Taking Your Profit First – With Mike Michalowicz
"I became a self-made millionaire in my early thirties. My big fat ego exploded but I had no clue what I was doing, spending money like it was raining and it took me only about a year and a half to evaporate all my wealth" - Mike Michalowicz
Mike is an Entrepreneur, Speaker and Author who has been blessed with over half a million readers of his books - Fix This Next, Clockwork, Surge, The Toilet Paper Entrepreneur, The Pumkin Plan AND Profit First. He has keynoted at the worlds biggest events and has built four multi-million-dollar companies and sold two of them: one to private equity and another to a Fortune 500.
But those are just peak moments from decades of entrepreneurial struggles.
Not too long after making his fortune, Mike lost it all and set out on a mission to eradicate entrepreneurial poverty so that no business owner must go through what he went through. In this interview, we spoke to Mike to learn how he helps business owners find better ways to grow healthy, strong companies.
Lesson 1. Pay Yourself First
The Profit First methodology by Mike believes that the traditional accounting formula of ‘Sales -Expenses = Profit’ fails most entrepreneurs more than it helps. A study by the US Bank revealed that 83% of small businesses are in check-to-check survival, they don’t have enough income today to support the bills of tomorrow let alone actually paying themselves for the work they put into the business. The irony of this data is that one of the primary reasons people start a business as an entrepreneur is to achieve financial freedom.
Mike explains: “The foundational formula that's taught in accounting makes very logical sense. You must have income come into your company, you subtract the expenses you incurred and what's left over is profit, but it makes logical sense. It doesn't make behavioural sense, and we are humans.”
With Profit First, you flip the formula so that it becomes, ‘Sales - Profit = Expenses’ which ultimately makes it a behavioural system. What happens now in your businesses is that every time revenue comes into the company, you take a predetermined percentage of that money allocated toward profit in an actual transfer of cash. Hide the money and then run our business off the remainder.
“It's the pay yourself first principle applied to our business and the impact is nothing short of remarkable. And I'm not saying that from a braggadocious way, we now have over 400,000 companies globally. Who've implemented profit first.”
Of the 400,000+ businesses that have implemented Profit First, 100% of them are now more profitable than they’ve ever been before. Mike reinforces this: “It wasn't some extraordinary change in their business. It was simply changing the formula to take your profit first and then their business started to speak to them. When you take your profit first and you see how much is truly is available to run your business, your business is telling you the changes you need to make.”
The core tenant around Profit First was inspired by Parkinsons Law, usually expressed as “Work expands so as to fill the time available for its completion.” What Mike realised however, is that the behaviours around the consumption of resources are true with money too. The more money we have, the more we spend and if there is less money, we spend less but we also become more innovative with what we have got.
"When we have a full roll of money, whatever's in our bank account, it’s very easy just to squirt it out and spend it all away. But when there's less money there, because we've taken our profit first and allocated money to other purposes, now you see what's truly available.”
Lesson 2. Don’t Run Your Business, Serve It.
"My business doesn't need me to run it, it needs me to serve it. When I was running it, I kind of felt like I was a superhero swooping in to work my butt off for another day. Serving it means leaning into the things that I'm good at that can have greater impact.”
How Mike serves his business is by writing books and being a spokesperson for the business. However, to focus on the areas that have the biggest impact, you need to surround yourself with a team of people who you trust to run the business operations day to day.
“I love the people I work with. It is a privilege for me, to, to serve them that I don't think many entrepreneurs can say that.”
Lesson 3. Be Transformational, Not Transactional.
“I used to think that the business was about the transaction. But now I'm like, oh, it's not about transactions. It’s about how much am I of service to my clients and changing the way they live their lives. And the interesting thing too is I think any business can be transformational. You can make toilet tissue and be transformational because maybe you've created it in a way that's ecologically responsible or something like that.”
Businesses that have a clearly defined purpose, whether it’s Nike ‘Just Do It’ or Mike’s ‘Eradicating Entrepreneurial Poverty’ always form deeper connections with their customers than businesses without. However, for many, purpose comes from trauma.
“There is usually a vital moment of life where everything changes, maybe we're in a car accident and we almost lose our life? From that moment forward we say I will never allow that situation to happen to myself or anyone else.”
Mike's purpose came from the trauma around finances when he lost everything and had to face his family and tell them that they were losing our house. Mike explained: “I will never allow this to happen again to myself, my family, or any entrepreneur. If I can save an entrepreneur from trauma like that, I will.”
But purpose doesn’t just come from trauma, it can also come from passion, a child hood dream or any other part of your life. Purpose is a feeling and an emotion; it helps to vocalise that purpose however the most important thing is just to lean into that feeling and try to ensure everything you do helps you to live and breathe that purpose.
It goes without saying that Mike's journey is incredibly inspiring. And one that many entrepreneurs can learn from and relate to on a personal level, the biggest takeaway from this is that no matter how much you struggle in the world of business, it's so important to learn from your past mistakes and use them to fuel a successful future.
If you haven't already pick up Mike's book Profit First and let it transform your business and personal life like it has for so many of our clients. If you're interested in implementing the Profit First methodology in your business, we're here to help.
If you like this article, it’s just a taste of what you’ll discover in Episode 2 of Beyond The Balance Sheet podcast – Taking Your Profit First with Mike Michalowicz so make sure you go and have a listen!