Financial and Personal Freedom through Profit First with Mike Michalowicz

In this Bold Money Revolution Podcast episode, I talked with Mike Michalowicz. We’ve talked about Profit First before and how I’m a Profit First Professional, so having the author of the book Profit First is a great opportunity. He is my mentor, and now you can learn a few things from him as well. 

Profit First Needs Clarity

Most people who know about Profit First fall into one of two camps. The first was me. They start reading the book, find the instant assessment in the book frustrating, and then their brain collapses. I didn’t even finish reading the book until I became certified. The other camp is people who get incredibly hung up on bank accounts but are missing the entire point of Profit First. 

Mike loves that Profit First has become popular, but plenty of people try to teach it without fully understanding it. Confusion is common. People post videos about not needing bank accounts and starting at a specific percentage. That’s why Mike is taking the approach of certifying people to make sure they understand the principles. He looks at it like reading a book about exercise, thinking you can just throw weights on a barbell and jump right in, only to pop out your knees minutes later. It’s important to be careful and understand the exercises. 

We’ve covered some of the details about Profit First on the podcast before with Ron Saharyan, so we will dive into some more advanced topics with Mike, including his overview of money, profit, debt, and what we see in the economy with small businesses. 

How to Look at the Economy as a Small Business Owner

The economy is constantly shifting and flowing. While there are huge events that everyone learned about in history class, it’s important to realize that there have been tons more recessions than the ones you’ve taken tests on. 

Economies have always turned on the backs of small businesses. Small business owners that make it through those hard times are constantly reassessing and repositioning. Whether they’ve made new offerings or reinvented, they catch the momentum as the economy recovers. The small businesses today that do that successfully will become household names later on. 

Consider the moves that businesses made during the pandemic. Restaurants switched to cooking classes and takeout offerings. DJs got creative by driving around and hosting pop-up parties in cul-de-sacs and people’s front yards. Going through a recession as a business owner will help you change how you do business going forward. 

How Profit First Can Help

Using Profit First is helpful in this mindset because you can’t talk about Profit First without talking about sales and efficiency. You’ll gain a different perspective on revenue and on expenses. Profit First helps you make decisions quickly and potentially save your business when the economy changes. It forces harder decisions to happen quicker, and you’ll become more innovative with your spending. 

The Revenue Goal Calculator tool was built based on Profit First numbers. It asks users to put in household expenses and will tell them how much they need to make. Depending on the amount of money you need to make to support your lifestyle, it will tell you how much revenue you need, how much will go to taxes, how much will go to expenses, and how much will go to profit. You’ll know the bare minimum you need to bring in to cover your expenses. 

Mike asks business owners why they started a business. There are two primary reasons: one is financial freedom, and the other is personal freedom. Ironically, what typically happens after starting a business is that you experience financial stress and personal stress. The calculator is a great tool to help business owners understand what will give them financial comfort. More money won’t necessarily solve your problems. It’s more important to understand what numbers you need to hit. 

Is Debt Necessary?

Mike believes there are three types of debt. Two of them are good, but most people don’t recognize them using these terms. He covers those types first. Some people believe that debt creates wealth, but it’s so much more nuanced than that. That’s why it’s important to understand what the different types are. 

Debt leveraging is when you have to spend money upfront to make money. It’s situations where you might borrow a certain amount to invest, but you know that you can pay back in a specified time frame and have a profit left over for yourself. 

Debt bridging is another type of debt. It is when you go into a slow period of business unexpectedly or seasonally, and you use the money to cover expenses, knowing that you’ll be back in the black in a few months and can pay back that money. It can help you get through slow or quiet times. 

Debt anchors are what businesses most commonly do. It’s borrowing money with the hope that it can be paid back. It’s called an anchor because we owe this amount but haven’t recovered, and it’s stuck with us. There’s typically accumulating interest, which just adds to the problem. 

Many businesses use the first two terms, even when they are actually dealing with debt anchors. Once you have debt, you must address it as quickly as possible. There are only two ways to do that: reducing your operating expenses or reducing your profit take. 

There are really two goals with debt. First, you pay down your high-leverage debt. Second, you build a cushion in your business, so you don’t have to take on as much debt for growth or expansion in the future. With Profit First, if you take on debt, you do it intentionally. 

The Most Successful Mindsets for Profit First

I asked Mike to talk about peoples’ mindsets in business, particularly online business. Everyone has different belief systems and ways of thinking about business, so I was curious about which mindsets were shared by those who have been most successful with Profit First. He broke it down into three.

The first one is sustainability. Understanding that profit is a contribution when your business is profitable enough, it can sustain, and it can be of service to more and more clients. Money will be recycled when you have it. Profit is sustainability; profit is of service. 

The second thing is using a shareholder mindset. Business owners doing Profit First stop calling themselves entrepreneurs. That word has been used to describe the “grind and hustle.” Instead, use the word shareholder because that is someone with equity in a business. It’s a shareholder’s job to have the business grow and become more profitable. 

The third thing is Mike’s favorite. It’s your clients. They want you to be wildly profitable, and that’s a mindset that you need to understand. Your clients don’t want you to be worried about money when they hire you. They want you to deliver value and be the most important customer you have at the moment. They want your focus, which won’t happen if you are constantly stressed about money. Your clients will benefit most from your profit because you’ll be able to price more strategically and be more available, present, and innovative. 

Final Thoughts on Profit First with Mike Michalowicz

There are two steps you can take today if you’re curious about Profit First and jumping in. First, call your bank and set up a savings account. It takes just a half hour, and you can do it all online now. The second step is to allocate 1% of your income to profit. It’s such a small amount, and you won’t feel any negative implications on your business, but you’ll positively impact your perception. 

Check out Mike’s book, Profit First, if you haven’t already, and check out more episodes where we dive into Profit First.