By his 35th birthday Mike Michalowicz (pronounced mi-‘kal-o-wits) had founded and sold two multi-million dollar companies. Confident that he had the formula to success, he became an angel investor…and proceeded to lose his entire fortune. Then he started all over again, driven to find better ways to grow healthy, strong companies.
Among other innovative strategies, Mike created the “Profit First Formula”, a way for businesses to ensure profitability from their very next deposit forward. Mike is now running his third million dollar venture, is a former small business columnist for The Wall Street Journal; is the former MSNBC business make-over expert; is a popular keynote speaker on innovative entrepreneurial topics; and is the author of Profit First, Surge, The Pumpkin Plan and The Toilet Paper Entrepreneur, which BusinessWeek deemed “the entrepreneur’s cult classic.”
From the Profit First Professionals Website: Everyone on the planet knew it. It was a cold, hard fact. The world was flat. Until it wasn’t. That’s when everything changed. Society is addicted to axioms: beliefs that have become so entrenched in our global culture that they are never challenged. These axioms are simply considered to be true, because everyone says it is. Then one day, someone calls bullshit. Sales – Expenses = Profit is one of those axioms. For centuries entrepreneurs have followed the “profit comes last” formula off the proverbial financial cliff. Now everything has changed… In his globally acclaimed, paradigm shifting book, Profit First, business author Mike Michalowicz explains why the Sales – Expenses = Profit formula actually prohibits profitability and keeps the vast majority of businesses, throughout the world, struggling to survive check-by-check. Michalowicz teaches us to a new formula: Sales – Profit = Expenses. This seemingly subtle change, empowers you to grow your profitability immediately and permanently. Join Ed and Ron for this dynamic interview with Mike.
Questions/Topics We Discussed with Mike
The first edition of Profit First came out in 2014? Revised and Expanded edition came out earlier this year, 2017.
Your life’s purpose is to eradicate entrepreneurial poverty. Explain.
The Small Business Administration reports there are 28 million small business (< $25m in revenue):
- 125 million businesses globally
- 8/10 business fail; #1 reason: lack of profitability
- 50% fail in first 5 years
GAAP: Sales – Expenses = Profit
This equation doesn’t make human sense because it goes against human nature. Explain.
Primacy Effect: we focus on what comes first, so the Profit First formula changes the equation:
Profit First: Sales – Profit = Expenses
GAAP does not model cash.
Profit First works because it doesn’t try to fix you. It’s designed to work with who you are already. Profit not an event; it’s a habit!
This revised equation requires you to reverse engineer your business:
- Are all expenses necessary? Who knows? Most are too busy chasing sales
- It’s the same with pricing:
- Customer > Value > Price > Cost > Product/Service
- Reminds me of Henry Ford: “No one knows what a cost should be.”
- There’s a difference between being Frugal vs. Cheap
Shouldn’t some of these businesses fail? Isn’t that the market saying this business is not a good idea?
If we can increase the probability of success of small businesses, society would be better off, which is why you’re so passionate about this topic, isn’t it?
When do you suggest you start Profit First in your business, from day one?
You’re working a lot with accountants now, right? And do accountants have this same challenge in their businesses?
Do you notice a difference between CPAs and bookkeepers (e.g., bookkeepers are more proactive and CPAs are more reactive)?
In how many languages have your books been translated?
You recommend five checking accounts: Income/Profit/Owners Comp/Tax/Opex + 2 no-temptation accounts. What’s the logic and mechanics of all these accounts?
Explain TAPs: Target Allocation Percentages.
You equate PF with the Granny Shot in basketball. Explain.
You talk about the eight Mistakes business owners make with Profit First:
- Going it alone
- Too much too soon
- Grow first and profit later (#1 objection; not substitutes, complements)
- Cutting the wrong costs
- Plowing back and reinvesting
- Raiding the tax account (stealing)
- Adding complexity
- Skipping the bank accounts
Do you ever bring the Profit First business owners together, not just the accountants who consult on the system?
Have you found any banks willing to work with you?
Other than succumbing to the lies of GAAP, what are other issues facing small businesses?
What’s the #1 issue/problem facing the accounting profession?
Are you optimistic or pessimistic with respect to Artificial Intelligence?