it’s Fix This next.com It’s based upon my book. You don’t need access to the book or anything, you can do this for free, and there’s no download or anything. It just presents it on the screen, so it’s super quick. But if you go to Fix This next.com you’ll see a button there, nice and red, nice and big, that says take the free evaluation, it will evaluate your business, it will determine where within these different levels specifically there’s actually 25 different potential combinations exactly where your business is, so you can start applying the next fix that will move your business towards your vision. So that’s free at fixes next.com

 

Henry Lopez33:57

Great stuff, I think everybody needs to take advantage of that, because if we’re stuck, this just is a few minutes investment. If you can get any kind of input that helps you figure out what to do next, then it’s huge. So, thanks for sharing that. I know you’re big into books, as I am. You’re always reading. We’ve talked about your books, Profit First, Your Latest, Fix This Next. Is there another book that I think is one you’re reading currently that you might recommend?

 

Mike Michalowicz  34:18

Yeah, I was just wrapping up Rejection proof, and I love sharing this book, because it’s, it’s not well known, but it’s a really great book. The author, his name is Jia Zhang, came to the US from China, and was just really nervous in a community. He was highly introverted, and realized the only way he was going to build confidence in himself to achieve his business aspirations was to build the muscle over rejection. He was so fearful, rejection, he committed to a journey of 100 days of rejections, asking absurd requests. Wow, to see how people respond, and what he does is he documented his journey and what he learned from it, and how he changed as a human. It’s really a fascinating story and powerful lesson.

 

Henry Lopez35:00

all right, Mike, great stuff. I could keep talking for hours, but let’s wrap it up. What’s one thing you want us to take away from this conversation, especially in the focus that we took on finding profit first in our small businesses? What’s one thing you want to stick

 

Mike Michalowicz  35:11

to set up that account? You know, I told you the simplest, easiest step is to start profit. I think within 24 hours of hearing this, there’s no excuse not to set an account with your bank and start allocating 1% It is so easy, and I think the grand mistake people make is they hear and say that’s an interesting idea, a great idea, and it’s left there in a year from now or two. They’re not profitable, and like, what should I do? You have a chance right now to bring permanent profitability. I assure you, it’s permanent profitability to your business if you just set this one account starts 1% and and then now you’ve dipped your toe in the water, start swimming down the road,

 

Henry Lopez35:45

and then that begins that process of if you need to reverse engineering to figure out what you need to change in your business to get profitable and stay profitable consistent,

 

Mike Michalowicz  35:54

right?

 

Henry Lopez35:54

Where do you want us to go online again to find out more?

 

Mike Michalowicz  35:56

So you can go to fix this next.com to get started. If you want to learn more about me, you can go to Mike mccallowitz.com No one can spell that, so you can go to Mike motorbike.com That’s my old nickname in high school, is Mike Motorbike. Go to Mike motorbike.com you’ll learn all about what I have going on.

 

Henry Lopez36:11

Mike, wonderful conversation, as I knew it would be. Thank you so much for taking the time to share of your knowledge and to be with us today.

 

Mike Michalowicz  36:18

Henry, it’s been a joy. Thanks for having me.