If you feel that you are an entrepreneur or think that maybe you are an entrepreneur, you should know about Mike Michalowicz and his books. If you are operating through standard accounting, GAAP accounting, or what Mike calls Frankenstein accounting, you are going to want to listen to this episode and how you can increase profitability.
In this episode we are talking with Mike Michalowicz about his most popular book Profit First and how and why you should implement it in your business. I have implemented Profit First into my business and several listeners have reached out and said that Profit First is the secret to the growth of their property management companies.
[03:57] The pain that created Profit First
[06:41] When Mike had to tell his family how he lost all his money being an angel investor
[10:57] How Jason found out about Profit First
[13:03] Why every business owner should apply the Profit First accounting method
[14:15] How Mike is driven by the Profit First system to eradicate entrepreneurial poverty
[15:48] 80% of entrepreneurs are struggling check to check
[18:52] Pay yourself first isn’t a new concept, but Mike applies it to business
[21:37] The principles of Profit First and why GAAP is crap
[23:10] Get started by setting up multiple bank accounts and paying yourself first
[25:39] Parkinson’s Law – we get the same results with less money
[34:00] How business owners need to take care of themselves financially
[43:53] Mike’s other books The Toilet Paper Entrepreneur, The Pumpkin Plan, and Surge
Jason: Welcome DoorGrow Hackers to The DoorGrowShow. If you are a property management entrepreneur that wants to add doors and expand your rent roll, and you are interested in growing your business and life, and you are open to doing things a bit differently, then you are a DoorGrow Hacker.
At DoorGrow, we are on a mission to grow property management businesses and their owners. We want to transform the industry, eliminate the BS, build awareness, expand the market, and help the best property managers win. If you enjoy this episode, do me a favor, open up iTunes, find the DoorGrowShow, subscribe, and then give us a real review. Thank you for helping us with that vision.
I’m your host, Property Management Growth Hacker, Jason Hull, the founder of OpenPotion, GatherKudos, ThunderLocal, and of course, DoorGrow. Now, let’s get into the show.
This is episode 25 of the DoorGrowShow. In today’s episode, we are hanging out with Mike Michalowicz. If you don’t know who Mike Michalowicz is, you should look him up of Amazon, and check this guy out. Mike Michalowicz is a bestselling author, he’s written and sold several books that are just classics in my opinion. If you think you are an entrepreneur, if you feel like you are maybe an entrepreneur, you should know about Mike Michalowicz and his books.
In today’s episode, we’re talking about his most popular book Profit First. We’re talking about how to implement Profit First in your business, why you should, and I even mentioned how it’s been a game changer in my own business. Since we aired this live interview, I’ve had several clients, people reach out and say they start in implementing Profit First in their business and some people have said this is a secret to their growth in their property management company.
If you are operating through standard accounting, GAAP accounting, looking at your bank account like Frankenstein accounting as Mike calls it in his book, you are going to want to hear about Profit First and what it can do for your business and your profitability. Let’s get into the show.
Okay, we are live. I’m here with Mike Michalowicz.
Mike: Nailed it. Right out the gate, nailed it.
Jason: You had the pronunciation guide on your bio. But that’s what it looks like anyway. Hey Mike, it’s a huge honor to have you here. I am a fan. I don’t know if anyone watching is aware but if anybody watching, I have a poll thing down there, fill that out. And also. I’ve got the button there to get your book, right there.
Mike: Oh, awesome!
Jason: It’s just sitting there, you can go right to Amazon.
Mike: So promotional, I love it.
Jason: This isn’t promotional.
Mike: This isn’t promotional behind me, the strategic position box.
Jason: Right, right. You have your Toilet Paper book up there, though. I’ve got your Toilet Paper somewhere.
Mike: I do, I do. It’s just off cam. I got to swing all the way around.
Jason: Okay. I’m really excited to have you here. I wanted to first hear a little bit about the pain that created Profit First. I think that’s what really I connected with in the book, I think that’s what a lot of entrepreneurs, like the secret, this dark secret that we all have, these business owners, there are so many that are not profitable, or just scraping by, they’re paycheck to paycheck. I don’t know if you want to talk about that, but I would love to hear about what kind of inspired this thing. Because this is the promise so common yet and it seems so damn simple. It seems so simple and nobody really connected with this.
Mike: We’re going deep fast. The problems in the city is and what my life was like on the surface level, oh we’re on an entrepreneurial success. Actually, I felt it too. I was growing businesses. Couple most of them are companies from scratch, I started them myself, both with partners but we just grew and bootstrapped and I sold one to private equity, I sold another one to the Fortune 500. I was like, dude, look at me, I’m like a genius, man. Anything I touched turns to gold.
But the only thing that was very […] are selling to Robert Half International. I don’t know if you heard them. They acquired my second company. They don’t know account […]. My bank account blew up but my ego just went… I’m like, oh my God! I am God’s gift to business. I am such a genius. I believed my own garbage.
What happened was I started spending money, first on trophies and acquiring stuff. Like I had to have the LR3, Land Rover, the 7 Series BMW, and the house, the sabbatical. Nice right? But really not. I found out no one cares about that stuff. No one that cares really matters or no one that matters cares, however the rule works.
I also said, I’m going to keep this lifestyle. I’m going to become an angel investor through all these companies and just everything I touch will turn to gold. I quickly destroyed many businesses, I actually call myself the angel of death because I was so incapable of being an angel investor. What I did was I lost all the money in about two years span. Never declared bankruptcy, even though my accountants strongly advised I should and maybe legally I should’ve. Maybe financially I’ve been prudent but I didn’t want to. That was in 2008, 9 years ago. I had to tell my family that every penny was gone and up to that point Jason, I was lying to them by omission, I hadn’t told them what’s going on and I came home that day, February 14th ironically, Valentine’s Day, I was sobbing because I didn’t tell my wife, my three children everything is gone.
The turning moment, I actually wrote about in my book. I think it’s important to share because so many of us entrepreneurs live on the top line. Yeah, how many millions you doing, man? It’s always about size, size, size, we don’t care about the financial health, until it crushes us. I had to refinance my house, I had to do all these things just to stay afloat but that day I had to come home and tell my family.
My daughter, nine years old at that time, when I told her, she ran out of the room. Everyone’s terrified, that’s the answer. The thing is she hadn’t ran out of the room, she ran to her room to get a piggy bank and she put that in front of me and said, “Daddy, I’m going to support us.” At that moment, there was the piggy bank. That moment was just devastating. As honored and proud of my daughter, I was just so ashamed with what I’ve done, how I destroyed my family. And then believing that success is top of the line thinking. That’s what actually sparked Profit First. The resolution to my own problems.
Jason: Yeah. When I read that in the book, I was really touched by that because I was like I was going through that myself and it just really resonated obviously to much smaller level. I don’t have the millions of dollars, I don’t have the Tesla car that I would love to have someday. But there were times where I wasn’t able to pay my team. I’m like, “Hey guys, I’ll get money in. I’m hustling and grinding.” It felt like the whole world was against me and I couldn’t figure it out. I didn’t know why. I was like I can make money, I’m delivering value, I’m providing services for clients, but I look at the bank account and it seems like money is there and I go and try to spend money to make money and I’m just juggling and it doesn’t make sense to me. It was just incredibly painful and us crazy entrepreneurs, who gets the bulk of the stress.
My wife was going nuts and getting crazy. I’ve gotten brighter lights on. These are my indoor glasses.
Mike: Nice, nice.
Jason: It’s like of a life hacker, solar bio hacker nerd. For those listening, I just put on orange sunglasses so it blocks blue lights, for all the light in my office. Because I want good lighting for the video version. Anyway, it was incredibly stressful. In fact, there were times where I couldn’t pay my team. It was always like I had to hustle and grind and get the next deal on, and get more bills on, get money in. I was always trying to outpace the spending. None of it seems to make sense. I didn’t want to focus on the numbers, I wanted to focus on staying in my area of genius, and creating, and providing value, and connecting, helping people out. It got to the point where I was like something has to change. I had a coaching client that mentioned Profit First to me. He was like, “Yeah, we’re looking at doing this in my business.” What was funny is he cancelled me as a coach then, probably because I was expensive.
Mike: Oh, I screwed you over.
Jason: No, it’s cool. I heard that and then one of my coaches who I shot a bunch of money to, he did a podcast and he had his accountant on and he was all about know your numbers, and this guy was talking about how he was a Profit First accountant. I looked him up and I can see he’s a Profit First account. Then, he didn’t really mention you. He talked about Profit First. He was talking about knowing your numbers and this sort of thing but I saw on his website that he was a Profit First accountant. I was like, oh okay.
Then I’d also heard from another business coach at a conference I was at and he was like, “You need to know your numbers.” I was like, “Okay, I need to know my numbers. I get it. This is this thing I’ve been avoiding, I need to be clear on and know my numbers. I can’t just say it to my wife and my accountant. You guys do this and I’ll make the money.” It turns out, my account was already a Profit First Certified whatever in your network. I was reaching out to other people and trying, “Hey, could you help me and do the Profit First?”
Mike: Who’s your accountant?
Mike: Oh, Julie Babcock. I know Julie, that’s awesome, that’s awesome.
Jason: I was on a call with her earlier today.
Mike: It’s great.
Jason: What I love about Julie, Julie is an entrepreneur. She’s an entrepreneurial minded person. She gets it. That’s the thing, it’s nice to have an accountant that is also entrepreneurial minded because they get that. They understand what it’s like to have a spouse that’s not entrepreneurial minded and things were crazy. She’s helping me get all these accounts so that I can start funding my crazy while still paying my team members and keeping everything.
For me, the level of pressure and noise, because that’s what really kills us entrepreneurs has just decreased dramatically in knowing that there’s money in all these different accounts. Everybody else is watching or listening are like, “What is he talking about?” I’m going to say this as a plug for what you’re doing in Profit First but I honestly believe that every business owner should employ the Profit First Strategy, they should either fire their accountant and find a Profit First coach accountant or they should convince their accountant to do Profit First and take them through this process and get on board with this. It makes so much sense.
You went from this painful situation. Daughter’s bringing you the piggy bank, and my kids did things similar when I’m like, “Hey I need to do this.” They try to help and you’re like, “This is not your problem.” This is not a problem that I should be putting on my kids, but they feel all of this. That really is why we do everything. Related to this, little side note, what is your why? You’re doing so many different cool things, what really drives you? Everything that’s sitting on your shelf there, your Pumpkin Plan, Profit First, Surge, Toilet Paper Entrepreneur, what motivates you to do all this? What’s driving you?
Mike: I have turned it into a little bit of a tagline but I’ll tell the meat behind it. The tagline is to eradicate entrepreneur poverty. The why for me ties into my own story. I was an entrepreneur for 15 years before I had this collapse. As I look back on it, I had this outwardly shell of success. Look at all the things I’m doing and the stuff. But inwardly, it was a mass of stress. It’s compressing in my chest, and this constant I don’t know how to make payroll. There were nights I would not sleep through the night, I was so panicked about doing whatever it takes next morning to work my ass off to make money to cover payroll.
I thought this lifestyles was unique to me because all the entrepreneurs I talked to are so successful, everyone was making millions. But not me. I was making millions but I wasn’t keeping anything. I found out that’s actually the norm. When I had this collapse and lost all this money, I asked other entrepreneurs. Everyone has their own story. Maybe it’s not losing the house and cars, but maybe it’s not being able to cover payroll. It perpetuates, it’s not like it’s a one time event. Because the entrepreneurs have lived this way for the entire of their businesses.
There was a statistic released by the SBA, there’s other sources but Small Business Administration is part of it, that stated 83% of entrepreneurs, and there’s 125 million entrepreneurs are small business in the world. 83% are struggling check by check. Meaning they don’t get deposits in this month, they can’t cover payroll, or the rent, or whatever it is. The vast majority cannot make it past one expense.
That’s enough. I lived through it, I know how painful it is. I know that first and foremost, that has to stop for me, so I developed Profit First literally for myself and then once I perfected it over the years, I said, okay, I got to get this out of the bigger way. I started helping people individually through it. Two years ago, it became a book, the one you have. In two weeks, there’s the new version on the way. The new version right there which is coming out. I’m re-releasing it in a revised and expanded version.
The reason I’m doing this is to eradicate entrepreneurial poverty. I will not stand for it. Big job in front of me. It will take a lifetime plus, but I ain’t stopping.
Jason: Do you sometimes sit back and realize and give yourself credit for the impact that you’re having on so many different business? I want to give you a little impact here. My wife is a greater piece because of me doing this. My children are a greater piece. I may be able to spend more time with my kids as a result, my wife has jury duty right now. I basically have four hours to get work done during the day. It’s ridiculous.
Mike: Right, right.
Jason: My business would have burnt to the ground before, but I’m okay. I’m okay because I’ve got these accounts in place. I have this feeling of gratitude because I know the level of pain I was in and level of pain I was causing. That’s just got to feel really rewarding and I want to express that to you and let you know, thank you. Thank you for doing that for me and for my family because it’s been a game changer.
Mike: That means a big deal, thank you. I do get letters literally daily, emails, but also written letters, cards of these stories I blow my mind away.
Jason: You talk about the elephant in the room a bit in your book, you talk about the guy next door with the multimillion dollar house with the amazing car, the Tesla. He is one bad one month away from losing everything.
Mike: Disaster. But you know, I think what’s added to it is […] and there’s hundreds of accounts that are doing it. There’s entrepreneurs like you who are spreading the word. I’m the first to admit that the Profit First concept is not a new concept. It’s pay yourself first, it’s the envelope system. It’s stuff that’s been around forever.
I’m just saying let’s apply it to business. That was my contribution saying hey, we can apply this to business. Now there’s this community that’s so active spreading the word and supporting others. Just like you did, you saved your business and now you’re telling others to follow suit. There’s thousands of us now actually moving this along. I’m grateful to be part for it, I’m extremely grateful for you, Julie, all these people who are carrying it forward because I really think, together, we can eradicate entrepreneurial poverty. Let’s talk about that disease, let’s make that the measles of the past. Let’s eradicate entrepreneurial poverty and move on to more important things.
Jason: I love it, I love it. I actually turned one of my clients onto it.
Mike: I saw it, there would come up.
Jason: Are you cool with me bringing somebody in here?
Mike: Oh my God! It’s awesome!
Jason: Because I want people to get this because if I can sell people on the idea of using Profit First that are in my audience, they’re going to have a greater space, and that facilitates growth. That helps entrepreneur stand their area of genius and out of the pressure and noise that brings us all the worst attributes in entrepreneurs, instead of the best attributes. Julie’s in here as well. She’s hanging out.
Mike: Julie B, what’s up?
Jason: Anyway. I met with Sterling and I just thrown it out in passing and he got the book, he went and got a Profit First accountant. He had some phenomenal growth in his business. For property managers listening or watching, he went from being stuck and trapped at 60 doors to going to 300 doors in six months.
Jason: I would say that large part was our seed package that we do for the property managers but a piece of it was that he was able to also dial in the financial, the number and he did that using Profit First, and that’s significant. I don’t know if he’ll pop in here, but if he does.
Mike: We’ll say hi.
Jason: Then we’ll listen to him. You didn’t to the bankruptcy thing. You’re feeling all the stress, you started figuring out hey, I need to pay myself first. Share with the viewers some of the principles, explain why GAAP is crap.
Mike: Okay. That’s my little tagline too in the FB account and the bookkeeper throws up in their own mouth when they hear me say that. The reason I say GAAP is crap, not that it literally is a bad system. But it’s ineffective because it doesn’t account for human behavior. Profit First is a human behavioral cash management system. What I realized is what I was doing and so many of us do, our accountant tells us read the income statement, and balance sheet, and the cash flow statement, all these documents, tie them together and you’ll know where we stand. But instead, what I do is I log into this, my phone, log in my bank account and see my balances. Based upon what I see is balance, I make a decision to spend money or not, that I can afford to do something. I call that bank balance accounting.
One component of behavioral psychology is very hard to change our behaviors. Accountant, bookkeepers, and coaches, they’re been trying to do it for centuries, just read that darn income statement, understand your cash flow, it’s all there. That’s true! But our behaviors don’t change, we revert to looking at our bank balance and make a judgment based on that. Profit First is a system that works within our natural behavior, we setup in our bank.
Here’s the big outline of it. First thing is we want to set up multiple bank account at your bank. It works like the old envelope system. My mom used the envelope system, she work in the factory down the road. $100 comes in, she cashes in that check, she puts $10 into the food, $50 into the mortgage, $20 into vacation, and some money to emergency.
What happens when she went to the food store, that first envelope, whatever money was in there should work it, and it wasn’t always the same, sometimes she was sick. Whatever money was in the food account, that’s what she worked with, she made it happen. Sometimes it was rice and beans, other times it was liverburst, it stands for liver sausage which tastes as bad as it sounds. Whatever.
Jason: I’ll avoid that.
Mike: Avoid it. It was the envelope system. The second principle we’ve told is pay yourself first, we’ve been told to do this in our personal lives, when money comes in for personal income, put a portion into your retirement or to your savings right away to make sure that’s protected, then use the rest of the money for your lifestyle. Profit First implements that.
Basically, how we do it, go to your bank—instead of using one account for your business, that’s the big mistake, use multiple accounts. One for profit, one for paying you as the owner—that’s your owner’s pay, that’s your payroll for you—, another one for your tax responsibilities, when tax time comes. One to operate the business, it’s called the operating expenses. Maybe another one to buy materials and products. We have these accounts, what we do then is as month flows in in our income, we then divide the money, we allocate the money to the different accounts. Now, you can continue to do our behavior. We log into our bank, just like we always did, but now we see all the accounts listed, we look at each one and say, oh! I have $100 saved in profit. I cannot touch it but that’s good.
And we get to our operating expenses and see how much money you have to run your business. That’s the two core principles, is to pay yourself first, allocate that profit first and the divide the money up into the envelopes and now we understand where we stand but we never have to change our behavior. You can still just log into your bank account.
Jason: Right. The standard accounting mindset that most people have, that you talk about over and over in the book is really simple, you’ve got revenue, and then you take out the expenses, and then what’s left over is profit. The reality is there’s never anything left over.
Jason: I think you said Parkinson’s?
Mike: Parkinson’s Law. Do I tell you about that?
Jason: Parkinson’s Law? Yeah. Explain Parkinson’s Law.
Mike: Thanks for bringing it up. This is the most fundamental thing you need to understand about how our behavior, all of us, because when you understand this, you understand cash management. Parkinson was a philosopher of the 1950s, 1960s, nothing to do with Parkinson’s disease. It’s a different guy.
He releases a study that discovers that economic 101, the demand and supply curve is not matched to the behavioural response to the supply and demand. Economics 101 says as demand for something increases, the more we as consumers wants something, supply will increase to match demand. The Parkinson’s said actually is the reverse. As more stuff becomes available, more supply, our consumption or our demand for it will increase. It’s the reverse.
Basically, if I put a cookie on the table, on the plate in front of you and say, “Would you like a cookie?” You may say, “Yeah. I want the cookie.” If I put 10 cookies on a plate in front of you and say, “Hey, you want a cookie?” You may eat six or seven. More supply, more consumption. It’s subconscious. It applies not just to the cookies, it applies to use of any resource. When there’s less of it, of course we’re more frugal because there’s less to consume, but also we become more innovative.
Another example is with toothpaste. A full tube of toothpaste, we use a lot. An empty tube of toothpaste, we become highly innovative. You twist, and turn, and bend the living crap out of that toothpaste tube to extract one drop of toothpaste. What that is with Parkinson’s law, less available, more frugal, more innovative, twist and turn.
In our business, when money flows into business, we have one checking account, which I bet you most people watching, if you’re not set on Profit First as we have, you see a clump of money, you see a full tube of the toothpaste, you see a big plate of cookies. What do we do? We have the money available so we pay our stack of bills, we do all these different things and the money’s gone. But if we take our Profit First, remove it, then the remainder of the money is less now, is it for operating expenses, you give yourself intentionally in your empty tube of toothpaste. Now, you have to squeeze, and twist, and turn to make the business accomplish the same things with less money.
Parkinson’s Law states you’ll become more frugal, that’s obvious, but you become more innovative, you’ll find ways to get the same results with less money. That’s what makes businesses breakthrough. When you can figure out to get a solution without putting gobs of money to it, it’s great. Take your money at Profit First, hide it away from yourself and Parkinson’s Law becomes your ally.
Jason: We do this all the time. We eat what’s on the plate. You always hear people, if you want to eat smaller portions, get a smaller plate. We tend to eat whatever’s on our plate. It’s in our nature. If there’s money in the account and we think there’s money there, I would go and spend it. I’m going to go hire coach, I’m going to go do this, I’m going to go do that. I’m like, oh crap! I’m going to pay my team or oh, I got to do this. And then you never know when stuff’s going in and out, if you just had that one account. It’s like, oh, I just spent this money. Well, something else is going to hit. I love how you call it in your book, Frankenstein.
Mike: Yeah, the Frankenstein. The business becomes a soul sucking, cash eating monster. We keep on feeding it and saying when is that breakthrough moment going to happen? There’s another behavioral tendency called Primacy Effect. In the revised version of the book, I talk a little more about behavioral components.
Mike: It’s important to know this. The Primacy Effect in particular means when something is put immediately in front of us, that becomes our prioritized focus and our belief for all the circumstances around us. Not well worded, but I’ll give an example. If I ask you today and you’re feeling well and I say, “How do you feel? How’s your health in general?” If you’re feeling well, the likely answers are, “I feel good! I’m pretty healthy.” If the day you were sick and I said, “How do you feel? How’s your health?” You’ll say, “I feel like crap. I seemingly get sick a lot.” Whatever’s happening in the moment, we play out as the greater scenario. With money, if I ask the client or someone I’m working with, “How you’re doing financially?” And they got the big deposit come, they’re like, “Oh! The business I great. Things are rolling. We’ve recovered, things are great.”
Conversely, if I ask people and they have no money that day, “How’s business?” They’re like, “Oh my God! It’s midible, I’m really struggling and it feels like it’s always like this.” Whatever’s in that moment we believe to be the long term vantage point.
Profit First gets us out of that. We overreact either way, we overspend because we seem that we have tons of money or we get all panicky when there’s not much money. Profit First, by dividing the money out, it actually stabilizes the flow of cash, and instead of going through these feast and famine they experience as deposits come in, it normalizes it. It brings back our senses. We’re no longer reactionary. We actually start reverse engineering that profit. We take our Profit First, we start becoming much more calculated on how do I make this happen consistently.
Jason: The Parkinson’s Law—I Googled this—work expands to fill the time available for its completion. It can be used towards money. It can really be applied towards anything. We’re going to use whatever’s on our plate. In nature, you see this. You take a goldfish you put it in a little tank, it stays small, right? You take a goldfish, you put it in a big pond, those things get big. They grow to their environment, the same thing with our money. I love that.
And then I love the idea of paying yourself first. I just watched this documentary on Netflix, there’s all these spy in the den or spy in the whatever. They take these cameras and they film these animals from a vantage point that normally you won’t be able to see as a human, because they will probably eat you or something, I don’t know.
There’s this spy in the den and in this documentary, you see that these lions work together as a team, which is very different than tigers. They work together more as a team and the females hunt as a team, and the females go out and hunt, and they’re really good at hunting. The one female that got the kill gets this animal, and it’s like, “This is mine.” And starts digging in. Then guess who comes along?
Mike: Papa bear.
Jason: Yeah, the king of the den, the king of the herd. He comes in and he’s like, “Get out of here.” Scares her off and he’s like the king eats first. My kids are watching this and at first I was watching this and I was like, “That’s not fair!” But then later you see that he protects the entire herd, he’s protecting the little cubs, he’s expected to go to war, and all of them sit back and let him fight. But they called it like Spy in the Den. Lion’s den is maybe where they hang out, I don’t know. But yeah, they’re called the pride. I’m being corrected.
Mike: I’ve been studying those things. Pride is for lions, gaggle is for goose. Clowder, that’s for cats. A group of domesticated cats are called clowder.
Jason: Yeah. I’m not a fan of cats so that’d be the worse one for me.
Mike: There you go, you don’t want to be caught in a clowder then.
Jason: No. I’m a dog guy.
Mike: It’s called a pack, by the way.
Jason: The king eats first. If the king doesn’t eat first, what kind of a king would a king be? He wouldn’t be thinking clearly, if he’s starving, how’s he going to take care of the entire kingdom? I think as entrepreneurs and business owners a lot of times, we self sacrifice in some ways.
Mike: Oh my God. You’re so right.
Jason: And we hurt ourselves. This goes back to that. It really is a core principle that as king of the organization, or queen, you need to make sure that you take care of yourself, not just health and everything but financially so that you can make sure that you’re taking care of everybody else.
Mike: It’s the old put the mask on before you do it for other passengers thing.
Jason: Yeah, exactly.
Mike: Entrepreneurs, it’s a […] Jason, before they start resenting their business. For me, my first business, it was about two years in, I was working my butt off, I was working so hard, working ridiculous hours, I was barely able to pay my employees, I never took home a penny. By the way, my employees thought I was rich! You have no idea. I hated that business. And part of it, that was an impetus to start another business, and this is the exact same thing.
I’ll tell you this. The number one employee in any business is very easy to pick out, it’s the owner, because think about the sacrifices we make. We work through holidays, we sacrifice family, we work ridiculous hours, and we do it for no pay, which by the way is the definition of the World’s Greatest Employee. If you’re willing to come to my company, work ridiculous hours, sacrifice your family, work through holidays and do without me paying you, you’re hired!
Jason: And we take the biggest risk. We’re taking all of the risk! We’re taking all of the risk and we’re operating sometimes in a house of cards that’s absolutely ridiculous, sometimes not even profitable and then you turn around everybody else that’s not an entrepreneur, they want safety and certainty. They work for us. It’s a myth for most business owners that there’s safety and certainty there. They think there is. Profit First actually helps create that, which is great.
Mike: Certainty for us, because when we have that certainty, and the owner, you know that money’s been reserved for you, then you start managing your company. Going back to that example with the pride. The king’s got to eat, the queen’s got to eat, I get it. Instead of having to fight for it, meaning literally, take the money either from my employees and not pay them. Let’s make sure it’s enough for everyone so we create a portion of money for everyone to be covered.
A component of Profit First, as you pre-apportion money and there isn’t enough money to pay your bills—that stack of bills that has been piling up—that is the lead indicator that you can’t afford those bills.
When you have an expense you can’t pay, you can’t afford it. That’s your business giving you direct feedback, we need to change around how you operate your business to be more efficient.
Jason: Let’s clarify this for those who are listening. Profit First accounting flips the model of revenue minus expenses equals profit. Profit’s what’s left over. Instead, it’s revenue, minus profit, based on usually a formula, equals what’s left over, what you can do for expenses. First thing Julie had me do is start looking through my expenses. What can you cut? What expenses can you cut?
Mike: I’ll tell you, for any business when we set this up, for a business to cut 10% expenses seems like a no brainer for most businesses. The one misnomer or one of the misnomers about Profit First is oh, to become more profitable, I must cut as many expenses as possible. But there is a point where you start cutting, not fat, but the muscle of your business, it becomes damaging. Profit First is not about cutting all your expenses, it’s about cutting the frivolous expenses.
But step two, this is the far more important one, it’s about becoming innovative. There’s a story I love to share about Apollo 13. Have you seen that movie by any chance?
Mike: This one’s the innovation. In that movie, the pivotal scene is the astronauts are circumnavigating the moon, looking to come back to the world, the earth. But as they’re going around, “We got a problem, our oxygen filters are failing. And we have about 10 hours of oxygen before it all turns to carbon dioxide, we’re dead, and we need 48 hours to get back to earth. We’re dead.” The next scene, this is a real story, the lead engineer goes into a room with the other engineers, with the cardboard box, he dumps his box on the table and said, “Those parts? That’s all we got in that shuttle up there, that capsule. Make an oxygen filter out of these parts.” It was like wire, duct tape, tubes, and they did.
Here’s the lesson here, is when NASA had tens of millions of dollars, and that’s what they invested making oxygen filters, taxpayers money. They build oxygen filters for tens of millions. When they didn’t have any money and didn’t have time, they had to work with the pieces that they had, and they made an oxygen filter out of junk. Listen, I’m sure some of the stuff that was up there are ready. They just made out of a tube and they start breathing into it, they used some of the materials that was up there. But NASA, the smartest people in the world, as they got more money in, they expanded to that resources and we can use all that money to make an oxygen filter, and they brought in complexity, unnecessary complexity. When they didn’t have the money or time, they simplified and made this system that works.
The lessons here, you can cut some cost. But when you don’t have money, it also forces innovation and simplicity which brings about the efficiency, which actually it facilitates the best growth. It’s more than just cutting cost, it’s about innovating.
Jason: I hear that from too many people, they’re targeting innovation. Everyone says, “You should be innovative, you should be like Apple, you should be like this, you should innovate.” But then they don’t want to say, “Hey, maybe you should set limits on spending. And maybe you should make it difficult so that you have a need to innovate.” I love this.
Mike: It’s the concept of intentionally handicapping yourself where you have to become a better performer. You see this was some athletes and so forth that they have a physical challenge or something and actually convert that into an asset of some sort, musicians do this. A blind musician is more in tune with the audio, the sound. Stevie Wonder is a great example, how phenomenal he is. We’re the same thing in the business, by intentionally limiting the availability of a resource, it strengthens our other. By limiting the resource of money, it’s strengthens our innovative spirit, and our way of finding alternatives.
Jason: That’s fantastic. What a great insight. I’ve noticed that I used to just go spend money. I think a lot of entrepreneurs do this, we go spend money and we buy this program, we buy this, and then we don’t even have time to do those things.
Jason: Like this morning, I said to Julie. I said, “Julie, here’s these people I want to hire, these roles I want to fill, and this is what I want to do, and these things I want to do.” She’s like, “Okay, we’re going to open up another account just education.”
Mike: She’s awesome.
Jason: Because this is a big deal, I want to spend a lot of money in programs, and coaching because I love to learn. I love that. I need an account for that.
Mike: Yes! And an envelope.
Jason: An envelope. She’s putting limits on me. And those limits are making me go, okay, how can I make more money because I’m going to make more money so I can do this fun stuff that I want to learn and do.
Mike: You’re so doing it right, Jace. That’s the idea. In the old model, we spend the money and then we panic after the fact and say, “I got to get the money, I got to pay off that credit card.” In this model, we first allocate money to the purpose, we have to earn it first and then we can do the transaction. We actually have the money in hand, we will be able to pay for with cash when you make the decision. But also, it increases the value of that decision. I’ll just use my credit card, I don’t feel like paying. There’s my credit card, $2000, let me watch this class now, watch with a couple months from now.
But when I had to pay cash for it, this is a part of me going out the door right now this second, here’s my cash, now I see it as significantly valuable and important and I’m actually making more effort and extracting value out of that product or service I purchased.
Jason: Especially if you’re doing active work, consciously thinking about saving for this thing, then it becomes infinitely more valuable.
Jason: Love it, love it. I want everybody to go out and get the Profit First book. I’ll tell you what I did and I’m proud of the worst example. I read probably the first half and just started getting into all the number stuff and then I was like, “Julie, help me out here. I want you to help me take all this and help me make sense to me.” That’s where I really recommend you people do.
There are a lot of property management entrepreneurs that you guys are very accounting focused, you’re managing trust accounts, you’re handling rent payments, you’re doing all of this. If you are an accountant type of person, then you could probably get the book and just dig into this and you would love it, otherwise there are resources and I’ll link to those in the show notes right below here. There’s Mike’s resources, that links right here at resources page. You could check out. Have the get Profit First link, I’ll put the also in the show notes, it’s the big button right below, you can get the book on Amazon, and check that out.
Mike, it’s so fun to hang out and jam with you. You’re on my dream 100 hit list. It’s really cool to hang out. If you have a few more minutes, I’d love for you to log your other stuff and tell us about your other books. If you could go back, your very first book that started you up.
Mike: Yeah. I’ll grab them off the shelf here.
Jason: Toilet Paper Entrepreneur.
Mike: The first book was The Toilet Paper Entrepreneur. The Toilet Paper Entrepreneur is my first book and this was similar to Profit First. It’s the concept of the lack of resources is your ally. This is really oriented toward someone that’s early stage, starting a business in the very early stage under million dollars and looking to grow. I talk about how I found the lack of education, the lack of resources, the lack of contacts, the lack of money, all those thing are actually advantageous, you just need to position the right way.
Second book, The Pumpkin Plan. This book is about rapid growth. How can you grow your business quickly but do it organically and healthy, not by infusing money, getting venture capital, how do you do it yourself? What I did is I studied the colossal pumpkin farmers, and found that they just changed a few things in the pumpkin growing process that sparks this growth. It’s uncannily parallel to what we can do in business. I explained that in there.
Surge is a book about timing the market place. The biggest advantage you have is if you’re in the market in the right place, the right time, clients will carry your business forward. Even poor marketing and all that stuff goes out the window if you’re in the right place, right time. That’s Surge.
And then Profit First. I’m re-releasing that’s why you see it looks different. It’s coming out February 21st, two weeks from now. I have expanded, revised and expanded. I simplified it further, I realized a lot of readers, you read the first half of the book, you’re like, “I got to get someone on here.” Everything’s in the first 40 pages of the book, you will have Profit First, and then if you want to get more sophisticated in, that’s towards the back. If you want to hire a professional, you can then go hire a professional. But it’s all in there. It’s simplified the best I can, plus the stories. There’s a baseball team that actually used Profit First and I explained how they did it. There’s maybe a dozen of new stories of companies that have been successful with Profit First.
Jason: Love it. I have to check that out. Cool.
What I really like about The Pumpkin Plan, and I call it the Pumpkin Principle, I love that idea of getting rid of the rotting pumpkins. I just got off a call with a lady before this. She was going through a divorce, she’s trying to run this property management business. I said what’s your biggest challenge right now and she said, “Time.” I was like, “Oh, okay.” I asked her about that and she was dealing with all these property and maintenance issues and whatever. She was describing specific situations with specific property, and she’s got a portfolio of only 40 doors. But all of her time’s eaten up. Basically I point out to her, I said, “It sounds like all of your time is being eaten up by three bad properties.” She was like, “Yeah.” I was like, “If you got rid of those three bad properties, those three rotting pumpkins in your pumpkin patch that are going to rot the entire patch. What would that do in terms of time?”
I have this principle that I share with property managers called The Cycle of Suck. If you guys haven’t heard that, Google Cycle of Suck. It’s the top link right now. Cycle of Suck, it’s the top link right now, but check out the Cycle of Suck for property managers and it’s based on this Pumpkin Plan, that if your take on crappy owners, plants, then you’re going to have crappy properties. If you have crappy properties, then you’re going to have crappy tenants, and then you’re going to get crappy reviews, and then if you have crappy reviews online, you’re going to attract crappy clients. The cycle continues.
We’ve got Philip here, he says, “For those who don’t have time to flip through a book, you can get the audio, and Mike has colourful stories, love listening.” Mike, you have your own podcast.
Mike: I do, I do.
Jason: You’re fun to talk to and so yeah, you can listen to the audio books. It’s a great hack for entrepreneurs. Cool.
Mike, I would love to have you on at another date to talk about some of your other books. I’m not trying to eradicate entrepreneurial poverty per se, but my why is to inspire others to do what works basically. My why statement, from Simon Sinek, my why statement is to inspire others to love true principles and to me, true principles are the things that work. That’s why I really love these kind of books because they illustrate principles and they share principles and you can apply them to a lot of different things, like we talked about the Parkinson’s Law.
Mike, great pleasure. Anything else you’d like to say to the audience? Or where they can find you or get a hold of your stuff?
Mike: Sure. I’ll say where you can get my stuff and I’ll give you my final little thought. My website mikemichalowicz.com, you see on the screen. That last name, it’s a doozy to spell so I have a shortcut. My nickname in high school is Mike Motorbike, so if you go to mikemotorbike.com, it’ll bring you to my website. I’ve wrote lot of resources there. I used to write for the Wall Street Journal but my big promise is if you go to the homepage, I promise you’ll experience a site like you’ve never experienced before. It’s way different, and hopefully you’ll get some ideas from that.
The final thought I have for you is Profit First, with all the different accounts and stuff, I’ve come to realize it can be a sudden shift for businesses, it can be a little overwhelming going all in, hiring a Julie Babcock is a great way to get going, but today, or right now, you can take your first step and start small.
All I do is I encourage you set one account, a checking account at your current bank, not a new bank, just have a checking account and then allocate 1% of every deposit to profit, that new account. Just by doing that, when the time is right, you’re ready to take the next step, you can. It’s such a small amount that just by doing this small allocation, you’ll start winning over the confidence in yourself that you can allocate profit first. Maybe, 90 days from now, now you got a 2% or 5%. And within the year, you’re going to have so much progress in your business. The key is getting started now and the key is getting started with a small, small easy step and that’s how you do it.
Jason: Alright, Mike Michalowicz everybody. Mike, thank you so much.
Mike: Thanks Jason.
Jason: You just listened to the DoorGrowShow. We are building a community of the savviest property management entrepreneurs on the planet in the DoorGrow Club. Join your fellow DoorGrow Hackers at doorgrowclub.com.
Listen, everyone is doing the same stuff; SEO, PPC, Pay Per Lead, content, social direct mail, and they still struggle to grow. At DoorGrow, we solve the biggest challenge getting deals in growing your business. Find out more at doorgrow.com.
Find any show notes or links from today’s episode on our blog at doorgrow.com. To get notified of future events, or news, subscribe to our newsletter at doorgrow.com/subscribe. Until next time. Take what you’ve learned and start doorgrow hacking your business and your life.