Profit First For Fast Business Growth with Mike Michalowicz

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Episode Summary

Having to restart a business from almost nothing and coming up on top is one proud experience Mike Michalowicz likes to share with business owners. But this is one life experience Mike doesn’t want to ever encounter again, because now he has learned that by letting go of his ego he rediscovered the meaning of entrepreneurship and felt that he wanted others to learn from his experiences of correcting himself. He is the author of four books including Profit First which Business Week calls “The Entrepreneur’s Cult Classic.” Learn how hiding money from himself made his business profitable because it forced him to find innovative ways to market for fast business growth.

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Today’s guest on The Successful Pitch is Mike Michalowicz who is the author of Profit First. He has incredible insights on the importance of paying yourself first with your profit in order for you to become profitable. What that does for you is it identifies those services and products you might be offering that are not profitable. If you just see your business growing and being this cash-hungry machine and never making a profit, you don’t even have a clue what you should be cutting and what you should not be cutting. He said, “A lot of people come up with excuses about why they can’t do it. It’s too simple to work. I’m very unique, this would never work for me.” Believe me, he’s got case studies of himself, having it work as well as many other businesses. He said you really have to take a look at what would you do if you had all the money in the world? More importantly, what would you do if you had no money in the world and they both give you freedom? Finally, he said a lack of resources with no money is what triggers innovation. Enjoy the episode.

Listen To The Episode Here

Profit First For Fast Business Growth with Mike Michalowicz

Our guest is Mike Michalowicz who is an entrepreneur behind the three multimillion dollar companies. He’s the author of Profit First, The Pumpkin Plan and what Businessweek deemed the entrepreneur cult classic, The Toilet Paper Entrepreneur. Mike is a former small business columnist for the Wall Street Journal no less and the former business makeover specialist on MSNBC. Today, Mike travels the world as an entrepreneurial advocate speaking to groups and people just like us. He’s globally recognized as the guy who challenges outdated business beliefs and teaches us what to do about it. Mike, welcome to the show.

Profit First: Transform Your Business from a Cash-Eating Monster to a Money-Making Machine

John, it’s a pleasure to be here. Thank you.

I always like to hear people’s story of origin. Before you were a famous author and a famous columnist and doing all these business makeovers, did you know you wanted to do this from the get-go when you were in school or what happened? How did you get where you are?

I was a little bit of a stumbling-bumbling fool I would say, perhaps I still am. After college, I had no entrepreneurial aspirations whatsoever. In fact, my upbringing was get one job and live that job for your life and that’s what I aspired to do. I thought that was a perfect formula. I just couldn’t get a job out of college. Without a job, at least not an adequate career job, I decided perhaps I could start my own thing. Quite frankly, there were a few beers in me when these thoughts came through. Liquid courage did help. I quit my job that night with a little bit of a slur in my voice. The next morning started my first business but also was married and had a young son at that point. It was trial by fire. It was motivation out of fear and it took me quite a few years. I started to fall in love with the experience of being an entrepreneur. I grew that small business. It was a computer service company and sold it to a private equity group after eight years. I started another business in computer crime investigation, ended up in the right place and the right time. That one headed it. We helped facilitate some of the Enron trial and some other major cases where computer forensic evidence was involved and sold that to a Fortune 500.

Clearly, I know everything about entrepreneurship and you sensed the ego as I say that. My ego got hold of me and just became this ignorant, obnoxious person. I’m ashamed of how I behaved. I thought I knew all the answers. I thought I was better than other people and decided to become an Angel investor. That’s where I lost all my money. I started investing with my own funds from the selling of my companies. I started investing in all these different startups and I had no right to be in that space. I had no clue what I was doing. All these businesses collapsed. I lost literally all my money in spending good money after bad. That became the spawning moment for me, the day my accountant called me and said, “Mike, you should declare bankruptcy,” which I didn’t. I didn’t believe I even deserve to be forgiven for what I have done. I worked through it but also had to resort on life.

We, my family, my three children at that point, we lost all of our assets, we lost everything has to start anew. I also experienced depression there in that period. For all those dark times which I hated going through, I never want to experience that. I don’t wish that upon anybody. It was the greatest learning lesson for me. It triggered me to rediscover what true entrepreneurship is, to become a columnist, to start writing books and then fell in love with that phase and I’ve been doing that ever since.

[Tweet “Only sell what is profitable”]

There are so many things I want to unpack there. The first one I want to talk about because this is everyone’s goal at some point typically is, and you made it sound so easy and I can see why that would inflate your ego because it must have felt easy, you sold not one but two companies and made a lot of money. There’s got to be some lessons from that that you could explain. Did you identify who could potentially buy your company when you started your company and you always had that on mind? Did somebody stumbled upon you and found you? Tell us a little bit about that, Mike.

The things that worked was my first company. It was really driven out of fear. I had to make that business work. I started building a little reputation in a niche community. That’s one of the lessons. Once I started targeting a niche, the business grew quicker. The other companies that were in that niche, really scratching the surface of it caught notice of me too and that’s where this private equity group stepped in, so they approached me. The second company, same thing. I was approached in the same thing. I figured out a niche. This was computer crime investigation but specifically we did defense investigation. We actually facilitate part the defense side of Enron. People ask me by the way, “You do work with Enron, were they guilty?” The answer is yes. There was no evidence otherwise. Even though they were our clients, ultimately through their law firm, they’re guilty.

The element I didn’t realize is timing is a major component. I think we can do some things to manage timing. I was just by luck in the right place at the right time but I attributed it to my own intelligence, and that was a fatal flaw. I thought, “Cool, I started a forensics business and do a couple of moves. It’s going to take two and a half years before it’s acquired for millions.” Clearly, I know what I’m doing and now looking in retrospect, I didn’t make Enron happen. It happened. I just happened to be there. Yes, we can be opportunistic, we can position ourselves but luck does play a component and I think I disregard the significance of that. That’s very important. Luck may and will present itself, we seem to grasp it. Be very careful with thinking, “I’m super intelligent. I know everything.” I sure heck don’t.

The real takeaway for me from what you said is figuring out a niche, what problem are you solving and be in that specific niche and then the fact that Enron got all that publicity that attracted someone, “You’re involved with that? I want to buy you.” That’s the luck part, but you also had the foresight to realize that you were solving a big problem and in this case, it had to do with computer crime. That’s really valuable. The other thing you mentioned that everyone experiences and so few people are willing to talk about so I’m really grateful that you brought it up, is this trough of despair that you hear that most entrepreneurs go through. Sometimes it happens before you get your business sold and you wonder, “What am I doing? What am I thinking?”

In your particular case, your journey was a little more dramatic, which makes for a great story which I love. We’re going on the hero’s journey and the stakes are very high. Where you’re in such a high peak of huge success and then, “Everything I touch doesn’t turn to gold.” The truth is that’s true for everyone and we just don’t see the failures whether you’re Richard Branson or Oprah. Not everything they touch turns to gold. You think it does and then you go, “Wait a minute, there’s plenty of things that didn’t work out for them. We just don’t get a lot of publicity around it,” or you forget about a movie that Oprah made that didn’t work out or whatever it is. How did you get yourself out if this trough of despair/depression?

It was a two-year journey. I remember the one that kick off was someone in my family looked at me and said, “You have the mightiest touch, Mike. You’ve done this twice now.” I believed it. I really felt like mightiest, anything I do, I do right. Then the collapse happened. How it transpired for me is first, disbelief. I was in really disbelief in how my business were failing. I was putting good money after bad and they’re collapsing faster. I truly believe if I just put more money in it, that’s going to be the solution. That’s disbelief and really disregard for the reality.

Then I had to face my family. I told my wife and children sobbing, ashamed because we lost our assets that day as I was telling them. I had lied to them by omission. Then I went into depression. How it manifested for me? I’m not really a drinker. I like a beer or a margarita or both. I was firing down beer after beer. I’m insomniac, I wasn’t sleeping and wallowing in my own errors believing that I couldn’t get better. Suicidal thoughts, planning; actually, I know a great way to kill myself now. Those nasty thoughts of the world is better off with me not being here. I also realized that that was such an easy escape for me but I would be actually punishing others. I never really, really believed it but I was thinking it for sure.

The turning moment, which is the most bizarre thing, was just to start journaling. A friend of mine said, “Mike, just start journaling AKA a diary. Start a diary.” I thought what that meant, John, was to write down, “Things will be okay. I look forward to the future. Life is good.” He said, “No, what a journal is write down the thoughts that are in your mind at the moment. It doesn’t matter how disgusting or nasty or angry it is, just write it.” I wrote these ramblings but I started feeling relief. I was bizarre just by writing nastiness, I felt relieved. I became an avid journalist. Then the moment came I said, “What do I want to do in my life?” A lot of people say, “When you’ve all the money in the world, what would you do?” The better question is, “When you’ve no money left, what would you do?” It’s the same choice. There’s absolute freedom when there’s nothing and there’s absolute freedom perhaps when there’s everything.

I asked myself, “If I have nothing, what would I do? I could start over.” I looked at that journal and I said, “I actually like the writing component.” I could write about what I’ve learned in my journey. I could fix my own wrongs. I could start helping myself. That’s when I started writing books. Wall Street Journal then called me and said, “We’d like you to write for us.” MSNBC called and said, “We want you to be on television sharing your thoughts.” I didn’t realize this but honestly, everything I was doing was actually just trying to correct me. I’m trying to fix me and started to realize maybe other people could benefit from this too.

Again, so many wonderful insights there; I don’t know if you caught it or not or if it was an intentional play on words but you were journaling, writing in a journal and then you became a journalist. This concept of getting our negative critical thoughts out so they don’t stay in our head. Whatever the format is, talking to somebody, writing it down in a journal is so valuable because anybody can do that. That’s great stuff. That’s how you get out of that cycle of just perseverating over and over again in all the negative things of “I’m not good enough. What was I thinking? No one loves me. I’m not having a good idea. There’s scarcity in the world.” I really love what you said, Mike. I’ve never heard anybody say that instead of asking, “What if I had all the money in the world, what would I do? What would I do if I had no money in that world?” Both have the same answer. There’s a whole other book there, that whole concept of freedom.

You write about in Profit First that you came across this small, easily overlooked paragraph in The Toilet Paper Entrepreneur. I want to just go a little bit on the journey. You get out this depression and you write The Toilet Paper Entrepreneur. That’s a great title. Tell us how you came up with that title and what this overlooked easily paragraph is in there.

The Toilet Paper Entrepreneur

I wanted to find an analogy of something that we experience in life but don’t talk about it. A situation where there’s lack of resources and we don’t talk about. That is the definition to me of entrepreneurship. Entrepreneurship is a struggle yet we don’t talk about it. It’s vibrato and chest-pounding when really for the vast majority of us, we’re scant on money, we’re scant on resources, contacts, friends, experience. None of that stuff is available to us, yet we survive. I was like, “That’s the bathroom.” The moment we run out of toilet paper and there’s that three sheets. Of course, you don’t talk about it because that’s embarrassing and personal. The realty is we’ve all been there and we’ve all navigated it. I wanted to get this reality of the lack of resources actually triggers innovation. The Toilet Paper Entrepreneur is the lack of contacts, meaning you don’t have a network of people, requires you now to establish a network of contacts. It’s finding a new way to approach it. A lack of education or experience forces you to break the rules. It was a beautiful thing. That’s what that book was about.

I also put in there literally a three sentenced paragraph. I started talking about profit in there because I realized it’s a problem that I had. As much as my businesses grew in these companies I told you I sold, they were never profitable. They only made money for me when I excited, which is the big difference. I wrote and I found a little trick, hide money from yourself. That was basically it. When money comes into my business, I immediately take a portion and hide it away from myself and I won’t even miss it. By doing that one little mechanism, I started becoming profitable. I started getting a few calls, a few inquiries. People were saying, “I tried that ‘take your profit first’ technique and it’s working.” I said, “It works for me. I thought I was just alone. I thought I was the only weirdo that experience that.” It turned into a full system now. We estimated it recently, we think there’s 30,000 plus companies doing Profit First at the start of this year.

I love that line, “Lack of resources triggers innovation.” Because that’s not, “Poor me, I don’t have the huge staff or the huge funding I need or whatever it is to make my business a success,” and just go, “No, I’m going to figure out how to do it,” or “I didn’t go to an Ivy League school,” whatever. “I don’t have the right contacts.” This concept of hiding money from yourself to get profitable reminds me of what people do with automatic savings programs or the concept of your 401(k), just to have the money taken out of your paycheck. You never even notice it so you don’t spend it. Applying that to the business, is there an automatic way to hide money that you recommend?

[Tweet “Lack of resources triggers innovation”]

Yes, there are a couple of steps. You’re very astute because that’s exactly the system. It is the 401(k). It is the ‘pay yourself first’ system. I’m just a guy who says, “It works on our personal lives, we got to apply it to our business lives.” This is the process, when money comes into your business what I found most entrepreneurs run their business off their bank account. Maybe you were told read the P&L, the balance sheet. We don’t do that. Quite frankly, I have been in business for twenty plus years, I don’t know how to read a balance sheet adequately, but my accountant wants me to. What I do is I log in to my bank and see what balance is available and I make gut decisions based upon that.

What I found is the best systems are ones who don’t requires a change but the system actually works around our existing behavior and puts guard rails in place to make our existing behavior that gives bad results, now give good results. What we do is we set up another bank account and ultimately, multiple bank accounts. For now, start with one new bank account at your existing bank, call it profit. When money comes in to your main checking account, immediately transfer that percentage into the profit account. This is the envelope system. We’re dividing up money and we know what money is available for what purpose.

Step two is we got to hide the envelope because we’re going to dip in there when emergencies come about. What you do is you set up another bank but the goal here is not a convenient bank. No online banking, no starter checks, no ATM card. Now, we’ll transfer a link. When I transfer the money into my profit accounts, down the envelope, I know its purpose. I invoke a transfer, sometimes it takes a few days. It goes to that new bank and now it’s out of sight, out of mind and I have to draw my business off the remainder. That simple process, it allows us now to work with what’s left over. It’s human nature to very easily adapt to the circumstances around us. When we downgrade our house or where we live to a smaller space, initially it’s uncomfortable, we’re used to more space. Then we sell off some furniture, we do whatever and be like, “Here’s my new cozy space again.” We’re very adaptable. When there’s less money now available to run the business, at first it’s a little bit uncomfortable but it’s shocking how quickly we adjust and rarely is the business compromised. We just find more innovative ways to do things. We find more cost effective ways to do things and because we’ve taken our profit first, we have assured profitability.

It almost reminds me of the analogy of just eat 10% less per day. You will survive and you’ll probably lose some weight. I think that’s that same mindset. You talk about why Profit First works is because it doesn’t try to fix you. We don’t need to be fixed. You have this great analogy about flying and flapping your arms. Could you explain what that does? I think we’ll all relate to what that feels like.

I decide to open the book this way. If someone called you, “Do you want to fly? It’s really simple. Run off the nearest cliff, start flapping your arms as hard as possible and you’ll fly.” If we are crazy enough to try that out and we actually jump and we start falling, the guy yells from the top of the mountain, “Flap harder.” Of course, it doesn’t work except there is the exceptional few. There are some that just by the happenstance of nature, they bounce off a rock or two, they land in a certain way, that it doesn’t kill them. Then we have what’s called a confirmation bias. The world points to that person that landed and said, “See? He flapped his arms right. He flapped harder. That’s why he survived. That’s what you need to do.” We’re all like lemmings, we keep jumping off the cliff trying to flap wings and the few survivors become the confirmation bias. When it comes to profitability, that’s what’s happening. Most businesses are not profitable.

There was a study in part conducted by the SBA, there’s other sources too. It identified, at least that’s what I’ve heard, that 83% of small business survives check my check. They don’t have enough money to survive next week if they don’t get deposited. That’s flapping real hard. The few survivors, the few Facebook or whoever it is, we point to them and say, “See? It does work. We just need to flap harder. We just need to get investment from bankers and private equity and all these people that come in.” The answer is, “No, they are the exception. They are the ones who are truly lucky.” Don’t bank on luck, instead bank on your human nature and leverage it to your advantage. Taking your profit first and saying, “You’re sitting in an airplane and fly that way. That’s going to work a little bit better.” That’s what I’m trying to say here.

Don’t bank on luck, bank on how you naturally behave now, your existing human behavior. The goal is however you already behave, we just got to put parameters around that that natural behavior becomes our advantage.

[Tweet “Hide the profit from yourself in a separate account”]

Instead of flapping your wings, get in an airplane. I would say that means collaborate. Don’t try to go alone a little bit too.

Collaboration works in all aspects of business, but when it comes to Profit First, I was the first guinea pig ever to do Profit First. I started it almost ten years ago, when I wrote. What I noticed was I set money to a profit and then I stole from the money. I “need” the money. It was like a drug addiction. I got a partner, his name is Larry. Talk about the buddy system is real simple or collaborating. I got checks for my business with dual signature. Larry does not own my business. He’s not part of my business. He has his own company. I said, “Larry, for me to take profit form my business, I need you to sign on this check too.” I did the same for him. Larry is a stingy guy. Anytime I want to access the profit account, he’s like, “No, you can’t touch it.” Let me tell you why and I had to justify that the distribution profit was the true definition of it, which by the way is a celebratory account. When you take profit out, it is a reward for the equity owners. It is not to be invested back into the business, plowed back, pushed back, reinvest. None of that stuff. That simply means it’s a deferred expense. I had to prove to Larry, “I’ve saved enough profit. The business can run on its own. I’m going to go on a vacation with this.” In the beginning it was, “I’m going to go to Starbucks with this.” Then Larry would authorize the check. That’s how I collaborated.

Tell us one more story of how this has helped you. You have an example of somebody who owned a hot air balloon company.

His name is Keith Fear. What Keith does is he had a hot air balloon business that was not profitable. The irony was he grew it to $500,000 or $1 million in revenue which sounds like a pretty, healthy small business. He was still at a full-time job because every time the balloon took off, it was costing him money. He’s losing money. Even though people are buying tickets, it still cost the money. He said, “I go to get profitable.” He read Profit First and said, “It ain’t going to work. This is a stupid system. It’s too easy,” was his answer. Six months later, he read Profit First again because his business is not profitable. He said, “No, it can’t work. I’m too unique,” was his next defense. “I’m different than the ordinary business, the ordinary guy.” Third time he read it, he said, “Out of desperation, the business was going under. I had to do it.” Then fast forward a year after implementing Profit First, his business achieved profitability. What was surprising was his business started to grow explosively. Here’s one of the hidden benefits of Profit First. When you take Profit First, you have assured profitability. That’s the beautiful part. Also, it now forces you to identify the services you offer or the price you offer that are actually truly profitable because you want to enough money to sustain unprofitable stuff, that’s an expense. He had to reduce the things he was doing. He only did now certain length trips. He couldn’t do the short up in the sky and back down. That was a money loser. The long ones where it was a day trip and you go picnicking, it was just a couple on losing money. The one hour trips, that was the money-maker. He refined what he did.

The Pumpkin Plan: A Simple Strategy to Grow a Remarkable Business in Any Field

The second thing is then when you do less services, less products, it forces you to service a more narrow community. Some people don’t want your service. The people that were daring themselves to go up in hot air balloon, they were the up and downers for five minutes. They were no longer buying from him. The couples that want to have a romantic getaway, no longer buying. The people that were out for an adventure for an hour, now started buying. Those were the profitable folks. He narrowed down his offering, narrowed down the clients that he’s tracking, which means less marketing to a more focused community which meant the community is talking about him more but it cost him less because he’s more focused. His business actually grew two or three times faster than it ever grew before because he took his profit first.

Once we get over the excuses of, “This is too simple, I’m too unique,” and then we finally do it, the big a-ha here is stop doing what’s not profitable. If the whole thing is not profitable, you can’t figure out what that niche is, then it is profitable and do more of that. When you niche down to only doing things that are profitable, then that’s what people start referring you to and that’s what you’re known as, as opposed to trying to be all things to all people. That is just fantastic insights there, Mike. You talked about without Profit First, the business really is this cash eating monster. When you take control of it, then you become the boss of the monster as opposed to the other way around. If you have the time, I’d love to hear one more story because you have so many great ones. What was your initial instinct on the story?

The baseball team. It’s a funny story because it was so visual for me. I got a letter in the mail, this is about a year after Profit First was released. I opened the letter and inside is a baseball card. It’s a manager of a baseball team in this yellow tuxedo. I flipped the card over, on the back it said, “Jesse Cole, Manager of the Savannah Bananas.” Below it, it said, “We’ve started Profit First and it saved out team. Call me.” I called this guy. Savannah Banana is a Minor League baseball team in Savannah, Georgia, had a million dollars of debt. They were going under. They implemented Profit First in a year. Eradicated the million dollars of debt, have become profitable, are now in regards to attendance and profits and revenue, the best performing Minor League baseball team in the US, because in part of Profit First, and a big part because of how this guy embraced it. He did the system but he then embraced innovation. They do some of the most crazy, fun, engaging and profitable things I’ve ever heard of.

It’s just so exciting and exhilarating. I’m so glad you shared with us your journey because it would be very easy to just look at, “I started two companies, I sold them and now I’m this best-selling author and I’m a TEDx speaker and I write for the Wall Street Journal and I’m on TV. It was easy and breezy and you could do it too, maybe.” Then you’re like, “No, I had my own challenges to overcome.” That same discipline that you learned when things weren’t going well is the discipline you’ve applied to Profit First and I think that’s really the big insight there. Without that experience, you might not have had the discipline and focus to come up with and clearly, it’s working for you and many other people.

We have challenges still yet in front of us but I think the ultimate thing is to realize that going through a challenge for me, it’s nasty and dirty. I never look forward to a problem. I never lived through it in the moment saying, “This is great. I’ll learn from this. I hate it.” The discipline of looking back at our life’s journey, I think we can find a lot of answers for ourselves in that.

Mike, how can people find your book, follow you on Twitter, etc.?

Amazon is the mecca for books, so that’s the place to go. The cheapest price is there. If you prefer bookstores, it’s in Barnes & Noble, airports and in your local bookstore. All my books, I have free chapter downloads and I blog. I like to podcast too. It’s MikeMachalowicz.com. Here’s the deal, that’s the longest, most Polish name on the planet, I get it. No one will figure that out, here’s the way to get there. My nickname in high school is Mike Motorbike. If you go to MikeMotorbike.com, that will get you over there. I hope the resources are big value, but I promise you this, I expect it to be the most different website you’ve ever seen if you do spend a little time on the homepage.

Thank you so much for being on today.

It’s been a joy, John. Thanks for having me.

Links Mentioned

• Profit First
• The Pumpkin Plan
• The Toilet Paper Entrepreneur
• Savannah Banana
• Amazon
• MikeMachalowicz.com
• SBA

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