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Mike Michalowicz, Founder, Speaker, Author and Advisor
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From Bankrupt to Bestseller: Turning Self-Improvement into Bestsellers
How Mike Michalowicz helps businesses find success by examining his own failures.
Brutally honest and refreshingly genuine, Mike Michalowicz has helped hundreds of thousands of entrepreneurs tackle the world of business using unconventional, but effective methods.
The approachable, actionable processes he’s outlined in books such as Profit First and Clockwork infuse both soul and skill into the sometimes stodgy realm of business advising, boosting startups and small businesses around the world. (Our very own Nathan Chan swears by Michalowicz’s Profit First approach to managing cash flow.)
As Michalowicz continues learning and sharing his understanding of the business world, his own role as an advisor is growing ever larger. He’s even building a growing network of accountants, bookkeepers, and coaches who provide financial coaching and support to entrepreneurs around the world.
One of the most exciting qualities of Michalowicz’s work is how rooted in real life experience it is, and that doesn’t mean he’s just trumpeting his own achievements and methods. Sure, he’s started and sold multiple businesses. But his successes haven’t inspired his career as an author nearly as much as his utter, dismal failures.
The Folly of Youth
Ah, the thrill of success as a budding entrepreneur. Michalowicz is a lifetime entrepreneur with many impressive wins lining his portfolio. But in retrospect, some of his early efforts were not nearly as successful as he thought they were at the time. These days, he’s not so thrilled with his early years.
On paper, his businesses made a lot of money and influenced a lot of people. It just turned out his measurements of success were all wrong. “I got caught up in the vanity metrics…how big my business was revenue-wise and how big my business was people-wise,” Michalowicz says.
With those as his benchmarks, he’d approach other entrepreneurs and ask about their own vanity metrics, sizing up their revenue and team size and then fighting to stay on top. But even when his own numbers were high, his businesses weren’t thriving where it truly mattered.
“I didn’t have an appreciation around money. I had arrogance and ignorance,” Michalowicz says, “and together are a deadly combination.”
Despite growing revenues, Michalowicz’s businesses showed horrible profits and cash flow. This made it an extremely stressful time, and Michalowicz found himself begging clients to pay early just to cover basic expenses.
“I foolishly thought that if I took care of , the rest of the business would take care of itself,” Michalowicz says. It didn’t, and now he’s of the opinion that revenue is actually a stress point. The more revenue a business does, the more stress it creates.
Michalowicz’s skewed perspective of revenue and money wasn’t the only factor in his ultimate demise. It was when he sold his businesses that Michalowicz started down the path of false success and security, a path that ultimately led to him losing it all.
After selling his businesses, Michalowicz dubbed himself an angel investor. But his investment practices were hardly angelic. It only took two years of brazen investments to leave his bank account empty.
Ten failed companies later, Michalowicz had gone from millionaire status in his early 30s to penniless. “I prefer to go by the ‘Angel of Death’ because I was so bad. I was so out of place, in a zone that wasn’t my skill set,” Michalowicz says.
Rebuilding a Career With Heart
As cringeworthy as his entrepreneurial failures were, what came next for Michalowicz was even more humbling—facing his family.
“Emotionally, I hadn’t accepted it yet,” Michalowicz says. “ I had to face the music. I told my family…and my daughter ran out of the room. She ran to her room, grabbed her piggy bank, and told me. ‘Daddy, I’ll support the family.’ That was a moment of shame.”
It was also a turning point for Michalowicz. It didn’t result in instantaneous change, but it did plant a seed—one he remembers to this very day. After this moment, he began to reflect on his own life. He came to recognize how his arrogance and cockiness played a role in his downfall and he set out to fix his own errors.
“Every book I write is about, foundationally, fixing myself. There’s a saying, ‘We teach what we need to learn,’” Michalowicz says, “and the books I write, I hope they serve millions of entrepreneurs. But, ultimately, they’re about fixing myself.”
But Michalowicz didn’t find his passion for writing that quickly, or easily. Before that epiphany came some hard times. Between drinking, being diagnosed with functional depression, and struggling with insomnia, Michalowicz faced his darkest days before the dawn.
“I removed myself from any social interaction. I hid away…I started drinking, and I couldn’t sleep,” Michalowicz recalls. “I remember looking forward to falling asleep, and hoping that I’d never wake up…because I didn’t want to face the next day and go through this dark cloud.”
But another turning point was on the horizon. One day, while chatting with some friends, Michalowicz mentioned his struggles. In response, someone keeping a journal in lieu of therapy. Michalowicz tried it out and came to realize that journaling was the outlet he needed.
“I used to think I had to write 10 positive affirmations, but the objective was to write whatever came to mind. It became a very therapeutic process for me. … It became a life-changer,” Michalowicz says.
He began to write daily, working to vacate his mind of negative thoughts and relieve the pressure built up from anger and disappointment. Before long, Michalowicz rediscovered his focus and began to move forward, out of the fog of depression and failure.
Writing consistently also reawakened a dormant passion within Michalowicz. He’d always wanted to be an author.
It was always his answer to both questions of, “What would you do if you had all the money in the world?” and “What would you do if you had none?” He’d believed for years that if your answer to both questions was the same then you’d discovered what gave you purpose and sustainability, a rare combination in today’s world.
Living His Dream
So Michalowicz followed his passion and began to write. He had the means and experience to tell his story, but it took him a while to own the title.
“When people asked me what I did, I said I was an entrepreneur who was writing books,” Michalowicz says. “One day, I said, ‘If I’m going to be an author, I’ve got to say I’m an author.’ From that point, I was really consistent with it.”
As he explored his new world of authorship, Michalowicz realized that writing was a way for him to understand a concept. As he researched and investigated new topics, he’d create simplified ways of approaching them, which he then turned into books.
For example, to Michalowicz, accounting has always been a tough subject. His response to that perplexity was Profit First, in which he defined a new way to approach business accounting. His book Pumpkin Plan is a response to his struggle to grow his businesses, and Clockwork challenges workaholics to automate their businesses.
“My most recent struggle is the pride I had in being a ‘grinder’ or ‘hustler,’” Michalowicz says. “Now, I don’t associate pride with that; I associate inefficiency.”
Like Clockwork
As passionate as Michalowicz is about his businesses, he no longer wanted to be the blood pumping through it anymore. Instead he wanted to provide its thought and its spirit, while leaving the day-to-day heavy lifting to someone else. This goal inspired him to figure out a new process and, of course, write a new book.
“I believe there’s a Maslow’s hierarchy of entrepreneurship, just like there is for basic needs,” Michalowicz says. “I believe there’s three versions for business owners, and the foundational one is profitability. … The next level up is recovery of time.”
That’s what Clockwork is about—the recovery of time. He worked on Clockwork for many years, and when he completed his first transcript, he threw it out. He didn’t think it was ready and started from scratch.
Clockwork is based on interviews with and research into several successful companies who’ve systemized important processes. Throughout his research, Michalowicz also studied nature, specifically beehives.
“ follow simple rules to scale, and one became the essence of the book,” Michalowicz says. “I call it the QBR, and it stands for the queen bee role…and the queen bee isn’t the most important insect in the hive, herrole is.”
His explanation was this: Within a beehive, every bee knows the priorities … not the most important person, but the most important duty, or task. That top priority is to lay eggs, therefore sustaining the life of the colony. Although the other bees don’t perform this task themselves, they know to protect and support it at all costs. That means their priorities are as follows: First is to, to protect the queen bee role (QBR), and second, to do their primary job.
In Clockwork, Michalowicz outlines how this translates to business. He explains that every business has one QBR — such as a doctor’s office performing check-ups or a coffee shop turning out lattes — and in order for the said business to be successful and efficient, every person (whether or not they’re the doctor or barista) must recognize the QBR and protect it.
For businesses looking to implement this system, Michalowicz shares how he identifies the QBR for his businesses. “I take six sticky notes and write down the six most important things the does,” Michalowicz explains. “Using deductive logic, I remove one at a time based on what’s least important. left is the QBR.”
According to Michalowicz, the key to using the QBR system is to “identify, educate, and act accordingly.” Every business experiences bottlenecks, but when you keep your QBR well-oiled and protected, it’ll run efficiently—and keep your business efficient, too.
Securing Profit First
Michalowicz’s Profit First is another self-realization-turned-bestseller.
“For years, my accountant would tell me to read my income statement…all these different documents. He’d tell me to know my metrics, to know the health of my business,” Michalowicz says. “I never looked at any of those documents.”
Instead, his natural behavior was to access his accounts, assess his money, and take actions accordingly. He was never going to change this behavior, so he figured it was better to recognize that and develop a system that worked, and integrated these habits.
In response, he developed Profit First, a bank-based system that is built on common natural behaviors. He knew he wasn’t the only one who approached accounting in this haphazard way, and he wanted to help more small business owners feel better about their money.
To apply the system, you start with an income account. This account serves as a distribution platform for all your other accounts, which feed different business purposes. “From the income account, you allocate funds to different accounts: profit, owner compensation, taxes, and operating expenses,” Michalowicz says. “These are the foundational five. … I believe many businesses will have more specific accounts, such as payroll or capital expenditures.”
According to Michalowicz, most businesses have between eight and 12 accounts. His has 11, and the system has helped him understand exactly what money he has and needs to run his business. Profit First offers clarity on how money will be used, before spending a penny. It gives every dollar a purpose, and prioritizes setting aside funds as profit.
He attributes the psychology behind it to Parkinson’s Law. Parkinson was a 1950s behavioral theorist who studied how humans utilize resources. “He noticed that, as a resource expands in availability, so does consumption,” Michalowicz says.
Parkinson’s initial observation was about time, but Michalowicz found this is true for money, too. He observed that as income increases, so do expenses. On the other hand, when income decreases, people become more efficient with their money, because they have less.
The Profit First system helps entrepreneurs prioritize their money where it’s needed, not where it’s wanted. By paying out a certain amount to your “profit” account first, then to taxes, then to expenses, users avoid spending money they don’t have.
“The irony is, if we take the money out and don’t even see it, we live within the constraints of what’s leftover,” Michalowicz says. “If you want to protect money, you need to protect it from yourself.”
Following His Own Advice
Michalowicz’s books are hardly an academic exercise. He applies his systems to his own businesses, too. He’s currently going through the Clockwork-based process of removing himself from his business and appointing new QBRs. So far, he’s about 80 percent removed.
“The next stage is impact, and I think I’m going to write a book about that. I believe the final part of my ‘Maslow’s hierarchy of entrepreneurship’ is soulfulness, or impact,” Michalowicz says.
He believes a business can serve a great purpose, either touching people deeply, or touching a broad audience, or a combination. “I think we need to be clear on that impact works and have our business serve that purpose. That’s the ultimate way to grow a healthy business and care for communities.”
His books have also spawned brand new opportunities, such as Profit First Professionals, a global group of almost 300 accountants who are working with entrepreneurs to implement the Profit First system. So far, they’ve impacted over 75,000 people with this fresh approach to accounting—and the number is growing.
“ QBR is the messenger, spreading the word about Profit First,” Michalowicz says. “The more people that are aware of it, the more impact it can have on the world, and the better it is for our business.”
Part of protecting his QBR is commissioning others to spread the word about Profit First. Michalowicz can’t be the only one.
“So, now, many members are speaking. Three weeks ago, we had 30-plus presentations in one week. … I only did three of them.” Michalowicz says. “Profit First is spreading faster than ever.”
Key Takeaways
- The actions that led Michalowicz to lose millions and hit rock bottom
- How Michalowicz found his niche and rebuilt his career after 10 failed companies
- Why working too hard can signal a lack of efficiency
- How to manage cash and avoid spending money you don’t have
Full Transcript of Podcast with Mike Michalowicz
Nathan: The first question that I ask everyone that comes on is how did you get your job?
Mike: My job as an entrepreneur or a job otherwise?
Nathan: Yeah, I guess the job that you’re doing today. How did you find yourself doing the work you’re doing today?
Mike: Yeah, so I mean, so what I do today is I am a full-time author. I mean, that being said, I do own some businesses, too, but my primary function, my primary job is to be an author and how I got the job was I’ve been a lifetime entrepreneur. Had some great, you know, “successes”. I’m putting air quotes around it because I thought they were successes, I sold these businesses, they made a lot of money, but what happened was I didn’t have an appreciation around money.
I had arrogance around money and ignorance, and arrogance and ignorance together is a deadly combination. I lost all my money through just pure stupid, foolish moves and a cockiness that was undeserved and it resulted in near bankruptcy, but it also spawned a spark for me in that, you know, there’s a popular saying that if you had all the money in the world, what would you do?
Well, I believe theres’s a complementary saying and these two run in tandem. If you had all the money in the world, you know, we’d do something but perhaps something that’s whimsical. “Yeah, I want to write poetry because I have all the money in the world,” or “I want to sit on the beach and drink margaritas all the time.” Yeah, those are outlets but I don’t know if they serve a mechanism for sustainability. So I believe the second question is if you had no money in this world, what would you do?
And when the answer is the same for having all the money in the world or no money in this world, when the answer is the same, now you’ve found something that serves purpose and a greater calling. Something that your heart desires to do but also has sustainability because there’s a financial resource behind it and for me, if I had all the money in the world, I was like, “One day, I’d love to be an author.I think it would be so cool.”
And then when I had no money, I said, “This is also a means to an end. Like this can support me,” and so when the declaration was being a small business author in both cases, that’s when I said, “Okay. I’m going all in on this,” and I did. And that’s what my job is today.
Nathan: Awesome. Amazing and, like, I heard you speak at an EO event. You spoke about your “Profit First” methodology and, man, that was a very life-changing talk for me and I’ve implemented “Profit First,” made my life so much easier because, you know, we’re a bootstrap startup. We haven’t raised any capital so, you know, every single dollar that we generate in revenue, we have to make that work.
So I guess before we even get to that, though, and I really want to share this with our audience because we’ve never spoken with anyone around cash flow and management of cash and how to manage your money, especially when you’re just getting started or your business is growing. It can be tough and I know that, you know, a lot of people use revenue as a vanity metric and how big your team is as a vanity metric and how big others’ teams are and how much revenue other, you know, companies are doing or your competitors are doing or how much capital your competitors have raised.
So before we even get to that, you know, you said that you did, you know, start a few businesses and you ended up selling them and you made a lot of money and you lost that money out of pure cockiness because you didn’t value it or respect that. I’d love to go a little deeper on that. Can you tell us the stories around what exactly happened and the businesses that you were running?
Mike: Yeah. So I got caught up in the vanity metrics, those two specific ones that you said. How big is the business revenue-wise? How big is the business employee wise? Which is the old, you know, how big is it question. A classic vanity question and what I was focused on when those were my measurements, I would go to, you know, other entrepreneurs and say, “Listen, I just passed a million.”
And they’d say, “Well, we just did two million.” And I’d go “Oh my gosh, I need to do three million.” And I’d do anything to keep driving that number. When someone would say they had 10 employees, I was, like, proudly pounding my chest about 15 employees and then when someone said they had 20, it was like, “I need to get to 25 or 30.” And what I foolishly thought was if I take care of those numbers, the rest of the business will take care of itself.
In fact, you know, there’s that saying revenue is vanity, profit is sanity, and cash is king. I have a phraseology, right? I believe that revenue is really stress points. The more revenue a business does, the more stress it puts on the business because revenue is an obligation. Every time I sell something and generate revenue, I have an obligation to serve that or deliver product based upon it.
The more revenue I generate, the greater my obligation to my clientele. That’s stress. I believe what offsets that, the balance, the yang to that yin is profit and if I have tons of stress with no profit, tons of revenue with no profit, the stress points are so high that I was just sitting, you know, kind of banging my head against a corner of the wall, which I was.
What happened, though, is companies came in…in both instances I was in the technology space, technology services. One was in setting up computer networks, the other one was in computer crime investigation and both those businesses, high-growth revenue, horrible profit, I mean they were losing money, extremely stressful.
I was surviving check by check, you know, playing cash flow games, stretching out my vendors, not paying them on time, begging clients to pay me early just to cover the cash flow, and companies came in and bought both of them. And arrogantly I said, “Oh, clearly they’re buying my companies because they see my genius.” No, they were doing roll-ups. They were doing strategic acquisition saying, “Hey, if we buy this, you know, computer crime investigation company and 10 others, we can minimize their bloated costs, consolidate it, and we can actually run very efficient businesses.”
So they were very strategic in what they were doing. I didn’t see it but I also took money off the table, which affirmed my cockiness. I was like, “Oh, see? They’re paying me for this.I’m clearly a genius. I’m going to amplify this process and I’m going to start pumping and dumping businesses left and right.” I actually became an angel investor. I now lovingly reflect back upon those days and no longer call myself an angel investor.
I prefer to call myself…and I shared this at the event. I prepare to go by The Angel of Death because I was so bad. Like I was so out of place. So in a zone that was not my skillset and I started approximately 10 companies simultaneously, disparate industries, nothing I was familiar with, putting money into them, and these businesses all failed because, you know, I was inserting myself in ways that was inappropriate.
I didn’t have any knowledge and the entrepreneurs I was investing in weren’t entrepreneurs. They had never started businesses before. They just had an idea. So I was just betting on ideas backed by people with no experience and one really ignorant, cocky person. Me. Well, it took about two years and all those businesses were out of business and all the money I’d gained, and I had literally become a millionaire in my early 30s, everything was gone.
I mean every penny and I had to come home, face my family, who I’d been shamefully lying to up to this point by omission, I didn’t tell them how bad it was, nor did I even really acknowledge it to myself. I saw the money going away so logically I knew my bank accounts were depleting at a crazy fast rate, but emotionally I hadn’t accepted it yet.
Well, at this point in my life it was around 2008. There was nothing left. I had to face the music and I told my family. I was sobbing in front of them, ashamed of myself. I actually told this story at the EO event you were at. My daughter ran out of the room as I was telling this story, she was nine years old at the time.
I thought she was running away, which that feels appropriate when…you know, when devastating news is delivered, when we hit the darkest moments in our life, the solution is, I think, to run away. Like, you know, go where no one knows us. But as you know, my daughter wasn’t running away. She ran to her room, grabbed her piggy bank, came back to me, and looked at me, you know, with these big eyes in my face and said, “Daddy, I’ll support our family.”
And that was a moment of shame and embarrassment and frustration with myself. Also pride in her. I’ll never forget it. The piggy bank was wrapped in duct tape and rubber bands, not because it was broken. Actually, it was pristine condition but she wanted to block the stopper at the bottom. She wanted to ensure that no one ever took a penny out of there because she was saving the money for what she wanted, which was a horse and she felt that most valued goal in her life was insignificant compared to saving her father.
So I still choke up about it. That moment became a turning point for me and, by the way, it’s not instantaneous. It’s not like I said, “Ah, I know all the answers to my shortcomings,”but it did plant the seed. And it took me years. Over time, slowly I started to reflect upon my life and the arrogance I had, the cockiness, the ignorance and started to really investigate that, and set out to fix my own errors, my own problems.
So the ironic thing is all the books I’ve written…I have another one coming out, too. Every book I write is always about really foundationally fixing myself. There’s a saying, what we teach is what we, in fact, need to learn and the books I write, I hope they serve thousands, you know, hundreds of thousands, millions of entrepreneurs is my dream but honestly, it started because I’ve got to fix myself.
So that’s how I became an author.
Nathan: What ended up happening next after, you know, you kind of hit rock bottom and you said you’d come close to bankruptcy?
Mike: Yeah, so this is also a dark period in my life but I think it’s important to share because I don’t think I’m the only person that’s faced this. When I was facing bankruptcy, I started to drink. I went through depression. A mild form of depression called functional depression. Functional depression is where you still have the ability to function to some degree but I removed myself from any social interaction.
You know, I hid away in the corner effectively. I started drinking a lot and also became an insomniac. I couldn’t sleep and kind of slogged along. You know, I remember looking forward to falling asleep, begging I’d fall asleep because I couldn’t, and when I fell asleep, hoping that I would never wake up.
This is not suicidal by any stretch of the imagination but I wouldn’t wake up because I didn’t want to face the next day and go through this dark cloud again, and the process would happen over and over. You know, another turning point for me was I was talking with a group of peers and this one guy, I told him what I was going through and he looked at me, he said, “You know, you really need to start a journal.”
Thank God he didn’t say the word diary, by the way, because I think I would have never done it but basically a diary, and what I came to realize is the diary is an outlet for just allowing your thoughts to come out. I used to think I had to write, you know, 10 positive affirmations. Sometimes you see on Facebook where people write like, “I’m going to write 1 good thing a day for 50 days.”
But what the objective here was actually just write whatever came to mind. Anger, frustration, disappointment, any emotion and it became a very therapeutic process for me. I started writing constantly, just vacating my mind of thoughts and that became a life changer for me.
It became my therapy. Just allowing myself to relieve that steam pressure buildup of the anger and disappointment I had in myself and it started bringing back focus. I started to move forward again. That’s where I really started to go more and more all-in on being an author and starting to own that title of being an author.
This is just one last component. Once I declared I was going to be an author, like this is what I want to do, I realize now in retrospect, like, I didn’t really own it. When people asked me what did I do, I’d say, “Oh, I’m an entrepreneur.” Which I didn’t have a business at the time. I was just an author but I would say, “I’m an entrepreneur who…I’m writing a couple books.” And then one day, going through this kind of self-assigned therapy through journaling, one day I said, “You know what?If I’m going to be an author, I’ve got to freaking say I’m an author.Like that’s who I am. Everything else is secondary to that.”
And with that epiphany, things really started to change just because I behave consistently with it. I started really actively being a full-time author and for me, it’s been a dream come true. It’s the dream job for me.
Nathan: Yeah, wow. Amazing. So just to get this straight so I’m 100%on the same page, you know, when things got really, really dark and stuff, you rebuilt from journaling and writing?
Mike: Yeah. Yeah, isn’t that funny? Like writing became a therapy and it continues to be. And, you know, I don’t want people to be creeped out. Like, reading a book saying, “Oh my God, this is the guy’s therapy I’m reading?” It’s not that way. It’s not.
Don’t worry, you’re not…you know, you read my books, you’re not going through some dark journey with me. In fact hopefully, people find it to be a very engaging, fun, light, easy read. Simple but really profound ideas is my goal but the essence of it is I’m just trying to fix pieces of myself, and I realize for me to understand the concept is I really need to simplify it.
Like accounting. It’s complex, it confuses me, and it tires me out. It frustrates me and therefore I avoid it. So when I wrote Profit First, you saw me present on that, and when I wrote Profit First it was because I needed to fix my struggles with accounting. It was just too much and I came up with a super simple system that just worked with who I am, and that’s what I did with all my books. Pumpkin Plan was I was struggling with growing my businesses and it was too hard to go through, you know, business coaching and all that stuff.
So I made my own little system and sure enough, it worked. And my newest book’s called Clockwork. It’s about recovering time. Like my most recent struggle that I’ve confronted over the last six years is workaholism. Just, you know, grind it out and actually the pride I had in being a grinder, a hustler and now I don’t associate pride with that.
I associate inefficiency with that. I want my company to run itself. I don’t want to be the catalyst or driver behind it. I want to be the thought and the spirit and the soul behind it but not the heartbeat. And once I had that realization, I started writing the book as the solution I had been seeking for myself. That book, by the way, Clockwork, the one that’s coming out, that took six years to write because I have to live through it.
I have to figure it out for myself. I have to test it on others. I have to interview countless people and only until it’s right do I think it should go to the next stage and I should share it with other people.
Nathan: Yeah, wow. Amazing. So if we could talk about Profit First because that was a life-changer for me and then let’s talk about Clockwork, because obviously, yeah, you’ve written four books and obviously we can’t talk about them all. And, yeah, I didn’t…I’ve heard about The Toilet Paper Entrepreneur and also Pumpkin Plan but haven’t read those.
I will now just after speaking with you because I didn’t understand that these are all different systems that you’re I guess inventing and creating to make life easier as an entrepreneur. So let’s talk about Profit First. You know, how does that work? Why does that work? And why should people use Profit First as a way of managing cash flow?
Mike: Yeah. So Profit First was this realization I had about myself and I wonder, Nathan, if you’re the same way and many of the entrepreneurs listening. Is my accountant for years would tell me, you know, read your income statement, your balance sheet, your cash flow statement, all these different documents. Know my KPIs, my key performance indicators.
Have a budget. He’d even tell me I’ve got to know my metrics. Like, you know, what’s the operating cash ratio? What’s my inventory turn? What’s my cash turn? Like all these different things to know the health of my business and ironically, he said the one thing you should never do is look at your bank accounts because that doesn’t reflect the health of your business.
It’s these other things that reflect the health of your business. And tie all these sheets in together and now you have the map to your healthy business but here’s what I really did. I said, “Thank you” and then I never looked at any of those documents, and even today I’ve never been able to read a cash flow statement. I really don’t know how to read it. I don’t really know how to read a balance sheet. I’ll pretend it and even an income statement, I’ll say I know how to read it.
Like there’s the profit, there’s the expenses, there’s the income but I don’t really understand the consequences of it. But what I do know is that when I look at my bank account, based upon the balance I take actions. If there’s money, I spend it. If there’s not, you know, I panic and so I realized my natural behavior is to log into my bank account, see the balances, and then take actions accordingly.
I also realized changing my behavior is impossible. My accountant has been telling me for years to do something different and I don’t. Therefore, for me to think that one day, magically, I’m going to become this accounting guru is false. So Profit First is a system that captures our natural behavior. Specifically, it’s a bank-based system.
What I do is I log into my bank account now and I have multiple accounts. It’s based upon a concept called the envelope system where you pre-allocate money to an intended purpose. Money comes into my business, it goes into an income account, the sole purpose of the income account is to be a distribution platform, a serving tray, if you will.
Just like when you serve a meal. You know, you don’t tell your guests, “Hey, just everyone eat off the serving tray. Every man for themselves.” What we do is we apportion to every person, every guest at the table, to their plate a portion of the food off the serving tray. A serving tray’s purpose is to serve, not to feed our appetite. The plates are what feed us. So in our business, our income account is a serving tray.
Money comes in there for display purposes. We then carve it up or allocate it to these different plates and there’s a plate-like profit, a reward for the shareholders, owner’s compensation to pay the most important employee in the company, which is the owner-operator, taxes or tax liabilities, and operating expenses, which is how we run our business. And these are the foundational five, income plus those other four, and I believe many businesses, as you get more sophisticated at Profit First, will have some additional specific accounts.
Maybe a payroll account for your employees, maybe you’ll have a CapEx for capital expenditures. Big machinery and stuff like that. My own business has about 11 accounts now. I find most businesses end up…
Nathan: Oh, wow.
Mike: Yeah. I think most businesses have between 8 to maybe 12. More than that it gets unruly. I think most businesses need to have at least five, maybe you can have more, but by doing this what happens now, Nathan, is money comes into my business, it came in today, and then on a periodic basis it just piles up on that serving tray. I allocate it to these different accounts.
Based upon what I see in these accounts, I know the action to take. I know how much I can spend on my business. Actually, we took owner distributions today so I knew exactly how much was…
Nathan: Oh, wow. Congratulations.
Mike: Thank you. Thank you. By the way, this is the weekly distribution, that owner distribution. The profit distribution came out a week ago because that was the end of our quarter. We’re on the calendar year. So April 1st, the profit distribution came out and what’s interesting is the owner distribution supports my lifestyle. It’s my expected income and, you know, I do everything to grow that over time, growing my business, and then the profit is a bonus on top of it.
But what it does is it controls my expense. I know exactly what I have available to run my business on. I know exactly how to manage the business because this is how much money I have to do things. So it just brings clarity on the use of money before I spend a penny.
Nathan: Yeah, so what was so life-changing for me when I heard about the system, implemented it, it’s amazing, we still use it today is it gives every single dollar that comes into your business a purpose, and before that, you spoke about I think it was Parkinson’s Law.
Can you share anything around…
Mike: Yes.
Nathan: …Parkinson’s Law? I thought that was, like, wow. Epiphany for me because I was the same. I got it, man.
Mike: Yeah. Parkinson’s Law, that’s the big one. So Parkinson, just to give you a little history lesson, Parkinson was a behavioral theorist, lived in the…at least he came up with his theory in 1950 and what he was studying was how humans utilize a resource, and what he noticed is that as a resource expands its availability, so does the consumption.
His initial study was around time and how time works is if I have more time available to do something, if I give you a month to complete a project, it will likely take you a month. If I give you two days to complete a project, you might get it done in two days because now we’ve compressed the resource of time and so we hustle to get it done. It’s funny. If you interview most people, say, “Who’s good at cramming for tests,” you’ll find that actually most people say they’re good at cramming for tests.
Well, no. We’re not good at cramming at tests. We’re just naturally living into Parkinson’s Law. As the resource of time depletes, we start becoming more efficient in its utilization because there’s less time left. Well, his law or theory applies to all resources. If you like cookies, for example, and I put one cookie on a cookie plate in front of you, you have the propensity to eat one cookie.
If I put a plate of 15 cookies in front of you, you have the propensity to eat more than one cookie. Maybe three or four, maybe five or six, maybe over the day you’ll eat all of them because the resource has expanded, so, therefore, consumption expands. And the application’s true for money, too. When we look at that one bank account, that’s all the cookies right there on the table.
What do we do? We consume it and anyone listening to the show maybe can relate to this. Have you noticed, listener, as your income increases, it’s almost uncanny that your expenses seem to increase at the exact same rate. Every time you think you take a step ahead, your expenses instantly are catching up to it. You can never get ahead. If you’ve ever experienced that or you feel that way, that’s Parkinson’s Law.
Parkinson’s Law is the expansion of a resource results in the expansion of demand. So, Profit First becomes our friend here because it leverages the other side of Parkinson’s Law. What the other side is, as a resource depletes in its availability, we become more frugal in its use because clearly there’s less of it. Like if I only put one cookie in front of you, you can’t eat two.
You have to only eat one because there is only one, but the other thing is we become more innovative. We find ways of stretching it out. You know, you break that cookie into little bits and you have a little nibble here, a little nibble there. With money, if you reduce the amount of money available yes, you’ll spend less but you’ll also say, “Ah, maybe I don’t need new furniture.Let me buy used furniture. Maybe I don’t need a new computer.Let me see if I can get one for a company that’s upgrading their computers and get one for free.”
We start looking for innovative ways to get the same results at no or little cost and that’s where Profit First really works for us. In practice, money flows into our business, we immediately take or carve up the money in these different accounts, doing this order, by the way, of profit first, then paying yourself, then the tax, last thing you do is operating expenses, and there’s a behavioral reason behind that.
We want to reward ourselves with profit, reward ourselves with owner’s compensation, protect ourselves with taxes, meaning we don’t have to worry about it, and then serve the business last with the operating expenses. And when you carve the money up this way and take your profit first, you’re restricting the amount of money flowing into the operating expenses, which now leverages the positive side of Parkinson’s Law, where a constrained resource, money in this case, results in frugal use.
We’re much more selective in how we use that money and we become very innovative in how we use that money.
Nathan: Yeah, man. This is, like, so true and I always wondered, like, you know, I remember before I started Foundr and I used to work in a nine to five day job that I absolutely hated. I always noticed whenever I got a pay increase at my work that it was never enough. I’d always find a way to spend it.
Mike: Never enough, right?
Nathan: Yeah. Yeah, yeah.
Mike: Yeah.
Nathan: It’s crazy.
Mike: So, you know, the definition of that is you are a human being. So congratulations. Welcome to the race of humanity. Right? And that’s true for all of us. There’s never enough money. That’s why employees, business owners, and everyone and their mother and in between constantly have to come back to the coffers looking for more.
So the irony is if we take the money off the plate and don’t even see it, we live within the constraints of what’s left over. That’s how in many countries if you’re an employee, your taxes are taken out of your paycheck prior to receiving your net pay. As a result, most people pay all their taxes on time because it’s been taken out in advance. But if they pay…you know, if they want to save for retirement or something like that, they seem to never have money left over because all the money is coming into their pocket and then they decide well, maybe I should try to save some.
But you know what? Let me take care of my day to day expenses, first. So if you want to protect money, you’ve got to protect it from yourself. Remove that profit, hide it before you even really touch it, effectively. Remove those taxes, hide it before you touch it, and sure enough, your lifestyle will adjust to live off the remainder.
Nathan: Yeah, no. This was really life-changing for me, guys, so I’m really excited to have Mike on to share this with you and for me, another big thing, a big epiphany, was once you start using this system, when the money has the purpose…because for me, I’m a growth junky like most entrepreneurs. So growth, growth, growth. Any amount of money that we have coming we just keep putting it back into reinvest, to keep growing and now that money has a purpose, we can still reinvest for growth but it’s allocated, which just makes my life so much more easier and less stressful.
So this is amazing, Mike. Thank you so much. So…
Mike: Oh, thank you.
Nathan: …I guess before we move on to the Clockwork book, I just want to know, like, how can people get started? I know you have, like, a little template or something that, you know, helps people with allocations or, like, how can people get started?
Mike: Yeah, so I’ll give you an actionable tip you can take without, you know, needing to download or access anything, but there is a download. I have a one-sheet, it’s free for download. You don’t even need to sign up. You can just go to my site and get it. So my site’s mikemichalowicz.com. I know that’s a real doozy to spell so there’s a shortcut. Go to mikemotorbike…that was my nickname in high school.
So mikemotorbike. You go to mikemotorbike.com and it’ll bring you to my site. Go to the resources page and on there there’s a “Profit First” section and you’ll see the quick start guide, the one-sheet, and it walks you through the steps of Profit First. So it’s there, it’s a free download, it’ll get you started and hopefully inspires you to read the book if you so desire.
But the action you can take without even downloading that resource, and there’s no excuse not to do this today, you can call your bank and set up one account. Set a savings account up and once you have that savings account set up, start allocating 1% of your income. It’s such a small amount of money that it won’t affect your business. I’m saying if you take in $10,000 or $1,000 or whatever the number is, let’s say $10,000, 1% of $10,000 is $100.
We take that $100, we put it into a profit account because if you can run your business off $10,000, you can run your business off of $9,900. It’s almost…it is inconsequential in regards to the effects on your business, but the impact on profit is significant. It’s $100, I know that’s not a life changer, but your impression will be “Woah, I just took my profit first” and you start building that muscle.
Then you’ll start asking yourself, “Well, what if I did 2% or 4%?” And over time, you’ll grow into it. So the key to Profit First, I tell people the big mistake that you’ll make is go in full throttle right from the get-go. It’s too abrupt. It’s too hard. I’ve found businesses that successfully implement Profit First, and we now have over 75,000 companies doing this. So it’s not like this is our first arrival at the…
Nathan: Oh, wow.
Mike: Yeah. So it’s not our first arrival at the rodeo. We’ve seen businesses go through this. The ones who are successful inevitably start really slow, build their profit muscle and they do it this way. They set up that one account, they start allocating profit toward it, 1%. Maybe a few months later they go to 2%, maybe a few months later they add another account, like owner’s compensation. Maybe it takes them a year, maybe even two years, but over time they start building more and more muscle and then achieve, you know, permanent profitability.
Nathan: Awesome. So let’s talk about your new book. When’s it coming out? Is it out? And what can people expect to learn? How did you come to writing this one? You said around your time and productivity?
Mike: Time, yeah. Yeah, so my newest book, it’s called Clockwork and what the realization is is I believe there’s a Maslov’s hierarchy of entrepreneurship, just like there’s a Maslov’s hierarchy of our needs. Our human needs. It starts off, you know, if you don’t have oxygen and water and food, you’re dead. If you have that, the next level up is you need shelter and heat and, you know, it keeps building up ultimately to self-actualization.
I believe in a much-simplified form there’s three versions for business owners, and I believe the foundational one is profitability. Meaning if my business isn’t making money, it’s draining money, all I’m going to worry about is making money. If I don’t have money, I’m done. The next level up, once we make money and I hope “Profit First” is a guide to get people there, once you start making profit and a consistent income for yourself, the next level now is the recovery of time.
And what I find is a lot of entrepreneurs become the essence of the business. They’re doing all the work and they do so much work, particularly nowadays, that they don’t have time for family, for life’s enjoyment, and stuff like that. We need to recover time and that’s what Clockwork is about. How do you design the business to run itself?
What I did was I…like I told you, I spent six years writing this book. Actually, the first manuscript, I completed the book and I threw it out because it wasn’t there yet. It was painful to do that but I wrote the book from the ground up again based upon interviews of very systematized, successful companies, my own experiments and failures with myself, and studying nature even.
I found, for example, beehives are very efficient organisms, if you will, or organizations and they follow simple rules to scale. And one of them, it’s such an important one it became the core essence of the book. I call it the QBR and the QBR stands for the Queen Bee Role.
In beehives, there is a queen bee who serves the most critical role, which is laying eggs. If eggs aren’t being laid, the hive will die. Bees on average live about eight weeks. So you need the constant egg production and one thing that’s important to note is the queen bee herself is not the most important insect in the hive.
They’re all important. It’s the laying of eggs that’s critical. So much so that if the queen bee is failing to produce eggs, they will spawn a new queen bee and get the other one out. So the queen bee serves the most functional, important role but it’s the role that matters. We’ve got to lay eggs and what happens is every bee knows the basic…not the basic. The only two rules. Rule one is you protect the queen bee role.
If eggs aren’t being laid, we’ve got to make sure that the eggs are being laid. That means get the queen, give her food, fan the eggs, fan the queen bee, cool the hive, heat the hive, or eradicate the queen bee and get another queen bee spawned stat. Like it matters that much. Once the queen bee role is protected and being served, then they go on and do the next thing, which is their primary job.
Some of them are scouts, some collect food, you know, nectar, pollen, others are drones, they move eggs around. So rule number one is to protect the queen bee. Rule two is do your primary job. How this translates into business and what I wrote about in “Clockwork” is every business has a queen bee role. There’s that one thing that a business hinges its success on. It’s the most important factor in your business.
Every employee, every person, the owner, too, must know what it is and must make sure that it’s being served and protected. Only once it’s being served and protected can they go do their other job and I’ll give one example before we, you know, wrap up on Clockwork. You go to the doctor’s office. A well-run doctor’s office, when you walk in, there’ll be someone checking you in.
It better not be the doctor. It’ll be someone else. While you’re sitting in the waiting room, a file will be pulled. It better not be the doctor pulling that file. It should be someone else. You’ll be escorted to a waiting…I’m sorry, an examination room. It better not be the doctor.
It should be someone else. Once you’re in the examination room, the first person that comes in is probably a nurse. They poke and prod you and do some initial stuff and they leave. Then the doctor comes in, very momentarily, does an examination and afterward, talks with you very briefly. That’s the queen bee role for doctor’s offices. It’s the examination and the prescription, and the doctor is the one who can deliver that service but if the doctor is pulling files, checking people in, even doing the pre-exam, she is being diluted in laying those eggs, the most important thing.
So a well-run doctor’s office has, you know, multiple, even, examination rooms that one doctor can go boom, boom, boom, boom one after the other and get these done. That’s the laying the eggs and what we need to do is analyze our own businesses, identify what’s the most critical role we’re going to hinge our success on, and then make sure that’s always the primary thing being served. If it is, it elevates the entire organization.
If it’s being compromised, the entire organization is being compromised.
Nathan: Yeah, wow. So what action items can people take just immediately to ensure that they can remain effective?
Mike: Yeah, so we’ve got to figure out what the queen bee role is in your organization and I’ll give you a real simple method to do this. If you’re a small business, usually the owner of the business is already serving it because you’re one of the most valued employees. If you’re a bigger business or you have highly paid employees, usually the highest paid employees are doing it.
So at a doctor’s office, either you’re the doctor or maybe you have a doctor’s office, you’re not a doctor, but your highest paid employees are the doctors. So we want to look at those folks. Then what we do is a simple chart and I use…well, not even chart. I use sticky notes and what I do is I take six sticky notes and put them down, and one each note I put down for that person, that employee or myself, what are the six most important things they do?
You know, the doctor, one thing I may write down is they write out prescriptions. Another one is they talk with the insurance company about bills. Another thing is they do examinations and then I’d write down all the things. Then, using deductive logic, I remove one sticky note at a time saying, “Well, these are the six most important but what one is the least important of these six?”
And I pull it off the table. Then out of the five, I say, “What’s the least of these five?” And through deductive logic, I get down to the true number one. That’s the QBR. Once it’s defined, we now educate the team and say, “Guys, we’ve identified that, you know, conducting an examination is the most critical thing. The people filling this role are X, Y, Z. You know, it’s the doctor and therefore if you ever see the doctor doing something other than examining, we as an organization have a problem.”
So it’s identify and then educate and act accordingly to predict that QBR. Kind of like…oh, I don’t know if manufacturing is a good analogy but every business goes through processes similar to manufacturers. Manufacturers have these things called bottlenecks. That machine that if it’s running slow, you know, the whole line waits for it.
In our business, it’s the same thing. The QBR is the most important machine…I don’t like that term, but the most important machine of the organization and if it’s not running at top capacity and efficiently, the entire organization is suffering. That’s how important this role is.
Nathan: So the need to find out the QBR.
Mike: Yeah, find the QBR, educate the team about the QBR, and, you know, protect it with your life. The entire organization will benefit from it.
Nathan: Amazing and, look, we have to work towards wrapping up because time is of the essence but, mate, I’m really curious around I guess what’s the biggest challenge for you in your businesses right now? So it sounds like, you know, I’m curious, like you said that you have 75,000 businesses using the
Profit First system.
Does that mean that not only as an author you have, like, a back-end of, like, a service or some kind of coaching or consulting or…
Mike: We do.
Nathan: Yeah.
Mike: That’s how we know we have so many businesses doing it. So Profit First spawned quite naturally, I didn’t even originally intend it, but the first people that were reading the manuscript started asking me, “Who’s the accountant or the bookkeeper or the coach that’s serving Profit First? “So I was like, “Oh, clearly we need an organization of professionals.” So I started Profit First Professionals and now we’re 270 plus people strong.
We have a global presence.
Nathan: Wow.
Mike: We’re in…Yeah, we’re in Australia. We have about 10 representatives in Australia now. We just opened offices in Melbourne and…
Nathan: Wow.
Mike: Yeah, and what we’re doing is these are people that are working directly with entrepreneurs that are looking for help. So we have impacted 75,000 plus people, plus we think there’s definitely more people out there that are going solo with the process, too. So that’s how we’re getting the word out and the most beautiful thing is for my own business, the QBR, the critical role, is the…we call it the messenger.
Spreading the word on Profit First. The more people that are aware of it, the greater the impact we can have on this world and the better it is for our own business. Well, if I’m the only guy out there, you know, doing all the speaking engagements that you saw me at, it’s very limited. So what we’re doing now is many of our members are out there speaking on “Profit First” and the big win happened three weeks ago.
We had 30 plus presentations happen in one week. That was the most we ever had…
Nathan: Wow.
Mike: …in a single week, and I only did three of them. I’m still doing it but I only did 10% of the speeches and that’s what protecting the QBR is, and as a result, “Profit First” is spreading faster than ever before and hopefully will continue to.
Nathan: Yeah, wow. So it sounds like you have, like, you’re not just an author. You have some other businesses going on.
Mike: Yeah.
Nathan: Yeah, I’m really curious.
Mike: I do.
Nathan: Like what’s the biggest challenge for you right now?
Mike: So my next…I’m still going through the Clockwork process myself to totally remove myself from the businesses that I own, but I’m 80% to 90% out. I have a president in my business, the Profit First Professionals. There’s presidents in some other ventures that I’m involved in and they own and run the companies as my partner.
So I’m removing from that. The next stage I think is impact and I think I’m going to be writing a book about that. I’m actually convinced. I don’t know if it’s going to be the next book. I think it is. I believe the final part of Maslov’s entrepreneurial hierarchy, starts with profit, goes to time, and the last thing is soulfulness or impact.
I believe businesses can serve a great purpose, either touching people very deeply or touching a broad audience of people or maybe a combination. Touching a broad audience very deeply and I think we, especially myself, need to become very clear on what and how that impact works, and then have our business serve that purpose. I think that’s the ultimate way to grow a healthy business but also care for our communities is by being very purposeful or soulful.
So that’s what’s next. That’s the next challenge for me.
Nathan: Amazing, man. Well, look, I’m a massive fan of your work. I just cannot thank you enough for taking the time to speak with me and share all of your wisdom with our audience. So where’s the best place people can go to find out more about yourself and your work? I know you said, I think…what was the nickname?
Mike: Mike-Mike Motorbike. Yeah.
Nathan: Mike-Mike…
Mike: Yeah, so Mike Motorbike. So go to mikemotorbike.com. You know, I used to write for The Wall Street Journal for a few years and you can…if you’re a subscriber, you can get my articles in their archive or you can sign up at my website. You can get all my articles for free. That’s actually some of my best work. I’d say even more powerful than my books because they’re very concise and actionable. And also all my books, the chapter downloads are there.
I’m a podcaster, a blogger, I think there’s a lot of resources up there for any entrepreneur who’s looking to move their business forward.
Nathan: Awesome. Well, look, thank you so much for your time, Mike. An absolute pleasure, mate.
Mike: Take care.
Key Resources From Our Interview With Mike Michalowicz
- Learn more about Mike and get his free articles and resources on his website
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