In this interview, David Cristello and Mike Michalowicz cover:
- How GAAP Accounting has been destroying profits (and how to reverse the damage)
- Mike’s how to “Profit First” formula and how to apply it to your (and your clients) business.
- How lack of money (and more profits) can drive innovation (and growth) in your business
- and much more
Mike’s Journey to Discover How to Profit First:
Mike Michalowicz is one of those guys who is just a character. A good character. Someone you can’t help but listen to. His humor and expertise blend perfectly together.
Mike says it’s easy for him to be out-going. He pokes fun of himself to lighten the mood. That’s why his books, “The Pumpkin Plan” and his first, “Toilet Paper Entrepreneur” were such smash successes.
Suddenly, a business book didn’t sound all business-ey anymore. It was just a normal guy talking to you. We’re drawn to people that make us feel comfortable. And Mike’s nailed this.
But, his path to profits wasn’t a smooth one. On the first day his book, “Toilet Paper Entrepreneur” hit the shelves, he made zero sales. Not even his mom bought a copy.
However – rather than sink into misery – Mike went all-in. He bought 20,000 copies of his book and started hustling. He’d take speaking gigs, he’d consult, he’d cold pitch…anything to start moving product. It worked. After one year, he had sold all 20,000 and then some.
He realized his the problem was the competition was stiffer than he imagined. He wasn’t the only ‘self-help businessman’ out there.
That’s why he had to try a different voice and approach. A name like “Toilet Paper Entrepreneur” really sticks out from the normal titles you might see on the Barnes & Noble bookshelves.
And that’s the first lesson Mike discovered in his journey in how to profit first. When everyone is the same, they start sounding the same, they sell the same. The ones who rise above have one thing in common — they are different.
Are You a ‘Break-Even’ Firm?
The SBA did a study. They found 23,000,000 small businesses in America are ‘break-even’ businesses. This means if they don’t receive a deposit in the next 14 days, they can’t make a payroll.
If they don’t get a deposit by the end of the month —> they are bankrupt. Unfortunately, millions of businesses wake up every day with this hanging over their head.
How’s your firm doing?
Mike thought: “Ok…businesses can do all these cool things and solve problems, but they can’t figure out how to turn a profit? “
Mike discovered it’s a psychological thing.
Look at the equation that follows Generally Accepted Accounting Principles (GAAP).
Revenue – Expenses = Profit
Profit comes last in the equation…
Anything last gets ignored…
Businesses focus so much on generating revenue, they forget about how to be profitable. Basically, make $1, then spend $1 (expenses). Money in…money out. The trap of any entrepreneur.
What if instead, you changed your mindset. What if you flipped the equation around?…
Revenue – PROFIT = Expenses
After you make $1…you take out the profit you want to make. Say it’s 20%. Thus, you now have 80% to spend on expenses. This mindset forces innovation and frugality.
Mike talks about Parkinson’s Law. It means we expand our consumption based on supply. He uses an example of toothpaste. When we have a lot of toothpaste in the tube, we generously heap a ton on our brush. If any follows into the sink…who cares. But, when we are down to the wire with little left, we are careful how much we put on. Every morsel of paste is precious.
That’s why, when we use Parkinson’s law to our advantage:
- We change our behavior based on supply (hence revenue – profit = expenses)
- We become more efficient
Lack of money forces innovation. Rather than splurge the money we get right away. The path to how to profit first comes when you put profit in the forefront and not sales and expenses.
How to Profit First:
Let’s get concrete.
Here’s how Mike recommends to profit first in your firm. With every check you receive, take 20% out. This may take some adjusting and budgeting measures, but this is the goal you’re shooting for.
Here’s the best part…
You can then become a consultative accountant for your clients to help them do the same. Look, clients are looking for guidance not just a service. They all want to be more profitable. Why not give them what they want?
Become an accountability partner for them.
Unfortunately, we get sucked into past prejudices. Namely, the lies we tell ourselves that others tell you. Things like: “It takes money to make money. Take less profit now (meaning losses) so you’ll bear fruit tomorrow.”
It sounds crazy when you hear it. But that’s what we do. We become “just one more client” accountants. A never-ending treadmill.
The hard part about this ‘profit first’ process is sticking to it. An unexpected bill comes and you feel compelled to abandon the plan.
Mike recommends becoming ultra-focused and selective about what you do and don’t do.
You can easily become addicted to growing as fast as you can. And no one would blame you. This mindset is drilled into us by investors. That’s why you must have a disciplined process in place to have no matter what.
Going forward, you’ll look at businesses a completely different way.
No longer will you look at top line numbers. Those are always fun to see. Instead, you’ll be looking at the bottom. More profits mean more financial freedom. That’s it plan and simple.
When you have no profits carrying over each year, you’re forced to continue hunting for more clients.
Why not get off the treadmill?
Sure, cost reduction and stashing profits won’t get you interviewed by Forbes. But, it will give you more peace of mind, better sleep, a stronger savings account, and more room to grow.
We only had a short time with Mike today.
Here’s a link to his book to learn more about his “Profit First” method.
Let us know what you think in the comments!