Implementing a profit-first strategy in a small business can be tricky to navigate. How do you do it while keeping your operation running smoothly? What do you do first? Mike Michalowicz joins me in this episode to talk about his profit-first strategy and how he recommends implementing it. We also chat about making smart business decisions during the uncertain economy we’re dealing with as we live through the Coronavirus pandemic.
Mike Michalowicz is the best-selling author of multiple books, including Profit First, Clockwork, The Pumpkin Plan, and a book releasing in April—Fix This Next. He can only be described as a serial entrepreneur, a small-business consultant, and a genius when it comes to prioritizing profit. Don’t miss engaging and informative episodes!
This is the seven figure agency podcast discover the strategies and techniques to grow a highly successful and profitable digital marketing agency with your host, Josh Nelson, our Hello and welcome. Thank you so much for joining me on today’s session. seven figure agency Podcast. I am super excited to be joined today by Mike mccalla wits, you probably recognize the name for profit First, the pumpkin plan. Fix this next a bunch of amazing books. I can say personally, I’ve read most of Mike stuff I’ve said in several of his live sessions, we can say the profit first model really changed our business and move this from kind of like where we were making lots of money, but not necessarily as much profit as we wanted. So when the opportunity came up to have him on the podcast, I was super pumped. Mike, thank you so much for joining us today. Josh, thank you for having me. I appreciate this. So I guess I’d love it if you could just kind of start with a quick background about yourself and kind of introduce you a little bit but kind of your background and how you became
came this world renowned guru that you are today. Yeah, and I don’t know about guru, but I am a entrepreneur gone full time small business author. So ever since I graduated college, I’ve run businesses I was in the tech space, had a couple of exits had a private equity transaction, I had a fortune 500 exit. But I also ran and then it’s the interesting part of my story. I ran a angel investing company, and I was clueless, no idea what I was doing. So I started 10 companies that all failed, I wiped out evaporated all my wealth, destroyed myself, lost my house, all that and how to restart. And I think that’s the most important part is I didn’t realize how little I knew about entrepreneurship as an replaced right time, but was executing from a standpoint of arrogance and ignorance, which is a deadly combination. And there’s a saying, Joshua, if you had all the money in the world, what would you do? Now? He’s dreamed like one day you know, I would love to be an author and
Another complementary question, when you have no money, what’s your vocation to create your dream? And when when the answer is the same, like I said, I’m gonna be an author, a sustainable author, meaning I’m gonna make a living doing this as my dream. Those two answers coalesced. And it was, it was clear, this is what I had to commit to. So today, I’m a full time author I’ve written you can see the books I positioned very well for marketing right behind me. And that’s why what I do I help small businesses face the different challenges that they will face and hopefully simplify the process for them.
we recently did a session our group actually called the the profit first agency, one of your your certified partners, like fastener is in the group, and he did that. And so I was already I, I’ve read the book. I’ve heard the whole concept a number of times when I was sitting in a session where you introduced it live and you kind of talked about
How you came up with with profit first, and it was a, like a lightbulb moment for me. I wonder if you can kind of walk through that high level, you know, just like how you came to that? Sure. So there was a statistic
to produce, I think part by the SBA. I don’t actually know the relevant sources anymore. But here’s what I heard that 83% of small businesses are surviving check by check 83% the vast majority of people that start a business and understand that they start a business with the dream of financial freedom. That’s when I started my business and personal freedom, I want to do what I want. And the two things we dream about that personal freedom, that financial freedom, the two things we don’t get a 3% of us. So most businesses, when it comes to the financial side, don’t have enough money today to pay their bills next week, let alone payroll unless substantial sales come in. It’s very hand to mouth kind of existence. And it’s wondering, how come so many people there’s 180 million small businesses globally, and small business by the way defined by the SBA.
is a company that does $25 million in annual revenue or less? That’s my business for sure. I probably May the folks listening in right now, you know, we’re the backbone of the economy. How come so many of us are committed to to building a profitable company are able to attract clients?
service the business, there’s millions of different components that happen within the company and we do it all except the one thing we wanted finances, the cash at the end profit doesn’t happen. Why? Well, I believe it’s the foundational formula that we use. The traditional called gap generally accepted accounting principle, foundational formula for profitability is your sales, your revenue, minus your expenses, results in your profit. So sales minus expense equals profit, which logically makes sense. But behaviorally, it is most damaging formula because it’s telling us that profit comes last. In fact, it’s so pervasive, that’s in our vernacular, we call profit, the bottom line we call it the year end. All those things mean last as human nature when something comes
It means it’s insignificant, it can be ignored. It’s the manana syndrome. So what I teach in profit first is we flipped the formula. It’s sales minus profit equals expenses. Why meaning practice here is every time we have a deposit come into our business through a sale, we immediately take a predetermined percentage of that money, five or 10 or 1520, whatever percent allocated toward profit, high that money for our business, and then live off the remainder of the business lives off the remainder. It’s the pay yourself first principle applied to business. Yeah, wonderful. And I think one of the things you mentioned, as you were explaining, it was something about like the concept of serving trace and like at Thanksgiving, you’re just like, served from the one big tray. Can you talk through that a little bit? Because I think that was something that really clicked in my mind. Yeah. So what we have to do is we want to intercept our natural behavioral path. So prop first is based upon behavioral mechanics, and what I observed in myself and all the entrepreneurs I was interviewing and surveying
Was that most of us revert to what’s called bank balance accounting. I don’t read my income statement, balance sheet and cash flow. I don’t tie those things in together. I don’t know the metrics. But what I do know is I can log into my account this morning. And if I have money, I can spend it. And if I don’t know, I better sell something quickly. So if that’s our natural path to log into our bank account, we need a system set up there to intercept that. Just Just as a quick aside, I work out regularly now not because I love working out or because it’s wired into me, I figured out my behavioral path. When I wake up in the morning, the very first thing I do is go to the bathroom, and I used to drink a cup of coffee and so forth. Well, since I go to the bathroom first what I did is I put my sneakers on my toilet seat. So the only way I can use the bathroom is by grabbing my gym sneakers. And now I put them on and I started the pattern to exercising intercept the path. Well, what we do with our finances is since we’re logged into our bank account, we set multiple accounts there. There’s five foundational accounts and this is what they are the income account. Profit owners pay or owners comp.
Tax and operating expenses. And these all can be checking accounts at your bank. But what happens now is money flows in deposits coming from sales and goes into the income account. But the income account to your point Josh, acts like a serving tray. Kinda like Thanksgiving dinner. When when dinner served. You don’t just tell your guests the table. Hey, everyone, fight for it, fight for whatever you want. Just go for it. No, you’re just serving tray so that everything gets sliced Turkey? Well, the same thing. This is now a cash Turkey. Your Business has multiple responsibilities with that cash, cash comes into the income account. It’s a cash Turkey. we carve it up as percentage goes to profit. We already talked about that. By the way, that’s a reward for the shareholder for starting the business being the backbone of our economy. portion goes to owners compensation. That’s the pay for being an owner operator working in the business. If you had to replace yourself, would you pay yourself a salary that person that’s what that is? taxes. The biggest bill associated with operating business that we are least prepared for is the subsequent tax consequences. So this pays all the tax consequences for the owners of the business personal income tax.
Need the business liabilities and the last account is OP x. Now we’re doing is when money flows in we carve it up to its responsible account prior to spending the money so we know what the money is intended uses before we even access it. Yeah, such it’s such a powerful concept and when you do it, it’s like magically there’s money there for profit and everything else. No, there’s magically not like the money well as a Parkinson’s Law, right? The money’s gonna get spent, you know, you know, your stuff is that’s exactly what it is. So Parkinson was a theorist in the 1950s studying human behavior. And notice it’s interesting phenomena. As supply for resource expands. He argued that our demand or consumption that resource expands, I like chocolate chip cookies, you put one chocolate chip cookie in front of me, I have more of one if you put more than one of more than one. So as there’s more available supply to consume will consume more right now with this coronavirus going on toilet paper right the entire supply. If the store had one roll of toilet paper it would be gone.
Thousands of rolls, they’re all gone. So there’s more supply, we start consuming more. Well, it applies to toilet paper. It applies to food, but it applies to money. As more money is available to our business is flowing in and we see it all available will naturally consume more. It’s a biomechanic response, like, Oh, well how much money you have, I can buy that thing. I can justify that spending on new equipment, I can make that higher. But we spend the money without considering all of its intended uses. Because all the money is in one pot, when many businesses will experience Josh is your revenue does something like this, hopefully over time it goes up, but our expenses run as is almost uncannily parallel. And the reason it runs so parallel is because of Parkinson’s Law. What problem first does is intercept and leverage Parkinson’s Law in our favor, because incomes increasing, but now we’re extracting profit out. It puts a lower barrier for what we can spend and still will cool spend up to that limit. But since there’s this capture point between removing profit, you don’t overspend.
Yeah, it’s powerful.
powerful stuff. I think there’s a, there’s a mindset issue with most digital marketing agencies where they feel like it’s almost like a badge of honor to reinvest in the business to, you know, take whatever, you know, we made this month, 100 grand this month, and all we’re going to reinvest so we can grow. And so we’d like people. Can you talk a little bit about why that’s a faulty mindset such a trap? Yeah. So, reinvest other words, plow back our soft terms for the word expenses. We just don’t like to say that. We like to say I’m incurring more expenses, because that’s tough to swallow. But we’d like to say we’re reinvesting and plowing back. So what we’re doing in a situation where we’re applying back means there’s money for a period of time reserved as profit, but instead of distributed to shareholders, we’re gonna put it back in the business and the business is going to use that to hopefully grow. But the thing is, what that negates is actually thoughtful investment, thoughtful investments where we have a clear ROI specifically, we know if I put $1 in, I’m gonna get $2
back within 60 days, that is something I want to make an investment in. And I can borrow money for that. But what happens with most businesses, they say, Oh, we have this extra money here, let’s just put into growth, but there’s no consideration of ROI. It’s like, hey, Facebook ads are the hot thing, right? I’ll throw some Facebook ads out there. Or maybe you know what, why don’t we go offline and do a postcard campaign? And let’s try it out. But there’s been no testing, no preparation, no understanding. So be very cautious about those terms. reinvest in plow back means often you’re not being innovative enough. If you took that money off table, if you took that reinvestment plan back and actually allocate a profit, how would you grow your money without having to take on more expenses? Start thinking that way. And when you do, you start being much more innovative, you start cost controlling. So whenever I hear, reinvest or plow back I know this business does not understand its expense control does not know ROI, or at least doesn’t have an understanding specifically of their ROI.
Yeah, yeah. And
it seems like I don’t know why.
It’s it’s there’s this almost like, it feels like that’s how it’s supposed to be. Yeah. It’s just what was perpetuating the media. You know, we’re told every event you go to is other entrepreneurs. The conversation isn’t how healthy is your business, which it should be. It’s how big is your business? What’s your revenue? All the mindset is on the I call it the entrepreneur Joneses, right? It’s all about comparing the top line. And I was living that I remember going to my first entrepreneurs, kind of gathering at a $250,000 business and as far as hot crap, and I walk in, someone’s like, I have a half million our business. I’m like, Oh, my God, I suck. I gotta do half million. When I did that. There’s other guys doing a million I hit a million they were doing five when I hit five, they were at 10. I hit seven. And I was like, ah, and the thing was, it was all about this race to nowhere. I was comparative. The one question I didn’t come up was, hey, how healthy is your business? What’s the profit like in the in the secluded dark room off the side of the networking event where two people are having conversation after maybe a shot of bourbon. That’s when you found out
That, oh, you have a $10 million business that’s going under. That’s where you heard the real story. And what we just didn’t need to do is change the conversation to how healthy is your business. Next time someone asks how many employees you have, or how much sales you have, say, Hey, why don’t we talk about profitability, sustainability, my business, I’m more impressed by company, it does say $100,000. And they’re posting a $90,000 profit, they come in as 10 million with a $90,000 profit. Sales translates to stress on an organization. So the more sales I have, the more that top line grows, the more responsibility my organization has to deliver. And the small business owner, the more burden I’m carrying my back. So sales simply means stress. I want to know the profit. And that’s the health of an organization. Yeah, no, no doubt. So So practically speaking, you know, what’s the what’s the best way for digital marketing agencies to learn more about this? Obviously read the book, but practically speaking, what are the what are the next steps in order to implement profit first? Yeah, so yeah, reading the book will definitely help but I’ll give you one warning is that if
If you try to implement the entire system immediately, it can become overwhelmed. We’re very fortunate now we have well over 300,000 companies that have implemented profit. First we have, we’ve we’ve thousands of thousands of case studies. Here’s what we found the common thread to be. The businesses that have successfully implemented profit first, have done it by taking one small step at a time. And the first small step is to set up one account profit account. I already alluded to the foundational five accounts, you can even set 678 accounts, but start off with just one and call profit. And we do starting today is you allocate 1% of your income. So if 1000 bucks comes in, you take 1%, which is $10. You put in the profit account, and what happens to your revenue and the use of that money is inconsequential. $1,000 versus now $990 usually won’t have any impact in your business. It’s inconsequential, but it’s highly consequential is the fact you’ve allocated $10 to a profit account. It’s just a matter of time before you look and say, Wow, I can’t What if I allocate 2% or 3%, and most businesses have successfully rolled
That profit first do it over three to six months, they start building this momentum and muscle around profit. And then they start adding the other accounts. So our rule here, start slow and then let it grow. Got it. So don’t try and hop into the whole process set up the five accounts start moving, you know, 20% of this one. Yeah, too much too fast. You know, it’s funny, um, my son and his, my nephew is they want to do a Spartan Race. Now those two guys are 18. Clearly, I’m not 18. And they’re like, hey,
like, he was a kid. But can you do Spartan Race with me? I’m like, I’m gonna do it. So they don’t need a coach. I do. And I talk to the coach and he says, Listen, you’re gonna be running like crazy. We’re lifting weights. Here’s what I’m doing the first day of practice, we’re not going to run the marathon. The first day of practice is proper form stretching building toward it. If you if you’re preparing for a marathon, for example, and you start by running a marathon or your first practice, you are prone to significant injury, you’re not gonna complete it, and then we’re gonna abandon it. So start slow.
Build that momentum that strength and then keep it keeping persistent about it and then it comes actually comes enjoyable exercise but also accumulating money is a fun experience yeah no doubt so I’ll just say I mean on this on this topic you know as agency owners it’s we run businesses to make profit right so it’s not about the revenue it’s about the amount that you keep the best way to do it read profit first dive into the profit first agency training that Mike Tasker did and and start like Mike, mccalla Wits is saying like start with one account, start moving a little bit right away and build this muscle because there’s nothing more depressing I’ve experienced it to grow to seven figures and beyond and be making as much as you were when you were at 500,000. Right. It’s I don’t know if this is your quote or somebody else’s, but revenue is vanity. Profit is sanity. That’s right. Not that’s not my quote that’s been around. Yeah, revenues is vanity, profit sanity, and cash is king is the final part of that statement.
It’s float around forever, and it’s
truism, it’s just a simple fact. But is very normal and human get caught up in the How big is it contest and the entrepreneur Joneses. So we do want to take pause here. And that’s what profit first does is before when that money comes in. I used to have a $10,000 deposit money, woohoo, I got 10 grand. And now I realize No, no, I don’t when 10,000 comes in and gets carved up, I may have 6000 to operate my business. And the 4000 has responsibility to profit and pay myself and reserve for taxes. It just gives you a much better perspective was truly available to operate your business. No doubt. So I wanted to make sure we had time to kind of pivot a little bit I could put we could probably talk about profit first for Yeah, but there’s a massive economic crisis happening right now. This interview is happening called the the corona virus. And when I posted up in the group, you know what, what questions should I ask Mike? A lot of them were like, What is he thinking about this this crisis? How should businesses try and financially
pair, we’d love to hear your thoughts on that. Yeah, so we’re in the thick of it now. And there’s, there’s no question in my mind that there’s going to be sustained in negative impact that this will trigger a recession. Maybe won’t, but I can’t I see all indicators pointing to that. Now, one, here’s one good thing about being a small business, as a small business, we have the right to choose to participate or not. And in economic crisis, where big business has no choice, big business, or is affected by the numbers, but small business, think about it, you know, we lose 10 or 15% of our clients that may represent 510 1520 clients, it hurt, it’s hurtful, but it can be changed because we have the ability to get those 1015 or 20 clients elsewhere. So we have actually be proactive in our marketing and catching it on the big businesses. You know, they lose 10 or 15%. They lose thousands and thousands of clients. So what you’re going to see especially in digital marketing, the bigger agencies are going to start losing clients. We have an opportunity to pick them up.
Maybe offer them a new flavor or a new approach to their their resources. But inevitably, in these situations, I see the big companies serving the big clients, those big clients aren’t stepping down to smaller businesses. So, but but we have to see this as an opportunity. If we go in and say, holy crap, things are gonna get bad. I think it was Henry Ford, who said, if you think you’re right or wrong, or if you think it’s true or not true, you’re right, something like that. But whatever our thoughts are become a reality. So I totally bastardize his phrase.
If we think that this is gonna be devastating to our business, it will be if we think there’s an opportunity to grow our business, we will do that. It’s gonna be hard, you will have to change some of your offering. But watch the beer clients stepping down. And that’s an opportunity for small guys. No doubt, good opportunity there. How about like financial planning wise? Any suggestions on you know, how to maybe put more into the profit account and take lessons and distribution? Any any thoughts on that front? Yeah. So I mean, the nice thing is I’m getting emails from people that start
Profit first two, three years ago and like, wow, I got a cushion for the first time I like that definitely makes it softer. But there’s also a risk to to continue on business as per usual, living off a cushion. So I wouldn’t change any profit allocations yet. But if you have to if you have established profit First, if you start dipping into it, that’s a call that we need to cut down some costs pretty quickly.
But I would actually not make any changes as much as moving toward marketing and sales, I would not amplify my profit account because now you’re trying to run an even leaner machine and potentially lean times and that could be at risk. So I would actually just leave everything status quo. The thing not to do is to reduce your profit, so don’t increase it. But definitely don’t reduce it. Leave things status quo, because profit first is an indicator. If you are funding account your money to profit and so forth and there’s not enough money left you’re in your operating expenses. That’s your business telling you is being affected right now and you got to get sell your way. Sell you know for more revenue or
are cutting costs. So the reaction to this situation is monitor, cool, calm monitoring of your profit account makes a lot of sense and don’t start to think, well, it’s a tough time everybody’s gonna struggle, I’ll just take less profit during this period. No, don’t do that. You got to realize you got a profit. First that you’ve allocated, you got an operating expense account. If you’re overspending the operating expense account, that means it’s time to reduce overhead expense or sell more, right, if I’m understanding what you’re saying. Exactly. Right. So great, great advice. Yeah. And you know, it’s an opportunity to market to what we’re gonna see the most, the number one cause that gets cut is marketing right now. Right. So advise your clients say this is the biggest opportunity because your competition is going to drop marketing. We see it consistently in a down economy. So this is an opportunity to sustain your marketing or even increase it because now there’s a gap, open space of marketing opportunity. Yeah, and if you look at it from the perspective of a lot of us do SEO and pay per click social media management
The idea of look, things are slow, let’s let’s really invest in building your organic footprint. So as the economy comes back online, you get better placement, you’re better positioned on the market, as your competitors are being less active with pay per click advertising. That means there’s going to be lots of search wind, people sitting at home, but a lower cost per click, they can remain more dominant in their market for their services, while spending probably less. And so if you can have those types of strategic conversations, you can spin this to a positive for your agency and your clients as well. Perfect positioning. Exactly. Yeah, no doubt. So you’re you’ve rolled out a new book recently, and you’ve got it there in the back. Yeah, fix this. Next. Let’s talk a little bit about what that is and kind of what you’re up to on that front. Yeah, so it’s interesting that the timing is a little bit ironic. It’s just releasing now. It really is April 28. Officially cool. It’s still is still not still not out officially, but it’s available for pre order. It’s on Amazon. What I did
I wrote the book to address the biggest challenge entrepreneurs have. And what it is is the biggest challenge entrepreneurs have is knowing what their biggest challenge is, particularly in times of crisis, where there’s all this information. There is a disproportionate amount information around the epidemic, this case coronavirus over all these other things going on. So it has to draw our attention. How do we decipher decipher what’s the one thing our business needs now what’s the most vital need it has in the moment? So fix this next is a tool based upon Maslow’s hierarchy of needs, needs to translate into what’s called the business hierarchy of needs. There’s five stages of business experiences, and at times it will cycle up and down these stages. The foundation is sales and marketing, we have to have that for the creation of cash above that we talked about is profit. That’s a creation, stability for business. Above that so called order. It’s the maintenance or main maintenance of efficiency, but that’s impacting the highest levels legacy, those are all about contribution. Our business we have to ask ourselves critical questions of what are we experiencing now? A lot of businesses
Is will revert to oh my gosh, I need more sales right now, when actually the solution may be to shore up some of the profitability or at least sustain profitability. other businesses, sales are not going to grow much. So the opportunities at the order level, creating efficiency throughout the organization, the greatest way to cut costs without actually cutting off any of their benefits is to create efficiency through your organization, get things more done, get more things done effectively, and without much effort. And you’re actually creating cost efficiencies. So fix this next. In the book, I have these 25 questions. You can evaluate where your business is right now in the moment, and one thing you need to tackle and in response to the coronavirus and what’s going on, and since this book isn’t coming out, we’ve activated our website it’s called fix this next.com people can go to fix this next calm, enter their
enter to the free evaluation and for free.
You can get a full evaluation of your business and what you should be working on right now. In this
The circumstance. Nice. So fix this next comm.com and there’s an evaluation that will help kind of pinpoint focus on next. Yeah, yeah, it’s funny. I was just I was just reading this weekend this morning and I was reading Extreme Ownership by Jacko Williams and really a fascinating read and they talk about how the military particular Navy SEALs respond to a situation whereas information overload, kind of like now, and how we have to slow down take pause, and think very decisively, but but give ourselves pause to evaluate that pause part’s hard. So the fixes next evaluation, is that pause. It forces you to spend three, four minutes thinking about your situation before taking action. It makes a lot of sense. Sounds like sounds like a great book. Everybody should go check that out and kind of wait with bated breath. I imagine it’s gonna be on audible.com as well. Audible Yeah, I finished recording a few weeks ago. I’m super excited about it. This is my life’s work I’m it’s a culmination of all the research I’ve done over the last 10 years as an author
And for the entirety of my entrepreneurial career. So
I really hope that this helps people just be very specific, deliberate in the growth of their business and not reacting to these outside influences that we can’t control. Mm hmm. So it sounds like it couldn’t have come at a better time either. So yeah, it’s ironic, right? Yeah. This is the time we need it. It’s kind of ironic. Yeah, I’m definitely excited about it. So any other nuggets pieces of wisdom you would have for that digital marketing agency probably doing high six figures trying to get yours and beyond? Yeah, one more big nugget and I want to go back to profitability. I want everyone listening to know your clients wants you to be profitable. They want you to be wildly profitable, particularly in times like these because there is so much distraction. And here’s the thing. They will not say, Hey, can you charge me more you know, can you ramp up the prices on me? Absolutely will never say that. But what they will say is, I need your firm’s undivided attention. Marketing test matters more than anything right now.
I need you devote it to me not worrying about the next customer you need bring in the door. All that says is that they want you to be profitable, because the only way not to be distracted or panicked about the sustainability of your business is to have a healthy bottom line. Therefore, you must be profitable. Every single transaction, we need to make profit, habit, profits, not an event, it’s not gonna happen, eventually, profits habits baked into your business and your clients want it for you. Because if you’re profitable, you can pay attention to them and serve them the way you need to be served right now.
Yeah, powerful. So one of the one of the questions that came up that I don’t even know if you can address it was
some people that are a little further along in this process. They’ve got their profit accounts set up. What’s an ideal allocation for an agency? Can you speak to that at all? I guess that would require more hands on Yeah, no, I can speak to a little bit. So in in the book profit First, we did a survey of 1000 businesses. Now this was industry agnostic. We looked at marketing agencies, we looked at Pizza
jobs. And we looked at professional services and everything in between. What we found is there’s a certain what we call taps are target allocation percentages that these businesses were achieving among the fiscal elite. So coming to like one to 5 million if I remember the numbers, right, we’re posting about 10% profit, or more 10% of that money is going to the owners compensation 15% to tax and then the remainder, which 65% was going to op x. And as an example, say you’re a $2 million company $2 million company was posting a $200,000 bonus to the owners the end of the quarter or year to the profit account, the owner was taking home 200,000 there’s 300,000, we reserved for taxes, because when you start making income like that your tax bill will be big, and the business was living off the remainder which is 1.3 million was running the business. Now, those are simply taps. And what we found is about 5% of the business population, the fiscal elite are achieving that. So I suspect one or two people It seems the podcast right now are achieving numbers like that and if you are here
keep growing, why not become the elite of the elite. But the majority of us are not achieving numbers like that. Now you’ve a target. I wouldn’t start there, use the method we talked about take small incremental steps, but consistent steps to get there. But that would be a target of what we want to move toward. So it’s if I heard those numbers, right, it’s a net profit to the owner of somewhere around 30 to 35%. Yet well, exactly. So you, you read it exactly correctly. And you’ll get confused about that tax count. So 10% to profit 10% to owners comp, temporary 15%. Tax as up to 35%. You nailed it, but people say but Mike tax goes to the government. Exactly. Yeah, exactly. But they don’t use call the tax, you’re reserving it for them, but they still see as income that’s not being spent in your business. So that money is just being allocated, but it’s considered by law as a distribution to the owner. Got it. So I mean, in the in this digital marketing world, there are so many people out there teaching
you how to work from home
Massive, massive profitability. And there’s this misnomer that you’re going to be able to retain 60 to 70% profits in a digital marketing agency. And that hasn’t been my experience. Like we’ve got 30 full time employees, you know, we’re always looking for a total compensation, you know, of around 30%. So that’s what we pay ourselves that personal benefits as well as our profitability. Yeah. Sounds like that’s pretty much in line with where you where you want to be ain’t too shabby. We found was there was thresholds based on the size of the business. So brand new business just getting started, you probably are at the at the CES. And that’s the confusion that people have. So when you’re a solopreneur, and you’re generating 100,000 or $200,000 in revenue, and you do all the work yourself, you should expect to be taken home. Yeah, 60% of that stuff ultimate is going into your pocket. But the reason is, is because you’re doing all the work. Now there’s a trap in this if you continue all the work. You will
We’ll stop growing because it’s, it’s riding on your back. I do an example I just did a live presentation, but two weeks ago, perhaps the last live presentation for a little bit right now. But I did a live presentation to 500 folks, and I surveyed them said, who in this room would rather make $100 an hour, and who’d rather make $10 an hour by show of hands, and of course, every hand went up for $100 an hour. So now let me add invariable What if you can only make $100 an hour through your own effort? So in 24 hours a day if you’re exhausted, tired that money stops, but the $10 an hour, it comes in, you know, a waiter walks over to wherever you are in the beach is hands up at $10 an hour every hour into perpetuity, regardless of what you’re doing, but rather half now, it was about 5050 most hands, I say the majority still work toward the hundred because it’s 10 times amount of money. But people start saying money automatic that’s not bad, but I can’t live off that. Then I add one final variable I said what if that $10 an hour could be turned into 20 or 40 or 100? or any number? What is the
There’s no cap on that $10 an hour it will grow over time, but the hundred dollars an hour’s cap, which would rather have now the $10 an hour became the most compelling every hand went up for that, because that that’s unlimited perpetual source of funds. Well that those three scenarios are the definition of a solopreneur. That’s kind of business in our back versus the transitional state 100 versus 10. on automatic, versus the fully implemented clockwork called the clockwork to business, a business that’s running on automatic. If you’re a small business and you’re under 100, to 2000, in revenue and your kind of business, you’re back, you are positioning yourself to be capped, you’re making a 60% or whatever profit which feels great. But get to the next level, you need to start bringing on resources, people, more technology, and those things will have costs associated with it. Therefore, you’re gonna go through that dip process that hundred versus 10, but the 10s at least on automatic, once you understand that 10 is more valuable, then we start concentrating energy on having other people do the work. And the ultimate acid test is if I can leave my
business for a month, or a year believe it leaves my business for one consecutive month. And the business runs on automatic in my absence. And I get that, that 10 or 20 or $100 an hour on automatic. I have a business I can run into perpetuity and automatic and that’s the business we want. No doubt. Yeah. So I mean, that’s a powerful, powerful insight, definitely check out clockwork because it will help you figure out how to put those systems in place so that you can land the clients have the work done, take a little bit of a hit and profitability, still retaining that 30 30% 35% range. Yeah, but you’ve got the freedom to live your desired lifestyle to grow the business more if that’s what you want to do. Spend more time with a family, if that’s what you want to do, right? That’s exactly right. And that’s why we start our businesses, right, we talked about in the beginning, we start for two reasons, financial freedom and personal freedom. And yet the two things we don’t get are those elements. Profit first by taking profit first. I see it now with these 300,000 plus companies, you will achieve financial freedom. The personal freedom is all about the cloud.
work process. And that’s why I document these books. That’s why it was so important to me extract ourselves from the business. The beautiful thing of being a small business owner is when the business can run your absence. absence, you have the right to either go out and do whatever you want hit the beach, or you can insert yourself in the business that gives you the most joy doing the work you like. I love my business. We have clockwork debt, but I love being the spokesperson. I love doing interviews. I love writing books. I love speaking. So that’s where the business has a that’s reinsert myself in the business for my business to to be fun for me. Yeah. So I just want to hop back to that question of profitability. And it’s kind of concept that I should be able to retain 70 75% even as I grow, and even as I scale. Yeah, obviously, you’re gonna put strain on yourself to have to do it yourself in that environment. Or it sounds like there’s also a risk of either not being able to have enough resources to properly serve the client. Right, right. Can you talk a little bit about that, like, excess profitability can also be a danger. Yeah, yeah.
Exactly. So you can go into it just to start, you can be starving the business, right? So you could theoretically cut costs down where you have zero cost and every dollar comes into profit. But then you have no resources delivering the work. There’s a saying, in a business like that you want to cut the fat, you don’t want to cut the muscle. And when you start cutting the muscle, that’s when you bring harm to your organization. So it is a balance. We it goes back to the ROI question. As you bring on more investments in your business and more cost. We have to ask ourselves, is this returning profit? Is it bringing about efficiency? Is it driving the business forward in the way I intended? Or are these arbitrary pot shots, and sadly, allows small businesses to make these arbitrary pot shots and that’s the waste of money. So you can be too profitable, you can put so much money aside that you’ve now choked your business out from getting the oxygen that needs to fuel it forward. It’s a rare scenario that happens is usually the reverse is usually we’re spending every penny. It’s cool. I think this is a really special
conversation because usually when this concept of profitability comes up, people have this notion I’m going to grow a seven figure based business, and it’s going to have 60 to 70% profitability. Yeah. And then when they realize, oh, man, I’m only getting like 20%. They don’t realize that’s actually probably pretty good. And they should continue to grow and expand that profitability. But shangela law is 65% with a legitimately scaled business. Yeah, it’s funny in my own business, so I have multiple companies, but one of my core businesses is proffers professionals. We talked about Mike, he’s a member of our organization. And we’re, you know, it’s a it’s a two and a half million dollar lease last year, we did over two and a half million, and this year will be bigger than that. We expect we intend. But as we’re growing, that we are hypersensitive to profitability, and that’s what our whole organization is about. So as we got to a stage, we took intentional pause at that stage and said, you know, where are the inefficiencies here? How do we increase the profitability to achieve numbers, we want to be as demonstrative but also for ourselves to be
The elite of the elite. And I’m proud to say, you know, we achieve that consecutive years now being, you know, among the elite profitability wise, but it’s a concentrated effort. And the interesting thing is it was never by cutting costs. We never said, you know, we got to lay off staff or something for profitability sake. What we simply said is, with our existing staff, how do we grow the organization even more without taking on more cost? And so we have for a company, about 12 people here, that includes myself, my business partner, but most of us are actually part time. So we’re able to run this very lean and mean and sustain that profitability, hmm. and grow it varies by and I think any organization can do that. I just wanted to show as a demonstrative I think any organization can do it. Once you get to a level. The next level up if you will, is not bigger revenue all the time. It’s really kind of battening down the hatches on profitability and efficiency. Right. And it depends upon your goals, your targets or your course Yeah, ratio.
Just having a nice, tight operation with with high profitability. Yeah, and I hope I’m encouraging people to our goal, I think should be health of an organization. Suppose the size, I believe the right size business will find us. There was a time, I was like, Oh, I want the next Amazon. I want the next Tesla, you know, I was talking like that. Now I’m like, do I really want that? No, I don’t want that size or obligation. I want a healthy business. I want never to worry about money, I want my business to be of great impact. And once I define that, I’m finding the right size business and it still feels like it’s going to be a bigger business in regards to number of employees and revenue. But we might be close to it. I’m very happy where I am. Nice. So at the end of the day, it’s about more more income, more freedom and a bigger impact, right. I think that’s what you want in your business. That’s what we want our business that’s what our agencies want in their businesses. And that starts with with a hyper focus on profitability. Easiest way to do it is to carve out your profit first and then put systems and procedures in place so you can grow without having to do it all yourself.
Yeah, exactly, I would just add more personal income as opposed to income from organizations more personal income to a degree, because I think that’s the way we can be contribution. First, initially, you know, we are providers for ourselves, our family, but ultimately, our towns, our community, our state’s our world, right. And so I think we can achieve that by being fiscally responsible. And I think that’s a necessary thing. And the beautiful thing is it doesn’t need to be complex anymore, you can do with your bank accounts. Yeah, very, very great. I know we’re running out of time here. So just quick implementation items on this. I’ll kind of go through my list helped me add to it. If you haven’t implemented profit first, kind of start with just one bank account. Yep. 1% of your of your total revenue into that as your profit account. At that stage, do you recommend taking a distribution against that on a quarterly basis? Or what do you recommend on that first? Yes, yes. So we start distributions immediately. I’ve been doing this for I said, 10 years is actually 11 years now. I’ve taken 40
For 45 consecutive quarters of profit distributions, my business, and they’ve gotten bigger. And it’s been a life changing experience. But my favorite profit distribution was my first one. It was $8 $8. So I just started out, I was taking 1%, it was a month into it. And there’s $8 in account, or 16. I went took half. And I’m not going to bank them, like, hey, please give me that just singles. I want to, you know, fan myself with $8 and then went to Starbucks, I slid the money across the table, and said, you know, give me the best thing you got, which is Starbucks is nothing. By the way, nothing’s $8 and buy a cup of coffee, and I thought it was the best cup of coffee in my life. For the first time. I didn’t use a credit card, debit card expenses in the business is simply my business saying, Hey, thanks for running me. Congratulations.
That feeling was powerful. And so I encourage people, when you start doing this, start slow, but we’re gonna take a profit distribution as a reward to you. We want to build that emotional muscle around profitability. And I bet you your first distribution will be a proud moment because
Most businesses don’t take quarterly profit distributions, most small businesses, but we should. Yeah, no doubt, take take, take the profit, right, you can take the profit, you only have it.
From there like as you kind of expand this, you want to create the five key accounts, figure out how your allocations are going to go. And it’s probably best to get with a profit first consultant to map that out, right? Yeah, yeah. So we have 450, plus proffers professionals, globally, that work in different industries, different categories, and can be a great service is really beneficial to have an outside set of eyes coming in who’s proficient and knows that kind of get a trainer at a gym, you can go to the gym and work out. But if you don’t know what you’re doing, first of all, you can get injured. Secondly, it’s hard to stay accountable to it because like, Oh, it’s painful and hurts. But a trainer knows the right exercises that you need to do and will hold you accountable. And that’s what I proffers professionals like, yeah, and Michael Tasker is in the group, so you can definitely tap him. He’s awesome. He can help you help you get all this set up. And then
If you want to learn more about fix this next and or you and kind of how how they can plug into you best what’s the best way to do that? Yeah so fix this next comm is definitely place to go to evaluate your business if you want to learn but kind of the the universe of books that I’m working on and get some free content it’s at my website Mike mccalla Wits calm no one could spell that. So the shortcut is Mike motorbike.com I’ve never driven a motorcycle By the way, it was my nickname in high school. So go to Mike motorbike, comm forge it to my site all the content you want is there it’s all free. Excellent. Well this has been amazing. My personal mentors from afar via through your books in your training so it was an honor to meet you in person. I appreciate you taking the time and I know that our members will get great value from from today’s session. Josh Thanks for having me. Have an awesome day. Good luck with the with the coronavirus Yeah, you too wishing you and everyone you know health. Yeah, absolutely.
Outline of This Episode
- [0:52] Mike’s Background in the industry
- [2:36] How Make came up with Profit First
- [5:32] Intercept your natural behavioral path
- [10:00] The problem with the “reinvest in the business” mindset
- [13:43] How to implement the Profit First model
- [17:43] Mike addresses the Coronavirus crisis
- [19:45] Suggestions for financial planning for small businesses
- [22:38] Details about Mike’s NEW book Fix This Next
- [27:37] The ideal profit allocation for an agency
- [29:50] Transition from solopreneur to entrepreneur
- [34:32] Why excess profitability can be a danger
- [42:00] Connect with Mike Michalowicz
The profit-first model explained
Most people start their businesses with a dream of financial and personal freedom. Mike shared a startling statistic: 83% of small businesses and surviving check-by-check. Many don’t know how they will meet payroll the next week. How can 180 million small businesses around the globe be unable to make a profit? It’s because they aren’t prioritizing profit.
With how the COVID-19 pandemic is affecting small businesses, it’s more important than ever to focus on profitability. Mike flips the foundational formula that we all know on its head. Instead of operating under the assumption that Sales – Expenses = Profit, his formula is: Sales – Profit = Expenses. It is a game-changer.
Intercept your natural behavioral path
Mike has observed that most people revert to bank balance accounting—they don’t know their metrics. They simply log into their bank account and if they have money, they spend it. It’s Parkinson’s Law—as your bank account grows, your consumption of those resources grows to meet the supply. If the account is low, they have to wait for a sale.
You need a system set up to intercept that spending behavior. The easiest way to intercept and leverage Parkinson’s Law is to separate your business account into 5 different accounts:
- Income account: the money the business makes flows through this account.
- Profit: Pay the profit account first.
- Owners Pay: Pay yourself a salary for the work you do.
- Tax Account: Account for the taxes the business will have to pay.
- Operating Expenses: After all of the other accounts have been allocated to, you operate your business with the remaining money.
Listen to the whole episode as Mike and I discuss this concept and how to roll it out in detail.
What is a solid business plan during the Coronavirus crisis?
We are in the thick of this crisis now, and with many small business owners already living paycheck-to-paycheck, what can they do to navigate the next weeks and months? Mike believes there will be a negative impact on the economy and we will likely go into a recession. But he points out there are some pluses to being a small business. Bigger agencies will inevitably lose clients—and we may lose some as well.
BUT we can look at this as an opportunity. Larger agencies will lose some of their clients and those clients may be looking for a smaller—possibly more affordable—agency to handle their business. This is where you need to be proactive with your marketing. As larger agencies are cutting ad spend to mitigate their losses, you can snatch up the ad space at a fraction of the price.
You HAVE to look at this as an opportunity for your business. If you concentrate on the possible devastation, then you will inevitably struggle. Focus on marketing and sales, and if your operating expense budget is suffering, find ways to tighten things up and become more efficient—but never lose that profit-first mentality.
You can be TOO profitable
I get it, you must be thinking—”Josh, that’s ridiculous. How can you be too profitable?”. New entrepreneurs launch their businesses thinking they’ll rake in a nice 60-70% profit. If you’re a solopreneur just starting out, sure—it’s doable. After all, you’re doing all of the work yourself. But it’s not scalable. At some point, you’ll stop growing because one person can only do so much.
As you transition your model from solopreneur to a full-fledged business, you’ll likely have a dip in profit for a while—it’s completely normal. There is a cost to bringing on more people, resources, and technology. You don’t want to starve the business by pushing for an unrealistic profit.
As you streamline your business, you can level those numbers out to a healthy 30-35% profit (profit pay, owners pay, and tax expenses). Mike points out that it’s far better to have a business that’s profitable and healthy where you’re not working all-day, every-day. You want to build a sustainable business model that gives you the personal and financial freedom that you desire.
We talk about Mike’s model in detail, as well as creating a more efficient and effective business that focuses on profit first. Listen to the whole episode for great resources that Mike shares.
Resources & People Mentioned
- BOOK: Extreme Ownership
Connect with Mike Michalowicz
Connect With Josh Nelson
- Josh’s Coaching Page on Facebook
- The Agency Success Facebook Group
- Seven Figure Agency on YouTube
- Josh on Twitter: @joshnelsonimc
- Josh on LinkedIn
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