Encore – Michael Michalowicz – Profit First | 428

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On today’s special encore episode, Matt is joined by Michael Michalowicz, former MSNBC business makeover expert, popular keynote speaker on innovative entrepreneurial topics, and author of Profit FirstSurgeThe Pumpkin Plan, and The Toilet Paper Entrepreneur. Learn about Michael’s highly effective Profit First method, the biggest mistake readers of his books make, the lessons Michael has learned through creating three multi-million dollar companies, and much more on Thought Leader Thursday!

profit first

What You Will Learn About Encore – Michael Michalowicz – Profit First:

  • The lesson Michael has learned from selling two multi-million dollar companies and then losing his entire fortune
  • The small change that had a huge impact on his money-making abilities
  • Michael’s take on his hit book Profit First
  • The moment Michael knew his book would be a huge help for entrepreneurs
  • The biggest mistake readers of his book make (and how to avoid it)
  • The key to pull off the Profit First method
  • The one bad piece of advice Michael hears everywhere

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Transcript:

Matt Theriault: Hello, I’m Matt Theriault of The Epic Real Estate Investing Show, and this is Thought Leader Thursday.

Today, I’m joined by a very successful entrepreneur who, by his 35th birthday, had founded and sold two multimillion dollar companies. Confident that he had the formula to success, he became an angel investor and proceeded to lose his entire fortune, and then he started all over again. Driven to find better ways to grow healthy, strong companies, among other innovative strategies, he created the Profit First Formula, a way for businesses to ensure profitability from their very next deposit and forward. He is now running his third million-dollar venture. The former MSNBC business makeover expert is a popular keynote speaker on innovative entrepreneurial topics and is the author of Profit First, Surge, The Pumpkin Plan, and The Toilet Paper Entrepreneur, which Business Week deemed the entrepreneur’s cult classic. Such a difficult word for me, and I’ve said it so many times, and entrepreneur still doesn’t roll off the tongue very well.

But please help me welcome to Epic Real Estate Investing Mr. Mike Michalowicz. Mike, welcome to the show.

Mike Michalowicz: Thank you, Matt, so much, for having me on your show. I appreciate it.

Matt: Well, I’m really excited to have you on the show. Of all the books that I’ve read, because I read a lot over the years, there are really just a handful that have created significant – and I would say, lasting – change. Your book, Profit First, is probably the most recent. It’s among my top five I would certainly say, so thank you for writing it.

Mike: Thank you for saying that. I think it was an important message to get out – mostly for myself, initially. That’s why I wrote the book – to fix my own businesses, and I’m just thrilled by the number of people it’s impacting. It’s actually… this is my life’s mission, is to help entrepreneurs, so I just love hearing that feedback. Thank you.

Matt: You bet, you bet. Yeah, I listened to the entire thing on this past Christmas. I was on a long drive from Central Oregon to Southern California, and about three hours into it I called my wife. I said, “Download this book, and call the bookkeepers first week of January. Call them for a meeting because we’re going to do this.”

Mike: Oh, I love hearing that. I love hearing that.

Matt: Yeah, yeah, yeah. So we’re a little over two months into our Profit First strategy, and I’m going to be an amazing testimony for you if you need anymore, as it seems you’ve got a ton of [inaudible 00:02:25] already.

Mike: Listen, I think it’s important. I think every testimony, I think, further perpetuates what’s going on here. I’ve defined my life’s mission is to eradicate entrepreneurial poverty. I think there’s a lot of entrepreneurs who tout success, even feel it, but are so stressed about making money they’re not really successful. So please, yeah, spread the word, man. I thank you.

Matt: So before we jump into the Profit First idea, I had a question about your journey up to this point. There’s some similarities between your story and my story, and I’m just kind of curious. Specifically, you had a couple of successful businesses. You lost the money that you made and then rebuilt yourself back up again. What was your biggest lesson from when you were at your lowest?

Mike: Yeah, the big lesson is there’s a danger in this combination of arrogance and ignorance. When I made my money, signed my businesses, I became arrogant thinking that this was destined for me, that I was a genius, that I could make money at snap of fingers. The ignorance, too, is when I made that money, I had no understanding about money. Money, I’ve discovered now, is really an amplifier of who we are. I did not know how to manage money. I was doing stupid trophy things. I bought cars and a big house. I went on sabbatical in Hawaii for a month on a private island. All these things of spending money because I was like a big roller, and I’m blowing money, like, left and right.

When I lost all that money, I realized that first of all, arrogance, for me, is shameful. I am not better than anyone else. I’m not worse than anyone else. I’m just another human experience. And ignorance is a very dangerous thing, especially around money. If I don’t understand how to leverage money to use it to do the things I want in life, but also to serve others, I will just blow money. That darkest period of my life was a reset for me to start a path of learning about financial discipline and to no longer – hopefully never again – be arrogant, to respect money fully.

Matt: So now that you’ve recovered as an entrepreneur and you’re looking back, what would you say is your biggest takeaway from your rise and fall and rise again experience, and how are you applying that moving forward?

Mike: Well, I dedicated a book to it. I discovered that in business we have been told this established belief that profit comes last. We use terms like it’s the “bottom line” or it’s the “year end”. All of those things say that profit is the last consideration, and I had this realization: If my health is important to me, I don’t start saying, “Starting today, my health is going to come last.” I would never say that. I say, “Starting today, my health comes first.” When something is important, we say it’s our first priority. When something is unimportant or can be delayed or not considered, we say it comes last. “Oh, I’ll do it later. I’ll take care of my health later.” That means it’s not significant, and what we’ve been doing and what we’ve been programmed to do is say, “For our business, profit comes last,” but we’re saying, “Our business’s health comes last.”

So a simple, subtle change that has a tremendous impact is to take our profit first. That’s why I wrote the book, and the one thing I learned and the one thing I’ve been doing now religiously is every time income comes into my business, including today, I take a predetermined percentage of that money as profit. I hide it away at another bank so I have no access to it, and my profit accumulates. The result for me – I started this process over eight years ago – I have had 33 or 34 consecutive quarters of profit distribution in my business because I’ve taken my profit first. Before that? Never had a profit. I only made money when I sold the company. Now, my business is a health business that makes money for me. It has a profit distribution every single quarter. That’s the big change.

Matt: For those that haven’t read the book, can you give us a 30,000-foot [crosstalk 00:06:12]-

Mike: Oh, sure.

Matt: … of what Profit First is and why it’s important? You kind of already answered that, but [crosstalk 00:06:16]-

Mike: Yeah, but I’ll give you a couple other kind of details around it. First of all, it’s nothing new. This is an established method. It’s existed forever. It’s called the “pay yourself first” system. Now, this exists in our personal lives. I think a lot of people, myself, I never considered it for my business, but that was the “aha.” I said, “Oh my gosh, what if I paid my business first? What if I did this in my business?” And what it does is it actually reverse-engineers profitability.

Now, the entire system, there’s a way to do this with your bank. It’s very simple, a lot of simple steps, but the 30,000-foot view… what you do is, say I decide starting today, I commit to 20% profits for my business. This is above and beyond, by the way, paying myself a salary. Money comes in. I take 20% of it, I allocate it toward profit, and now it tells me what I have left to run my business – that remaining 80%. A portion of it, I also own a percentage-based system used to pay myself, my taxes, and maybe at the end of it, maybe 70% of the money is left to run my business.

What I’m doing here is actually reverse-engineering how to run my business. When I take my profit first, when I take care of myself first, my business then tells me I have to run my business on this remainder. This is actually how much money is really left over. The trap or problem most entrepreneurs fall into is we look at that top line and say, “Here’s how much money I have to run my business,” and that’s not true. That’s all the money that’s available for all aspects of your business and your entrepreneurial life, so we need to subtract out, care for ourselves first, and then our business will tell us what’s available to run it.

One last little anecdote. When you do this, if you don’t have enough money to pay your bills, your business is telling you it can’t afford your bills. It is giving you immediate feedback that we need to improve the business by increasing margins, doing better things, and cutting unnecessary costs.

Matt: But there’s so much more to it in order to really set yourself up for this thing to succeed, right?

Mike: Right.

Matt: Do you remember the moment when you realized that this was really going to be a difference maker for entrepreneurs? Like did you remember a – like, was there a moment where, like, “Yep, this is it, I’m totally [crosstalk 00:08:18]?”

Mike: Yep. Yep. So Profit First – and you’ll discover this in the book – it’s a bank-based cash management system. It’s actually the umbrella that sits over our accounting system, and what I realized is my accountant for 10 years I’ve been working with him, my accountant has been saying to me, “Mike, whatever you do, never log into your bank account to see what your bank balance is because that’s not reflective of your business. Read your income statement, your cashflow statement, all these different bank statements and tie them in together. Read these documents and you’ll know where your business is.” And what I noticed was I was always logging into my bank account on my phone and seeing if I had money or not, and if I had money, I’d spend it. If I didn’t, I wouldn’t. I was circumventing what he’s been teaching me.

The day I realized this would work was when I set up my accounts – my profit first accounts. There’s what we call the “Foundational Five.” I won’t go into the details now, but there’s five basic accounts every business needs – even more than that. I noticed now I didn’t need to change anymore. That was the “aha” moment. Ever since I started my business, I’ve been trying to force myself to do what I didn’t want to do: read the accounting statements. Once I noticed that I never had to change myself again, just log into my bank, see how much money is there, I knew this would work because I don’t need to change my behavior, but now I was getting the results I wanted. I saw my profit accumulating on the spot. I saw myself being paid. I made sure my tax liabilities were taken care of. I knew exactly what was available to run my business at any given time. That was a turning moment.

By the way, I’ve discovered this is the turning moment for almost every entrepreneur I work with. Most entrepreneurs I know never read their income statement, balance sheet, cash flow statement on a weekly basis, let alone monthly or yearly. They don’t know how to tie it in together, and so most entrepreneurs I know revert to what I call “bank balance accounting.” We log into our bank accounts and see how much money is there. Well, the beautiful thing about Profit First is no longer do you need to try to force yourself to be different than who you are. Keep doing exactly what you’ve always been doing. We’re actually going to change the system to channel your natural behavior and drive profit.

Matt: I haven’t had to change anything, right?

Mike: That’s the best part. That’s the best part.

Matt: Yeah. Exactly. So it’s been fantastic. So for the people that you’ve worked with that have this epiphany like I and have started to implement, is there a big mistake or a group of mistakes that they make as they’re implementing it?

Mike: Yeah. We have the statistical feedback now. We have an estimate of about 75,000 companies doing Profit First. We have 2,000 case studies though, and this is what we base our stats off of, and here’s what we found: The businesses that fail to succeed with Profit First go in too abruptly. They say, “You know what? I’ve never had a profit before. Starting today, man, I’m going to take 20% home. I’ve never paid myself really anything before. I’m going to take another 25% for me.” And the day prior they were never profitable, and now they’re forcing this profit to their business. It’s such an abrupt change…

Like, I can tell you, work out a lot. Could you imagine a guy like me, this skinny guy, I hit the weight room, and I say, “You know, I’m going to learn how to bench, I want to bench 300 pounds. Hey, throw 300 on the rack. I’m going to bench that out.” I would rip my sockets out and my eyes would explode out of my face. No f-ing way. But if I start with 50 pounds and then 60 and 70 and over a few weeks and a few months, I might get to 200 pounds. Once I’m doing that, maybe it’ll take me another year, but if I keep moving incrementally, I can build my muscle.

Matt: Yes.

Mike: In our business, we need to build our financial muscle. The key to successfully pulling off Profit First is not to try to bench 300 pounds. Instead, start with a very small profit. If you’ve never been profitable before, start by taking one or two percent. Build that up over time. Then move that to three and maybe four percent, and over the months then you move to the ideal strength of a business, which maybe is 20% or 30% profit, but you got to do it slowly.

Matt: Yep. That was one of the actual “aha” moments as I was driving. I was like, “Okay, I don’t have to go turn the whole thing upside down. We’re talking we can go with one percent and just move our way forward that way.

Mike: Yeah. Exactly.

Matt: I really like that. I really like that. So you’re a speaker, you’re an educator. Is there a piece of bad entrepreneurial advice out there that you hear over and over again that just kind of gets under your skin?

Mike: It’s funny. I had a call about it today, and it’s going to sound crazy because it’s my new kind of – I’m rallying against it, but it’s this concept of “hustle.” The thing is, you asked me like a week ago and I was still a big advocate. Yeah, we got to hustle, hustle, hustle, but there’s been something gnawing at me for years now, and then about five days ago I had the epiphany. We do need to hustle, but only for a period of time before we need to transition to the [systemization 00:12:59] of our business. Our business really needs to be a choreographed dance of different resources, and we need to be the chess master if you will putting the right pieces in the right place to get things done.

I used to have that mug, “GSD,” “I get shit done,” and I’ve actually made my own new mug, and it says “HTCGSD,” which stands for, “Have the company get shit done.” I need to be a designer. My goal for my business is that it runs fully independently of me, that I can sleep through the night and money comes in, that I can go on vacation for as long as I want and money comes in, and that doesn’t happen overnight. It’s a stepped-by process, but to get our business running like clockwork by itself requires us to change from that hustle mindset to the idea of, I’m just going to get it done, I’m just going to get it done, and to start being much more strategic and getting the processes in place, putting the right resources in place. That’s the key.

Behind the scenes, I’ve been kind of working on it, but about a week ago I drew the line, and by the way, how I did it is I’ve declared for myself a four-week vacation: December 18th to January 18th of this upcoming – you know, we’re nine months away. I am going off the grid. My assistant already knows. She’s disconnecting all my email. She’s re-changing passwords and stuff, and I’m leaving the office behind. The day I said I’m doing that, all of a sudden I woke up and said, “Oh my gosh, how do I get the eight people I’m leaving behind to do everything that I’ve been doing in the next nine months so I can actually pull this off?” It’s been a big mind shift for me.

Matt: So I got something for the audience, and before I go there, if the audience wanted to learn more about you and your works, what would be the best way for them to do that?

Mike: The best place to go is MikeMichalowicz.com. Here’s the deal. My last name is difficult to pronounce. It is extremely impossible to spell, so I got two shortcuts. One is, you can go to Google and type in “Mike” and then “Mic.” So Mike, space bar, M-I-C for Mic. When you see the longest, most Polish name on the planet, that’s me. Click there. The alternative is you can just remember a real simple nickname I had in high school: Mike Motorbike. If you go to MikeMotorbike.com, that’ll bring you to my site, and on the site I used to write for The Wall Street Journal, as you shared. I share my best archived articles. It’s only for subscribers of The Wall Street Journal, but you can get it for free, chapters from all my books, plus I’m a blogger and podcaster. All at Mike Michalowicz or MikeMotorbike.com.

Matt: Fantastic. Yeah, I tested Mike Motorbike because I got that from the book, and it actually worked, so.

Mike: Yeah. There you go, right? There you go.

Matt: Much easier. All right. So what I’ve done, Mike, is I bought 10 of your books, and-

Mike: Well, thanks, brother.

Matt: …I’m going to give them away to the audience. This is how they win. So go to Instagram, and I want you to tag Mike and Epic Real Estate, and I want you to create a post stating what you liked best about today’s interview-

Mike: I love it.

Matt: …and the first 10 people to do that, I’ll send you a free copy of Mike’s book, Profit First. So, Mike, I love this book. You’ve got other books. What is the next one that I should read?

Mike: So the next one, you can go back kind of in the archives. I’ve got four others, and I’m writing a new one called Clockwork, and I’ve got four others. I always respond with a question. I used to say, “Oh, read The Pumpkin Plan.” That’s one of my books about growth, or read Surge: Catching Momentum, or read… Here’s what I found: Determine in your business what’s the next biggest roadblock you’re facing, and let’s get the book that answers that. I may have not written the book.

So here’s the… I’ll give you the categories. If you are looking to run your business more efficiently, recover time for yourself, have more time freedom, the book is called Clockwork. It’s on Amazon for pre-order now. If you’re looking to grow your business organically, meaning if you picture your best client right now and you’ve had 10 or 100 more of that best client, what would that do? If that was important for your business, that’s The Pumpkin Plan. If you’re looking to market on automatic, have the market actually carry you forward, that’s Surge, and if you’re just starting out, maybe it’s The Toilet Paper Entrepreneur you should read. Those are the categories, but quite frankly, if you’re having like an HR problem, I haven’t written that book yet… there’s a book out there. Determine what your biggest challenge is in your business today, and then seek out the book that answers that. That’s my suggestion.

Matt: Super. All righty. So I’m going to let you go. It’s been a pleasure, Mike. Thank you so much-

Mike: Likewise, brother.

Matt: …for being here today, and if you want a copy of Mike’s book, this is how you do it. You go to Instagram, tag Mike, tag Epic Real Estate, create a post stating what you liked best about today’s interview, and then the first 10 people to do that, I’ll go ahead and I’ll send you a copy of the book, all right? So, again, Mike, thanks very much.

Mike: Thank you, Matt.

Matt: Have a good day, and let’s stay in touch.

Mike: Yeah, let’s do it. Take care, everyone.

Matt: Cool. Take care. All right.

Mike: Bye.

Matt: Bye. All right, I’m Matt Theriault. God bless to your success. I’ll see you next week for another episode of Thought Leader Thursday. Take care.