Financial and Personal Freedom through Profit First with Mike Michalowicz

Tara Newman: Welcome to The Bold Money Revolution Podcast. This is your source for straight-talking, no fluff business, and high-performance conversations that add real depth and value to the way bold leaders live, work and thrive. I’m your host, Tara Newman. I’m here to show you how to optimize your performance as a leader so that you can grow a business that is profit-rich, efficient, and allows you to generate real tangible wealth for yourself and others. We are here to help you lead with your values, to perform without overwhelm and burnout, and to do your most important work in the world.

The toughest part of setting a revenue goal is knowing where to start. It’s normal to be confused about this goal. After all, how many of us actually got a finance degree at the same time as starting a business? Probably none of us, like a big goose egg. If you weren’t taught how to do something and then you combine that with the internet marketing world telling you what you should want for your business, well, it can start to feel like a game of monopoly. Instead of having a revenue goal, you operate on luck, a roll of the dice, and simply hope you bring in enough, which would explain why 83% of small business owners are living paycheck-to-paycheck. It would also explain why business owners feel like they are working way too hard for what they actually take home.

This free calculator is simple and easy to use. Here’s what Alexis had to say about it, “It was helpful to compare my current reality and needs with my dream needs and to see the concrete numbers laid out in front of me. Seeing the numbers in front of me made my goal seem more attainable and was not overwhelming.” I want you to head on over to theboldleadershiprevolution.com/revenue and grab your Revenue Calculator today.

I’m so excited I have Mike Michalowicz here with us today. Mike is the author of Profit First and he is my mentor, as I am a Profit First Professional and I’m really pumped to have this conversation with him. Hey, Mike, welcome.

Mike Michalowicz: Hey, Tara. It’s a joy to be with you. Thanks for doing this and thanks for being a PFP.

Tara Newman: Oh, my god. I love being a PFP.

Mike Michalowicz: It’s a big deal. It’s a little bit of the feed on the street, if that’s the right choice of words, of Profit First and so I just love that you do it. People hear the concept and they get it but they don’t really get it until they do it and they need the guidance of someone that’s professionally certified.

Tara Newman: Yeah, I find people actually in two camps. They read the book, they found it frustrating because they get to the chapter where you start having them do the instant assessment in the book and their brain collapses, which was me, that was me. I didn’t actually read the entire book until after I was certified.

Mike Michalowicz: Oh, wow, yeah.

Tara Newman: Then I have a book club program with implementation in The Bold Profit Academy to take people through it.

Mike Michalowicz: That’s fantastic.

Tara Newman: Then we have people who are Profit First-ish and what they think is Profit First is the bank accounts which are actually missing the entire point of Profit First. People get really super hung up on the bank accounts and the TAPs in the book, which is actually if you go straight to bank accounts and TAPs in the book, you’re probably in trouble.

Mike Michalowicz: You’re probably in trouble, I know. It’s wonderful, the Profit First has been so popular. It’s unfortunate there are some folks out there that try to teach Profit First but they don’t understand it and so now there’s this confusion out there in the market like, “Well, I saw this video of someone saying you don’t need bank accounts and you got to start at this percentage.” No, no, no. But it’s a good problem to have.

Tara Newman: It is, but I also really appreciate the approach that you’re taking with certifying people, to walk people through that so that they don’t wind up in that place because they can really hurt their businesses actually.

Mike Michalowicz: Oh, yeah. To me it’s like going to the gym like, “Oh, you read the book on some exercises,” now someone’s there like, “Oh, I read the same book. Let’s start working out. Let’s throw this weight on your barbell there,” and then you start doing squats and your knees pop out. You gotta do it right, you have to build the muscle, if you will, appropriately and you have to do the exercises appropriately, otherwise, you can injure yourself.

Tara Newman: Yeah. Mike, I know that if you’re a listener on my podcast, you’ve probably heard the one with Ron Saharyan, and it’s actually an incredibly popular podcast on my podcast. Ron and I really get into what is Profit First and some of those details. What I really want to talk to Mike about today is just some maybe even more advanced topics and just his overall view of money, profit, debt, and what we’re seeing in the economy and all those things. Mike, I’d love to hear your hot take on the economy right now in small business. We’re seeing a lot of changes.

Mike Michalowicz: Yeah. This is the most bizarre economy I’ve personally experienced. There’s this weird divergence. Even as of today’s recording, Wall Street continues to explode, Main Street’s collapsing, but even in Main Street, there’s this divergence. There are some businesses that are crushed, some that are actually more successful than ever before. There’s this like “Don’t talk about the secret if you’re the successful one. Better not say anything because you don’t want other business owners to know you’re successful because so many are hurting.” There’s this weird psychology going on. But here’s a couple observations: first of all, I think we have a responsibility to change the label. This is technically defined as a recession. I think we can call it the reinvention. As small business owners, we can say this is the great reinvention, not the 2008 Great Recession.

I think the second thing that’s interesting is what I did last year. I read and studied each recession back to The Great Depression, there’s been, oh my gosh, now the number skips my mind, I think it’s 13 or 14 recessions.

Tara Newman: This is my mentor because I did the same thing.

Mike Michalowicz: Oh, did you? I love it. Here’s what’s fascinating, every single economy turned on the back of small business. That was fascinating. The big names were actually the unknown names at the time and they just repositioned, they made a new offering, they reinvented, and they caught this momentum as the economy recovered. They facilitated faster recovery. I think coming out of this economy, it’s going to be the names you don’t know of that five years from now are going to be the big names.

I think also, listen, we got punched in the chin, to me this is the ultimate coldcock, they’re walking down the street and all of a sudden, out of a dark alley, this monster punches you in the face and it’s like, “Okay, wake up small business.” I think some businesses will never return to the way they were. I don’t know if venue-based businesses are really going to go back 100% to the way it was. There’s going to be new flavors of it. I’ll give you one example.

A restaurant in our own area here, when they had to go into shutdown, a lot of restaurants were starting to do takeout—which is a good response—this company did an exceptional response, they started doing cooking classes. They went out to their past patrons and said, “Hey, you loved our main menu dishes, why not cook this at home? We’re going to have our chef come in, broadcast to your house over Zoom or whatever, and now you can do a two-hour cooking session and enjoy your favorite meal from our restaurant at home.” They were more profitable doing that than ever before and they were re-engaging the community. There wasn’t just one family doing the cooking class, it was now other patrons and people were seeing their neighbors as a great way to bring commune back. I think we have to think at that level.

Tara Newman: Yeah. What I’ve been saying is it’s not a function of industry, it’s a function of the mindset of the performance. I’ve watched people do some really, especially restaurants, innovative and creative things. They’ve also really leveraged their relationships that they’ve built their brand loyalty with their customers. I think there’s a lot to learn from some of those folks.

Mike Michalowicz: I got to tell you about, like I said, an industry you would never think could recover was DJs. Restaurants were struggling, they could do takeout, DJs were done. I heard this one DJ, she got a van, would drive to a neighborhood, a cul-de-sac and put on impromptu house parties where you’d dance in your yard and lawn for 15 minutes and she wouldn’t charge for it, she had sponsors. She said, “Hey, enjoyed our immediate dance party? This came from Joe’s Pizza. Get your free pizza delivery for a discount right now.” She became a marketing arm for the restaurants who needed to get the word out that they do delivery. It was such a smart strategy.

Tara Newman: Yeah. I was planning for a recession since 2018 because I saw the writing on the wall. You and I have both been through the great recession as business owners. Once you do that, you don’t quite look at business the same again. I was prepping for it but this was really unexpected in how it happened and I knew that when this came, I was going to double down on my own professional development and really look to see where and how I can add value to my clients. That’s actually how I wound up being a PFP.

I joined in, I think it was like right at the beginning of April of last year, because I was watching how Profit First has been helping me and based on the loose recommendations that I’ve been making to my clients, I was like, “This is the answer.” Everybody’s coming out with their 10 hacks to recession proof your business, but Profit First is actually the answer. Have you seen the fruits of your work come through very differently in this last year? Because just as a PFP, I have seen it.

Mike Michalowicz: Yeah. I can’t tell you how many people reach out to me, it’s in the thousands–

Tara Newman: They saved their lives.

Mike Michalowicz: Some people save their own lives using the system. I don’t want to say the system saved their lives because it’s the execution, it’s like saying a recipe makes a great meal, no, it’s the person that actually cooks it. What was interesting too is there were people that just implemented it months before the recession by chance, before the COVID shutdown and they’re like, “Oh, my god, I had time to think and adjust,” it was the people that had no money that were just bamboozled and shocked and they had to make money the next day and responded desperation. It’s changed lives and it’s such a blessing to be a little cog in the wheel of what happened in this situation in a positive way.

Tara Newman: I think the reason why it’s doing that is because you can’t talk about Profit First without talking about sales and without talking about efficiency.

Mike Michalowicz: That’s right.

Tara Newman: Even if you’ve been implementing this for a handful of months, you have a different perspective on revenue and on expenses. You’re already looking at that because when my husband and I lost our first business in the recession, we didn’t make decisions soon enough. We didn’t cut expenses quick enough. We almost waited an entire year. We’re like, “Oh, this is going to change. It’s going to be okay. It’s going to turn around. We’re going to get there.” We kept spending the way we were spending both personally and in our business. That was the death knell. Profit First, I see people being able to have a line of sight and make decisions very quickly.

Mike Michalowicz: It forces a hard conversation earlier to your point. When you take your Profit First, there’s less money available to spend. That’s the essence of it. With less money to spend, now we have to start making these cognitive decisions. It’s forcing hard decisions now. It is much easier to say, “Oh, things will turn. I can just wait this out longer,” but it puts it in your face, we say that the business is now speaking to you.

Once you have less money to spend, because you’re taking your Profit First, you have to become more innovative in the use of those funds but also it forces conversations like how do you increase margin? Efficiency is an extraordinary way to do that. How do you price, repackage in a way that you can dictate a higher price point and the value is perceived by a customer to be appropriate for that price point, yet it brings a lot more profit? Those are conversations that we typically never have. We just hope that things will get better. But now it’s forced upon us.

Tara Newman: Yeah, and then what we’ve done with my team is we’ve programmed a Revenue Goal Calculator based on Profit First numbers. People put in their household expenses, and they can use it in doing different models like basic needs, you can do it for the luxury lifestyle, give your money a purpose kind of thing, and then it tells you how much you need to make, and then it translates that to an annual salary, and then it translates into the Profit First numbers. Based on how much money you need to make to support your lifestyle, it will tell you how much revenue you need, how much is going to go to taxes, how much is going to go to expenses, how much is going to go to profit.

Mike Michalowicz: It’s amazing. I love hearing that you’ve enhanced the system like that.

Tara Newman: If you’re in trouble, you know the bare minimum that you need to be bringing in to cover your expenses, it starts to have a different level of clarity and conversation where you can go, “Okay, maybe now’s not the time to be thinking about a luxury lifestyle because we’re in very uncertain times. But now is the time to be making sure that my family’s protected, that we have money coming in, and this is how much I need to do that. This is how much revenue I would need and here’s where it would go.”

Mike Michalowicz: The ultimate irony of business ownership is when I ask owners why start a business, the two primary reasons are: one is financial freedom, I don’t want to worry about bills; the number two is I want personal freedom, to do what I want when I want. There are some other reasons too but those are two, or I would say 97% or 98% of time are the two primary reasons. The irony is we start a business and we don’t experience financial freedom, we experience financial stress. We don’t experience personal freedom, we experience more personal stress. It’s like, “Oh, my gosh, why are we not doing this?” The calculator you’ve developed, Tara, is exactly what we need. We’ve got to start off with understanding what gives us personal comfort, what gives us financial comfort? That is, as a business owner, our personal lifestyle. The business then needs to be able to support that. But what most entrepreneurs do is we don’t even consider that, we just say the business needs to make more money and more money.

Tara Newman: Then they overwork like hell because they don’t know what numbers to hit.

Mike Michalowicz: It’s true arbitrary, it’s like more will solve it. The greatest irony is this, more revenue to a firm is actually more stressful to an organization. Because revenue means obligation, you sell something, you gotta deliver on that something, and that becomes stressful. You start this horrible cycle of trying to grow your way out of it and it actually burdens you more.

Tara Newman: Correct. Someone said to me the other day, another mentor of mine said to me, “Oh, you’re actually solving problems without creating new ones,” because most business coaches are focused on “get clients now” and that creates a whole host of other problems down the line. But if you’re operating from Profit First, you’re actually solving problems without creating new ones, which is awesome.

Let’s chat about debt for a sec, you have a really great chapter on destroying debt. If you need to pay down debt, Profit First is the way to go. My clients have literally played down over six figures in debt using massive amounts of debt very quickly. But that’s not actually the conversation I want to have, I want to know what’s your take on debt being necessary. Is there good debt, bad debt in terms of your perspective?

Mike Michalowicz: Yeah. I believe there are three types of debt. I think two are good but unfortunately, we don’t recognize that we use these terms. Let me explain what they are and then I’ll tell you my perspective. There’s what’s called debt leveraging. Debt leveraging is the idea of, say, I have an opportunity to make some money but it requires money to do that. I borrow from you, say, $100,000 to do this thing. Debt leverage is where I’m going to get a return within a specific period of time without extremely high probability so that I can pay you back and gain the delta, the difference. If I know, if I borrow $100, that one month from today I’ll have $200, I can pay you back plus the interest for borrowing that money and have the difference for myself. That’s a debt leverage.

There’s another one called debt bridging. Debt bridging is where I go into a slow period of my business unexpectedly, or seasonally that happens too. I use money to cover ongoing expenses with the predictable knowledge that within a certain period of time, a month or two from now that I guarantee, I’ll be back in the black and I can pay back that money I borrowed to bring me through this quiet period. That’s called debt bridging.

But most businesses don’t do either of those even though we say, “Oh we’re debt leveraging,” we’re not because the word is predictable. There is no predictability. We borrow money in hopes, so that is what I call debt anchors. Debt anchors are we take on money with the hope, “Oh, I’ll do a Facebook Ad, I’ll get some money back.” “Oh, we’re just going through a quiet period. I don’t know how long it’ll last, probably a week or two. I’m just going to borrow money.” Now we have an anchor because we owe this money back but we haven’t recovered, therefore we can’t afford it and now it’s just stuck with us. That becomes so burdensome.

Now we have the accumulating interest and so forth. But even worse than that is just the stress of saying, “Every penny I make is going to this other person. I’m not ever going to get out of this.” That’s the problem I see.

Tara Newman: Yeah. I saw somebody, they were talking about mindset people having a lot of shame around debt and they were like, “Well, I just flipped my mindset and now I believe that debt creates wealth. This is my mindset that I’m going to have.” I’m like, “Oh, I understand that you’re trying to negate the shame around that. I get that we can use and borrow people’s money, but this is really nuanced and I’m not sure this is the best way to communicate about this.” But what I want to say on a very practical level is that what you’re saying is Profit First, here’s how I think Profit First helps, one, you pay down your high leverage debt, that’s what you do with your Profit First, that’s the first goal.

Second goal is once you’ve done that, now you’re building a cushion in your business that you shouldn’t have to take on that much debt for growth or expansion because you have now pre-planning for that. However, if you have to take on debt for expansion when you operate from a Profit First model, you’re doing it intentionally, you’re making a choice. “I’m not going to take profit from myself because I need to be investing this into the business and I need a little more,” or whatever you’re doing, you’re doing it intentionally because you have the clarity around the numbers.

Mike Michalowicz: Yeah, and you’ll feel a personal impact. We humans are emotional beings so we respond to pain and pleasure. If you do take on debt and you now need to service this debt, and I would suggest paying it back quickly, you have to address it accordingly. The only way to do that is you could reduce operating expenses but it means you have to increase margin or do something to address that reduce operating expenses. The other way is you start reducing your profit take, how much you’re taking home. Now you feel at a very visceral level. I’ve taken on debt to expand my company and I’m going to pay for this. By feeling that, you are much more selective in the debt that you incur.

Tara Newman: Yeah. My last question for you, we hear a lot about mindset in the business space, particularly the online business space, and it means different things to different people. But I’m curious because we all have mindsets, we all have belief systems and how we think. What are some of those mindsets, those ways that people think are what they believe who have been the most successful with Profit First? Are you seeing any commonalities around these people thinking of this a certain way and so therefore they’re super successful when they implement Profit First, and because of that, they do a great job at it?

Mike Michalowicz: Yeah. I’ll give you three quickies. The first one is profit is sustainability, profit is contribution. The negative mindset is profit is greed. Profit is contribution when your business is profitable enough, it can sustain and it can be of service to more and more clients. Also, that money will recycle through when you have it. It’s like breathing, it comes in, also, exhale it, clank it, use it in ways that are of service to you but which are also of service to the people that you’re giving the money to. Profit is sustainability, profit is of service, it’s contribution.

The second thing is to use a shareholder mindset. Business owners that do Profit First stop calling themselves an entrepreneur, which I love that word but it’s been bastardized to do everything, grind and hustle, I hate those words. People are now calling themselves shareholders. A shareholder is someone that has equity in a business, they’ve taken risk by investing in it, their job is to have the business grow and become more profitable, which means bringing on more employees to be a healthy organization but not to participate actively in it. Shareholders share in the profit and they give strategic direction. I own some stock in Ford, I vote for the new board, I give some strategic input on certain decisions, and so do all shareholders, and I get my distribution because I’ve taken risk. Use that label shareholder.

The last one is my favorite one, your clients. Your clients want you to be wildly profitable. You have to understand this mindset. When a client hires you, they don’t want you worrying about money. Could you imagine you have to have brain surgery and your brain surgeon says to you, “I’m really stressed out. I have no money, I’m desperate, I need more patients. Can we do your surgery right now?” No, don’t touch my brain. This is true for anyone that uses our services or our products, they want it to deliver value to us. They want them to be the most important customer that we have at that moment. They want us to focus on them and the only way you can deliver any of that is by being profitable.

Your clients won’t say, “Hey, I wish you would charge more,” or “I wish you were more profitable,” they won’t say those words, but they want your full undivided best attention. The only way to do that is by being profitable.

Tara Newman: Your customers benefit the most from your profit for a lot of reasons but you can price more strategically, you’re more available, you’re more present, you’re more innovative. There’s just so much that your customers benefit from when you’re profitable. I honestly think Profit First is the solution to crony capitalism, but we can talk about that another day because I know we’re rolling out of here. But any last words of wisdom, tips, anything you want to share?

Mike Michalowicz: Yeah, sure. Here’s the last tip, for anyone listening right now, if you have not done Profit First yet and maybe you’re curious now but maybe you’re skeptical, that’s totally normal, I invite you to do two steps and you can do it before the day is out. This will permanently bring profitability to your business. Step one is to call your bank and set up a savings account. It’ll take a half hour, actually COVID worked in our favor here, you can do it all remotely, just have them email you the forms and stuff. Step two is allocate one percent of your income to profit because it’s such a negligible amount, you won’t feel any negative impact on the operations of your business but you’ll have a highly positive impact on your perception.

Now a little bit of money is accumulating, it’s just a matter of time before you try two or three percent and increase it and deploy the full system. That’s the tip. You’ve no issues not to get started today. Set that one account and see how it serves you.

Tara Newman: Thanks so much for coming by, Mike.

Mike Michalowicz: Thank you so much for having me.

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