Do you know what a lion looks like?
You probably do.
Your brain automatically creates an image that needs no explanation.
Unfortunately, when you introduce yourself as a bookkeeper, people automatically have a mental picture of someone who does data entry, collects receipts and so on.
If you're trying to set yourself apart, your label has to change.
Our guest, Mike Michalowicz, who is the author of books such as Profit First, The Pumpkin Plan and The Toilet Paper Entrepreneur, can help you stand out.
During this interview, you'll learn...
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Why becoming a profit advisor is more attractive to potential clients than just being a bookkeeper
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Why you should learn the envelope banking system then teach it to your customers for their financial health
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How you can use the power of Parkinson's law to help you and your clients' businesses
To learn about Mike, visit http://www.mikemichalowicz.com/.
To find more about the revised edition of his book, Profit First read here.
To download his white paper, How Bookkeepers Can Position Their Business To Get More Clients, click here.
To access more great tools to help your bookkeeping business, sign up for our free resources below.
EPISODE TRANSCRIPTION
Michael Palmer: 01:22 Welcome back to The Successful Bookkeeper podcast. I am your host, Michael Palmer, and today's guest is Mike Michalowicz, and if you need pronunciation, you can go to his website and actually click a button and he will pronounce it for you, which is awesome. He's the entrepreneur behind three multimillion-dollar companies and the author of several books, surge profit. First, the pumpkin plan and the toilet paper entrepreneur, which is this week actually called the entrepreneurs called classic. So today's guests, I mean is incredibly accomplished from an entrepreneurial standpoint. He's globally recognized as an entrepreneurial advocate and formerly a small business consultant for the Wall Street Journal and host of the business make-over segment on MSNBC is your business. Welcome to the show, Mike.
Mike Michalowicz: 02:10 Michael, it's a pleasure to be here, so thank you for having me.
MP: 02:27 Yeah, I actually heard of you quite a long time ago from my brother in law, Ron, who was absolutely raving about the pumpkin plan.
MM: 02:35 Yes, he just loved it.
MP: 02:45 And actually, he, he's a very good storyteller. So I think I've read the book through Ron and just the concept of really developing your key strategies. You know, like when you're growing a pumpkin. I mean, it's a beautiful metaphor for business development and actually any kind of planning I would say. So, uh, he, like, he loves you, he loves your work. And so I've just started now listening to profit first and on audio and I got to say, Mike, I absolutely love it and I encourage all the to listen to Mike
MP: 03:00 on Audio and I'll tell you why because he actually sounds like he's in your car seat beside you. It's like not the stuffy, you're not that stuffy. Uh, reading this book, it's like you've taken aside. Okay. Let me tell you something that it's not in the book yet. I love it. It's so fun.
MM: 03:20 Thank you. Thank you. Well, if Ron's listening first a shout out to Ron for, for spreading the word. I appreciate that. And I, I actually just re-read private first. So, uh, I'm rereleasing it on February 21st actually, um, through penguin books. So I revised and expanded the book. So I just finished rereading it on Friday of last week. And the same thing. I, I like when an author reads something, but it's conversational. I want to feel the energy. And I also like it when some authors do this, Gary Vaynerchuk famously does this when he breaks from a straight read of his book and says, let me tell you why I wrote that chapter, or let me tell you a new insight that came out after the book.
MM: 03:58 So this new release of profit first I have even more of that stuff because now I have all of these success stories I've come in. And so I started sharing the stories.
MP: 04:10 Beautiful. Those got to test stick and you're absolutely right. It really does give a different feel to it. And I think the retention level for the listener goes way up.
MM: 04:25 Yeah, I think so. I hope so. Yeah.
MP: 04:30 So Mike, tell us a little bit about yourself and your journey to getting to this point. For our listeners who have not heard anything and this is their first time being introduced to you.
MM: 04:40 Sure. Well, you read out the Bio and uh, I love lovingly call that a CV or the curriculum vitae, but I have a different use of the acronym. I truly believe a CV stands for covers vomit because, uh, because most of, uh, of my entrepreneur endeavors have been gross and disgusting and some of you don't want to talk about.
MM: 04:49 And, and I think it's true for most people, but we hear the bullet points and they're like, oh my God, you know, sold three companies and you know, multi multimedia. It sounds so great. Well, I, all those things happened. I sold a company to a fortune 500. I've sold a business to private equity. I've, I've been involved in roll-ups, I've raised capital, but that, that's like one flash of a moment out of years of panic and problem actually decades. So those businesses, I grew and essentially sold, never made money. I was so growth-oriented and so stressed out about housing and cover payroll. And they were, I was saved by someone who thought they could fix the mistakes I've made. In retrospect, I see that. And um, what happens after I sold my second company, I felt in belief or in love with this concept of, oh, grow fast and sell, be growth-oriented.
MM: 05:43 And the profit really is when you sell your business or profit happens when that big client swoops in. I always thought it was a future event. So I tried to replicate it. And my third try was as an angel investor, I started at 10 companies and it was a business, an abysmal failure. I was an abysmal failure and lost all my money and basically lost my mind. I went into depression and just, that's the vomit. But the most important part of I thinks of my entrepreneur endeavors because for me in awoken, me too, there's got to be a better way. That surviving check by check is extraordinarily stressful and it doesn't need to be that way. And I sat on a mission to, and this is, you know, my mission now is to eradicate entrepreneurial poverty. And first, you know, patients in this mission was me.
MM: 06:33 I'm like, I gotta fix my own challenges. And now I'm trying to roll it out on a, on a large scale, there's, I think there are 125 million businesses in the world. I think there's about 80 to 90 million that are surviving, check by check, like literally do not know how to pay their bills next week. So, uh, I started a program profit versus the book that you mentioned. I've also started a program around it that empowers bookkeepers to cause bookkeepers are the front line, you know, they, they work with the entrepreneurs to start guiding entrepreneurs profitability, but in a way that naturally supports the entrepreneurs so they don't have to change who they are so they can become profitable just following the same habits that they already have. So that's my mission. That's what I'm doing.
MP: 07:17 Yeah. That's awesome. And you know, we have the same mission at Pure Bookkeeping specifically for bookkeepers, but myself personally, I think that's why I love your work so far and love listening to your audio is that I believe in the small business entrepreneur. I believe it's what those are the people that make our countries great and the more we can do to help them be great and have the money they need, the more they're going to do that for their families in the communities that they live at. So they know it's, it's June 30 Internet like hug you. MM: 07:45 Yes, I'm the Internet. Huh.
MP: 07:55 Um, and so, you know, the minute I actually got to say like your, you, you, you mentioned it a little bit there, but your white sheet or white paper or a little one page on how bookkeepers can position their business to get more clients is awesome and it's so short.
MP: 08:11 It's so impactful. It's so powerful. I loved it. And that was, you know, I downloaded that and I'm like, Dave, get Mike on the show. So for listeners, you have to download this. You're going to go to our website, you'll get the link. And of course, I'm sure Mike, you'll give us a link at the end there as well. But let's talk a little bit about that because what I have to say, what I really loved about it is all of the experience that you've had over the past five or six years, maybe it's more now and embedded in that one page. Yeah.
MM: 08:40 Thank you. I, yeah, I think there's 10 or 11. I actually don't have it sitting in front of me, but I know exactly what you're talking about. I, you know, I think one unique perspective that I came from as we were writing that document as I was preparing it was I've hired a lot of bookkeepers in my life for my businesses. One is an angel investor. I think I've worked with 10 or 15 different bookkeepers. And one of the big Ahas that I had was that we need, bookkeepers need to be different. And quite frankly, this is true for any industry you're in, but particularly bookkeepers, when I asked someone what they do and a book he responds says, well, I'm a bookkeeper. They instantly put themselves, when I call it a generic box, it's a, it's like if I say the word elephant, the people listening, we can't help but picture an elephant in our mind and we can try and resist as much as we want.
MM: 09:36 But we see an elephant. And the reason is our minds do these pictorial associations with words. It's the easiest form of memory is called pneumonic memory. And it's the easiest form of memory. And what it allows us to do is to shortcut the requirement for any future knowledge. Meaning if I say elephant, I don't need to say it's a big animal with four legs, a long trunk, kind of like a nose. Like Oh, they explain it, you know, whether it is. So it expedites communication tremendously. So it's a great convenience tool in communication. But we as bookkeepers, we fall into traps. When I approached them and said, what do you do? They say, my bookkeeper in my mind pops up. A bookkeeper, you know, is person clicking and clacking away at the keyboard, writing some checks out, uh, preparing an accounts payable list. And when that picture draws my mind, my mind sees every bookkeeper the same.
MM: 10:26 Every time you say the word bookkeeper or elephant, the same elephant pops my mind, the same bookkeeper. So the problem is now I see in my mind that all bookkeepers are the same. So if you approach me and say you're a bookkeeper, my mind says up, don't use anything else. I know what you do. And you can go on saying, listen, I've worked with very complicated clients that require inventory management, so forth. I've uh, I have these credentials and this background and experience that really is applicable to your needs. And in my mind, I'm like a bookkeeper's a bookkeeper cause the picture popped up. So one of the principals and I perhaps arguably one of the most important is to change the label you use when you present yourself. Because we don't want to fall in that generic box. The example, and believe it or not, this is all, but this is just one of the 10 things on there.
MM: 11:17 I already have one paragraph, but I'm giving the long explanation. Now if I approach you, say, what do you do? And you say, for example, I'm a profit adviser, the client will be stunned. Kind of like a deer in headlights for a second. And that's the reaction you want because that means the client can't identify you with a generic label. They can't say, oh, it's just another bookkeeper. And the response it will inevitably trigger is they all say what? What's the profit adviser? And if you hear those words, I am telling you, you are sitting on top of the golden opportunity because that means the client doesn't recognize what you do and therefore they need you to define it. And that's where you stand out and point out your credentials and you say, I'm a private advisor, which means I have specialized skills and driving profitability. I have a mechanism that'll help you drive profit in your business. I've always credentials and so forth. And then you wrap it up like this. You say, and by the way, I leverage all of my bookkeeping knowledge. I have all the abilities of a bookkeeper, but all bookkeepers have that ability. And what we're doing basically is pushing away the generic labeled bookkeepers and saying, I'm different. And it all gets triggered by coming up with a new unique label.
MP: 12:35 That's fantastic. And really I love the fact that it's so, it's so simple for people to do and it's something that most bookkeepers are not thinking about because they're bookkeepers. They're not. This is, I mean, what you're talking about is, you know, these are positioning strategies that a lot of people have spent a lot of time thinking about and working on and this stuff works. Yeah, it, you know, Mike, the thing I was thinking about as you were speaking, is with the, their customer. Their customer is a small business owner, small business entrepreneur, however, you'd like to call it. And I personally have come across a lot of these people. I work with lots of different entrepreneurs and business owners and I loved them and me, you know, I grew up surrounded by small business owners. In fact, every single person in my family at some point is has owned a small business and oh, cool. Yeah. Unfortunately not too great success because of my opinion, they didn't hire a great bookkeeper.
MM: 13:40 They try to do it themselves. Yeah, I, you know what I am with you 110% the problem you, I always try to look from the customer's perspective and I've seen that over and over again. Why don't they hire a great bookkeeper and because they feel it's unnecessary. Because bookkeeping's easy because my software does it automatically. And the problem then is not there is a truly ours because we're missing opportunities to really care for clients. So yeah, they're gonna lose that. Their business may go under, even if they mismanage it that that much, but they're missing out on someone that can actually help elevate their business. Someone that can bring them to the next level. So that again points to the client who says, I don't need a bookkeeper. The bookkeepers who say there, and I just use profited visors because that's what we tell our bookkeeper members to do.
MM: 14:28 But you could pick anything as long as it resonates with you, meaning your abilities. And it's a, it sounds like a distinct technical term. Like, don't ever say I'm the queen of bookkeeping. That's a, that's a marketing gimmick. It's gotta be a technical term. But what happens is if you lead with that unique title you've assigned yourself, now you can acknowledge the customer, you what you're right. You don't need a bookkeeper that's too rudimentary. But let me tell you what we are going to do to drive your business forward and assure it's, you know, in this case, profitability. And then point back to, and I do use and I'm very well versed in all the bookkeeping processes and skills, but you really don't need a bookkeeper. And you know when, when we fly fight someone and say, you know, you really need to hire a bookkeeper.
MM: 15:13 You really don't know what you're doing with your business. It triggers a defense mechanism. It's like, you know, someone comes to me and says, Oh God, you really don't know how to address Michael, like, what's going on with you? Like instantly, like who, who are you? You're offending me. But if you are looking for something specific and say, you know what, I really need someone who can help me color match ties. I don't just come to you and say you don't know how to dress. I say, you know, I'm in color match specialist. So I talked to the thing that you see you need and I happen to address the underlying stuff that you also need, but you aren't aware of you. You really do at the sell to the want of the customer. Not Argue it because they'll, they'll fight back. It's a natural self-defense but services their want and their need.
MP: 16:02 Hmm. Absolutely. And uh, you know, just that reframing of what you do right out of the gate I think is, is fantastic. So Mike, the profit first, talk a little bit about profit first. Cause there's what I, I mean I could probably, I'm guessing, have about a whole year's worth of episodes with you alone. Um, just with your knowledge and the different books that you've written and you know, I'm going to probably beg you again in the future to come back and talk about other books that you're, that you're going to write, I'm sure, but some of your past ones too are great, but right now profit first really is a big focus from my interpretation of what's going on online. Tell us about that book. I think it's really valuable not only for people to read for themselves, but I think as bookkeepers it's important because the methodology that you're teaching in that book is actually something that could be one of the tools in the tool belt of, uh, of, of our bookkeeping audience.
MM: 17:02 Oh, I totally agree. I hope every bookkeeper considers using this system or a system like it, it doesn't have to be private first, but a system like this and when we say what is not and then how it turned into what is not is, um, it's not any more of those reports and traditional cash management. And the reason it's not that its because of myself and the vast majority of entrepreneurs I've interviewed and worked with over the years don't follow the rules of traditional cash management. Now, you know, kind of really playing this out is a, a, a good entrepreneur as defined by bookkeepers and appropriately so. By the way, it should be able to read a P and l cash flow statement, balance sheet, tie the numbers in, know your KPIs, know your budgets, a, know the ratios, like the operating cash ratio, the inventory turn no, all this stuff and assess it on a periodic basis, weekly, monthly at least, but ideally weekly.
MM: 18:03 And you'll know exactly where you stand. And that's what we entrepreneurs are told to do. But then what we really do is we log into our bank account, uh, see what the bank balances. And based upon our balance, we're making decisions on how to run our business. We literally circumnavigate all these tools and reports that are in front of us and just log into our bank account and trust our gut. And it, it objectively fails us every single time. Not In it, not in the moment, but business after business that runs off of this bank balance accounting's how much is in my bank account usually burned through cash very quickly. So my question is why does this happen? And secondly, I believe that there's a great book called the power of habit by a guy named Charles Duhigg. I love that. I believe that if you have you read that book?
MP: 18:52 I've, I've, I've read the book, I've actually spoken with Charles. He's a fantastic wow, wow. Phenomenal, phenomenal book. And one of the core arguments in there is you can't change your behavior. There's a kind of click world mentality cause it, you know, you see the trigger and you just start doing it. The entrepreneur logs in that bank account, they're on their pattern. You can't, can't stop it, but you can put guard rails around it to make in some cases a bad behavior, your best behavior. And that's what profit first is. It's a behavioral-based cash management system. And what that means is it allows the entrepreneur to continue to do what they always do, log into the bank account, Cesar balances, and then quote-unquote trust their gut. But the guard rails editor in place is, we use the envelope system. This is something that's, you know, it's everyone's family tree.
MM: 19:43 At some point someone in your family uses the envelope system. In my case, my mother did it, so I had the first-hand experience with this. My mother worked at a local manufacturer would actually right down the road from where my office is now part-time. And when she'd come home, she cashes in her checks and then takes the cash and divide it up and put in different envelopes when envelopes had food and other envelope said, give back to the community. One was for the mortgage, you know, and, and she, my father is the same thing. They would divide the money up into these different envelopes. And then when my mom went food shopping, she would work with what was in the food envelope. And perhaps the most interesting part was she always had enough money for food. Now don't confuse that with having the same amount of money.
MM: 20:26 She always had enough meaning when she arrived at the food store, that's when she opened the envelope and whatever's in there she'd work with and sometimes, of course, she was sick or worked overtime. So the money would vary the percentage she put it in there, but she'd work with what she has in business. The core principle profit first is setting up these envelopes. Now my case, we call them plates but set up these envelopes. You have the entrepreneur or yourself and I encourage every book you did for yourself first. If you're going authentically do this for a client, you must understand the system for yourself from practical experience. But you go to your clients, you're entrepreneurs, you haven't set up multiple accounts. And I mentioned in the new reverted or revised version of the book, there are five key accounts that we have to have, but one is, for example, to pay the taxes.
MM: 21:10 You know, his year-end comes, the tax panic ensues and the entrepreneurs got dig money out of their wallets and they get Piaute owed at the bookkeeper. And the tax count and saying, why wasn't this prepared? I know the big business should be reserving the taxes on a regular basis on behalf of the entrepreneur. When the tax bills do, it pays the taxes. The owners, inevitably the last person to get paid, the best employee in the company is the owner. They work ridiculous hours. They, they will work through holidays. I'll sacrifice family. That's the definition of the best employee. We got to treat the honor that way. So we're gonna have an account for the owner's compensation. We set up another one for the profit itself. The profit and owner's comp is totally different. The owner's comp is for being an owner. Operator means you work inside your own business, but the profit is distributed to people who equity in a business.
MM: 21:59 Equity meaning you took you the courage and took the risk to start a company and you own 50% or 100% that's the profit distribution. Just like if I own stock in a public company when the distribution comes out, that's not because I worked for GE. It's because I invested in GE. So profit and owner's comp are two different things. And another key account, of course, is the operating expenses. But what happens here Michael, is when money flows in say $1,000 of deposits come in, the first thing we do is we divide up that inbound deposit into its different percentages, these different envelopes and now when the money is in the owners, I'm sorry, the operating expense account instead of $1,000 check is going and being available to spend. Maybe it's only half of that means 50% of it, it's $500 and the initial adjustments kind of brutal people are like, oh my God, I, I didn't expect that. It's kind of an ice bucket challenge, kind of shivering pain. But the reality is that is the appropriate number for your company to run healthily. So just gives them a whole new perspective on profitability.
MM: 23:08 You know, listening to profit first. Now it's like a light bulb went off and for me a long time ago, this is spoken, I guess maybe 15 years ago, there was a book I read and talked about doing similar to this. For just my personal finances. And I asked that very simple multiple bank accounts. One bank account is for paying all of the bills of life and it's all set up automatic every month. The right amount goes in there and it's just handled. And when I did that, the amount of that it was like, you know, uh, you know, a check would bounce or I would be like married or I can I use my debit card, we'll the rent check, you know, is there enough in there? And when I changed this, it was like, you know, that's handled. And then another bank account was my spending. It's like this is, I can use this to buy groceries, I can use it for, you know, fun or whatever. And I actually think there was another bank account that was for fun and for, uh, for actually, you know, food and utilities and stuff like that.
MP: 24:13 Your
MP: 24:13 system applies to business. And I've just never thought of it in a business sense before. And I guess it's because I've been trained, you know, to have a business degree and you know, I've had small businesses and it's always just one bank account.
MM: 24:29 Yeah. It's always been that way. And um, I think that's the only thing that's unique about privately first. I, there's no, it's not like these are systems I just made up and said, you know, maybe this will work. These are tried and true systems. So the envelope system has been around ever since I think money's been around and there are other principals in there too. The pay yourself first principle, right, where you pay towards your retirement first. Like a 401k is a considered a pay yourself first system profit first has that component in it too. I think what makes it unique is just what you said. I, I think I'm the first guy said, oh, all those principals that work in our personal life work within our business, our personal business.
MP: 25:08 Yeah. Never heard of like anybody talking about this from a business perspective. And that's what's refreshing is that there's a lot of businesses out there that that would benefit greatly from, from doing this. And I mean, we're one of them. Like we're just literally out of a conversation with my business partner about setting up these different accounts. And the first thing he was like, wait, I don't know if we need that many accounts, it's going to be expensive, you know? So talk a little bit about that. The maybe the resistance that people have to that kind of thinking. It's so, it's almost like this, we're, we're, we're um, what's that saying? We're penny-wise, pound-foolish, right? It's like that's going to cost us a dollar a month. And it's like, well, yeah, but if we don't do it, what's it costing us?
MM: 25:56 Right, right. So actually talk about those, those arguments. I hear them all the time. You know, I've been speaking about profit first now for three years. I'm literally tomorrow morning taken off again and doing another keynote on profit first. And the most common resistance is exactly that. What if I need to have multiple accounts, it will cost me money. And fees. And the second most common thing I get is I can just do this on a spreadsheet so I can kind of address both those things. When it comes to the multiple accounts, first of all, you don't need to incur the fees. There's a lot of banks out there that don't incur fees. I've worked with everything with from capital one spark who's really impressive to the locals who we use as a local credit union and they're amazing, a no fees. They do get confused though.
MM: 26:42 When I walked into the bank and say, I need to set up another account. They're like, Geez, you got 12 accounts now because private first there are five foundational accounts, but as your business develops over time and you really start, you leveraging the system, sometimes it makes sense to have more accounts so the fees don't let that deter you. They probably won't even incur. And if your bank says, you know, you can talk to the bank manager to say, listen, I want a store more money here. I want to save more money here by the need to use these multiple envelopes, these accounts that do it. Can you do something for me? And some banks jump right on that and make an adjustment accordingly. So do it. That small little effort, the returns are huge. The second part is I can just do it on a spreadsheet and when someone says that I get it, but then I respond to him and say, well, you know, you can do in your accounting system too.
MM: 27:31 And how's that going? How's that serving you? And usually, they're silenced and say, well, I'm not profitable. Exactly. What we need to do is insert a system that works within our natural human behavior. We, if, if we log into our bank account to see our bank balance, that is the one spot I know you're going to go every single time. And therefore I need the accounts there. If, uh, if I said a spreadsheet, you can circumnavigate that. You just go right to the bank account, uh, and you avoid looking at the spreadsheet. So any kind of supplemental system, and I've tried them because I want it to do that has failed me every single time you gotta get the account set up. But there's, there's one last little tip as I've been doing this, I get invited back to some events saying, hey, you should come back next year, do a follow-up presentation.
MM: 28:20 And now I've done so many of these. I start off by saying, who remembers me speaking on profit first? And you know, if it's the same attendees, all the hands go up. And I say, who? Honestly, honestly, who's doing it? And I have a room of say 200 maybe like five hands, 10 hands go up. And I used to get really frustrated. I'm like, I am telling you, I swear to God this will save your business. You'll have more profits than you ever imagined to just do it. I used to get upset thinking there's something wrong with people. And then I said, oh no, no, no. The issue is me, I'm teaching one last fundamental part wrong. And what it was was I would divulge the entire system, the elements we talked about today, and there's some more stuff. I would reveal all that stuff and put it on the table.
MM: 29:03 And then I realized, uh, in the recent years that I'm asking people to do too much, it's like saying, Hey, I want to get in shape and I'm telling that person, you're gonna run a marathon starting today. Let's go. It's prone to failure. So the one last tip, and if you're working with your clients and why help them start achieving greater levels of profitability, don't do the entire thing that to get started, only do one piece. And that one piece has them set up only one new bank account at their current bank. They don't have to go to a new one, go to their current bank, set up one new account, and we're going to label it profit. And it can be a savings or a checking account that doesn't matter but label its profit. And then every time a deposit comes in, take 1% of that money and put it in the profit account.
MM: 29:47 And what that means is if they get a deposit, say of $1,000 1% is 10 bucks, and if that client of yours can run a business off of $1,000 they can absolutely run their business off of $990 all we're doing is taking a small piece and no, they won't get rich and know their profits won't skyrocket starting that way, but what will skyrocket is their confidence. Once they see another envelope that starts accumulating money, they'll say, hey, maybe this is worth moving that profit percentage to two or three and over time, five and 10 and sometimes we have some people we're working with, you know, 2030 40% profitably. It's amazing, but the successful people start very slow, no longer raise the bar and say, I'm all in, you know, I'm gonna run that marathon. We're actually going to lower the bar and start very slowly just to win over your confidence in the system.
MP: 30:45 Yeah, that's great. Great Advice. Starting with one thing is, is another one of the pieces out of Charles' book, the power of habit. It's focused on one habit and then other habits develop around that. So it's a, it's really cool. What I, well, I love to bake is, you know, you mentioned that or started to talk about it. This was huge, these are human behaviors around money and we have, you know, all sorts of weird emotions and thoughts about money. And we're in a small business. We are, it's more of a human that's running that small business when it's small. If it was a big business, I mean, you know, they're going to have people to run those spreadsheets, as you say. And their job is to make sure the spreadsheets managed and the accounts are managed. But as a small business, it's a reflection of you as an individual, as a human being. And so your system really starts to create new behaviors around money that force new habits and will out. The outcome is that businesses will be way more profitable.
MM: 31:43 That's right. You know, it's funny. So I've studied there, the small businesses and uh, from, you know, revenue less than a hundred thousand. You know, the most common businesses, most businesses do under 250,000 annually by starting businesses all the way up to $50 million and did find you're right there, there's a transition as a certain point. A company is no longer managed by the owner or at least fiscally managed by the owner. But what happens is they start setting budgets. So it is spreadsheets as you suggested, but then the department heads, what do you do that they do? They spend their entire budget actually, you'll sometimes get that phone call saying, I have X, Y, Z budget. I need to spend it to get my budget again. And so what does large corporations are doing is the exact same principle. They set a number, they divide up into now instead of five or six accounts, they have to say 700 accounts.
MM: 32:32 They just call them budgets. And those budgets are where they assigned to the employees of the business. But one of those accounts is a profit account. Those large companies are pre-allocating profit. They say we're running this at a 20% margin, the money comes in and gets allocated to our profit immediately. Yes, and a spreadsheet, but gets allocated to profit immediately. And then the employees are told you gotta work within a budget, you cannot go over and you better use it all because if you don't use it all, you've proven you don't need it. So it's, it's this very predetermined thing. And what happens in these businesses that we've been implementing profit first with that op-ex basically becomes a budget and it says here's your, instead of $1,000 deposit, here's your 500 bucks to run your business. And what I found is most businesses will actually use up all that money.
MM: 33:17 But what's fascinating is they will get the same results with less money because it forces innovation. And if we've time, I just wanna share one more story about, yeah. Okay. This was kind of I think the most important part of profit first. One of the behavioral principles is called Parkinson's law and Parkinson's law states that our demand for a resource is dictated by its supply. Meaning the more available something is, the more we demand it. If I served you a very small plate of Sushi, like say two pieces of a roll of Sushi, chances are if you like Sushi, you'll eat both pieces. If I serve you a plate with 20 pieces of Sushi, chances are you're going to eat more than two because there's more available. You may not eat all 20 there's a certain point where it's just way too much, but you may eat six or 10 pieces, you'll, you'll eat more.
MM: 34:08 And so that's Parkinson's law. The supply dictates our behavior, how much we consume the story when the share is about Apollo 13 it's one of my favorite stories cause it, it points to how even the smartest people in the world are simply human animals and live by this Parkinson's law behavior. Have you seen the movie Apollo 13, Michael?
MP: 34:30 I have. Yeah. It's a great movie.
MM: 34:40 Okay. It's a great movie. It's a real story as you know. And this is what happens in the pivotal scene. A, it's a calamity from the get-go. It's the space race between the US and Russia and the US launch up, uh, the Apollo 13, this capsule and the outer space to circumnavigate the moon, uh, and come back with whatever findings they have while they're up there. Uh, during this horrific, you know, disaster wrote, uh, trip. The biggest problem happens.
MM: 35:01 They are using the moon's gravitational pull to launch back to earth and the oxygen filters on the capsule fail. Uh, literally the NASA had developed these filters that could take carbon dioxide, recycled it back into oxygen so the astronauts could breathe and live. They radioed down, I'm sure you'll remember the scene. They radioed down to Houston and say, Houston, we are losing our oxygen. We estimate 10 hours of oxygen's left, uh, before we die. And they had like 48 hours or something to return to earth. Next scene, you see the lead engineer of NASA walking into a room with a big cardboard box and there are these other engineers around the table. He takes the box and dumps it on the table and all the engineers look at it and he looks at him and says, we have to make oxygen filters within the next 10 hours out of this stuff.
MM: 35:57 Do it, and they did. They literally made oxygen filters out of like tubes and duct tape and wire and like a toothbrush. It was the ultimate Macgyver scene and it happened. In reality, the message or lesson behind this though is extraordinary. NASA spent tens of millions of dollars of taxpayer money, our money to build the original oxygen filters and they worked. They worked until they failed. Then when NASA, the same engineers had no time. The 10 hours, no money because money was irrelevant to this point and just mix us supplies. They created an ocean filter that worked and I'm not saying they should've done that from the get-go. I realized they use some of the materials and stuff that was already up there, but they were able to fix it. The thing is, the lesson is they could've done something that was more stable, more reliable, more cheaply. They proved it from the get-go.
MM: 36:54 But NASA, the engineering team was said, you have tens of millions of dollars in your budget, make oxygen filters, and they found a way to do it for tens of millions when they weren't given any resources. They found a way to do it. That's Parkinson's law. We become extraordinarily innovative when our back is against the wall. And so with profit first, when we allocate less money to the running of your business, your operating expenses, you will find the same results. You have to set the same standard for your business. The thing that will change according to Parkinson's law is you'll become extraordinarily more innovative. You have to find a new way. You have to break the industry rules because you have less money. So the greatest irony of all from profit first, now that we've collected literally hundreds of stories that we have documented thousands of emails and just outreaches to us, but hundreds of collected stories consistently. And this is what really opened my eyes. Businesses that allocate their profit first actually grow faster than their competitors consistently because they are forced to become innovative. And find more frugal ways to do things, more innovative, more industry, rural busting ways to do things. So profit first doesn't just make you more profitable. It seems to almost always facilitate better, stronger, faster.
MP: 38:15 It's super exciting. I love it. And you know what I love about this conversation Mike, our listeners are going to be able to apply everything that you've talked about today and more when they read your book and consume all the information that you have. They're going to be able to apply it to their businesses and those businesses are going to grow faster than their competitors and they're going to have more money in their bank. They're going to be able to do the things they love to do in their lives and a whole bunch more because of this mentality. And they're going to be able to help be the profit guardians for their customers and help them do the same things. And maybe all their customers don't implement everything. But it's the philosophy and I mean we could live our whole lives by Parkinson's law. I mean it's, you know, you want to achieve something. Start thinking about Parkinson's law is, it's fantastic. So you know, it really, it's just the ripple effect that can happen here for our listeners. So I really want to just give you an opportunity to share, you know, how can people find out more about you? Where's the best place to start and start consuming the good work you do.
MM: 39:22 Oh, thank you very much, Michael, for allowing me to do that. I, uh, and I agree, I, I see this as an upward spiral. It the change agents of financial health. I believe this world is truly bookkeepers. It's, we can serve entrepreneurs, entrepreneurs, as you were saying, right in the beginning, entrepreneurs will serve their family, their friends, their employees, and it will perpetuate this. Uh, for me, if you, if you want more information on profit first, uh, you can just Google profit first. It's on Amazon, Barnes and Noble, any bookstore at airports. But if you want to get a download you suggested it's on my personal website. It's Mikemichalowicz.com. Now a couple of things, It's brutally hard to spell. I actually sometimes still misspell my own name. So uh, here there are two ways to get to my website. If you go to Google and type in Mike, M, i, k, e and then space bar mic mic. By that point, Google will pop up the longest, most Polish name on the planet. That's me. I select that it brings you to my site and you can download it if you want to remember a domain. My nicknaming in high school was Mike Motorbike because it rhymed a, you can just go to Mikemotorbike.com that too will forge you to the website and all those resources up there plus a private first and all my other books. You can get free downloads of quite a few chapters from the website.
MP: 40:44 And those, I have done that Mike and I gotta say those. Those blew my mind. The amount of value and the way the simplicity of it, it just makes it fantastic. I got to say, Mike, you're a very generous, very authentic person. People listening. Mike has to be in your top five of the people that you put on your, you know if you call them advisors, business advisors, Mike is maybe number one or two, right. I can't say enough about the work you do so it's fantastic. We love it and of course, we'll have links and everything at Thesuccessfulbookkeeper.com for people to go to and link right to your right their websites. Thank you so much, Mike. You know I just hate to have to end this because I personally, I'm a fan and I just have so many questions. I hope we'll have been able to have you back in the future to discuss other topics and you know you've got a whole bunch of stuff as I mentioned so but I do really want to thank you for being on the show. Thank you.
MM: 41:30 It was a real joy. Thanks for letting me share.
MP: 41:40 Well, that wraps another episode of the successful bookkeeper podcast. To learn more about today's guests and to get access to all sorts of valuable free business-building resources. You can go to the successful bookkeeper.com until next time, goodbye.
