Show Notes
That software may put accounting tools at your fingertips, it does nothing for helping you manage and really UNDERSTAND the money side of your business.
Profit First is a book, a method, a framework that does do that–helps you really understand where your money is, where it’s going and how to generate more of it for you.
During this interview with Profit First author Mike Michalowicz we’ll take you through what the profit first system is and how to apply it to the custom t-shirt business.
Visit http://mikemichalowiscz.com
Watch the video below!
Transcript
Welcome to the Custom Apparel Startups podcast, your best source for information, news, tips and tricks to get you off the ground running, and earn success with your custom apparel decorating business. So, get ready to soak up some knowledge!
Now, here are your hosts, Mark and Marc!
Mark S: Hey, everyone, and welcome to episode 72 of the Custom Apparel Startups podcast. My name is Mark Stephenson, from ColDesi.
Marc V: And this is Marc Vila, with Colman and Company. Today is a really cool episode, actually. We’ve got a world-famous star, just well-renowned.
Mark S: A published author. Literally, I’m looking at my Kindle right now, and I have the book on it.
Marc V: That’s interesting.
Mark S: Well, that wasn’t the book, but this is the book.
Marc V: Alright, then. We’re talking about Profit First, is the book that kind of inspired our guest today. We did a podcast about six episodes ago-ish. Honestly, I did not look it up, but you guys should make sure you go to CustomApparelStartups.com, if this happens to be the first one you’re listening to, and you will see some episodes about profit. We did another one about time budgeting, as well, and budgeting money and time.
But today, we’re going to go ahead and really dive into this idea of making your business profitable. So Mark, tell us.
Mark S: We’ve got Mike Michalowicz – am I saying that right, Mike?
Mike M: You nailed it, man!
Mark S: Okay, cool. I was practicing quite a bit, honestly. I was hoping. I listen to your podcast, which is great, by the way.
Mike M: I’m still practicing, and still struggle, so that was pretty good.
Mark S: That’s good. The reason that Mike is here is because we actually had a recommendation from one of our Facebook group members, Shelby Craig, who does a great job in his own business, printing custom t-shirts in Tennessee. He just said that this book changed his business, and that I had to read it.
So, I did. I’ve got to say you share some really practical, exciting ideas.
Mike M: Thank you. I actually wrote that book originally, at least the concept was to fix my own challenges. And I became aware that I wasn’t the only guy going through financial challenges. I’m happy that one of your fans discovered it and shared it with you guys.
Mark S: Cool! Why don’t you give us the rundown? Because I want to talk a little bit about, my wife’s an Accountant, and I’m in sales and marketing. So naturally, we have nothing in common. And this is one of the things we definitely don’t have in common. So, why don’t you kind of talk to everybody about how you came up with this Profit First system, and why? And then, a little bit of the nuts and bolts.
Mike M: I don’t know if your wife has disdain toward the book. Quite a few Accountants and bookkeepers read it, though, and say “Gosh, this is so anti-Accounting.” But you know, I’m finding a faction, and a growing faction of Accountants and bookkeepers who see that this is kind of an umbrella over traditional Accounting.
But it’s necessary for many entrepreneurs. The reason is, here’s how I manage my money. My Accountant would say “Mike, never look at your bank account, because that’s not representative of where your business stands. What’s representative of it is your income statement, your balance sheet, your cash flow statements.” There’s these different metrics; KPIs, budgets, blah blah blah.
All of that stuff would just fly over my head. It still does, quite frankly. I barely know how to read an income statement. I can fake my way through it. But a balance sheet or a cash flow statement, forget it.
So, what I would do is I would revert to what I call “bank balance accounting,” which means I would log into my bank account, see what money is available, and react in a couple of ways. If there’s a lot of money, I’m like “Oh! I can spend it!” If there was no money, I’d say “Oh, damn!” Panic would ensue, and I would sell anything to anybody.
It was a very reactionary-based cash management system, but it was my ultimate shortcut, because I had to see what money I had, and then trust my gut.
What I came to realize is that, in its raw essence, is a very poor cash management system. But I also realized I had all [inaudible 04:48] something that’s more effective, but couldn’t find a way to actually do it.
I think this is typical of many entrepreneurs, that we are really good at being promoters for our business, being really good at operating our business. When it comes to the numbers, we think we’re really bad, so we revert to this ultimate shortcut.
I think to change our behavior, even though we know there’s a different behavior that may serve us better, is really hard. So, I developed this system so that I don’t need to change anything. In fact, I continue to do today, exactly what I’ve always done. I log into my bank account daily. I already did, this morning.
But by using the Profit First system, I start channeling my natural behavior to bring the results that I want. That’s the key. Don’t try to change yourself. Change the system that can channel your existing behavior, to get the results you want.
The essence of Profit First is this. Historically, most businesses, and I suspect most of your fans listening right now, have one, maybe two bank accounts. But they inevitably have one primary checking account, where all of their deposits go in, and all of the bills get paid out of it.
The problem that happens is when we’re looking at that account, when money comes in, we say “Wow! We’ve got a lot of money! We can spend it.” And when there’s no money there, it invokes this panic. The reason is that one account acts as what I call a serving tray.
Kind of like when you have a family dinner or whatever, and you serve a meal on a serving tray, you don’t tell your family “Hey, everyone. Grab your knife and fork! Everyone for themselves!” No. What you do is you actually apportion some of the food to everyone’s plate, to make sure that everyone at the table has something to eat. The serving tray actually is simply to display, and a serving platform. But you never eat off of it.
That’s the foundational essence of Profit First, is that we’re going to set up bank accounts at your bank. One account is going to be a serving tray, where money comes in, but you never pay a bill from there, ever again. Then, we’re going to apportion pieces of that money to different accounts that serve different purposes.
One of them serves profit. Another one makes sure that the owner or owners are being paid. Tax liabilities are addressed. Operating expenses are addressed.
What we do is we divide the money up. We apportion it to these different plates, if you will. Then, you know, prior to utilizing your money, what the intended is purpose is.
You see how much money has been allocated to profit. You see how much money has been allocated to pay you. How much money is truly available to run your business.
The final part I want to share is the reason I call the book Profit First, is one of the foundational, I believe, flaws in accounting is that we’re told that profit comes last. It’s a logical argument. It makes sense logically, mathematically. You have to have income/sales. You have to subtract expenses you incur. Then, what’s left over is profit.
But the problem is from a behavioral standpoint, when something is a leftover, when something comes last, behaviorally, it means it’s insignificant.
Like if you got rushed to the hospital and they said you’ve got to change your diet, you’ve got to start exercising and do things. Otherwise, you’re going to die. You don’t come out of the hospital saying “You know what? Finally, I’m going to put my health last.” No, you say “I’m going to put my health first.”
It’s human nature that what comes first gets addressed. What comes last gets delayed, or even ignored. And we’ve been trained that profit comes last. We call it the “bottom line.” We call it the “year end,” which means it can wait until later.
So, the fundamental shift in the psychology around profit is there’s a new formula that I argue is sales minus profit equals expenses. And every time there’s a transaction, we take our profit first, allocate that to the profit account, and then run the business off the remainder.
Mathematically, we’re just swapping variables, so effectively it’s the same. From a behavioral standpoint, now profit is a priority, and we force it to happen. Therefore, assuring permanent profitability in our business.
Mark S: There’s a couple of things that I love about what you just said, as it relates to our customers. Marc was just talking, Marc Vila was just mentioning, before we got started today, giving like an example of the way our listeners are typically managing their supply budgets and things like that, now.
Marc V: Yeah. In our ecommerce store, in our ColmanandCompany.com, where you go and you purchase all of your supplies for your DTG printer and Digital HeatFX and embroidery machine and all of that stuff, what typically happens, what we see with our customers when we look at it as a whole, is that so many small business owners, and it doesn’t matter how much money they’re making in their business, but it’s a matter of small meaning that the person who is doing the sales is probably helping with some production. It’s a husband and wife team.
Mark S: It’s a one to three person business.
Marc V: Yeah. It’s a family. So, what happens is you and your family start this business together, or you and a really good friend start this business together. Then, you run your business the same way that you – mixed within your household budget.
We have customers that use their personal credit card and they also have their business, so they have two credit cards on file. One of them goes to their house, as the billing address. The other one goes to the business, meaning that they’re not managing the money, the profit, the payroll, the utilities, the supplies, the taxes, all of that stuff well enough.
Mark S: They’re not thinking about it until it’s time to – until you’ve got a big order or something like that, and it’s time to buy blank shirts or it’s time to buy ink. Then, they’re looking at their money, going “Oh, crap! I need to use these three credit cards, in order to get this next deal out.”
Marc V: Yeah. Then, your personal debt goes up, and it’s not properly represented. Then, you go ahead and what you do is after you sell, your order completes, and you get your final check from your customer, you end up paying your car payment or your -. So, there’s this big mix.
Then, in the end, just like Mike mentioned, they’re looking for this “How much profit did I make?” Actually, it disappears, because there is no profit at that point in time. Your business is like survival. It’s not looking at it like profits in business.
Mark S: I read your story, Mike, and I know you went through something like that a few times.
Mike M: Yeah, and hopefully have eradicated that from my life. I think that is a very normal, meaning typical and common, entrepreneurial phenomena. I actually call it entrepreneurial poverty. What entrepreneurial poverty is, is this outward perception of the world around us, that thinks we’re wildly successful.
I suspect that the day you start your t-shirt printing business, all of your friends are like “Holy cow! You’re an entrepreneur! You must be making so much money!” They hear about the topline sales. You get an order for $5,000 or $10,000 or whatever it is, and they’re like “Wow! You’re making $10,000!”
When the reality is we’re spending $12,000, to support that $10,000 sale. So, internally we are struggling. We’re surviving check by check. There’s this massive swings in volatility of inbound cash and outbound cash. Yet, we feel we have to perpetuate this persona of success.
So, there’s this what I call entrepreneurial poverty. We look wildly successful, while inside, the stress is unbelievable.
The resolution goes back to this system I was talking about with Profit First, which by the way, isn’t a new system. It think it’s a new application of an existing system. It’s the envelope system. Are you guys familiar with that?
Mark S: Yeah, absolutely.
Mike M: My mom actually brought that to my house, when I was a child, and raised my sister and I, our family, on the envelope system. Specifically, what she did was she worked at a local factory. She would cash her check. She worked part-time. Volatile income, by the way, when you work part-time. Sometimes, you work overtime, or you’re sick, and you get less money.
She would then cash her check and divide it up into different envelopes; the food envelope, the mortgage envelope, the community, to give back to the community envelope, and so forth. When she went food shopping, what she would do is she would grab the food envelope, drive to the food store, and then open the envelope when she arrived, and that was her budget.
What we have to realize is that even with volatile income, when we have to spend money, we still have to work within the confines of the envelope, which kind of forces innovation and so forth.
But I also realize there are certain fixed costs. I mean, a t-shirt is a t-shirt. You can’t say, if a customer orders 100 t-shirts, “Hey, we’re going to deliver 25. Are you good with that?” You’ve got to deliver 100 t-shirts. That’s a fixed variable cost, meaning it’s a necessary cost. It varies, based upon the demand of the customer.
We need to allocate that, too. What I share when I kind of give that super-fast outline of Profit First is what I call the foundational five accounts, the operating expenses and profit, what the owners pay in tax, and the income account.
But for certain businesses, you need additional accounts. Particularly in this business, where you have raw materials – t-shirts, for example – that you need to buy. We need to set up an account for that. We can call it raw materials or inventory purchase.
What happens is when money comes in, say a $10,000 order comes in, and say the raw materials cost, the cost for the t-shirts is maybe going to be $5,000. We allocate that percentage immediately, so $5,000 goes to that account. Then, the remaining $5,000 is truly what your business is making.
Because if you visualize this, you took $10,000 from the customer, but you didn’t really take it for your business. You took half of that money to give to the t-shirt vendor, the person who makes the t-shirts. The customer, in theory, could have just given that money directly to the t-shirt company, but you were just managing the transfer of money.
So, you transfer $5,000 to the t-shirt manufacturer, so you can get your supplies. Then, the $5,000, that’s what you’re truly being paid, to run your business, to put the logos and the content on the t-shirts. So, we’ve got to actually run the Profit First system off of that remaining $5,000. That’s what we allocate out.
That’s how you kind of replenish the accounts, to make these purchases and so forth. The problem is, when you don’t have a system like this, people see $10,000 come in, and they say “Oh! I earned $10,000! How should I spend it? I’ll do this and I’ll do this.” It’s a haphazard approach.
The goal is, in this envelope system, always divide the money up before you do anything else. Always allocate the money to the different accounts. Then, those accounts will give you clarity on the intended use of those funds.
One last trick is when you divide money up, and say there’s not enough money to pay your bills. You divide this money up and you look at your operating expenses. You’ve taken your profit, you’ve paid yourself, and you’re looking at your operating expenses, and you say “Oh, my gosh! I don’t have enough money to pay my bills.”
That is your business giving you direct feedback that you actually have inefficiencies, or you’re improperly running your business. Because we’re reverse-engineering profit. When you take your profit first, and you’re compensating yourself first, the remainder is what you have to run your business off of. And if you can’t run your business off of it, it’s not that you should cut your profit. It means that you’re not running a business that it can support that profit, currently. We’ve got to fix your business.
Mark S: I love that, because I’ve had at least one business like that, where back in the days where credit card companies would send you blank checks in the mail that you could write, that’s how I ran one of my businesses. It’s great to have those next big sales coming in, and you still have money in the bank account, and that all looks really rosy, right up until the time you have to close.
Mike M: Right.
Mark S: Because eventually, as all of this cash comes in, the bank account looks good for a very brief period of time. Then, you start writing those checks. But if you go in for a loan, or if you’re talking to a different kind of accounting professional, they’re going to look at things like “Well, what’s your average bank balance?”
Mike M: Right.
Mark S: And the average bank balance is going to look great, because you’re churning money in there all day and all night, when you’re actually not making any money, at the end of the day.
Marc V: I see it like just what you’re mentioning there and what Mike just mentioned. Whatever comes in, you’re going to have to do something about paying taxes, maybe sales tax, and eventually business tax, on that. So, a piece of that needs to go there.
You’re going to have to order t-shirts and ink and embroidery thread. So, a portion of it has to go there. Then, profit first most importantly, a portion of it has to go “This is how much money the business is profiting, is making. This way, I know I’m successful.”
If you do all of that math, and for some reason you can’t find any percent to put into the profit area, then you’re playing a really risky game with your business. You’re probably going to get stuck. You’re never going to grow. You’re one disaster away from being out of business.
Mark S: If you’re lucky in that situation, you’ll have to close quickly, before you get hypertension. You know?
Mike M: Yeah.
Mark S: There’s one thing that I’d like you to kind of differentiate for us, Mike, because I want to make sure that the listeners understand, is the difference between profit and owner compensation.
Mike M: Oh, yeah. Great question. Profit is a reward to the shareholders, the risk-takers in the business. These are people who have made an investment in the business. Sometimes it’s cash; buying machinery, equipment. Other times it’s sweat equity; just raw effort. Usually, it’s a combination.
If you look at it like a publicly traded company – I own stock in Ford. This is not a stock tip, by any stretch of the imagination, but I own Ford. Ford does a quarterly profit distribution. What they’re doing is rewarding the shareholders.
I don’t work for Ford. I don’t do anything with Ford, except I’ve invested in their stock. Ford distributes the profit, because they are rewarding the shareholders, the ultimate risk-takers.
Now, here’s what’s also interesting. When I get my distribution check, which is usually like $13 or something, I don’t look at the money and say “Oh, my gosh. Ford could really do better, if they had all of the profits re-invested in the company. I’m going to return this money to Ford. Actually, if all of the shareholders would do it, they could buy new buildings, they could do amazing things! Rah rah, guys! Let’s give our money back!”
No. What I do as a shareholder is I say “I took on risk here.” The value of the stock could go up, hopefully. Recently, it’s been going down. So, I’ve taken on risk. This is a reward for me, for being a risk-taker.
We, as small business owners, have taken the ultimate risk, the inception of a business. When that profit comes out, this is a reward for doing what 97% of the world population will never do, which is start a business. It is never to be re-invested, plowed back, pushed back. Those are all soft terms for saying “There is no profit. This is an expense.”
This is a reward for taking on massive risk. That’s what profit is.
Owner’s comp is what’s called the owner/operator pay. As an owner of a small business, inevitably or in most cases, you are also working in the business. You are an employee of the business. This is the reward for the most important employee you have.
You may have some other people that work for you, but I suspect as the owner, no one works as hard as you. No one is as devoted to the business as you. No one knows it as well as you. No one else is making the sacrifices like you do, sacrificing time with family and friends, and all of the things you do to make this business run. That is the definition of the world’s greatest employee.
The owner’s comp is the compensation for being a great phenomenal employee. We have to secure that. Profit is a reward for being a shareholder. These are two different things.
Our owner’s compensation, by the way, is what should support our lifestyle. Just like our employees, if they’re taking a salary from us, that supports their lifestyle. Our owner’s comp should support our lifestyle.
The profit is a bonus, above and beyond. And just like a public company, it comes out every quarter. When that profit comes out, go celebrate with it. Again, the rule is never put it back in the business. If the business can’t run off of what’s been allocated to its operating expenses, there is something that needs to be improved in the business.
Inevitably, it’s cutting unnecessary costs. There’s usually 10%, even 20% in most businesses that I’ve analyzed, and usually – this is the biggest one that people miss – massive margin opportunities. How do you grow your margins? There’s a huge upside there. We need to pursue that.
Mark S: I think that what you said is really important, because a lot of the people that go into the custom apparel business, their mindset is really they just want to fire their boss, and they want to work for themselves. Really, they’re just trying to replace their salary that they used to make, or the money that they used to make.
Only they’re not getting any of the side benefits. Nobody is helping pay their insurance. Nobody is filling up the water cooler, or paying for the air conditioning. So really, you’re kind of like – we did a book review on the E-Myth some time ago. You’re really just becoming that pro-preneur who spends all of their time working in their job, just to get a paycheck.
Profit is the point of being in business. It’s the extra money, after all of your expenses are paid, after you make your salary. The profit is – you’re right – your reward for starting a business. It’s not the job you do. It’s not getting paid for the job you do inside the business.
Marc V: What I feel is the, it’s not a million-dollar question. I think it’s like a thousand-dollar question. The reason why it’s a thousand-dollar question is because when you start, if you are a really brand, brand-new entrepreneur, this is how you’re doing it.
You have a full-time or part-time job you’re working. You finance a piece of equipment that’s a few hundred bucks a month. And your bank account is not huge. You’ve got $5,000 or less in your bank account. What you are trying to do is you are trying to achieve the American dream, per se. Right?
So, you purchase a piece of equipment, which allows you to produce something that you can create. You can sell something with a high margin, because you’re doing the labor. Then, you can build that and build that and build that. Eventually, you get to the point where you can fire your boss, because the business can support you.
At what point in time do you start to pay yourself? At what point in time do you start to put profit in? If I just got a piece of equipment, and my first order was nine shirts, that in the end, my quote/unquote profit, meaning the very simple word version of the word profit; the cost of my goods, minus what they paid for it. The shirts cost me $20, and I charged $100. I made $80, the simple profit.
When do you start? And then, if the answer is right away, how do I even do that, when my orders are $300?
Mark S: I think you’ve already sold yourself short. That’s at least a $1,200 question.
Marc V: Okay, there you go!
Mike M: The best time to start was yesterday. If you missed that, then it is now. The key, though, is to start slowly. This is like the same question as “When should I start exercising?” The answer is today, of course. But most of us like to delay it, delay it, and say “Well, if I wait long enough, then I’ll be ready.”
And you know, probably, how that goes. You don’t exercise and don’t exercise. You actually build a propensity to not exercising. The key, though, for example with exercise, is when you do start, the error that many people make is they go in full-bore. They’re like “I’ve got to really crank this up.” And they injure themselves, or it’s too painful. It’s actually starting slowly, and building the muscle, that helps.
With Profit First, the goal is to start immediately, but to start slowly. Just allocate 1% of your income toward profit. So, that order comes in. 1% goes to profit. The 99% can still go toward just running your business, like you have in the past, or just to paying off all of your debt.
I realize you may have, in the beginning, more debt than you do income. But it’s still important to start that profit muscle. Because once you see that account start filling up, you start looking at your business from a new perspective. You start saying “What can I do to sustain this profit?” You start reverse-engineering profit.
So, short answer, start immediately. We need that muscle in place. The longer you delay, and we have now literally over 75,000 companies doing Profit First. We have 2,000 documented case studies. We’ve seen every flavor now, I think, of this.
The people who wait, and put it off, rarely ever get started, almost never. The people who start abruptly and try to do the whole system from day one, have the highest failure rate. It’s too intense. The people who start the system, but start slowly, and persistently grow it over time, have the greatest success rate.
Marc V: So maybe, and correct me if I might be wrong on this, but this is how I might envision our customer doing it. You just bought a piece of equipment. You’ve made an investment, and you’re starting your business. You get your first order, and it’s not big. It’s $400, it’s $200, whatever it is. It’s your first order.
You have a few accounts. You take 1% of it – like you said, you start it slowly. Your first one is like “I’m just going to take 1% of this order. I’m going to take $10, and put it into this bank account.” Now, I have to pay myself. I can’t pay myself a salary, because my salary is more than $300. So, maybe you start with like an hourly rate.
You say “To start my business, I’m going to start slow. I’m going to pay myself $20 an hour. I’m making a choice and a number. It took me four hours to do this, so I’m going to pay myself $100.” I put that into my pay account.
Then, I know I’m going to have to pay the government 6%, so I just take 6% of it, and put it here. I know the shirts are going to cost me 20%, so I put that there. Then, that’s kind of it.
Mark S: Does that make sense, Mike?
Mike M: Yeah, you nailed it. You nailed it. You start having realizations, as you go through this process, saying “Oh, my gosh! The t-shirts I’m buying are too expensive for what I’m charging.” There’s only two fixes to that; buy cheaper t-shirts, or probably the better one is price higher.
Now, of course, you say “If I price higher, my competition is going to price cheaper than me,” which by the way, is a very bad conversation to have in your head, because now you’re positioning yourself as a commodity, thinking the competition is the same. The better conversation is “How do I dictate a higher price point, where the customer is thrilled to pay the higher price point?”
Mark S: I think we have 57 podcasts on that.
Mike M: Beautiful! Listen to the 57 podcasts. What happens is our business starts forcing these questions. In the old scenario, every dollar that came in, we use going out the door. We use everything. Then, we sacrifice ourselves. Because at least the customer won’t complain, because I’m sacrificing myself. But there will be a day where you resent your business, because it’s sucking my soul and my cash.
What Profit First does is it forces hard internal conversations immediately in your business, so you run your business more effectively. Those conversations are going to happen anyway. If you don’t do the Profit First system, it’s going to happen anyway. That’s the day you face bankruptcy, or you’re in that moment where “If I don’t get this sale today, I don’t know how I’m going to cover payroll” moment.
That happens for every business, if you don’t start doing this system. That conversation is coming, but what we’re going to do is force that conversation early, so you can position your business to be healthy.
Mark S: I think that’s so important, because I’m a low-quality QuickBooks user. I’ve done my own books inside QuickBooks, and I’ve worked with my wife, the Accountant, to do my books inside of QuickBooks. As a sales and marketing guy completely, with no other talents whatsoever, I know that I bought this for X dollars and I sold it for Y dollars, so I know that I made this amount of money. 100%, I know that.
I can’t find it anywhere! I’m looking in QuickBooks, and I look at the end of the month, and it’s one thing or another. It’s either that I know I made just a crapload of money, because I bought 1,000 shirts for $10, and I sold 1,000 shirts for $25. I know I made a lot of money.
But I’m looking at my one bank account, and I can’t find any of it. So, I think the idea of I’ve got one account, I’ve got the dinner tray. I’ve got one account that all of the money goes into. Then, it immediately goes out to all of those other accounts. At least the five total accounts to start with, correct?
Mike M: Yeah, you’re exactly right. You know, the funny thing is, just going back to QuickBooks, a lot of people say “Do I really need to do this with my bank? It’s a pain in the butt. It’s a lot of reconciliation, moving money around. Plus, my bank will charge me fees. Why don’t I just do this in my accounting system or on a spreadsheet?”
When I hear people say that and believe that, it’s a fatal flaw. It’s the final nail in the coffin, because your accounting system actually already is doing this. Your accounting system has what’s called a chart of accounts, and the chart of accounts maintains all of the different allocations of money; profit, how much you’ve paid yourself. All of that stuff is already there.
So, I always ask people, I say “Listen. Your accounting system actually already has all of this accounted for. How is it serving you?” They say “Well, I’m not profitable.” I’m like “Exactly.”
What we need to do, again, is intercept our natural behavior. If our natural behavior is to log into our bank and check out what our money situation is, then we need a system that is at our bank, and allocates the money. And again, kind of reiterating the point here, but when money is pre-allocated to its purpose, you know its intended use.
The sequence of how we do this actually is important. So, if you have that order for t-shirts come in, the first thing to actually do is allocate the money toward profit, not toward operating expenses. Even though it’s a percentage-based system, the slices of the pie always work the same.
There is a behavioral reason behind this. When we allocate money, transfer money to a profit account first, you’ll feel a natural reward mechanism, like “Oh! I just took a profit. That’s cool!” Then, the second thing you do is you do owner’s compensation. It’s paying you. You’re like “Hey! That’s cool!”
The third thing you do is pay taxes, and you’re like “Hey! That kind of sucks. I hate paying taxes, but at least I’m adhering to the law, and I’m not going to go to jail.” So, at least there’s a protection mechanism. Then, the final allocation is toward the operating expenses, the expenses of the business. That’s an awareness point.
I say at that point when you can’t pay your bills, and it may happen, when you can’t pay your bills, that’s your business telling you you’re not in the position to currently afford those bills. We need to fix something. Again, cut costs, but you can only do that so far, before you cut into the muscle of the business. So, cut unnecessary costs.
But really, look for ways to expand the value you’re delivering, and therefore, dictate a premium.
Mark S: Cool!
Marc V: Yeah. There’s so many podcasts that we have about all of the things you can do to really help fix some of that final problem that you mentioned, where basically, you’re not making enough money to do everything you just said. It’s about selling better t-shirts, selling to the right people, selling to the niche markets.
If you’re listening to this right now, and you’re kind of like “Yeah, I like this, but the problem is there’s too much competition, or my t-shirts are too expensive now,” or whatever it is.
Mark S: None of that is true, by the way.
Marc V: If you’re running into that, then you need to, like you mentioned, fix something. What everyone immediately tries to do is they want to go, and they’re like “How can I save $4 on a roll of vinyl? How can I save a few bucks on some thread?”
And it’s like what you’re doing is your business is bleeding, and you’re attempting to fix a big wound with a bunch of tiny band-aids that aren’t going to do anything. So for one, you have to do the first thing, which is if you get injured and you go to the hospital, and you get treatment. I think the treatment might be this Profit First.
Make sure that your body is in health, your business is in health. Then, turn around and actually start doing things to make more money, to make better money. Meaning that you’re not trying to shave 20 cents off of the cost of a t-shirt, because that really doesn’t matter. If you’re doing tens of thousands of shirts, it’s a lot of money.
Mark S: I think that the podcast that we most talk about is the trilogy we did on how to make more money next month.
Marc V: Yeah.
Mark S: There’s a lot of strategies in those, that you can use to try to bring up that top line. Just being careful that the point of your business isn’t driving up the top line. The other side of that is, like Mike has said a couple of times so far, is that you can’t judge the success of your business on the revenues.
Mike M: Oh, my God! That’s the bane to most people. There’s a saying that revenue is vanity, profit is sanity, and cash is king. It’s so true. It’s unbelievable how many people are persuaded, including myself – I used to be persuaded by the size of a business. I’d hear a business does a million dollars in revenue, and I’m like “Wow! That’s amazing!”
But I now consider revenue a stress point. I have a million dollars of responsibility, if I’m doing a million dollars in revenue, to other clients. I have to deliver a million dollars of promises. That’s stress.
Profit is the stress release program or pill. The more profit I have, it brings that balance about. I am far more impressed by a company that does say $100,000 in revenue, and is taking home $50,000 in profit, as opposed to a company that does $1,000,000 in revenue, and is taking $50,000 in profit.
Mark S: That’s a good point.
Mike M: The other thing I want to share, too, is I buy t-shirts and different embroidered goods. One thing my own guy did, which I thought was so impressive, and I paid a premium for it and was glad to do it – I was buying t-shirts for our internal staff, and he asked a question that no one in the past asked. He goes “What’s the reason you’re doing this?”
I explained “Well, we want to have an employee loyalty program. We really want to retain our employees.” He said “You know, I’ve got an idea,” as he was digging in. He says “Let’s do your shirts, but let’s embroider something internally, on the shirt, that touches their heart.” Because that actually came out of the thing that we were talking about.
The motto of our business is to eradicate entrepreneurial poverty. He goes “Let’s embroider that also on the inside of the shirt, something that will touch their heart at all times, and it’s known to them.” I’m like “That’s a genius idea!” Because he wasn’t now making a commodity shirt. He was serving the intended purpose of retaining employees.
My employees were thrilled. They never saw anything like this. I was thrilled, because it served my purpose. And he was thrilled, because he charged a premium for doing something that no one else even proposed to me. So, I think there’s opportunity there.
Mark S: Message me that guy’s information, because if he is a CAS podcast listener, I’m going to throw a party here at work. I really am!
Mike M: His name is Tom O’Dowd. I’ll give him a heads up.
Marc V: What’s so great about it is because these are things that we talk about, where we say “Ask your customer, what do they want? What’s the purpose? Why are you buying these shirts? What are they for? Why do you want them cheaper? Why do you think that having a cheaper shirt is better? What’s actually going on? Is it for your business? Oh, it’s for your business? It’s for your outdoor working employees, your landscapers? The cheapest t-shirt is not the solution. That’s the worst thing. You’re throwing money away.”
Mike M: Right. What’s interesting is I believe we need to sort, when it comes to profitability, sort our clients. And you guys already alluded to this, that not all clients are built the same. I think there’s two typical categories. There’s what’s called commodity shoppers, where they see the item they need as a necessity, but readily available anywhere, and all options are basically the same. That’s the commodity shopper. By the way, that does represent the majority of customers in any market. They’re just looking for the cheapest, easiest, most convenient solution.
The minority, but the best customers, are ones who see this service as life-saving. What I mean by that is, the analogy I like to use is Doctors. A general practitioner is basically a commodity. If my general practitioner says “You know what? I’m moving my offices 50 miles down the road,” or “I’m moving to a different state. Would you still be my patient?”
I’d be like “No. You just check me for when I have the sniffles or a skin rash. I’ll go to a local.” But then, there’s life-savers, like a heart surgeon. If I have heart disease, I want the world’s best heart surgeon, and I don’t care if I have to traverse the entire globe, to get to the best heart surgeon for my life-saving needs.
Well, customers see us in one of those two categories; a convenient guy who is just addressing a rash, or they see this decision as life-saving or life-important to their business. There are consumers, and I happen to be one of them, that see shirts and the uniform for my employees and for my members of my organization as life-serving. It’s critical to represent ourselves in a certain professional format.
Therefore, I’m willing to pay a premium, and I’m willing to navigate the globe, if you will, to find the right solution, the right provider. I think we, as vendors, need to categorize our customers. What customers that we have right now, are the commodity shoppers? And which ones are the ones that see the true additional value-add that we have?
Those customers are the biggest opportunity for more profitability and for more growth. Uber-cater to the ones who see the value in you. The ones who don’t see value in you, quite frankly, they’re secondary customers. If they’re looking for price, and you go up a little bit, they’re going to move on. Well, that’s a commodity shopper. Let’s focus on the value-based customers.
Mark S: And you know what? Those people will get automatically filled out, if you start putting your revenues, that percentage of your revenues, into the profit account first.
Mike M: Oh, yeah. They’re going to get sorted out.
Mark S: Cool.
Marc V: Yeah, great. Mike, if you have anything else – I think those are great closing words, but if you have anything else to add, before we go today, I think this is a great opportunity for our listeners here to do something that’s really different.
Mark S: Before you mention it, I just want to say I’ve got up on my screen ProfitFirstBook.com. Would that be the best place for our listeners to start interacting with you, Mike, in getting in on the Profit First system?
Mike M: That’s not actually the best place. ProfitFirstBook.com is the advertisement, if you will, for the book. If you want to discover the book, yeah, definitely go there. The best place to go is MikeMichalowicz.com.
But here’s the trick. Go to MikeMotorBike.com. That’s the shortcut, because I can’t spell Mike Michalowicz, half the time. So MikeMotorBike, try that out. That was my nickname in high school, by the way. Mike and then MotorBike. That will automatically forward you on to my website, or you can go to MikeMichalowicz.com.
Mark S: I love that! MikeMotorMike.com. That’s great.
Mike M: Once you get to MikeMotorBike.com – it’s just one O, it’s M-O-T-O-R. Delete one of those Os. There you go! – it will actually forward you on to my website. You can pass by that Welcome mat, by clicking that little link below it.
This is my personal website. Here’s what I think may be interesting. First of all, all of my books, you can get all of the free chapter downloads for my books. It’s either two to five chapters. You can really dig into these books, without even making a purchase at Amazon or wherever you buy your books.
But the other thing is I used to write for the Wall Street Journal for many years. My best articles are in the Wall Street Journal archive. If you’re a subscriber to the Wall Street Journal, you can get the articles that way. Or on my website, when you sign up, you get all of my articles for free, and they’re some of the best articles, I believe, I’ve ever written. Many of them inspired some of the books I’ve written.
So, that’s MikeMichalowicz.com, or the shortcut is MikeMotorBike.com.
Mark S: I haven’t done that yet. I’m definitely going to do that. And I’ve got to tell you, I’m scrolling over these books. I’m ready to buy the calendar. When you print it up, I’m in!
Mike M: That’s so funny. One thing I asked, I’m really into studying kind of human behavior. It’s kind of like a little hobby. I was interviewing a guy named Roger Dooley, who is a Behavioral Psychologist in marketing. He told me this little thing. He goes “The larger the variety of pictures that people see of you, the more engaged they get.”
Yet most websites with an author will be one static picture. I was like “Oh! I want people to be highly engaged.” He was like “Have a big variety of pictures.” That’s why as you move around, you’ll find some kind of golden goose eggs, some jokes there, too, that you’ll find as you navigate other parts of that page.
Do you guys want the bonus tip, like what you can do now?
Mark S: Yeah, please do.
Mike M: Alright, here it is. I think this is all about massive impact. It takes less than 30 minutes, and it will be a game changer for your profitability. It’s real simple. Start slow, and here’s how you do it. Call your bank today. You’ve heard this podcast. Do not hesitate! You get rewarded for action, not for idleness.
Call your bank and set up one account called Profit. Make it a savings account, and allocate 1% of any deposits that come in, into the profit account. Because like you were telling, if you have a $400 order, I’m not saying take a bunch of money. Take 1%, which is $4! Put that in the profit account. Because if you can run your business off of $400, you can run your business off of $396.
The impact to running your business is inconsequential, but the impact to moving profit in your business, and start building it, is massive. What will happen is every time you log in, you start seeing this small, albeit consistently growing profit account.
Then, I believe it’s only a matter of time before you change that 1% to 2% or 3% or 5%. Over time, you start building that profit muscle. This is the equivalent of getting the gym membership, and just going there for some stretching exercises. That’s how you start, and over time, you’ll be bench-pressing 300 pounds, or whatever your goal is.
But with your profit account, if you start slow, it’s just a matter of time. Maybe it’s months, maybe it’s years, but you’ll be extraordinarily profitable if you start today.
Marc V: I’m really happy you said that, because every episode, I always like to leave with like some homework to do. I’m like take an action on something right now, in this. Go and do this, right now. That’s the perfect one. I love it, because you don’t even have to have read the book or listened to anything yet.
One of the first things you could do is log onto your bank or call them, and probably logging onto your bank account and creating another new savings account probably will take you 12 minutes, tops. Then, boom! You’re done.
Then, the next time an order comes in, you throw 1% in there, and you’ve already taken action. You’ve taken the first step. Then, the second thing you do is you probably look at a bunch of other stuff from Mike, and see what else you can learn.
Mark S: It’s going in the show notes. You made the show notes, Mike!
Mike M: Nicely done. Thanks for the plug there. I appreciate it.
Mark S: No problem. Happy to do it.
Marc V: Well, thank you!
Mark S: Yeah, we really appreciate that. This has been Mike Michalowicz, from Profit First. MickMichalowicz.com or, because I can’t spell it -.
Marc V: MikeMotorBike.com!
Mike M: That’s right! It’s a tongue twister, I guess.
Mark S: Alright, everyone! Thanks for listening. This has been Mark Stephenson, from ColDesi.
Marc V: And Marc Vila, from Colman and Company.
Mark S: You guys have a great business!
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