Today is very special as I am interviewing the world renowned Mike Michalowicz, who is the author and founder of Profit First. Those of you who follow the podcast and follow my work, know that my mission and purpose is to reduce financial anxiety and increase financial resiliency for women. One of the main aspects of money when we’re running a business is how do we put profit first and pay ourselves first? How do we go about making profit in our business?
One of the key reasons why most people set up a business is to make money, to work towards financial freedom, because they want a better life. Maybe they want to leave a better legacy for their family. When I first started my business in 2016, I’d just come from an employed job. I’d been working as an employed financial advisor for 17 years. My money mindset was in a completely different situation to where it is now and one of the biggest challenges I found was charging my worth. This is why we spend so long talking about these topics on the podcast.
One of the books that I read on holiday a number of years ago was a book called Profit First. I just want to share a little bit about what happened for me after I read that book.
So I’ll be really honest with you. The first two years of my business, I was really just focusing on growing my audience and therefore my profit margins were lower and probably lower than they should have been or could have been had I have known how to implement Profit First from day one. This is why I’m really excited to introduce this to you today.
If you’re listening to this and you’re at the early stages of your business, or even if you’re a well established business owner, this is the time to think about implementing the lessons of Profit First.
When I read Profit First on holiday, I sat there with all of my little sticky labels and I bookmarked the hell out of this book, twice! I read it and I felt myself nodding my head going yep, that makes complete sense. Of course it does. Why have I been doing it like this?
The two years prior to Profit First, I had transferred all of my banking over to Starling Bank, and I really started to bring some curiosity and awareness to my habits, my beliefs around money. Why was I overspending? What were the emotions sitting behind my decisions? Within six months I had switched my banking, given every pound a purpose and really started to focus on curiosity and awareness, which is one of the first steps I talk about in terms of improving our financial situation. We have to bring conscious awareness to our spending habits, conscious awareness to our numbers.
But I was terrified to do so because I had a negative relationship with money and debt became something that was comfortable for me. I was comfortable to be in my overdraft every month. I was comfortable to be living on my credit card and overspending to fill an emotional void in my life.
So when I read Profit First, one of the key aspects of Profit First is about putting your profit first, putting your own needs first in your business, because if your business is not profitable, then it’s not really a business at all.
The principles in Profit First are centred around four key principles, which I will let Mike explain to you on this podcast episode. If you follow these four principles, I can almost guarantee that you will be making more profit in your business. You will be focusing on creating strong, powerful financial habits and that’s what it’s all about ladies. That’s what all of your relationship with money, how you manage your financial habits and behaviours is really at the centre of everything that we do.
Every decision that we make or don’t make around money centres from our relationship with money. This is all centred around Parkinson’s law. The psychological explanation, that in order for us to focus on profit, we need to have motivation. We need to be thinking of the small steps, the big wins. What’s the next right thing for us to be doing.
So it is with my greatest pleasure to welcome Mike Michalowicz onto the In Her Financial Shoes Podcast today. Mike has launched and sold multiple multi-million dollar companies, and he’s the co-founder of Profit First Professionals.
Mike has written a number of books, one of which I recently finished on my most recent holiday, Clockwork. Today we’re going to be doing a deep dive into his book Profit First. A massive warm welcome to our guest today on the In Her Financial Shoes Podcast.
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Hi, Mike, how are you doing?
I’m doing well, Catherine, thank you so much for having me and doing this.
I’m so delighted to be talking to you today, Mike, because the book Profit First literally changed my life. I know that it’s changed the lives of so many entrepreneurs. This is one of the reasons that you wrote this book was to create huge change and to help people out of entrepreneurial poverty.
First of all, I just want to thank you, Mike, for writing that book because it really seriously changed the whole way that I manage my business finances.
Well, you’re lighting me up. That is my dream. Actually it’s funny, you said eradicate entrepreneur poverty. I’m devoted to that. That’s on my wall right over there, eradicate entrepreneurial poverty. I feel compelled to carry that message.
It’s a shame that there’s so many entrepreneurs who’ve started a business with this grand vision of financial freedom and personal freedom. I can do what I want, when I want, I don’t have to worry about bills. We have this vision and then the reality of entrepreneurship is we work like mad dogs. We have no time for life. We have to work more and more, and we’re not making money. So this gap is what I call entrepreneurial poverty. I feel extremely compelled to resolve it.
I believe yourself, myself, all entrepreneurs, we have a big mission, particularly now with this COVID pandemic. There is a global recession upon us. We are in economic turmoil and we’re just in the beginning of this, in my opinion. Who will see us through this? It happens every single time, it’s small business. We must be successful not just to serve ourselves and our family and our communities, but to serve our collective globe. So I am rooting on entrepreneurs and will do everything I can to support entrepreneurship.
It’s so powerful what you just said there. A lot of the women that are in my audience Mike, really struggle with charging their worth and many of them will give away their time or their money free because of that lack of self worth.
I always say that if we undercharge for ourselves and we don’t put profit first, profit at the heart of our business, we’re not going to grow the economy. The economy is going to suffer as well as our own pockets.
And we start stealing jobs. So let’s talk about the downside. I get it. I get that the opponent to raising prices is in our mind. If I charge too much, people won’t want to work with me.
But we have to realize that if that’s our belief, that means people see us only as the cheap provider, not the good provider, not the valuable provider, but the cheap provider. If we increase our price, if they’re going to leave us, it’s because they want the cheap solution and who wants to be cheap.
But to your point, there’s something much bigger going on here. If I feel compelled to keep my prices cheap, I have to do the work. I can’t afford to hire the people. I have to grind it out even more, which means I’m actually stealing jobs from other people.
There was a study conducted, a global study of entrepreneurship. Only 7% of the people on this planet will ever be entrepreneurs or business owners, 7%. We are the weirdo minority. 93% of people are looking for good, reliable jobs where they can get consistently paid and do work that they enjoy doing. Our job is to build and provide jobs. Our job is to give jobs and shame on us if we have to be the cheapo, the low price provider, because then we’re stealing jobs from other people.
There’s one last piece I want to share because you can really tell I’m riled up about this. When we set a price, I want everyone listening in right now to realize that is your biggest marketing message you have. Hands down. I don’t care if you have Facebook ads and these other forms of advertising that gets noticed. What matters is the price. The second we see price, we determine value. It perceives value.
For example, if I put down a thing that looks like a diamond, I pop it on the table and say, hey Catherine, that thing’s worth about $5. I don’t need to say anything else. Oh, that’s a cheapo costume jewellery. It’s trash. It doesn’t matter if it gets lost. If I put the exact same piece down and say that’s worth $50,000 now, it’s like whoa. We’ll take tweezers. We’ll carefully put it into an envelope and put into a safe quickly.
The number one marketing message is your price. It sets the expectation for how the customer is going to behave. If you increase prices, you increase perceived value by default. It’s a necessity. Do it.
We can just finish the interview there and that would just be like a golden nugget Mike. Thank you so much for sharing that with us today. I think that will really help a lot of our listeners who really struggle with pricing in their services.
I haven’t read your latest book but what you were just talking about there really resonates with some of the work in your Clockwork book about getting your business to operate so that you don’t have to be working in your business all the time. That really resonated with something you just said there.
Take us back Mike, to before you wrote Profit First. Share with us a little bit about your personal story.
The inception, I guess, of how I became an author might be interesting. So I’ve been an entrepreneur ever since university. So my entire adult life I’ve been running businesses. By the way, I never aspired to be an entrepreneur. I didn’t have a newspaper route as a kid. My family are not entrepreneurs, but I decided to become one because I had to become one. I couldn’t get a good job when I was 21 years old and I’ve been an entrepreneur ever since.
I fell in love with the process. I’ve had the good fortune of building some companies in the technology space and then selling these companies. But my mindset became chock full of two dangerous elements. Arrogance thinking I know this thing now. Build a business to sell it. Pump it and dump it. And also chock full of just ignorance. So arrogance and ignorance is a deadly combination.
I started a third business as an angel investor with my own money, with the wealth I’d accumulated. I started making bets on different businesses. My arrogance was like, well, since I’m here, these businesses will be successful. I started 10 companies over a six month period and all of them collapsed within that year. I was a train wreck.
Sometimes moments in life, we see our bank account dwindling so quickly that we logically can see it fading, but emotionally don’t accept it. We hope that one big customer will come. I’m like, that one investor will come in and save my life, but it didn’t happen.
I’ll never forget the day. This was the day I became an author effectively. It was February 14th, Valentine’s day, of 2008. I got a call from my accountant who said, he’d finished doing the finances and the tax return plans for my business and told me that I should actually declare bankruptcy. He’s like, you are in a bad way. You’ve two choices, declare bankruptcy and see what you can do. Or liquidate your final assets, which was my house and a couple of cars. Liquidate that and go get a job.
I chose option two minus the get a job part. I decided I gotta liquidate things. I went home to my family that day and told them we have no money left. It’s a shocker because I’d been lying to my family by omission by saying, everything’s great. I got this, things are good, when they were shit.
I came home and I’ll never forget this. My wife and my three children were there. They had prepared a meal for us for Valentine’s day. They were sitting at the table. I came home half hour late. Not because I was running late. I didn’t know what to say to my family. I was sitting outside crying.
When I finally came in, the food was cold. I was sobbing. My face was red. My wife was like, did someone die? What’s wrong? That’s when I told her we’re going to lose our house. We lost it 30 days later. We’re going to lose our cars. I lost everything.
I had to tell my daughter, she was nine years old at the time, that I couldn’t afford to send her to horseback riding lessons. It was $20 and a group session she did with with six or seven kids and I was broke. As I said this, my daughter stood up and just ran. I thought she was running away, which honestly, Catherine, that’s what I wanted to do was just run away. But she was running to her bedroom to grab her piggy bank. She grabbed it and she came running back to me and she puts it on the table. She goes, daddy, since you can’t provide for our family anymore, I’ll step up and do it. I’m getting emotional.
I have told that story I can’t recall how many times now and every time it triggers me because I’m so ashamed of my lack of understanding of entrepreneurship. The outside effects. Entrepreneurship poverty: thinking I’m successful, I’m amazing. The reality, no understanding. This gap, this collapse I experienced. I devoted myself to fix that, to eradicate entrepreneur poverty.
The last little part of the story – and it’s not like a nice little bow tie on it! It wasn’t like the next morning I woke up and said, now I’m an author and I’m going to save the world – the next day I woke up and I started drinking.
I drank more than I should because I was medicating myself for another reason. I was an insomniac and I socially distanced myself from people before socially distancing was a buzzword. It took me about two years of depression and slowly moving forward that I came to this awakening.
I was writing a journal during that period, a guy’s term for a diary, and writing down all the things I didn’t understand about entrepreneurship. I still have it. I have a collection of things I need to fix myself. So every book I’ve written, Profit First too, is a solution for something I don’t understand about entrepreneurship. Admittedly, I’m writing the books that serve myself, but I also hope it serves countless entrepreneurs in navigating through those challenges. That’s how it came about.
Wow. Like I literally was getting goosebumps on my arms. I have a nine year old son and my youngest is seven. When he was five years old he contracted bacterial meningitis and we nearly lost him.
That was my moment when I was like, there was so much jargon used in the medical profession. I didn’t understand what it meant. When I went back to work in the finance world, it was like, how many people don’t understand money because they don’t understand the jargon.
There’s always like a pivotal moment isn’t there in our life. Thank you so much for sharing that with us. I can only imagine what that must have been like.
Devastating and thank you for sharing yours. We’ve all had, now I understand to be, trauma. I thought trauma was physical violence or something worse, like sexual abuse, but there’s all of these flavours of it, if you will.
I was interviewing a psychologist. I’m just fascinated about how the human mind works. She said something fascinating. She goes, I’ll tell you how to find your life’s purpose. She goes it’s either a big T, a little T, or the letter C. I said, what’s the big T. She said, that’s the big trauma when there’s a moment in your life that is so visceral, so painful that we make a commitment to ourselves to never allow that to happen again to us or others.
The little T is the drip trauma. That’s when you’re picked on for something growing up as a child or your parents do a bad job parenting and there’s this nagging thing where it becomes this overwhelming moment, but it results in that same thing. I will never allow this to happen to someone else, including myself.
The C is a childhood dream. This aspiration we had one day when I grow up, I will and that dream gets abandoned. Then there’s that day where you say, I will not let that dream pass. If we grasp the big T, little T, or the C that becomes this mission.
Honestly, I think when I’m out trying to teach, I’m really trying to learn. That’s the honest truth. What I’m trying to give is actually what I need to get. I think that’s true for all of us.
So where did you go from there, from that moment of going bankrupt and then writing Profit First, what happened in between that?
Desperation. Desperation’s a dangerous thing. Desperate people do desperate things. My desperation was, I didn’t have a house anymore. Thank God for our neighbours. They knew our situation and they were actually going to Europe to live, I think, in the Netherlands for a job assignment for a period of time.
They were seeking to get a house sitter to maintain their property because they weren’t gonna sell it. They heard our situation and said, listen, just pay a rent that you can reasonably afford. Your house sitters now. They gave a shelter that gave me time. I started to dabble in different things, trying a little consulting, writing some stuff. I remember actually at one point, my wife says, Mike, this is not working. You have to get a job. You really have to get a job which to an entrepreneur, the words get a job, you might as well take a dagger and stab it in my eye over and over. That would be less painful.
But there was this burning desire to become an author. It was building there. It was actually part of my childhood dream. I wanted to be of service in a big way. Somehow, someday. I didn’t have the words author, but it was something that was calling me. Then I just did it. I actually did a vision board. I believe in those and I wrote down if I didn’t have the problems I have today, what achievements do I want for myself? And there was my first book.
So I just started to do it. I started to write it. The first book came out. It was called the Toilet Paper Entrepreneur. It was this irreverent approach to entrepreneurship, very scrappy, but the book worked and required tons of hustle. I was now thrown into a new business. Selling books is like selling cereal. It’s any other product – you can go to the local market and there’s ridiculous amount of cereals available. How do you pick the one and how do you market so that the customer picks you? Well, that’s why I had to learn about books.
It was a struggle for sure, but I learned different approaches and ultimately what became popular in a cult classic type of way that a mainstream publisher said, we want to work with you going forward. That’s how I got in the door with a mainstream publisher.
Then I started to write my other books. Today I have, I think, six books in circulation. I’m actually actively writing one that can be released in 2021. My ultimate goal is to write 25 books. It’s all in that journal. I wrote it all down during that period of my life, the things I got to write. So I’ve a lot of work in front of me.
Wow! This is just the start of your journey then?
Oh yeah. We’re just scratching the surface. To me it’s like music. My favourite band admittedly is Def Leppard. They work really hard, just like every other band. Then you have a hit song. My hit song is Profit First right now.
What I learned from Def Leppard and all these other bands is, once you have your hit, you better perform that a lot. That’s what the people want to hear. I don’t want to hear the B side things when I go to concert. I want to hear stuff from Pyromania or whatever.
So I realized once I have that hit song, I have two responsibilities. Deliver on that because that’s what people want to hear and need. Secondly, I better write a bigger hit, so it’s a responsibility to level up. Every book I’m working on, I’m trying to deliver a concept that is of greater service and bigger service.
I’ve written two books or three books now since Profit First and I think the concepts are life-changing, but they’re not the hit songs yet so I’m going to keep on delivering Profit First until people are tired of hearing that song. Hopefully I’ll deliver some other hits in the meantime.
For those people who haven’t read Profit First, Mike, if you were going to summarize the four principles that you teach in Profit First, what are those four principles?
So it starts off with understanding the essence of why most businesses aren’t profitable. I thought there’s something wrong with us. It’s like the human mind, because you think about it. You got into business, I presume, to be profitable, to live a lifestyle that you define as comfortable. I did the same and so do the vast majority entrepreneurs.
That’s what financial freedom is. We can live a lifestyle comfort without worry, financial worry. Well, I’m like, how come almost all of us start a business for that reason yet we never achieve it. That’s when I saw the foundational formula and the foundational formula is sales minus expenses equals profit. Your turnover minus your expenses equals profit. What that formula tells us is that profit comes last. In human nature when something comes last, it means it’s not important. Most of us don’t look at profit until the end of the year when it doesn’t happen.
What we need to do is make profit a habit. I say in the book, profit is not an event eventuality. Profit is a habit. So I flipped the formula. It’s sales minus profit equals expenses. In practice, every time revenue comes into your firm, you immediately take a predetermined percentage of that money as profit and allocate it away.
The four principles are this.
- First of all, set up multiple accounts at your bank. One account acts as a depository account, money flows in, but then we’re going to carve up the money for different responsibilities, profit being the primary responsibility.
- But you also have to take a salary different than profit.
- You have taxes. I’ve yet to visit any country on this planet that doesn’t have a government with a long sticky hand that pulls money out. That’s our obligation and responsibility.
- And the business of course needs operating expenses.
We set up these multiple accounts. It’s like the envelope system if you’re familiar with that. When money comes in, you carve it up to its responsibilities and envelopes prior to spending the money so then when you do spend money, you know what’s available before you spend it for that purpose.
The second account is sequencing. It’s human nature that we need early rewards. We need to get the pat in the back to feel confident about something. A big mistake for example, someone hasn’t exercised for years and says, I can get back to that gym. New year’s day. I’m going to go and walk that treadmill. You know what? I’m going to run a marathon. I do whatever distance a marathon is and they injure themselves, they can’t sustain it and they say, clearly I’m not made for fitness.
The problem is we went too fast, too soon and instead of getting a reward, we got punished. The first day of the gym should simply be a stretch. Just stretch out. Let’s see if we can feel a little better and build that momentum.
With Profit First, what we do is we start with a low percentage of profit just to start stretching the business and start accumulating profit. It starts rewarding us – for the first time ever you accumulate cash profit. We get excited. We feel good. We add more profit percentages over time. So the sequence of allocating profit first is important because it is a reward mechanism. And in growing those profits over time, that sequence of events builds that strength.
The third principal is remove temptation. As we accumulate profits and other reserves like taxes that we’re gonna pay out in chunks to ourselves or to the government, if it sits in front of us, it becomes very tempting to borrow from it. Listen, I’ve been doing this Catherine for 12 years now. I’ve had 47 consecutive quarters of profit distributions. But in the very beginning, when the bills were stacking up, I looked at my profit account and I looked at my operating expenses. I didn’t have enough money in my operating expenses. I said, I’ll borrow from my profit account and I unwound the entire system.
Lesson is this: the op ex account, if you don’t have enough money in there, if you can’t pay your bills, you can’t afford your bills. There’s something fundamentally flawed. We got to cut costs, more importantly, amplify margin. Like we said, at the beginning of this, raise your prices, please. And hide away that tempting profit. We reserve those taxes. That’s gonna come out, but it has to go to the government. You have to pay them.
Then the final principle is to get into a rhythm. Doing things sporadically like going to the gym for a couple of days. You work out like an animal and you don’t go for three months and like, Oh my gosh, I haven’t gone in so long then you start up again, drives no results.
It’s that consistency over time and that persistency, that drives results. We set the rhythm of accumulating money, allocating out, spend within what’s available, reserve profits and taxes, and repeat the process again on a periodic basis. Then part of this rhythm is every 90 days, that’s what is called quarterly distributions. And so the quarter ends and that’s when this money comes out. The money that’s been accumulating in the profit account, comes out as a reward to you.
This is not your salary. You should be taking a salary, but this is a bonus on top of it. A thank you for running a business, that’s contributing to your society, your country, to our globe. It’s a thank you for being an entrepreneur.
We repeat that cycle every 90 days. I’ve just raced through something I usually teach in about one or two days, but that’s the essence of Profit First.
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I read Profit First twice on one holiday and I was so excited to implement it. I literally sat on my sunbed, I had like sun cream all over my notepad, worked out all of my taps and my caps, all of which are in Mike’s book. The first thing I realized is that I was my expenses were around about where they should be. I teach personal business finance, but even though you’re a financial professional, it doesn’t always mean you do it for yourself. Right? And I think that’s really important to distinguish.
The cobbler’s kids they call it.
The curse of knowledge.
I sat there and thought, okay, so my operating expenses account is about where it needs to be, but I actually plugged a few of the leaks that were there. I’m a big believer in actually bringing conscious awareness to our finances. So for me, I actually look at my money every single day, which I know sounds a bit excessive, but every day I top up my tax pot. In the UK, we have VAT to pay. So a proportion goes into my VAT pot.
Now I’m going to let you into a little secret, Mike. I don’t move my profit first plus account into a separate bank. The reason I don’t is because I spent years in debt. So now I see money accumulating, from a mindset perspective, it spurs me on to keep going with my money mindset.
I think actually the principles that you talk about are so important because if you’re an over spender, for example, then moving your profit account out of sight, out of mind is just genius, pure genius.
Profit First is a framework meaning it’s not something we have to adhere to 100% and that if you go off or you modify that you failed. The goal is to have a framework that then works within our behaviour.
Profit First is a behavioural cash management system. So a couple of things you said resonated with me. You said you check your bank accounts daily. Well, I think that’s awesome. I would argue most entrepreneurs do that, sometimes more than daily, maybe hourly. The reason we do is we want to see how much money we have. Did money come in? What’s my situation? Did money go out?
Now, traditional accounting says never look at your bank account. It doesn’t reflect your business. Read all those complex statements. But what we typically do, almost every entrepreneur, myself included is we revert to the bank accounts. That’s why Profit First exists at the bank level. It’s at the bank accounts because it intercepts our behavioural path.
I’ll give you an example. I’ve exercised sporadically my entire life, but the last five, maybe actually seven years now, I don’t miss a day. I work out five days a week, worked out this morning. I don’t miss it. The change was understanding my own behavioural path, my pattern. What I notice is when I wake up in the morning, that’s the best time for me to work out. I think it is for many people. But what I was doing was I wake up, I go to the bathroom, I come out of the bathroom, I’d make some coffee, I’d read the paper a little bit. I’d say, Oh, I really got to work out and I’m like, Oh my gosh, I’m late for work and I’d skip the workout.
Well, going through that sequence of events, I would say, I wake up, go into the bathroom. Oh, I go into the bathroom every single time. I will put my gym shoes on the top of the loo and intercepts by being a real path. The only way I can use that toilet is if I pick up the shoes. Now I have the shoes in my hand, I need to put them on my feet or I feel compelled to. And I started this positive momentum. It intercepts my behavioural path. That little change, changed everything.
With Profit First, we set this up at the bank so that when you log into the bank, you see what money is allocated to what purpose? The thing you said that resonated with me is you actually liked seeing the money accumulate right there at the bank, because you have clearly a very visceral moment with debt and your experience around that, that the accumulation of money fuels you.
There is a financial expert here in the US who’s very popular named Suze Orman. I don’t know if she broadcasts out in Europe, but it was fascinating. I’m not even actually a fan of hers. I don’t watch her television program, but I did see this one thing she said, and it was a eye-opener. She says, I can make you rich today. The moment you get more joy out of something, that’s what you should be doing. The fact that you’re getting joy out of the accumulation of money and you can see it and you get joy from that, it will continue that momentum.
For many entrepreneurs, myself included, as money piles up, I get the joy out of using that money, spending on something expensive. Therefore I have to hide it for myself. Then as the money accumulates on the side and I don’t see it, I work within the confines of what’s available. What gives me joy now is finding how do I get results that I want with scant money, with way less. So I start becoming very innovative. There is no wrong answer here in regards to the system, there’s a right answer in regards to your behaviour. What gives you joy?
I think as well, what you were just saying there, Mike, about focusing on profit. The typical traditional accounting method of sales minus your expenses equals profit. That’s just an accounting method.
When we flip that on its head, like you do in Profit First, it’s sales minus profit equals expenses. For me, this is all about the behavioural side of money. How we manage money is depending on our relationship with money.
One of the things that I often find with people that I work with and I’ve done a lot of study around this in financial psychology as well, is that often, most people’s values are inherited and they’re often values that are driven away from pain rather than towards pleasure.
In the scenario you talk about in your book of the toothbrush and if you’re brushing your teeth every single day, which hopefully everybody’s doing, is anchoring that new habit into something you’re already doing. Like you say, put your gym trainers on the toilet so that when you’re going to go to the toilet in the morning, you’re setting yourself up for success and you’re setting yourself up for success to work towards something that’s pleasurable rather than something that’s cemented in pain and pain away from debt or away from something or away from being bankrupt or away from not managing the finances how you’d like to.
In your experience, Mike, how often do you think entrepreneurs focus on money versus their mission and their purpose?
Ironically, while the intent often is coupled together, I want to serve the world and make money doing it. It gets decoupled very quickly and there is a fear of the money, the numbers.
I think the vast majority of entrepreneurs say “I’m bad at math.” I don’t look at the numbers and there’s this perverted expectation that one day, if I hustle and grind long enough that an avalanche of money will just appear my bank account. That one day, this switch will magically flip and all this money will appear and we buy into this and it’s totally false.
Like I said, money, profit specifically, is not an event. It’s a habit. Profit is an accumulation of small little wins that happen every day, every hour. Not that just magically fall into your lap. We need to put the habit in place today.
What was interesting too, and I tell people this with Profit First, you can start being more profitable, permanently and effectively immediately, if you do two small steps. One go to your local bank today and set up a savings account or checking account and call it profit. Here in the US that takes about 30 minutes, 60 minutes. It’s an investment of time, but it is a game-changing investment. It’s worth the 60 minutes.
The second step is any money comes in, take a small percentage. I even suggest starting with 1% of your cash flow into that profit account because the impact is inconsequential. If a thousand pounds come into your business today, 10 pounds is like nothing. It’s 1%. Put that into the profit account because if you can run your business off a thousand pounds, you can run your business off £990. It makes no difference. But what makes a massive difference is you start seeing a cash accumulation in that profit account. Then we start building that muscle. Now we’re stretching at the gym and that becomes walking and ultimately running a profit marathon. That’s how we get started. It really is that simple.
I get a lot of resistance too. I’ve been speaking all over the globe and it’s the ultimate privilege of a lifetime, but people come up and say, listen, I’m skeptical. This is a shell game, money’s money. This isn’t going to work. I hear them because that’s what I thought. A percentage is a percentage. It doesn’t matter where it’s going. But I found out it does because this is a behavioural aspect.
It’s the human mind. We like to get little reward bursts, dopamine. That’s why we like to surf Instagram and do all those things because of the little dopamine hits. The second thing is we want to avoid pain. So if we align something that gives us pleasure and avoids pain, meaning no money left the end of the year, don’t know how to pay taxes. If we avoid that and we have this accumulating profit, it will work into perpetuity.
I’m proud to say we have well over 350,000 companies globally doing Profit First and the feedback’s consistent. It’s a consistent drip of great results on building profit and pain avoidance. I don’t have to worry about taxes anymore. My taxes are paid. My business is running efficiently and effectively. Profit First is not a shell game. It’s a behavioural system.
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Are there any typical mistakes that people make when they try and implement Profit First?
So the most common mistake is I’m not going to use my bank, I’m going to do it in a spreadsheet. I get the idea. The reason it doesn’t work is because that does not intercept the behavioural path. That’s not the gym trainers on the toilet seat, right? That is something you don’t look at.
I explain to people, if you have an accounting system like Xero or QuickBooks, that is a glorified spreadsheet, all your numbers are already carved up. It’s called the general ledger. If that’s not serving you, a spreadsheet won’t serve you either. We must intercept the behavioural path.
The other common mistake I see is people going in too fast, too soon. They hear the profit first system and they say, I want to have a 50% profit. I’ve never had profit before. I want to have big numbers. I want to pay myself this massive salary and they start off that way. But now you’re trying to run a marathon where you haven’t exercised for the last 20 years. You’re going to tear your legs off your body. It’s too dangerous.
So you have to start slow and let it grow. If you avoid those two mistakes, generally we see significant success from businesses that implement it. So much so that they actually are not just more profitable than their contemporaries, they actually grow faster than their contemporaries because they’re focused on the efficiencies and what works within their business, as opposed to doing pot shots and just throwing money at different trend the ideas of the day.
Great. So first step then is I would say, read the Profit First book. Second step then is just to start, go to your bank. I mean, in the UK, we have providers like Starling Bank and Monzo, where you could literally open an account in about, probably about 20 seconds.
As long as you’ve got your drivers licence or passport it’s super quick.
Actually, the likes of Starling and Monzo, they are perfectly built for this type of module because you have one bank provider. Your main bank account is your operating expense account and then you just set up what they call these goal pots and you can put pictures behind them in your VAT pot or your tax pot, you could have a picture of a tax man and your profit pot, you can have a nice vision board behind it to inspire you to pay your profit.
So it’s beautifully equipped for this.
Tell us a little bit, Mike, about the taps and the caps. How do people work out their taps and caps?
This is a little more of an advanced concept in the book. Taps is an acronym. It stands for targets allocation percentages and caps stands for current allocation percentages.
Profit First is a percentage-based system. So we start with looking at where your business is today and then we compare it to taps. What do we want to target? In the book, I give examples based on different revenue ranges of what might be really effective taps. This was based upon a survey I did of about a thousand companies. You set the taps, but that’s not where you start. That’s where you target. That’s the marathon we’re going to run.
Then we rewind back to today and say, where are you currently? What’s the physical health? Are you having any profit? Do you have zero? Do you have some? And that becomes our caps, our current allocation percentages. Then we develop a rollout strategy.
Every quarter, every 90 days or so we make adjustments. We enhance the profits, somewhat. We improve your compensation. Reserve more for taxes. We put downward pressure on the operating expenses of the business. Then we let that settle in for 90 days to see how we’re doing. And we reiterate that process again. We repeat it again and again, until we hit the taps for our business.
Amazing. So good place to start then would just be to actually just understand your numbers and understand what are your expenses, what are your sales? And then you can start to work out roughly what percentage of your sales are going out for expenses?
What percentage of your sales are you putting aside for taxes and VAT and profits?
Yeah. Look at your historical performance. We may not be thinking in these terms of target allocation percentages and profit first percentages and all that stuff, but you are doing it in your business. We can extrapolate from your numbers very quickly what percentage of your revenue is translating to profit, translating to owners compensation and so forth.
Everyone has a starting point. We just evaluate your numbers. I would work with a financial professional like yourself, evaluate your numbers, understand your current position, then determine where you want to be and intend to be and then step in that direction.
Amazing. Any final words of wisdom, Mike? One of the questions that came in from my audience, actually just to finish off:
Obviously we are going through a huge global pandemic right now and it is impacting on people’s businesses in lots of different ways, some more positively than others…
I just stepped on my soap box.
I don’t know if you saw me do that, but I’m on my soap box. Here is the deal.
The clients that you have, your clients want you to be wildly profitable. Let that one sink in. Your clients want you to be wildly profitable.
They will never say, hey charge me more for what you’re doing, or could you rip me off a little? Of course they won’t say that, but here’s what they will say. I want your full undivided attention. I want the best of your services and products. I don’t want you worrying about trying to land a client. I want you worrying about serving me and the only way you can serve your clients exceptionally, the only way you can be focused on them is by not worrying about money.
Because if you’re worried about money, you’re worried about getting that next client in the door. You’re giving some attention to your current client while trying to get another one. They’re getting half of you if they’re lucky.
So your clients will not say the words charge me more, but they want you to. They won’t say, could you be more profitable, but they want you to, because that’s the only way you can give the best of yourself to your clients.
You have a responsibility to be profitable.
That was just beautiful!
My strap line of our podcast is small steps, big wins. It’s not about the money. And that’s exactly what you just said so thank you so, so much.
I know I can speak to you all day and I really appreciate your time today. Your book’s on Amazon, Mike but if anyone wants to check out any of your free resources that are available to help people get started with Profit First, where would they be able to go?
If you want to learn more about Profit First, I encourage you to go to profitfirstbook.com. That’s probably the best spot to get started on this book. There’s resources there to download and get you started and of course, access to the book and some free chapters too.
Great. And you have a podcast too, haven’t you?
It is called Mike Up In Your Business. It’s a brand new release and it’s just a different spin on podcasts. At least from my perspective. They’re really deep dives. They’re not how to necessarily, but you’ll find maybe some how to’s in it. They’re stories, but there are stories that I think are atypical. We just booked someone to do bio hacking. We talked about racial injustice for entrepreneurs. Topics that don’t get addressed as much, I think, as they should.
Great. I believe I’m going to be coming on your podcast very soon as well. Thank you so much for your time. Mike, it’s been an absolute pleasure to have you on the podcast today. Have a awesome rest of the afternoon.
Catherine, thank you for having me.
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