Episode 126 // Profit First with Mike Michalowicz

May 30, 2017

If you’re a business owner, you have to pay yourself. Mike Michalowicz, author of Profit First, joins us to talk about the importance of embracing profit and paying yourself from your business in order to grow a healthier and happier business.

Learn More about the Topics Discussed in this Episode
This Episode Brought to You By:
"If you want to grow quickly and healthily, take your profit first; it forces that process to happen."
- Mike Michalowicz

Discussed in this Episode

  • An overview of Mike's entrepreneurial journey
  • Revenue vs. profit
  • Loss aversion is making us fear profit
  • An overview of the profit first method
  • Profit vs owners pay
  • What percentage of revenue should you pay yourself?
  • Parkinson's Law
  • Growing vs staying lean
  • Giving it all away for free


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Kathleen Shannon 0:01
Hello and welcome to being boss,

Emily Thompson 0:03
a podcast for creative entrepreneurs. I'm Emily Thompson.

Unknown Speaker 0:08
And I'm Kathleen Shannon.

Mike Michalowicz 0:09
I'm Mike mccalla wits and I'm being boss.

Emily Thompson 0:16
Today we're talking about money management and putting profit first with Mike mccalla wits. As always, you can find all the tools books and links we've referenced on the show notes at WWW dot being boss club.

Kathleen Shannon 0:29
Alright you guys I want to put an end to any myth is that money is evil money is difficult. Money is hard. I'm not an accountant. Because fresh books cloud accounting has made it so easy for small business owners freelancers side hustlers, to keep track of their expenses, to send out invoices and to get paid faster. And honestly, that's all it comes down to. One of the things I personally love about freshbooks is that they've designed it for creative entrepreneurs. Whenever you log into your dashboard, you can see exactly what your business is up to. You can see how much money you've got coming in, and what you've got going out. You can easily pull reports to see what your profit and loss is. You guys if you're not staying organized with your money, you're going to have bad feelings about money. So I want you to get organized with your money today. Try out fresh books for free they're offering our listeners a 30 day unrestricted free trial to claim it Just go to freshbooks comm slash being boss and enter being boss in the How did you hear about us section? Alright, back to our episode.

Emily Thompson 1:37
By his 35th birthday, Mike mccalla Wits had founded and sold to multimillion dollar companies confident that he had the formula to success he became an angel investor and proceeded to lose his entire fortune. Then he started all over again driven to find better ways to grow healthy, strong companies. Among other innovative strategies, Mike created the profit first formula, a way for businesses to ensure profitability from their very next deposit forward. I am personally a huge fan of his work, including his books, the pumpkin plan and profit first and think that creatives have a lot to learn from his simple way of thinking about how any sized business treats their money.

Kathleen Shannon 2:21
Mike, we are so excited to have you on the show. Thank you so much for joining us.

Mike Michalowicz 2:26
It is a joy to be here. So thank you for having me.

Kathleen Shannon 2:30
All right, starting off, Could you just tell us a little bit about your entrepreneurial journey that led you to making a bajillion dollars? isn't right,

Unknown Speaker 2:39
I'd like to make a billion dollars

Kathleen Shannon 2:42
writing becoming an author of a few books, what have you tell us where you got started? And how how that word went down.

Mike Michalowicz 2:50
So I'll share the the raw start and some of the raw elements and the highlights you hear in a CV? Which by the way, your CV stands for curriculum

Emily Thompson 3:02

Mike Michalowicz 3:02
Yay, that Exactly. That's what I thought that's my thought stood for actually stands for it doesn't it stands for covers vomit. Yeah. Because is, is it's one piece of paper with a few bullet points. And the real story is disgusting, atrocious mess and vomit basically. So I'll share some of the CV and then the real stuff. So graduate college can't get a job. So that's actually why I became an entrepreneur. started my first business was in computer networks, and really was successful in that business. And when I say successful, meaning it became a $2 million company in revenue before I sold private equity. If you define that success, I don't really know actually what successes but in that regard, but

Kathleen Shannon 3:50
I mean, $2 million, no big deal.

Mike Michalowicz 3:52
No, well, no, I see. Right. That's what people hear, right. But let me tell you the real story behind it. So 2 million sounds great, which is it's all true. But first of all to get there. I was fear driven, first fearful because I had no income coming in. So I would wake up at five in the morning and work till the next five in the morning because I was panicked to make money to support myself and my family. Then, as it was growing, I became fearful hasn't paid payroll. So it was a panic stricking fastest to sell anything to anybody to keep this business going. With the hope that one day, it would get big enough that I could sell it to make a lot of money or a big client would come in or that big turning moment where it finally be profitable out of nowhere. Well, the moment happened was I sold the company to private equity, which in retrospect, I say oh, that's how you make money. In retrospect, that doesn't happen to me to many people. But my second company was then in computer crime investigation that company two grew quickly to about 7 million in annual revenue when I sold it was only two and a half years old. It just exploded. ends up right time. Right Place. The Enron trial broke, we conducted the investigation in part for the Enron trial. Christie Brinkley was getting her like, you know, 12 divorce, we did one of her divorces. Some, there were some of these big murder cases where computer evidence was involved. We got this, just we're right at the cusp of one computer evidence was becoming relevant to all these major cases. I thought I was a genius. I was just smart enough to start a business that happened to be in its explosive growth mode, and we caught it. And but the same thing was throughout that it was so fearful stress of how am I going to pay payroll, I payroll of $250,000 a month. And remember saying, if I don't make a sale this month, like a big one, I got to refinance my house to pay payroll, and I don't have 250,000 in my entire house. Like, it was terrifying. It was acquired by a fortune 500. I then said, Okay, now I'm convinced you actually don't make money. When you run a company, you make money when you sell a company. So I decided to become an angel investor, start 10 companies simultaneously, all of them, bomb all of them. So I lose all my money. Go from a millionaire to a 00 err, my actually a minus 50,000 miles $100,000 with credit card debt air and have to start a new and that actually triggered this realization that I had no clue of how to manage money have no clue really how to run businesses I thought I did. Because I was measuring myself by the CV, but not the real elements below it. That triggered me becoming an author. That's why I've written my four books. So that's why I'm a full time author now and just love supporting entrepreneurs, and quite frankly, myself and figuring out how to run a business properly. And well and softly.

Emily Thompson 6:48
I love that and Well, I I I love that you had a windy path. I I obviously don't love that, that it was so up and down. But

Kathleen Shannon 7:01
it makes me feel good about being a little small fry. Like I yeah, you know, it's kind of like that, would you rather love and have lost than the never have loved at all? I think I would rather never make a million dollars than to lose it overnight. You know what I mean?

Mike Michalowicz 7:19
I hear I don't think you're wrong. I don't think you're wrong. And I I think too many of us, though, compare ourselves based on the top line this size of business, you know, it's the old How big is it? Question pray frankly. Right? And like, why are we doing that? It? really the question is how healthy is it. And I today and far more impressed by a business that has 50,000 in annual revenue where the owner takes a home everything or it was then a company does a million or 10 million, or the owner takes on 50,000 the top there's a saying top, you know, revenue is vanity, profit is sanity, cash is king, the top line is really stress. Those are your stress points. And the more revenue you make, the more responsibility you have to keep feeding that beast. It's the profit. That is the release from that it is the stress free component. So I'm more impressed by the profitability than that top line.

Emily Thompson 8:12
I agree. And I always feel like there has not been enough. Enough attention there. I mean, we are always wondering how big it is without actually wondering what it can do. And so, so I think that I think that bringing it back to bring it back to that profitability piece is so important. And I was actually gonna save this, I think until a little later in the interview, but I want to share like my first my first business was a tanning salon back in the day. And I'll never forget getting my first Profit and Loss back and having a profit. And my accountant telling me how bad that was. How. Right? Yes, and how I needed to spend more money. And we hear this all over. So our people are people are creatives, they run small businesses, lots of photographers and Yogi's and coaches and those sorts of people. And we hear two people getting to the end of the year needing to spend all of their money because they don't want to have that profit number because then they have to pay taxes on it, which I think is not so I got my first profit and loss. my accountant tells me how bad it is that I have a profit. I'm so confused at what my life is about that I'm a business owner and profit is not the goal. And I ended up spending a couple of years rebelling against that mindset was like this, you know, rebellious young girl trying to run businesses and I will have a profit and cap having profit until we changed accountants still a thing. And then I fell into the trap of Okay, profits not a good thing. We shouldn't have it because everyone everyone's telling me that that you shouldn't have profit because they didn't have to pay taxes. So I love that. I was reading your book, I was high fiving you and a mending you on all the pages because finally someone got The thing that I had always felt and was really confused about this idea that profit is not a bad thing. It's actually supposed to be the goal.

Mike Michalowicz 10:09
Emily, you are right you are, I want to kind of push around that accountant of yours not not hurt anybody but right. But, but I also also want to defend your accountant, because that response is normal accountants job, they feel is to reduce our tax consequences. And it is true, but within certain confines, really what they're doing is make sure that we're compliant with tax law, we have responsibility to pay the government and make sure that we're appropriate compliant, that's their primary objective, their secondary is to put us at this minimum, or reduce our tax hold so that we are compliant with tax law, but that there's a least consequence to us. But they missed one part, they missed one critical part that was called its behavioral component called loss aversion. So here's what loss aversion is. loss aversion is a human behavioral response that when we possess, something is taken away from us, we feel great pain, as opposed to who's never given to us in the first place. An example is like, if you own a car, say you acquire a car, you always wanted that red, Porsche or whatever it is, and you get that car that you've always dreamed to have, maybe barely afford it. So you're trying to make payments, you can't make payments, all of a sudden, you get the pink slip called in and the merge company says we're gonna repossess your car. Well, we will then go to extraordinary measures to retain the car because that's my baby, that's. So what we do is, I won't drive anymore, I'll drop the insurance, I'll keep it in the garage lease, I can see it sitting there. And maybe I'll get a second job working overnight, so I can pay the bill. Now, here's the thing, we could have done all those things, we could have got that second job anytime we wanted to, to acquire that car in the first place. We don't do until we possess it, and then we are fearful of the loss, then we go through these almost illogical things, I'm going to stop paying insurance and not drive it so I can keep a car. That makes no sense because cars are meant to be driven. So when it comes to taxes, here's the thing. It depends what tax bracket you're in, it could be 2535 45%. But we literally are paying say 30% we're literally paying $3. To our sorry, we're paying out $10 to save $3 meaning when our taxes are due. And the government says we're gonna take 30% of your income, we say, oh, let me spend 100% of what I have. So I don't have to pay 3% of the 30%. It's a loss aversion. And what we do is we start incurring expenses, and we start justifying, well, I needed that extra computer that's going to sit there and never be used, oh, I need that new things. And we start spending money to prevent this. This, this last feeling. The thing is, profit is designed to celebrate profit is designed to reward you. And yes, there is gonna be a consequence in taxes, we are gonna have to pay some tax bill, but we want to actually increase our profitability because that translates to rewarding ourselves and also sustainability. We want to build a cash war chest. So many businesses are just trying to not be profitable, that they have no money, they have no cash reserves. In the day, something tough comes their way. They're out of business. So how Yeah, be profitable. Yeah, there is gonna be tax consequences. But if you reserve money for your taxes in advance, it defeats that loss aversion and isn't as painful as it seems. Yeah. Oh,

Unknown Speaker 13:28
they're in the air.

Emily Thompson 13:30
I love that. And I love the work that you do. I love the work that you do with accountants to even like help change the mindset there so that it trickles down to the business owner as well. But talking about profit, so profit first is your book. I gave it a read a lot of our people in our clubhouse in our community, I've read it as well. Everyone loves it, loves it and sees it as like, the basics for setting up like financials in your business, which I think is so needed, especially in our crowd. And it's so great because it really is for not accountant, literate entrepreneurs. Like a lot of times, I have added mission to make I have the worst time keeping a net and gross.

Kathleen Shannon 14:13
I need to know which is which I know

Emily Thompson 14:17
I always have to Google it. And it's just it's embarrassing. But so a lot of us are not very accountant literate. Like we don't we don't know the speak basically.

Mike Michalowicz 14:27
Right? Which means your human being by the

Emily Thompson 14:31
right. But your book lays it out in a way that I found so easy and so helpful. I do love numbers of time. So I totally got in and like was running all of our numbers and all of the things and I thought it just laid out a very basic framework for understanding how money in your business works, especially with this idea of pulling a profit first. So if you can, and I'm sure you can wonderfully, it can you share more about the profit first method and what makes It works so well for those of us who don't speak accountant.

Mike Michalowicz 15:03
Yeah, yeah. So yeah, I'll give you this system. And the reason it does work is because the vast majority of us don't speak accounting, accounting, ease or account terms or whatever. Those are the people who do decide to become accountants, I admire them. They are the Spock's of our planet, very logical, but they, they miss out on the human behavior. Now, the entrepreneurs, we are the captain Kirk's of the world, we are very much an over actor, like Kurt, we can sell anything to anybody. You know, we are, that was my worst worst.

Emily Thompson 15:40
No, that was fantastic. I really most loved the hand motions.


Mike Michalowicz 15:46
I wish I could see the video. So we we are emotional. And what that means is we're generally extraordinarily compelling, we can sell the crap out of our services, because we believe it so much, we generally work extraordinarily hard, because we're so passionate about it, this emotional fire we have. But we then sometimes aren't so good at the details. We aren't so good at the numbers. And so we do say, well, let's just put that off until some future point. And we go back to let's Excel and this is grow, and let's serve people. And how we manage our numbers, therefore is we don't go through all that accounting stuff that our accountant tells us to go through. Instead, we revert to what I call bank balance accounting, we have a log into our bank account, see my balances. And based upon what I see there, I'll make a determination if I can do something or not. So what profit first is a system that says that realizes, instead of trying to make people do what we don't naturally do, instead, put guard rails a system around what we already do, and make what we already do our ally. And the problem with traditional accounting is it's been around for hundreds of years. And accountants still are speaking till they're blue in the face saying, read your income statement tied into your cash flow statement, read your balance sheet know the difference between, you know, gross gross income and net income. And we're like, ah, and so what we do, we revert to banks, our bank balance. So here's what we do. It's the it's basically the envelope system. I don't know you know, Amber Duggar, right.

Kathleen Shannon 17:19
Do you know her? witness familiar? Oh,

Mike Michalowicz 17:21
wait, is that whenever duggars amber Duggar? She isn't. She's one of ours. She's not one of the dyers. Amber Duggar is an expert in private first and implementing it with health coach businesses and stuff like that. And she gave me the best analogy. She said, Mike, it's the envelope system. And the remember the envelope system like this is I'm sure someone in your family has done this, my mother did this. You take money and you put it you divided it up proactively, you get your check in for $100 of pay you cash in you put $10 in the food one, you put $20 in the mortgage, and so forth. Amber is like Mike, this is the envelope system at your bank. And what you do is you have multiple bank accounts. So what you do instead of having one primary checking account, your bank, starting today, we have multiple accounts. One is for profit one is for owners pay. And listen, there's no one more important at your business than the owner themselves. And when we're

Kathleen Shannon 18:16
taking a pause you for one second here between profit and owners pay because I think that a lot of our creatives that aren't making a bajillion dollars, like let's say we're just making around 50,000 I think that's probably even the median of what our listeners are making. I think a lot of them think that profit and owners pay are the same thing. So could you differentiate or explain what the different?

Mike Michalowicz 18:37
Absolutely, absolutely. And many people get confused over that. Profit is a reward for the equity owners of the business, meaning if you own a percentage of your business may have a partner, maybe your solo, whatever equity you have, profit is a distribution for the equity you own. And what equity means is us, you're the person who had courage to start this business in the first place. You if you own public stock, here's a simple analogy. I own some stock and Ford, I'm an equity owner in Ford stock. And on a regular basis, they do a profit distribution, meaning they have excess money that they send out to the equity owners. And when I get that check, like literally, it was like 15 bucks. last five uncredible when I got my 15 bucks, here's what happens. I didn't look at that money, say oh, you know, I really should give this back to Ford. They really deserve it. The management team can reinvest this or plow this back and do better with it. I said, that money's for me. I'm going to Starbucks and gonna go crazy with this. So a profit distribution is a reward to the equity owners for starting the business. A true reward for you to do something with the owners compensation is your pay for working inside the business. This is what you live your lifestyle off of. So many of us are what's called owner operator We own the business. But we also operate and run the business, we were the only employee, the owners pay account is money that comes to you on a weekly or bi weekly basis that you use, and you live your life off it. Additionally, profit will accumulate, that is a distribution of money, well, I suggest we do a quarterly so every 90 days, that comes out as a bonus for not for running the business, but as a bonus for owning the business in the first place. And then you spend that money to celebrate, that's your reward, you know, go to Starbucks on that one. So that's those whose accounts, the other account taxes, you know, when taxes are due, we started our business in part for financial freedom, the business is starting today gonna start paying that tax responsibility on our behalf. It prevents loss aversion, what we already talked about when the business is paying for that. And then when the account is operating expenses, that's what we run our business off of. The other account I didn't mention, by the way, is the income account, that's where the money flows in, it just sits there, then the money gets allocated like Amber duggars, Tommy is an envelope system, it gets allocated out to these different accounts, then we run our business accordingly. As an example, say $1,000 comes into our income account, it used to be Oh, I have $1,000, you log in my bank account, I have $1,000, from my business, the answer The truth is No you don't, you've allocated based on percentages, money out in these different envelopes, maybe 50%, maybe 20% is going to operate expenses. So you don't have $1,000 from your business, you have 20% to run your business, which is $200. And the other percentages, maybe 10% went to profit. If $100 there, maybe 30 or 40% went to owners pay me $400 there, maybe somebody went to taxes. And it becomes a very easy way to immediately know what money is available for what purpose in your business.

Emily Thompson 21:46
So it's it's about being like ultimately proactive with your money, it's not getting money and going, Oh, now that I have money, what should I do with it? It's about getting money in knowing exactly where it's going to go. And making sure it's going into the right places before you even have the chance to make a bad decision.

Unknown Speaker 22:01
How lujah

Kathleen Shannon 22:02
It's so interesting how we just accept that we have to pay our taxes, right? Like it sucks. I mean, Well, that depends on whatever, I won't get into that. It's a thing that most people don't enjoy doing. And we just accept that we have to pay our bills, like we just accept that we have to pay these certain things. So why can't creative entrepreneurs just accept that they have to pay themselves a salary like they have to compensate themselves for doing the job that they're doing?

Mike Michalowicz 22:33
You have to it. So this is another so all this of our brand behavioral principles. And there's a thing called a reward mechanism. And what happens is when we start celebrating rewarding ourselves, we become it's an add a form of an affirmation, we become more confident when we do. And when we don't the reverse happens. For example, if I start my business this year, and I make no money, I'm like, ah, I guess it wasn't this year, but it's my first year, maybe next year. Next year, don't make money. I'm like, ah, maybe maybe I did something wrong. But next year, I'll correct it. by a third year, I'll make money like what the EFF is going on. And I start resenting my business. most business owners that I've met over time, if they're not paying ourselves, it's only a matter of time before they start to resent their business. But when we start rewarding ourselves and start caring for ourselves, now we can we say, Wow, the business is paying me back, we can truly embrace what we're doing. So you got to pay yourself, for God's sake, you got to pay yourself.

Kathleen Shannon 23:28
And I think even if it's the tiniest amount of money, so let's say you really are getting $1,000 a month, and 10% is going to profit, how much do you think should go toward owner's compensation? Like, is there a breakdown of how much there is?

Mike Michalowicz 23:41
Okay, good. So I ran an analysis and it is available for free download. So you don't have to it's in the book, but you can also get it for free on my site. Awesome.

Kathleen Shannon 23:49
We'll include that in the show notes. Perfect, perfect.

Mike Michalowicz 23:51
So I analyze these businesses of all different sizes. And I found that the small businesses actually have very thin operating expenses, because generally a small business is just one proprietor, it's the owner themselves doing everything. And therefore there isn't much expense. I don't have to pay payroll to employees, I don't necessarily even need office space, I could work out of my house or something. So in a company that's super small, generally 10 to 15% profit, they're paying themselves upwards of 50 to 60% of the income to to themselves owners pay. So let's say 50% 10% of profits is around numbers. And they're reserving about 15% for taxes. So all combined that 75% 25% to run the business. And I found that's a business income of growth mentality. Some businesses pay themselves even more to the owner, maybe 80% is going to the owner or 70% to the owner. So that's the rough percentages.

Emily Thompson 24:47
I think this is so important because one we talk a lot about knowing your numbers and how important it is. We actually did a I guess it was a clubhouse masterclass recently on budgeting where we were asking people how Often they look at their numbers, how familiar they are with it, we had some people in the clubhouse who was actually pretty proud of they looked at their numbers, and we're more familiar with them than than people that I had experienced in the, in the past, it makes me wonder if that's just clubhouse people, and they're just that boss their own. Right they are on it. But it's so important to know your numbers and know how much of your money is going on. Whenever you're talking about, you know, your story with, with, you know, your first business making was a 2 million a year, like, if your expenses are 1.9 million, then then there's not like your operating expenses are that much, then it's not a hugely healthy business. And so whenever you can ever you can look at your numbers and and be able to tell if you're healthy or not. I mean, that's, that's just being an entrepreneur. So if you're not looking at your numbers, look at your numbers and know what's going down.

Mike Michalowicz 25:57
I agree 100%. And there's another behavioral principle that really speaks to the power of knowing your numbers. It's called Parkinson's Law. Have either of you heard of this? No. Yes.

Emily Thompson 26:08
But yes.

Mike Michalowicz 26:10
Okay. So let me explain Parkinson's Law. Because I'll tell you, Emily, when some people hear this, you know, I make 50,000 a year. I'm barely scraping by now. And now this, this yucko guy is saying, take a percentage of profit first, like I can barely get by now. This is going to collapse on business. He's this guy's stupid. Well, I'm a little bit stupid, but I gotta admit that one. But Parkinson's Law is the behavioral principle of how we work around money. And if you understand this, you'll understand the opportunities that exist in your business. So here's what Parkinson's Law is. Parkinson was a theorist from the 1950s discovers that as supply the availability, something increases its natural human tendency to increase our demand for that thing. For example, if I put a food plate of cookies on table, there's two cookies on it, I'll probably two cookies. If you put a plate on the table with 15 cookies on it, I'll eat more than two, I might make it into five or six or more. And so the the greater the supply, the greater the consumption. But my fair examples around toothpaste and this translates to money, believe it or not, tonight, when when we go to brush your teeth, there's gonna be one of two circumstances for all of us. You go to the cupboard or the bathroom, whatever, you pull out your toothbrush, you pull out that to a toothpaste, it's either going to be a brand new tube of toothpaste, or an empty one. And once a brand new tube to put that long bead on there, do my captain Kurt if people could see me, you put that long bead on there and you start by commercial

Kathleen Shannon 27:37
style like

Mike Michalowicz 27:41
that perfect curlicue at the end was that brand

Kathleen Shannon 27:47
with like the green in it like the green jet Aqua Fresh, fresh,

Mike Michalowicz 27:52
Aqua Fresh, that perfect thing at the end, right and we use as long bead. But more you know, more often than not, it seems that tube is almost empty. And now it becomes like a whole different endeavor, we twist we turn we bend, we bite the edge of it at the edge of it. There's that that turtle moment that when when you you, you have to push with such force to get that toothpaste out. You put the toothbrush in your teeth to clamp it close, and you push with him in that little turtle head of Aqua Fresh peeks out and you try your toothbrush and just then it shoots back in. It's so frustrating. At the end of the day, we'll get like one little drop of toothpaste on a toothbrush and start brushing. And the lesson is this. When there is a full tube of toothpaste, we use that long Colgate bead, when there is nothing left we use less but but more importantly, become highly innovative in how we extract the toothpaste, twist turn, double thumb cut the end off. We do remarkable things. Money's the same way, when we have money come into our business regardless is $1,000 or $500. whatever the number is, when it comes into that income account. It's a full tube of toothpaste. That's all the money. So our subconscious responses, squeeze out the toothpaste, wait, I need to buy this, I need to pay for that and we use up the money. But if we intentionally divide that money up first, we allocate these different envelopes. And we work with the operating expense account only. Now we intentionally are serving up a empty tube of toothpaste, which means we'll be more frugal, of course. But the exciting part is we become more innovative that twisting and turning and bending. We will find new ways innovative ways to get the same results with less money.

Kathleen Shannon 29:37
Yes, I love this so much because I think that there is something to working with what you've got that makes creative entrepreneurs. Well creative, right? Yeah, I want to tap your brain a little bit about growing versus staying lean and how we stretch and kind of use our own resources and DIY more things versus investing and getting help that can help us grow faster or bigger than we could ever imagine. And this is kind of I've just been playing around a lot with the idea that you have to spend money to make money. And on one hand, I think it's very true. And on the other hand, I think it's a load of bullshit. And I think both things are maybe true. But I'm just curious to hear because it sounds like you've had experiences with spending a lot of money to make a lot of money. But you've also run some lean businesses as well. And what's kind of your mindset now from the lessons learned,

Mike Michalowicz 30:30
I love that you dropped the BS bomb. That was beautiful. I got a little bit emotional, because I agree 100%, Kathleen, that when we spend money, if we if we believe we need to spend money to grow, we're fundamentally flawed, it becomes this perpetual trap that so many businesses fall in, they think they need to spend money to grow. And since they spent money, they need to make more money. So they seek ways to make more money, as a little more money comes in and sales, they say we need to spend it to continue our growth. And it becomes literally grow to cover expenses mentality. And that's what I've experienced myself. And yeah, I grew by is never profitable, which means you have more of an albatross around your neck, it's a bigger business, that now you really better feed this beast, or you are in deep, deep garbage. So instead, I found that they aren't polar opposites. In fact, if you drive profit, it actually has sparked tremendous growth. And as I rewrote the book and release the new edition, I interviewed companies that focused on profit, they were growth oriented before, meaning spend oriented, they focus on profit, and they actually grew faster. So that kind of was confounding. How can you grow faster if you focus only on profit? Here's what I found. When you focus on profit, you actually have to reverse engineer that profitability, you're putting the X in the map saying I'm taking 10% of every deposit, now, it's going toward profit. Now, that means I have 10% less flowing in my business. So to support that profit, I need to figure out what are the services or products that I'm selling, that are actually profitable, and ends up most businesses have a mix of stuff, and some is more profitable, and some is less or not even profitable. So now you have to focus on fewer products and services, the real good ones, the ones you're really good at doing efficiently, so you can be profitable. Well, if you focus on fewer products and services, that means you can serve a you have to serve a smaller variety of client needs, for your products and services for your needs. Well, if you're serving clients with fewer needs, that means you have to focus in a tighter set of customers, kind of like a general practitioner doctor can work on anyone at the surface level. But a heart surgeon can only work on people that are having heart problems, not brain problems. So you have to focus on a more narrow set. That, by the way, is called niche specialization. Now, when you offer few products and services, but you you have to become extraordinarily good at them. Because you're serving a small client base, you're now if you're doing fewer things for fewer people you do extraordinary. Well, that's the definition of niche specialization, you become extraordinary talented at few things for a community of people, they talk about you, it spins up, they're the only ones that want you because you're the world's best at it now. And that spawns massive growth. So it's fascinating that if you want if you truly want to grow quickly and healthily, if you take your profit First, it actually forces that process to happen.

Kathleen Shannon 33:21
Okay, can we walk this through like a scenario? Yeah, let's say that some of our listeners are coaches, and they can make a really good profit with a one on one coaching service. Like they know that right now they can make $6,000 in a six month long coaching engagement, okay. However, the business they want to build is one that scales and grows where they can maybe do group coaching, and be servicing 25 people at once for $6,000 apiece, right? So there is this idea of like, what's profitable now versus the business that you're wanting to grow? And what if the business you're wanting to grow is at odds with what makes you money right now?

Mike Michalowicz 34:03
Well, so that means you're if you think it's at odds, you're probably looking down at traditional mindset saying, Well, for me to scale it, that means I need to have 10 more people doing what I'm doing. And so what I want to do is say, Well, to be super profitable, we're away we can do it that's innovative, and new. Now, there's things out there, like you could do group coaching over zoom or video. So it's still just you, you have a new technology that allows you to disseminate a new way. You could, you know, of course, do video education and stuff like that. You can make what you do into a product. A lot of people do that. So now, it doesn't take any of your time besides the original development and deployment. But now you have a product, but it's hard to sell generic coaching product because there's so there's so many coaches out there, quote, unquote, everyone's a coach. So because you want to be profitable, you have to focus on a specific coaching technique or process for a specific community, and then you become good at it. Now, here's the thing. There's a woman named Cindy Thomason SPECT, you've never heard of her unless you're an Amazon seller. She's a coach for Amazon sellers. And she specifically coached Amazon sellers how to be profitable. So she coaches one thing to one community. And trust me, she has way more than $6,000 a month, per client, that she charges, because she's a specialist. But she started off as a generalist, she did coaching for anyone that wanted to improve their profitability and grow their organization. And she'd be lucky to get $6,000 every couple years from a client by doing that. So again, if you're coach, I've seen coaches do this, narrow down what you're offering for a very specific community and serve that one specific community in a unique way better than anybody else. That's where the premiums are. That's where the profit is.

Kathleen Shannon 35:48

Unknown Speaker 35:49
I love the Amen.

Emily Thompson 35:51
Right. So I'm guessing to to sort of take this to our product people, the same process works for product makers as well, correct?

Mike Michalowicz 36:00
Oh, yeah, sure. I mean, you literally you could make coffee mugs, the most critical, generic thing in the world. And you could make massive profits out of if you're speaking again to community, what if, you know, what are your thinking? You serve people with super dainty hands like tiny hands with these big mugs with these massive grips? Like there is a community that can't grab those mugs. But what about the community to have those massive hands like these awkwardly large, disgusting hands? They need mugs. I don't know why they're disgusting. And that was,

Kathleen Shannon 36:29
yeah, that was totally unnecessary stay body positive here.

Mike Michalowicz 36:34
They had these massive, massive ogre hands like a beautiful

Kathleen Shannon 36:37

Mike Michalowicz 36:40
Like there's a community out there, you can make a mug specific to them, and they will pay a premium. So we we got to have this general mindset of, Oh, I have a product that can serve everybody, because that's actually the poor man's approach, we have to think Ivan can create a product that serves a very specific community so well, that they're willing to depart with significant amounts of money because it caters to them. So well. That's where the profit is.

Emily Thompson 37:05
I love that. And I guess that's also where you get the most satisfaction from your customers as well when you are solving their problems. So specifically, and gloriously that, of course, they'll pay well, for

Mike Michalowicz 37:15
now. I'm gonna Amen. You. Amen.

Kathleen Shannon 37:17
I can't have an off topic question. We're in the middle of writing our little off topic. So you mentioned in your most recent version of profit first, was that painful, like having to go back and revise and add to like writing a little bit about that? I know, that's completely off topic, but it sparked my curiosity.

Mike Michalowicz 37:39
Well, I love that you're writing a book, I think authors are the coolest people on the planet, honestly. Yes. Oh, yo, yo, because I think what I love about authors is we are creating something that will transcend time, something that's permanent out there. And I think we can have the greatest impact. I mean, literally, you can pick up a copy of my book, probably for a penny use copy, you can probably pick up for a penny on Amazon. And you can get literally my life's effort and knowledge in there. It's cheaper than going to a president, you'll see me speak at a an event, you got to be scribbling taking notes. I already wrote the notes for you. It's in my book. So So I love authors. For me, the process of writing a book is a I'm not a naturally efficient writer. So writing profit First, the first time took me four years to compile and write the second go around, I rewrote the book, I was efficient. This time, it took me about 14 months. And that was an efficient one. So when it comes to writing a book, it's not it's for me, it's not an easy process. But I do know the one key secret as an author, I hope you do this, I'm sure you are put every ounce of your knowledge and soul into your book. The the books that I found are successful, the author clearly gave it all away, everything's in there. You don't need to hire my company to do profit. First. You don't need to call amber Duggar, whatever, you don't need to be nice, because they can move forward further. But everything's in there. The books that fail are books where people say, Well, you know, if you want, here's step one, and two, if you want a three and four, you better pick up the phone and call me that those are the books that are just bombers.

Kathleen Shannon 39:26
I mean, I think that's how we found the success that we have with our podcast, which has been amazing. But that's always been our philosophy and our business is to give it all away for even from blogging. And it's funny because going from blogging to writing a book, we used to give it all away for free on the blog. And now I'm like, we can't burn our content on the blog. We have to save something for the book. So I just

Mike Michalowicz 39:47
before you about giving away Yeah,

Unknown Speaker 39:49
tell us

Mike Michalowicz 39:50
yeah, no sorry to step on. You

Kathleen Shannon 39:52
know, our best conversations happen whenever everyone's interrupting each other.

Emily Thompson 40:00
I think it's best drunk conversations happen that way.

Mike Michalowicz 40:02
Oh my god if we were boozing right now that we should have

Kathleen Shannon 40:05
all been drinking,

Mike Michalowicz 40:07
I totally, I did a podcast yesterday we were drinking on the podcast. And it was well it's a long story but it's funny. So here's what I found with the give it all away mentality. Many people sadly are fearful of and I guess rightfully so that if I give it all away, some people will take that knowledge and just run with it never need me. And here's the truth. That's right. They will they're called the do it yourselfers I found there's two types of consumers out there the do it yourselfers and the I need someone else to do it for me sell furs, or whatever you're gonna call them. The do it yourselfers are seeking the best knowledge and they will go to the free source who gives it all away. But here's the power to do it yourselfers they will take the knowledge they will absolutely do it themselves. And they'll run into people that need help. And that's that personal say, how did you do it? They'll say, Oh, I found it in this book. They will point back to the source. Do it yourselfers are extraordinary marketers for our business. The other people, the people that need help, they'll read the book and what they're looking to do is actually qualify us. They don't yet feel that or say that. But they're reading through it. Yes. Oh, I get it this work. Yes, they're agreeing with it. And if we put it all in there, they're saying this person is the compendium of knowledge. They have it all. They're this the person I want to hire. So when you give it all away, the do it yourselfers become your marketers and the people that need you see you as qualified.

Kathleen Shannon 41:25
Yeah, so you're creating brand advocates, and you're creating real customers,

Unknown Speaker 41:30
terminology, terminology better.

Emily Thompson 41:33
And I also love how that's coming from the guy who wrote profit first. And this idea that like monetizing, and getting as much profit is not quite in those words. I think you know, what I mean, is definitely what we're working for. But it all comes from being as generous as possible as you can with what you know.

Mike Michalowicz 41:52
Yeah. So when people see my title, they're like, Who is this tool? I mean, this guy was the all about money. You know that New York accent comes in when you Oh, he wants money, though you care about. And that's my New York accent. I love it. That was pretty bad. But

Emily Thompson 42:08
it also had its own hand gestures.

Mike Michalowicz 42:11
Face twist, right, the face twist you you're about money. But the truth is, truly, I believe I'm all about my my life's responsibilities, all about contribution and giving. And I realized the only way to maximally contribute is to be sustainable. So profit translates to St. sustainability. Sustainability translates to perpetually giving and contributing. I believe we are all here for a calling. And you can you can believe it's God given or self given. I'm cool with however you define it. But I believe we're here for a purpose. And the only way we can live our purpose to the max is by addressing the profit first. That's what private versus we have to address it first. So we can do what we're called to do. It's it's unfortunate some people to see me as the money grubber guy. No, that's not true. Oh, we're not getting defensive.

Kathleen Shannon 43:07
I'm gonna pivot back to the book a little bit, and to the bank accounts, and really getting on top of managing your money. This is more of like a tactical, logistical question. Is it complicated to open that many bank accounts? Or is this day and age? Is it easy to kind of umbrella it under a bank account? Do you have any tips or advice there?

Mike Michalowicz 43:28
Yeah, so that is a common resistance. I get like, Oh, my God, if I have to open one more damn account,

Emily Thompson 43:33
I know, I told this, or I told my money guy who's the who's the he will be reading the book. Next. I told our money guy, I was like, Look, we're doing this, read this book. And he's like, God, you read another book. I know, trust me. I was like, we have to do it. And it starts with bank accounts. And he's like, Wait, what? Because banks, but continue?

Mike Michalowicz 43:52
Yeah. So here's the resistance of bank accounts. Oh, the bank will charge me more fees. I can't afford the fees. Secondly, the administrative nightmare always accounts going on. I just want my one account. Here's the the irony. First of all, multiple counts when it comes to the administrative component is easier than one account. One account. If you ever done a reconciliation, you got to go through say, What was this for? What was this purpose for? Now, when you look at the your different accounts, you go into the profit account, every time money moves, its profit related. When you look at the tax account, every time there's a movement of money, it's tax related, it's actually pre categorized for you. So it's way easier to manage. When it comes to bank fees. Some banks are a pain in the arse, no question about it. Some will say, Well, if you have more accounts, we're gonna charge you a fee. Here's what you do, find a different bank. Or if you really love that bank, go to the bank manager and say, Listen, I actually want to save more money at your bank and you want to increase my fees. That ain't gonna work for me. Let's get rid of those fees, and you'll find banks negotiate. So find a new bank or just talk to the bank manager and you'll be pleasantly surprised that there won't be bank fees by having multiple banks accounts and but definitely Do it. The gains so far outweigh the perceived costs. It's unbelievable. You don't don't let those little potential roadblocks stop you

Emily Thompson 45:09
love it. So what is what is the number one thing that people can start doing right now, if they want to start better managing their money, other than picking up your book and reading it.

Kathleen Shannon 45:24
Okay, now, everyone pick up the book and read it, it's changed our life, it's changed my money game over here.

Mike Michalowicz 45:33
So here's the simple step. And this doesn't even require the book. Many people want to hear the system. And there's there's these five accounts we alluded to earlier, there's these different steps and stuff. That's the full behavioral system is putting you in this channel for profitability perpetually. But I also find that if you go into a full steam from day one is a lot to take on over. But it's it can be overwhelming. And then people can fail and give up. It's like saying, you know, you want to start running for life. Well, once you run 26 miles a day. Now once you run a marathon a day, when you're just starting to run, no, the best thing is actually start walking around the block. That's how it should get started. So with profit first, I suggest there's no excuse not to do this literally today, as you're listening to this podcast, set up one account, go to your existing bank comm and just have one checking account. I mean, it's only one account, rename that checking account from checking to the word profit, then allocate 1% of every deposit to profit. That means if if 100 bucks comes in today, I'm saying take $1 out of the 100, put it into your profit account. And now run your business off 99 bucks, because you can run off 100, you can run off 99,000 bucks come in, I'm saying take 10 bucks, put in a profit account. Because if you can write off 1000, you can write off 990. The thing is, you won't get rich overnight this way I get it. But you will be rich in confidence, realizing that when you pre allocate money to a profit, that that profit will stick. And you'll find a way you run your business that more efficiently. Once you start getting that confidence yourself that you can work the system, then change it from 1% to 2% allocations to maybe 5% the province over time. And once you went over your confidence fully, then go this go the system full bore.

Kathleen Shannon 47:13
I love this so much. Because I've always been kind of the anti Suzy Orman latte factor. I'm like, if I want a latte, I will just hustle out five extra bucks a day, or whatever it is, I'm an creative entrepreneur, I can make that money. But what you're saying here and where it's finally clicked for me is that it's not about the dollar. It's not even about the $100. It's about the behavior that is driving that. And that behavior can translate to so many other areas of our business and how we run our business.

Mike Michalowicz 47:44
Yeah, and I would even argue that's absolutely true. And I add one more thing, you deserve that latte like that's actually what's called celebration. And I think a lot of principles are told about sacrifice. If you're willing to live for the next 10 years, like a popper on a cardboard box, you'll be a billionaire. True, but who was like a pauper for 10 years in a box? And what if on the ninth year, one day before the 10th year I die, that was a effing sucky, 10 years for nothing. So I actually believe we need to bounce reward with smart savings. And here's how we do it. When we allocate that 1% or 2% of profit, we don't sacrifice that latte, we sacrifice the things we don't need with that membership for that software we never use, you realize, Oh, I shouldn't have that and you turn it off, you start finding these elements in your business that you weren't using or weren't leveraging much you turn those off. But the more exciting thing is because we're business owners, you find ways to generate a greater premium. How do I charge more to my clients fairly and appropriately, to make more profit. That's where the real juice is. And you have to continue to reward yourself. Because if you sacrifice yourself and you deny yourself that latte, you deny those things you like, then we start resenting our business say, why am I even doing this? It's constant sacrifice. So bounce that reward with the appropriate cuts and explode in innovation,

Emily Thompson 49:08
and greed. And one of the things I loved most about reading through your book and well not and period is that I've done most of this stuff naturally for a decade. And so I feel like on some level, like if you have an entrepreneur brain, this stuff makes sense to you. You just need someone to tell it to you. A couple of years ago whenever I had just started running my business, my web design business, which was after the tanning salon, windy path as well. I was saving 10% of every deposit that came in and like was religious about it and ended up paying for a trip to Europe whenever I was, you know, just two years into so low income, new business was able to was able to Very easily do something really awesome for myself. And that's a practice I actually haven't kept up with just quite as much as I was then. But that was something that I was naturally doing as someone who was in a business not only to pay expenses, but to make money for myself. And I think that I think that bringing it back to profit, and thinking about how you can run really lean businesses, is exactly what's going to get all of us to where we want to go and beyond this sort of feast and famine, struggling starving artists mentality that so many are not even mentality but reality that so many of us have, it comes from managing your money really wisely.

Mike Michalowicz 50:43
Yeah, not to be hard. What I love is you said you already doing most of this, and I'd argue the profit First, it is nothing new. This is the envelope system. This is the pay yourself first principle. These are all established principles that we've done in little bits and pieces in our personal lives. I'm just saying, let's translate that to our business life. Just because our businesses and personal lives are so ingrained as creative entrepreneurs, and you'll start to see an impact. There's no question.

Kathleen Shannon 51:08
Well, we are so excited to implement the profit first method in our business in a very structured way using your book as guidance. So thank you so much for writing it. Where can our listeners learn more and find you?

Mike Michalowicz 51:21
Thank you, Kathleen. If you want to learn more about the book, Amazon Barnes noble, your local bookstore just ask for profit first. If you want to kind of go to the mecca of all things that I got. It's my website. Now it's Mike mccalla Wits calm is a doozy of a last name. I still, I still struggle with it, quite frankly. So there's a couple of shortcuts. If you go to Google and type in Mike MC Mike space MC, the longest most Polish name on the planet appears that's May. The second thing is if you go to Mike motorbike.com, that was my nickname in high school. It forwards you on to my site. And what you what you will find there on my site is I used to write for the Wall Street Journal. So you'll find downloads of my articles, samples for chapters from all my books, and the blog and podcast. It was all

Unknown Speaker 52:12
awesome. Thanks so much, Mike.

Emily Thompson 52:15
And we'll also make sure that all of those links Mike motorbike and otherwise are on our show notes at beating boss club.

Kathleen Shannon 52:25
This episode of being boss was brought to you by fresh books cloud accounting, thank you to fresh books for sponsoring us and you guys can try it for free by going to freshbooks comm slash being boss. Thank you for listening to being boss. Find Articles show notes and downloads at WWW dot being boss club.

Emily Thompson 52:45
If you're a creative entrepreneur, Freelancer or small business owner who is ready to take your goals to the next level, check out the being boss clubhouse, a two day online retreat followed by a year of community support, monthly masterclasses book club secret episodes and optional in person retreats. Find more at www dot being boss club flash clubhouse.

Kathleen Shannon 53:09
Thank you so much to our team and sponsors who make being boss possible our sound engineer and web developer Corey winter. Our editorial director and content manager Caitlin brain, our community manager and social media director Sharon lukey. And our bean counter David Austin, with support from braid creative and indicia biography,

Emily Thompson 53:27
do the work, the boss and we'll see you next week.