Profit First | Mike Michalowicz on How to Go from Busy to Profitable

Audio Transcription

Mike Michalowicz.: Revenue translates directly to stress. What I mean by this is the more revenue you generate for your organization, the more obligation you have. These are sales. So the more obligation you have to deliver a product or service, well the more obligation you have, the more stress that’s put on the organization.

Clay: Yes.

Mike Michalowicz.: And if you’re the one operating the organization, that’s the more stress directly on you. So more sales equals more stress. The balance for this necessity is profitability. And yet no one focuses on it. So that’s why I am so vehement about bringing profitability to businesses of all sizes.

Speaker 1: On today’s show we have the opportunity to interview the bestselling author of the smash hit book for business owners all throughout this country. The book is called Profit First, and the author, his name is Mike Michalowiczichalowicz, and on today’s show he shares with you and I why you must create a system for telling your money where to go before you spend it, why you must pay yourself first. Why profit is a habit, why the goal of every business should be to remove the owner from the daily operations profitably. Why profit is a reward for the investors and owners of the business, and why the biggest challenge for most entrepreneurs is knowing their biggest challenge. Today’s show can absolutely change your financial life, so grab a pen and a pad and let’s enter into the lab of the Profit First dojo of mojo with Mike Michalowiczichalowicz.

Ryan: Some shows don’t need a celebrity narrator to introduce the show, but this show does. Two men, eight kids co-created by two different women, 13 multi million dollar businesses. Ladies and gentlemen, welcome to the Thrive Time show.

Ryan: (singing)

Clay: Yes, yes, and yes Thrive nation on today’s show we are interviewing the best selling author of the book, the Profit First and the host of the entrepreneurship elevated podcast, Mike Michalowiczichalowicz. Welcome onto the Thrive Time show. How are you sir?

Mike Michalowicz.: I’m doing well Clay, thank you so much for having me.

Clay: Hey since last time I talked to you I was actually on your show.

Mike Michalowicz.: Yes.

Clay: You have added a button to the top left of your website that helps to help people understand how to pronounce your name properly. But just to clear it up for our half million listeners, how do you pronounce your last name?

Mike Michalowicz.: Yeah, so it’s pronounced Michalowicz, but if you’re an old high school friend of mine it’s Michala [inaudible 00:02:41]. That was my nickname in high school, which-

Clay: Oh that is great.

Mike Michalowicz.: Which yeah still goes with me. So occasionally people will shout that out in an audience. Hey, it’s Michala shits.

Clay: Oh my gosh, that is so funny. Well I first ran into you in 2016 when you so, so graciously had me on your show, and during that time I’ve ran into so many people, probably two or three dozen people at our conferences who are disciples of your program. Could you tell the listeners though, where you were at financially before creating the Profit First system?

Mike Michalowicz.: Oh yeah. I mean, so it’s critical, it became the inception of Profit First, we’ve got to rewind back to 2008, so 12 years ago. I had built and sold two companies, I was on top of the world financially, I had everything figured out, but admittedly was chockfull of arrogance and didn’t realize how much ignorance I had. I started a business right around that period that was a total calamity, it was an angel investing company, and I wiped myself out financially. And what I realized, it was a devastating period for my life, I actually went through depression, and I lost my possessions. The only thing I didn’t lose was my family, thank God. And it was an awakening for me that I really didn’t understand what made entrepreneurs successful. I thought I did, but I didn’t know, and I didn’t understand finances. I thought I did, but I didn’t.

Mike Michalowicz.: So I started to investigate how to drive profit consistently. And here’s what I found. Most entrepreneurs wait until the end of the quarter, or actually most cases, the end of the year, that’s what I was doing, to see what my tax returns were, to see if there was a profit. And if there was it was an accounting profit anyway, there was no cash there. So I decided to create a system that worked with how I naturally behave. And what I did naturally was I was logging into my bank account every day to see if I had money. If I did I’d spend it, and if I didn’t, you know I’d try to sell something to somebody quickly, a panic would ensue. And I decided to create a system around that behavior of what I call bank balance accounting.

Mike Michalowicz.: So Profit First is a system where money as it flows into your business through sales, we immediately allocate money to its intended use before spending a dime. So some of it goes to our profit, some goes toward the operations of the business, others goes to reserve for taxes and so forth. And by doing this I was carving up the money at my bank, saw what the money’s intended used was, because these were all different bank accounts, it was very clear. And I started to work within the confines of what I truly had available for the different parts of my business, and my life.

Clay: Now can you share with the listeners what kind of businesses were you involved in? Because there’s so many listeners out there I think who can relate to this idea of being able to sell a lot, but being unprofitable, you know being very busy but not profitable.

Mike Michalowicz.: Yeah.

Clay: What kind of businesses were you involved in? Because I think on the outside you might think, wow this guy’s really killing it.

Mike Michalowicz.: Yeah. So my first business was in computer integration. It means I was in the tech space setting up the hardware and configuring it, in the end it grew to like a $2 million company and it was growing consistently, but it was not profitable. You know that top line is purely just a vanity metric, it’s not the health of a business. But I sold that to private equity, I made some money. I didn’t like make F-you money, but I did make F-me money. My second business was in computer crime investigation, right place, right time. I started that business, six months later the Enron trial broke and guess who got the phone call? We did. Not for prosecution, that’s the FBI and CIA, but the defense attorneys for Kenneth Lay, Andrew Fastow, called us and said, hey can you get involved this case? And sure enough we did, and it put my little startup on the map instantly, we bootstrapped it. We did, I think our first year, first full year, we did over $1 million. Second year we were approaching seven million on our run before we sold it to a Fortune 500, I had a partner there. We sold it two and a quarter years in.

Clay: Wow.

Mike Michalowicz.: Yeah. And dude is a big deal, and I’m like, I became a millionaire in my early thirties, I’m like I’ve got this all figured out, now I’m a genius.

Clay: Oh, genius.

Mike Michalowicz.: I believed my own Shataki, anything I touched turned to gold. That, that was ultimately the downfall, was I was so full of arrogance, and also ignorance that my third venture in 2008 was an angel investing company. I helped all these different startups and I threw my money at these businesses, and you know I’m like if I’m there we’ll be successful.

Clay: Yeah.

Mike Michalowicz.: And that was my downfall. I lost all that money. I lost my home, homes over it, I lost everything. And that was a wake up call that I didn’t understand entrepreneurship. I happened to be in the right place at the right time on that one big deal. But that’s not fiscal discipline, that’s not healthy business. That’s good fortune. And that’s, listen, that is a part of entrepreneurial success, but it needs to be backed with discipline, understanding, prudence and those things I had to learn later on.

Clay: Did you watch the end scene of The Jerk with Steve Martin? I mean is that kind of how you felt when you hit bottom?

Steve Martin: I don’t need any of this. I don’t need this stuff. I don’t need you. I don’t need anything, except this. The only thing I need is this. I don’t need this or this, just this ashtray. And this paddle game. The ashtray and the paddle game, and that’s all I need. And this remote control, the ashtray and the paddle game, and the remote control and that’s all I need. And these matches. The ashtray, and these matches, and the remote control, and the paddle ball.

Clay: Okay, so when you were at the bottom though, I know we can kind of laugh about it now, but what did it feel like?

Mike Michalowicz.: Yeah, so in the moment it was really hard. I actually, like I told you, I went through depression and by the way, this is self-diagnosed, I went through what I think it’s called functional depression. I never sought out a therapist, after the fact I did, like once I got through that, I’m like, oh maybe I should actually have someone that specializes in how our mind operates and talk to that person. So I admittedly started to drink. I started to, I became an insomniac, and was really wallowing in this space. The way I got through it or out of it, was a friend of mine suggested journaling, and journaling is the male version of a diary. But just write down thoughts. And I thought initially I should just write down, you know grateful things. I’m grateful to be awake. I’m grateful to be alive today. But he explained to me, he’s like, no, write down any thought you have in your mind.

Mike Michalowicz.: And what happens is I started to write down these hateful and angry thoughts at myself, at the world. And what happened as I wrote those thoughts down is it relieved the steam valve, and for maybe five minutes, other times a few hours, sometimes even a full day, I was able to concentrate again on moving myself forward. And when I started to slip back into that depression, I started journaling again, and it would relieve me and I’d focus forward and push myself forward. I attribute a lot of my turnaround to that ability to relieve the steam of my bad thoughts, and start slowly, consistently moving forward. I also found purpose. Like I found that I got to fix these entrepreneurial misnomers for myself, but also for readers, and I committed myself to, as I call it now, eradicate entrepreneurial poverty. There’s this gap, like the day Clay you start a business, anyone listening starts a business, the world thinks like, oh my God you’re a millionaire now.

Clay: Oh yeah.

Mike Michalowicz.: You’ve got so much money.

Clay: Oh yeah.

Mike Michalowicz.: You don’t even work, you just in the beach. And of course it’s not the reality. The reality is we’re making no money, and we’re panicked, and we’re working day and night.

Clay: True.

Mike Michalowicz.: That gap is entrepreneur poverty. So I devoted, I made a commitment to myself that day forward, I said I will eradicate optional poverty for myself, but for everyone affected by this. And I realized I may not be able to do that in my lifespan. But I’m going to commit to building products, my books, putting things in place that every entrepreneur that’s affected by entrepreneurial poverty has a pathway to achieve what entrepreneurs deserve, which is success. Which is wealth, which is comfort, because entrepreneurs are the providers for all of us. And if an entrepreneur can be stable, and wealthy, and happy, then so can the employees. And so can our world.

Clay: You know you have gotten into fitness now, you’re looking great by the way, just looking great.

Mike Michalowicz.: Thank you.

Clay: But you know how sometimes you go to the gym and there’s a guy at the gym who clearly cannot bench 250, but he’ll look over at you and go, bro how much can you bench, bro? I can bench 250 bro. You know a lot of entrepreneurs, you talk about it and on page five of your book Profit First that people brag about the size of their business. They always brag, oh the business guys, so how many employees do you have? Oh I’ve got 45 guys. You got 45 guys, I’ve got 25 guys. I got 60 guys. Pastors brag about the congregation all the time. Bragging about the top line. Can you talk about the danger of running around bragging about how many employees you have?

Mike Michalowicz.: Yeah, yeah. It’s totally the, how big is it contest, and here’s the reality, no one really cares. I mean, so here’s the problem, it is perpetuated in our media. So when I walk through an airport or something, and I stop by the newsstands, every magazine oriented toward entrepreneurs are about these entrepreneurs that are wildly successful in regards to revenue. That’s how they define it. This person went from 10 million to a 100 million. This person has a 70 000 employee company. So all the bragging rights are attributed to size, and it perpetuates on through all business. You know I go to these entrepreneurial conferences and that’s exactly what they ask. Like, hey what kind of revenues are you doing? Or if they don’t want to be that bold, they’ll simply say how many employees do you have? Which translates to revenue. And I used to buy into that, and I felt the competition I have to be bigger than these other people.

Clay: Oh yeah.

Mike Michalowicz.: I’ve subsequently flipped a question, like I really do not care about size. I don’t care if a business does a 100 000 or a 100 million, neither of those impress me or deter me. What impresses me is that when I ask the question, I say, well tell me how healthy that business is, and that $100 000 business, that owner says, oh it’s 90% profit. It’s all actually coming through to me, I build mechanisms that I don’t even have to work. It’s money on automatic. That’s mind blowing. And the $100 million business, you know that guy’s like, I’m stressed beyond belief, we have $7 million of debt. We’re highly leveraged. Like that sucks.

Mike Michalowicz.: Here’s the hidden truth that no one really considers, revenue translates directly to stress. What I mean by this is the more revenue you generate for your organization, the more obligation you have. These are sales. So the more obligation you have to deliver a product or service, well the more obligation you have, the more stress that’s put on the organization.

Clay: Yes.

Mike Michalowicz.: And if you’re the one operating the organization, that’s the more stress directly on you. So more sales equals more stress. The balance for this necessity is profitability. And yet no one focuses on it. So that’s why I am so vehement about bringing profitability to businesses of all sizes.

Clay: We Work, you know We Work was a company everybody was talking about, We Work for a long time.

Clay: WeWork was a company. Everybody was talking about WeWork for a long time going, “Man, this company was 16 billion. We work. Whoa!” All of a sudden it comes out, “Oh, oh, WeWork. Oh, oh. Oh, oh! I know.” So, help the listeners out there go from the oh, oh to the practical. On page 19 of your book, Profit First, you start to get into the details and you start to talk about your process. As you get into page 40 of your book, you really start getting into the details about setting up all the different accounts. Can you help our listeners out there who are notetakers and people who are implementers, what should they do right now if they’re a roofer, if they’re a dentist? They’ve got a lot of gross revenues, sales are high. Talk to us about your five accounts. How does that all work?

Mike Michalowicz.: Yep. So, what we’re going to do is first flip the formula. So, first understand the traditional formula for profitability is sales minus expenses equals profit. The reason that fails us is it tells us that profit comes last. Profit First, what it’s going to teach you is a behavioral mechanism. It works with our minds. It’s human nature. When something comes last, it’s insignificant. So calling profit the bottom line or the year end are the worst things we can do. Yet that’s the common vernacular.

Mike Michalowicz.: The new formula is sales minus profit equals expenses. Mathematically, they’re identical, but behaviorally, they’re radically different. Every time a sale comes in, we’re going to allocate a portion that [inaudible 00:15:23] profit. Now, how we do it in practice is at your bank. The reason we do this at your bank is that I found in my surveys of now where I believe well over 100,000 entrepreneurs.

Clay: Wow!

Mike Michalowicz.: Every time I do a speaking engagement on Profit First, I survey the audience. What I found consistently that the vast, vast majority of entrepreneurs do bank balance accounting. We don’t read our income statement tied to our balance sheet and cashflow statement. We simply log into our bank account, and if we have money, we can spend it. If we don’t, we panicked. That’s the situation.

Clay: 100,000 people. You’ve interviewed 100,000 people, approximately, surveyed them, and you’re saying that most people, they just look at the bank account and they go, “If I have money, I can spend money. If I don’t, I don’t.” Is that correct?

Mike Michalowicz.: That’s exactly it. Listen, these people are checking their bank accounts once a day. That’s the frequency. These aren’t just micro businesses doing like $50,000, these are half a million, a-million-dollar companies. I just spoke at a conference where companies are doing $10 to $50 million, same behavior. They have a controller or a CFO, but the owner is still logging in and is highly biased by the cash flow.

Clay: True.

Mike Michalowicz.: A lot of deposits come in, they’re like, “My God, business is great, finally.” The next day, they go, “Business sucks.” That’s this reactionary mentality. Here-

Clay: Mike, I have one quick thing I want to interject because I know the listeners out there would benefit from this. You see this all the time. When I first started helping companies with their marketing, I ran into a cosmetic surgeon one time who his card got declined for payment to me, for some marketing. He’s got a big house, big, nice cars, the whole thing. We ended up finding out that he had something like a half a million dollars of accounts receivable owed to him, and he literally was maxed out on… He had no money in his account at all. I mean zero. I had to point out to this guy in his 50s, who’s a baller building the new house, that “Dude, the money that you told the lender that you had isn’t right because you are looking at accrual-based accounting. You weren’t going off the cash.” I seriously watched a grown man cry, and then I had to have my team try to help him collect. Is that uncommon for that kind of craziness as the company grows to happen?

Mike Michalowicz.: Sadly, it’s not that uncommon. I mean, it’s devastating. It’s a game we played the outside world, but the game we’re playing with ourselves. We actually try to convince ourselves we have money and that it’s just a cashflow situation. That just one more big sale or one client will fix everything, and it never does. We’re looking at the top line only, and it’s a real problem. We’re looking at sales only. So, we need to address profit.

Mike Michalowicz.: Here’s what I tell people. Profit is not an event, meaning an eventuality that at the end of the year or a certain point is going to happen. Profit’s not an event. Profit is a habit. Every transaction, every day, every minute in the business, a small percentage of money must be constantly dripping out. That’s how you accumulate profit.

Mike Michalowicz.: Now, in execution, how we do this is we set this up at your bank. To your earlier point, we set five bank accounts. They are in, and these can all be checking accounts for now, an income account. It’s called income, unique name, income, profit, owner’s comp, tax and OpEx. The income account starting today is a depository-only account. Money flows into your business, existing income account, and you don’t touch it. You do not pay a bill from there. It’s simply to reflect your inbound cashflow. So, when you log in to your bank account, you see how much money sitting there every single day.

Mike Michalowicz.: Then from the income account, we do an allocation. We call carving up the cash turkey. Just like Thanksgiving, the turkey comes out. You don’t tell people, “Hey, everyone, for themselves fight for it.” You carve the turkey so everyone can get some meal, some portion of the meal.

Mike Michalowicz.: Now with our bank, we do the same thing. The income account that cash turkey, you carve it up, a portion goes into profit. Profit, just to be very clear, is a reward for the investors or the founders of an organization. People have shares and stock. You’ve taken on extraordinary risk, which by the way, supports employees, that supports our economy, locally, nationally, globally. You need to be rewarded for that.

Mike Michalowicz.: Just like if you own stock in a public company. I own Ford. Ford sent me a stock distribution. I didn’t say, “Ford, I don’t deserve this. Sorry, take it back.”

Clay: Sorry, no.

Mike Michalowicz.: I didn’t say, “Can I work the line for a day or whatever?” I simply said, “I invested in you. I want the valuation to go up, but it could go down. This is my reward for the risk.” That’s the profit account.

Mike Michalowicz.: Next account. Owner’s comp. Owner’s comp is different than profit. Profit is a reward for taking risks. Owner’s compensation is a payment for being an employee of the company, arguably the most important employee. If you are an owner operator, this is a person who owns a business but also works in the business. Chances are you’re the most skilled employee the company will ever have. As in that role, we need to pay you a salary, and here’s the salary we pay you. If we had to replace you, hire someone else to do you, do your work, or do you, do your work, what would you pay them reasonably? That’s your salary.

Clay: Well, it’s a do you. To do you. I don’t think we have to pay anybody.

Mike Michalowicz.: If you hire somebody to do you, what would you pay them? You would pay them millions to do you and do your part. Then the next account is called the tax account. This is a reservation of money to pay your personal taxes. An owner of a business, the biggest liability or biggest bill a business receives associated to the business inevitably is the tax bill. Yes, the one we’re least prepared for. The business, regardless of your business formation, can pay your taxes. It can reserve it. Through a mechanism, it can pay your taxes for you to talk with an accountant to do that.

Mike Michalowicz.: The last step is an OpEx account. OpEx account is the money available to pay the operating expenses of a business. In summary, we have that one account income that feeds the other four accounts. Those four accounts are based upon different percentages. If $1,000, for example, comes into your income account, you now finally realize you don’t have $1,000 to operate your business. After allocating it, you may have $600 go to OpEx, but now you’ve also reserved for taxes, paying yourself and a profit account.

Clay: Mike accountants don’t like your system and some bankers don’t either. I have found that accountants get really surly with me. None of my accountants, just other accountants that I happen to be running into. No one I’ve actually talked to. They get upset when you try to set up five accounts. They’re like, “It’d be easier if you just do the one account. It’d be simpler for us.” I see that. Then bankers, when you start setting up all these different accounts, some of them get squirrely. Have you run into that, too?

Mike Michalowicz.: Yeah. So, I got to first defend accountants or bookkeepers. They have been trained in the traditional process called GAAP accounting. Profit comes last. GAAP stands for Generally Accepted Accounting Principles. It’s in every book, every magazine, every article in our vernacular, bottom line, year end. So, we are steeped in this process of treating profit as an afterthought. I’m simply saying that we flipped the formula. But when an accountant or bookkeeper hears it, that has heard the other approach forever, it’s like getting hit by a brick wall. It’s unfathomable.

Mike Michalowicz.: So simply, here’s the challenge you can do with an accountant or bookkeeper. Say, listen, I want to try this new approach, profit first. By the way, there’s over 300,000 companies, successfully, have used it and more every day that are very profitable. But since you’re insisting this other system, profit comes last, tell me about your client base. How are your clients, is this correct? They will say, “Yeah.” “How many clients you have?” Maybe they say, “100.” They say, “Okay. I was 100 clients.” “How many of them post a quarterly profit distribution?” “None.” “Okay. How many posts at least, a 10 or 15% profit year end, year out?” They’re like, “Well, a few of them, a handful.”

Mike Michalowicz.: Well, clearly, the system they’re working with does not yield a quarterly profit distribution. It doesn’t yield sustainable profits on a yearly basis. Why would we want to keep doing a system that’s not serving them? Why don’t we try this new system? Now, here’s the other great thing is profit first is not an accounting system. It’s a cash management system. So, it simply manages the cash flows to the bank, but the accounting works the same way. The beautiful thing is you’ll be going back to your accountant. Once you set the profit first system for yourself, and I surely suspect, you’ll be the most profitable client they’ve ever had.

Clay: Okay. Now, here we go. We’re making a unicorn connection here. Ryan Wimpy, you love this guy. You love Magic Mike.

Ryan: Yes, sir.

Clay: Mike, meet Ryan. Ryan, meet Mike.

Ryan: Mike, nice to meet you, sir.

Mike Michalowicz.: Ryan, honored to meet you, my brother.

Clay: Ryan, you tell our listeners and tell Mike, how much that the profit first system has improved your life and the life of your wife and your business tip top [inaudible 00:23:57].

Ryan: My wife a lot. When we got married she was like, “Oh, no!” when she saw the bank account and the one account, but we have six accounts. We actually have a advertising account as well.

Mike Michalowicz.: Nice.

Ryan: Because we have some vehicle wraps that will come up every month and shows… or every year, not like a monthly expense. Then we have like events that we may do once or twice a year. So, we go ahead and put money aside for that just every week.

Clay: So, you have some questions for Mike here?

Ryan: I do. I do have a few questions. One is a profit first clockwork question.

Mike Michalowicz.: Okay. Lay it on me.

Clay: Here we go.

Ryan: Is it normal for a business with income of like $750 to $1 million range, if your clockwork in the business and you take yourself completely out, that either the owner income percentage or the profit first percentage drops to compensate?

Mike Michalowicz.: Great question. Just for clarity, there’s no… Clockwork is a book I wrote about designing a business to run itself. So, remove the owner. That, by the way, I believe, should be the goal of every business, that there is no dependency on the owner, which gives you, Ryan, the freedom to reinsert yourself in the business any way you want [crosstalk 00:25:01].

Ryan: For us, it’s franchising. So, I got to take myself out and even some of the time of my top guys so that we can train new locations.

Mike Michalowicz.: Perfect. Perfect. It is normal for the owner’s compensation to be reduced. Because if you’re not working in the business as an owner operator, and now you’re working less and less for the business, your owner compensation will drop because you’re not acting as an owner operator. But your profitability should stay the same and even increase a little bit. So, drop the owner’s comp if you’re not working in the business.

Ryan: Got it. Thanks, sir. Yep, that’s good.

Clay: Wow! It’s one for one. Here we go. One for one. Mike, you’re going to make a point. Okay, continue.

Mike Michalowicz.: Nice.

Ryan: So, my second one is a clockwork question as well. So, we also have a division where we order from 30 different vendors, and we order all the… We have a dog training company. So, we order leashes, shirts, hats, all types of stuff. But whenever I read the Clockwork book, it recommends doing the screen recording, right? All of your processes, and then organizing the videos.

Mike Michalowicz.: Yes.

Ryan: So I started off doing that, but I found it very time consuming and, to be honest, a little cumbersome. I ended up just putting step-by-step instructions on a Google document. It’s now like 30 pages long. But I just wanted to talk to you about the downside of that versus the time-saving because it is a whole lot faster. I have sat my guy right down next to me, he sees me do the document.

Clay: Mike, why do you recommend the videos? Why do you recommend the videos?

Mike Michalowicz.: Yeah. The net effect is if there’s a faster, more effective way, always go with what’s faster and more effective. That’s the key. Here’s the reason for video. When we create a video, we can often caption activity as we do it. So, we record the process. But the key element is this, once you deliver it to that guy, you must mandate after a period of time that he records a video explaining the process, next, the same process because ultimately the greatest student in any room is the person that teaches the process.

Mike Michalowicz.: I want to know he’s mastered it. The only way I can know he’s mastered it, if he can effectively teach it. Plus, if he starts creating the videos now of what you’ve taught him and any other knowledge he has, should he walk out of the door any day? Now, we have the recordings of all the processes he was doing, so that’s the key for video. It brings about teachers, which brings about mastery.

Clay: Mike, I’ve got a few hard-hitting questions for you. One is your new book, Fix This Next: Make The Vital Change that will Level Up your Business. What’s this book about it? What inspired you to first write it?

Mike Michalowicz.: So, I am so pumped about this book. Well, we’ll see what readers say about it, but here’s what inspired it. I have discovered that the biggest challenge entrepreneurs face is knowing what their biggest challenge is. People come to me, constantly, and I was going around doing the same thing saying, “Mike, what book should I read next?” I asked other people, “What should I explore now?” It wasn’t until I realized I need to figure out what my challenge is in the moment in my business, the most impactful thing that if I fix it will move my business forward. I need to pinpoint that challenge, but I couldn’t find a mechanism to do it. So, over the last five years, I’ve researched, tested, I’ve guinea pig all four of my businesses.

Mike Michalowicz.: Five years I’ve researched, tested. I’ve guinea pigged all four of my businesses, plus a lot of volunteers that went through the process. I developed what I call the business hierarchy of needs. I translate it from Maslow’s hierarchy of needs, which is human needs, but into a business structure. And what I found is that there’s some fundamental things that need to be addressed first before other things can be addressed.

Mike Michalowicz.: It’s like building a structure. You need to have a strong basement in place to put the first floor on and you need a good first floor structure to put a second floor on it. Yet some businesses jump right to building second floor and there’s no first or basement and the thing just collapses on itself. Others keep building the foundation forever so they have this massive foundation for a skyscraper and they put a little tool shed on top of it and the business collapses again on itself. So Fix This Next is a way to pinpoint where you are in building your corporate structure, if you will, to find the most impactful thing to work on next, fix it and then it helps you pinpoint the next thing you need to work on.

Clay: You obviously are busy. I’m not trying to have a competition with you but just to give the listeners some of sort of context, how many people work with you at this point? How big is your organization? How many people are involved?

Mike Michalowicz.: I have 12 employees, but notably, most of them are part-timers.

Clay: So you have 12 employees and you’ve impacted the lives of 300,000 business owners that you know about that are implementing your system. So I think with 12 employees making an impact into the lives of 300,000 people, that’s pretty awesome. And I know you’re busy, so how do you organize the first four hours of your typical day? What time do you wake up? What does that first four hours of your day look like?

Mike Michalowicz.: So the first four hours is exercise. Always first. We were talking about that a little bit off air. I work out five days a week, consistently.

Clay: You look like you work out [crosstalk 00:01:47].

Mike Michalowicz.: Thank God. Thank God for the … I have the iWatch, but like the Fitbit, they’re all the same. I used to say I worked out five days a week, but when I tracked it, I was working out like two days a week. My mind would fill in those gaps. Now I have no excuse. So exercise and then meditation/prayer for a little bit. And then I plan out, envision what the day’s going to be like. How am I going to feel at the end of the day is really the kind of envisioning.

Mike Michalowicz.: And then I come in and I always start off with the big one. I actually have a team meeting and we go around, we do a huddle and we do it very quickly. But everyone has a report on what’s your biggest thing you’re going to do … one thing today, not hundreds things.

Clay: One thing.

Mike Michalowicz.: What’s the one single thing you’re going to do as your biggest objective? And the next day we report on the prior day’s big one. And that’s how every day starts.

Clay: What time do you wake up?

Mike Michalowicz.: 5:30.

Clay: But you know what?

Mike Michalowicz.: By no alarm. I don’t believe in … I shouldn’t say I don’t believe in alarms. I don’t want an alarm waking me up because that’s interrupting my sleep. I naturally wake up at 5:30, sometimes 5:15, sometimes 5:00, other days it’s 6:00, but 5:30 seems to be the consistent wake up time.

Clay: Well, you have rules, I’m sure now, with your new diet plan. What are you eating and what are you not eating? I mean, do you eat primarily frosting and graham crackers or what are you doing?

Mike Michalowicz.: Yeah, graham crackers. You know what I started to investigate is a vegan diet. I think it’s kind of crazy and extreme. So I was hesitant to it, but I started to go more and more plant based. And I’ve done the opposite what a lot of people do. At home, we like to cook a big steak or something like that occasionally and I love that tradition and I love steak. But on the road, it’s actually surprisingly easy to eat vegan. Where I heard from vegan saying, “Oh, it’s very hard to eat a plant based diet on the road.” It’s actually easy. I’m surprised how many restaurants have a vegan offering. So when I’m on the road, which right now is about 70% of my time, when I’m traveling on the road, I go vegan and when I’m home, I go back to my a steak and potatoes.

Clay: Okay, so you have these habits that you live by for your fitness habits, for accounting habits that you do. I think a lot of entrepreneurs … I want to go back to accounting for a second. I think they have a habit of using QuickBooks and there’s garbage in, garbage out. I see it all the time. I told you the story about that cosmetic surgeon. But they look at the QuickBooks and they go, “Look, I’ve got a half a million dollars. Woo!” And I say, “Whoa, Whoa, Whoa. Check the bank statement, Holmes.” Can you talk about how QuickBooks can make you quick broke if you don’t actually keep that thing updated? Can you talk about that?

Mike Michalowicz.: Yeah. Well, QuickBooks is a glorified spreadsheet. And I don’t mean that in a negative way. All accounting systems are. They’re a spreadsheet, it’s just presented in a different format that’s very digestible. Here’s where it can become a problem. It can be overwhelming and therefore we avoid it. Like, “I don’t know how to read reports. I don’t know how to enter data.” And we avoid it and therefore we’re not putting any data in or we’re putting garbage in, we’re miss assigning stuff. Well, garbage in, garbage out. So then we look at the reports, they don’t have our up to date information. It’s miscategorized. You put something in and you’re like, “Oh my God, I had $100,000 of website design? I haven’t talked to my website in three years.” No, that was your rent. You put it in the wrong category and it confuses you.

Mike Michalowicz.: So I’m not a fan on day to day management for most entrepreneurs of using an accounting system, not because they don’t work, we’re just ineffective and using them. It’s like giving someone a jack hammer when all they need to do is pound a nail on the wall. So what we should use is, I think, the Profit First system for cash management, but you should definitely hire a responsible, capable accountant and/or bookkeeper to manage the data entry for your accounting system. Because Profit First is not a small ball. It just manages the cash to ensure profitability. It will also tell you when there’s problems. When there’s not enough cash to pay your bills, Profit First will tell you, but then you got to figure out why can’t you pay your bills. And you need to investigate your QuickBooks or whatever your accounting system is. And that’s when I call my bookkeeper and say, “Hey, let’s go these numbers together.”

Clay: Well, I know Ryan has one more question for you, but I want to ask you this. What should an accountant do for small business owners? Because I see a lot of people that put their faith in the accountant. Did they move maybe a little bit beyond just delegating their accounting to their accountant, that I would say they abdicate it. They say, “Hey you just handle it. You, you, you.” And then every time, every single time they come into our weekly meetings and they say, “Clay, I owe $26,000 to the Internal Revenue Service. My accountant sucks.” And I talk to the accountants … it doesn’t matter what firm it is usually … and they go, “Well, the client needs to be … No, they need to stay on top of that. The client needs …” And so what should a client expect out of an accountant? Do you recommend a monthly meeting, a weekly meeting, quarterly updates? I mean, what kind of responsiveness should we expect from an accountant?

Mike Michalowicz.: Yeah. Just like any industry, there’s different degrees of engagement you can get from an accountant and different qualifications. So I suggest, minimally, that accountant is an advisor to a company in giving strategic direction around financial decisions. And a quarterly meeting … that’s how often I meet with my account, quarterly … is advisable.

Mike Michalowicz.: Now the primary function of an accountant is really compliance, compliance with tax responsibility to make sure that you are ready to pay your taxes. They don’t traditionally help you prepare for your taxes. They simply say, “Here’s the tax bill that’s coming, get ready.” They don’t give you guidance on how to prepare. But there’s higher level accounts that do that. Now this is very selfish and kind of pitchy, but I started an organization for accountants called Profit First Professionals to help accountants become advisory and to be proactively guiding clients toward more profits and controlling their taxes and being prepared for taxes. But an accountant you should meet with on a regular basis. Traditional accounts may only meet with you once a year and yes, it’s a responsibility, but ultimately you’re the one being affected, so call your account and say, “Listen, we got to meet more often and be proactive here.”

Clay: Now Ryan, we have just enough time here for Devin to buy a copy of … We always like to buy a copy of the book from the guest while we’re on the show. It’s an accountability thing. So we have just enough time here, Devin, for you to buy a copy of Fix This Next: Make the Vital Change That Will Level Up Your Business. We have just enough time for him to click the one click. It takes at least 10 to 15 seconds to click it. Devin’s fighting through carpal tunnel right now. I’m fasting for the entire day. I’m not going to eat a single thing, so I can afford the $17 to buy the book. So we’re doing all those things. We have enough time though, Ryan, for you to ask one more question for Mr. Mike.

Ryan: Well, yeah. First, real quick, I just want to say the Profit First system with the multiple bank accounts actually helped my marriage.

Mike Michalowicz.: Oh yeah.

Ryan: Because my wife really was frustrated with the income and I did not know how much was coming in.

Clay: Oh, man. It created a lot of business time at the [crosstalk 00:36:22] house.

Ryan: It really did help. So we really appreciate it. And we actually do it weekly, just to keep on top of our numbers, even.

Clay: They do it weekly because of their accounting.

Ryan: But I did … So like what clay was saying earlier and it was kind of answered, but we have had two different accountants with a lot of pushback for multiple accounts, especially with multiple entities. And I know you do have your own Profit First Professionals, but do you have another tip on how to get a nonprofit first accountants onboard with this system?

Clay: Non profit first accountants. A tip for getting nonprofit first accountants.

Mike Michalowicz.: I gave you that one strategy is to … You can be global confrontational and say how has it been serving your clients so far? The second tip is simply to really let accountants know that this is a cash management system … they don’t realize that … and invite them to read the book. Say, “Listen, I understand that you’re resistant to it, but usually resistance comes out of ignorance, meaning inexperience. I really want you to read this book or download the audible and listen to it, and then come back to me afterwards.” So many accountants have their aha in that process because it doesn’t …

Mike Michalowicz.: I don’t say accountants suck. I don’t retaliate. Accountants are actually absolutely mission critical. It exalts their capacity and gives them an extra tool. So just by getting them to read the book, sometimes you’ll convert them and get them on your side. And I’ll tell you, after having them read the book or them telling you they don’t want to read the book and they won’t, have them tell you they won’t support the system, there’s a certain point where you say, “Well, this is my vendor and they’re not willing to comply with a request that I’m making as a client. Maybe they really don’t want my business so much.” And that’s when I go elsewhere.

Clay: Mike, I appreciate your time so much. If everybody’s out there and you’ve learned anything today … and we’ve covered so much ground, we talk about how profit is a habit, why you got to pay yourself first, set up those five bank accounts. There’s so many knowledge bombs and I encourage you, really, if you care about a strong America and your family, you probably need to buy a copy of this book, Fix This Next: Make the Vital Change That Will Level Up Your Business. Some have suggested that I should passively aggressively attack listeners who don’t buy the book, but I’m not going to do that.

Ryan: That was me.

Clay: I’m not going to … Okay, so everybody pick up a copy of that book. And Mike, thank you so much for being on the show.

Mike Michalowicz.: Clay, it was an honor to be on your show. Thanks. And Ryan, pleasure meeting you.

Ryan: It was pleasure to meet you sir. Look forward to the new book.

Mike Michalowicz.: Thank you.

Clay: And now without any further ado-

Group: Three, two, one.

Clay: What if you could gain access to download each and every book that I’ve ever written for free? “Well, that’d be terrible because I don’t like you.” Okay. We’re making a big assumption, but assuming that you do like me and you’d like the Thrive Time Show, you can now go to thrivetimeshow.com/free-resources. That’s thrivetimeshow.com/free-resources to download each and every book that I’ve ever written for free. You can download the ebook version of each and every book that I’ve ever written for free.

Speaker 2: Ah, Clay. I just want to chime in here real quick. I don’t like you or capitalism. I feel like we should all get free stuff.

Clay: Well I am in the process of explaining where you can get free stuff and you can now also download all the helpful infographics. There’s infographics on Firing 101, the perfect hiring system, the principles from Ray Dalio, Internet Marketing 101, the lead bin management system, Managing Humans 101, Logo Creation 101, why Google loves WordPress, Time Management 101. We also have an incredible infographic about the importance of calling your leads often because the average person no longer answers their phone unless they are called multiple times and unless they receive a text from you. We also have the Importance of File Nomenclature 101, Sales Lead Conversion 101 and much, much more. And it’s all available for you to download for free right now by going to thrivetimeshow.com.

Speaker 2: Are you suggested and I should have to move my body?

Clay: Yes.

Speaker 2: Is this for free? Isn’t there a way you could just beam it? I mean, why do I have to move my body?

Clay: Because-

Speaker 2: Typing causes me anxiety.

Clay: Whatever.

Speaker 2: Which is why I would never go to thrivetimeshow.com/free-resources. I would never go to thrivetimeshow.com/free-resources.

Clay: All right, let me clarify. If you have the capacity to move your fingers, to go to thrivetimeshow.com/free-resources to download an ebook version of every single Amazon bestselling book I’ve ever written and all the infographics that have the power to change your life.