Put your Profit First. Always.

Put your Profit First. Always. Put your Profit First. Always. Put your Profit First. Always. Profit First Webinar PDF Note: Youll need Adobe Reader to view the PDF file above. Download Adobe Reader. Check out this archived webinar and learn to avoid the panic-driven cycle of operating check-to-check for your small business. Any small business owner or entrepreneur will tell you growing a business is hard work. But thats only half the story. Many business owners come to realize that a growing business doesnt necessarily translate into a profitable one. More often than not, the business turns into a cash-eating beast. In this archived webinar, author Mike Michalowicz shares concepts from his latest book, Profit First, and how he survived the grow at all cost method of business wealth. In this lively hour-long discussion, Mike will explain how business owners can avoid the panic-driven cycle of operating check-to-check. Highlights include: The Frankenstein Formula How the traditional accounting method of Sales Expenses = Profit builds cash-eating beasts and significantly hampers profitability. The 10/25 Rhythm A simple method for mastering the ebbs and flow of cash. Getting Started Today What you need to do now to be profitable before the day is out and forevermore. About the Presenter: Mike Michalowicz Author and entrepreneur Mike Michalowicz (pronounced mi-kal-o-wits) started his first business at the age of 24, moving his young family to the only safe place he could afford a retirement building. With no experience, no contacts and no savings he successfully bootstrapped a multi-million dollar business. Then he did it again. And again. Now he is doing it for other entrepreneurs. Mike is CEO of Provendus Group, a consulting firm that ignites explosive growth in companies that have plateaued and founder of Profit First Professionals, a certification for accountants, bookkeepers, business coaches and other business financial experts, who help their clients maximize profitability; he is a former small business consultant for The Wall Street Journal, MSNBCs business make-over expert and an internationally recognized keynote speaker on entrepreneurship. Visit MikeMichalowicz.com, check outMikes Twitter feed, or contact Mike online at Mike@MikeMichalowicz.com or at888-244-2843. Webinar Transcript: Put Your Profit First, Always (August 19) Welcome to this webinar presented by Monster. Im Connie Blaszczyk, managing editor of the Resource Center. Thank you for joining todays presentation, Put Your Profit First, Always. Our featured author, keynote speaker, and entrepreneur host is Mike Michalowicz. Now, its my great pleasure to turn things over to our host, Mike Michalowicz. Connie, thank you so much. It was a pleasure. We got together for a cup of coffee, about three or four months ago, and decided that we wanted to put this on. I just want to thank you and everyone at for doing this. Welcome, all the participants. Now, before we get this party started, I have a question for you guys. Who here theres a poll popping up on your screen is an entrepreneur or a small business owner? I just want to get a sense of whos joining us in this presentation. Or do you have a small or a medium-sized business, or perhaps youre not sure anymore? As I go along this presentation, Ill ask you a couple of polls, so I can get a sense for where you stand in different facets of your business. But itll help me and help other folks listening in right now to know where you stand in your business and what size business you have, how you qualify yourself. Please answer that and Ill give you some of the poll results as the results come in. A little about me, because I recognize that not everyone here knows who I am; My name is Mike Michalowicz. I started my first business when I was 24 years old not because it was something I intended to do. I was working for another employer and saw an opportunity. Never thought Id be an entrepreneur, and I fell into it. Well, I was very fortunate. Good timing has a big factor, but also some strategic moves, and I was able to build that company and sell it. I did that with the second company, too. I currently operate a group. We run an organization called Profit First Professionals. My organization certifies accountants and bookkeepers, and helps businesses just like the folks listening in by making their businesses more profitable. By the way, the results are coming in from the poll; 75 percent of the folks listening in right now are small business owners and 25 percent are medium-sized business owners. Medium business usually generate $5 million and over in revenue, and small business is generally $5 million and less. But there are many definitions of that, so its really interesting to see how youre defining yourself. While I had all those early successes with my business, I came to realize I am truly Dr. Frankenstein. Perhaps you are, too. The reason I call myself Dr. Frankenstein is I, and you, had the wherewithal, the ability, the intelligence to start a business. If you think about it, just like Frankenstein, we took together the scraps we could find of financial resources, some of the knowledge we had, and some of the resources and equipment we could scrap together. By stitching those things together, we were able to start a business. Very quickly, that miracle moment of starting a business turns into realization that we have built a a fiend is probably a better word, a cash-eating fiend a business thats just consuming money. The only way to finally make some income for ourselves, to finally pay ourselves the way we deserve, to experience the financial freedom weve been pursuing, is for us to grow more. Its just to grow to a certain size where that fiend turns into a workhorse for us. Yet, st atistics prove that doesnt happen in the real world. There are 28 million small businesses in the U.S. and 21 million are running check-by-check. That means 21 million businesses dont have the ability to survive in business even another week, if they dont collect more checks if more revenue doesnt come in, if they dont make another sale. These are truly check-by-check companies. It surprised me when I first heard about the statistic that so many businesses 28 million businesses and 28 million entrepreneurs and small business owners could start a business, have the wherewithal to get prospects and clients, to attract business, to collect revenue, do all these things, but couldnt turn a profit. Were people just inept in this area or was just something else flawed? Well, I found that there was something flawed. Thats what were going to go over in our hour or so together. Theres a formula. Its called GAAP, or Generally Accepted Accounting Principles, thats causing businesses to struggle thats preventing profit, in fact. Theres a better way to becoming profitable in your business, and I call it profit first. The process is simple it is putting your profit first. Now, Ill explain the steps that make that happen. When you put your profit first, there are many rewards youll reap. Well share what you gain toward the end of the presentation. Lets do one more poll question before I start digging into the meat of this presentation. I want to know, whats your perception of wealth? How do you define it? You should see it popping up on the screen now. If you would, pick the answer that suits you most, what is your idea of wealth? Do you see it as your ability to spend money freely? Is it having the capacity to grow your business while saving simultaneously? Is wealth just the experience of having win-wins with others? Is it maintaining a certain lifestyle or owning the lifestyle you want? Which one of these choices best represents your definition of wealth? Well, for many people Im going to come back to that poll in a second and share the results but for many people, wealth has been top line thinking. Well, top line thinking is we all know what the top line is. Its sales and revenue. I cant tell you how many meetings Ive gone on with entrepreneurs and myself for the longest time believing that success was defined by the top line how much money I was bringing into the business. But profit was an afterthought. In this little slide youll see here is not a typo or a misrepresentation of font sizes. We see revenue as the goal and profit as a little tiny afterthought. Because of this focus on the top line because of the belief that wealth is a top line most entrepreneurs and business owners are focusing there and not achieving permanent wealth. By the way, the results are coming in. Im going to flip back so you can see the answers. Seventy-five percent of folks have said that having the capacity to both save and grow is a definition of wealth. About 25 percent of the feedback is saying create a win-win for myself and others. So, wealth is defined in the experience and the financials. Its interesting. I agree; I think how I define wealth is a combination of those two. Why do good businesses go bad? Well, its caused by this formula called GAAP. Perhaps this is better called the tale of two businesses because in the earlier statistic I shared, out of 28 million small businesses in the U.S., 7 million sustained profitability using GAAP; Twenty-one million dont. GAAP, which well go into in more detail, is a flawed formula, but for certain personalities, it works. For a majority of entrepreneurs, it doesnt. The majority of entrepreneurs, in fact, experience whats called The Survival Trap. Its an emotionally driven trap. Let me explain how this works. Im sure everyone on this call is familiar with being in point A and wanting to go to point B. Point A is where you are today, point B is the vision you have for tomorrow. I think we all have heard the saying, too, that the shortest distance between two points where we are now and where we want to go is a straight line. In this graphic, you saw that just popped up from the screen, point A for many businesses has those 28 million. Twenty-one million of those businesses are in crisis. Crisis is defined for an immediate need for cash, and that if money doesnt come in this week, that the business is going to be in trouble. If money doesnt come in this month, the business may be out of business. Thats crisis. Well, when point A is crisis, were in a reactionary mode. The way to escape crisis is to take any action that will get money. I know that I have this text here a little bit small because I try to pack a lot in. But I hope you can see this, that if youre point A, youre in a crisis mode right now. You can take a direction immediately to the left, where it says, Offer a new product to make immediate revenue. You can offer a new service. You could do something that you havent done in the past, but you can offer something new to bring in immediate revenue. Or, for example, if you went straight down on this chart that says, Run a last minute promotion to generate quick cash, maybe youll discount something. Maybe you have a store and you discount or have a big sales promotion to get some quick cash. Maybe introduce a new product. Maybe you take on an unfit project just to cover this months payroll. Maybe an existing client comes in with a specific need that you dont typically serve and you decide to serve it. Well, what happens in the survival trap is any action you take any of these actions will actually get you out of crisis. So, in the moment, you win. You see, if you take action to the left, where it says, Offer a new product to make immediate revenue, youll get the money. Youre out of crisis. Its good in the moment, but then it pulls you back into crisis. Why is that? If you look at the chart, youll see a vertical line. It may be hard to see, but youll see theres a vertical dotted line. Fifty percent of the decisions we make in crisis actually are taking us in the opposite direction from point B. So, by offering a new product to make immediate revenue, its likely taking us away from focus, from specialization, therefore it weakens our core product line. And were actually taking further away from where we wanted our business to be because that crisis took us away from our vision. Conversely, about 20 percent of the time this is where you see those two horizontal lines, above point A and point B theres a horizontal line we take actions that move us in the general direction of where we wanted to go, but not directly. So, it takes us off course, over time. For example, focusing all our efforts on sales to get fast money and then we ignore service and products, so the quality starts to slip. Or sometimes 15 percent, 20 percent of the time we go below the line. Its only when we live in crisis mode like this that about 10 percent of the time do we do something thats consistent with our vision where we wanted our business to be in the first place. Its in those moments, we say, Its clicking. Its finally working. Im landing the clients I want to land and doing the exact service I love to deliver. Its finally all coming together. But if that happens out of crisis, that 10 percent of the time is happenstance its just a chance and its not a consistent effort. Successful businesses make staying consistent with going to point B with the clarity of their vision by only taking on work thats consistent with it, will actually get there. Most businesses 21 million out of 28 million are living in this crisis mode. Well, hopefully youre not there, but I suspect many of the folks on this call are. The reason or one of the foundational reasons is GAAP accounting. By the way, I know I am picking on GAAP, and Im going to pick on it some more, but I wanted to tell you something about GAAP accounting. It is a logical, established, effective system. The problem with it is its flawed because it doesnt match human behavior the way we naturally behave. Were going to dig into that in depth shortly. But I want to ask you guys a question first. Theres a new poll thats going to come up that says, Are you familiar with the GAAP accounting method? If you could, just answer now yes, you know it, and then you use it; no, and you dont t use it, or youre not familiar with it at all. By the way, if you do use it, say yes. If you know it, but you dont use it, say no. If youre just not familiar with it at all, just say that. Some businesses elect not to use GAAP, so theyre familiar with it, but dont use the process. While you answer that poll, Im going to go on to the next slide and Ill go back and tell you the results. The GAAP accounting method stands for Generally Accepted Accounting Principles. This is a process that has been mandated in the U.S. by the SEC, as required that all public companies adhere to GAAP accounting. If youre a small business, if youre a privately-held business, you are not mandated to follow GAAP accounting, but from my experience Im interested to see what the poll results are most small businesses upwards of 75 percent, say, to maybe 90 percent of businesses use GAAP accounting. Now, if youre not familiar with the word GAAP, you probably are familiar with income statements, balance sheets, and cash flow. Maybe you dont know how to navigate around those, but Im sure youre familiar with them. Those statements are all generated from GAAP accounting. What I want to do now is take in to the pros and cons, but then I can see the results are coming in. I see about 50 percent of folks are using GAAP. Forty-two percent are not using GAAP, which Im actually surprised. Most businesses use it, especially because when you submit your tax returns, youre required by law, even if youre a private company, to follow the GAAP principles. About 8 percent of folks are not familiar with it. So, use it or dont, or not familiar with it, Im going to catch you up to speed right now. GAAP accounting has been established and around for eons. Ever since, really, the start of business, this methods been around Im going to show you the core formula to it in a second and it makes logical sense. As we go through GAAP accounting, youve generated sales. From those sales often called income you subtract your expenses. They have some fancy terms like cost of goods sold; youre probably familiar with that. Then SGA, which stands for sales, general, administrative costs; these are different costs from your business. Then after that, you have this thing called EBITDA, which are your earnings before income tax and depreciation. You keep on subtracting out until you have your final bottom, bottom line your net, net profit. The challenge with GAAP is there are some cons mentioned already and were going to dig into it a lot deeper is that GAAP accounting does not work with our natural behavior. In fact, it works against it. The reason it fails is because of this thing called Parkinsons Theory. Ill touch on that too, in a minute. While its a very comprehensive system Im not suggesting on this call at all that you negate GAAP it is very complex. So, most business owners small and medium-sized business owners that Ive worked with actually take shortcuts and dont use GAAP for their daily management of cash. Thats what I want to explain to you and how to make your business profitable is this method called profit first thats a cash management system, but it will sit on top of GAAP. You can continue to do it, and youll need to do your tax returns, anyway. But theres also other benefits youll derive from GAAP by having your accountant or bookkeeper work with you and show you what these reports are showing. Now, the reason GAAP is flawed is when it comes to cash management what we need to do with our cash every day. The core formula for GAAP is what you see on the screen. I crossed it out because it doesnt work. But its sales minus expenses equals profit. If you think about the concept, it totally makes sense. You have to sell products or services, collect that money in, you then subtract out your expenses to cover those sales and to grow your business. But then the remainder is profit. Thats the problem the remainder or the leftover is profit. For most businesses, as our sales grow, expenses grow at nearly the identical rate. Thats because of whats called Parkinsons Law. Im going to touch on what Parkinsons Law is in a second. Its a behavioral tendency that people have that everyone in this call likely has and because of how GAAP is designed, it actually hurts our businesses. But I want to tell you what this formula did to me. I told you right when we started the call, I had the good fortune of founding and growing and selling two multi-million dollar companies, and now I operate my third. But while I was growing those two companies, they werent profitable on a day-to-day basis. The businesses were growing, but as sales were coming in, my expenses were growing just as quickly, so I fell into the survival trap sell more and more and more. I made my money, personally, was when I sold my businesses one was acquired privately, another was acquired by a Fortune 500. When that happened, I came to believe that profit is an event, that profit happens when that big client comes in and finally buys from you, or that investor, like in my case, comes in and acqu ires the company or a portion of it. That was a big moment. I found that a lot of entrepreneurs believe that. Perhaps youve experienced or have those beliefs for yourself that profit happens as an event, that there are these big moments. Well, I started an angel investing business after I sold my second company because I believed I just need to have lots of big events build companies and sell them. We land huge clients, sell some great intellectual property we developed to have these big moments. But Ive come to call myself now the angel of death because I wasnt a good angel investor; it was not in my field of expertise. Within two years of selling my second company, literally every penny Ive made, I was a private investor. I have now lost through my investing in arrogance and belief that I could just make these events happen following the GAAP formula. This moment it was a very personal moment, as I came home to my family in 2008 on February 14, specifically on Valentines Day to my wife and children and told them that every penny Ive made for us to provide for us I had now lost because of my arrogance, because I was following a formula that was flawed and I believed in intimately. My daughter, who was nine years old at the time, as I was telling her and my other children, my wife, she ran out of the room and she came back with her piggy bank, put it down in front of me, and said, Daddy, Im going to help us out. That was a humbling, humbling moment for me the most impactful moment, I think, of my entire life and it triggered a new thought and an empowering thought. I realized that profit is not an event, something that happens at some time and some big moment, but profit is a habit. Maybe thats something you want to write down. Profit is not an event, its a habit. Profit needs to be baked into our business. It needs to happen every day. Small amounts every day, small wins, small victories every day strung together, represents a huge profit. Now, the reason businesses suffer under the GAAP formula, which I showed earlier sales minus expenses equals profit is because of this concept called Parkinsons Law or Parkinsons Theory. Parkinsons Theory works like this: There was a behavioral specialist, named Northcote Parkinson his first name was Northcote. He realized that, as a resource was made available to us, we consumed it in its entirety. And the greater the resource made available to us, we still consumed it in its entirety. For example, if you and I were on the phone together discussing a project, and you were writing a proposal for me, and said it would take one week to complete the proposal, it would take you a week to complete the proposal. If we had the same conversation about the same proposal, but you said it would take five weeks, it will take you five weeks to complete the proposal. You see, whatever we make available as the resource time it is human nature to consume it in its entirety. The problem with GAAP accounting is that GAAP accountings complexity mandate that most of us do bank balance accounting. To manage our money on a daily basis, most entrepreneurs and small business owners go to our bank accounts, we log in to our one bank account, we see the money sitting there, we see whats available in checking, we make a decision accordingly. The problem then lies in that. In that, by looking at our bank balance, we fall victim to Parkinsons Law. We see the availability of a resource a nice deposit came in for $10,000 or $100,000 or $1,000, whatever represents a good deposit for you. It comes in, we see that money there, and then we say, Thats what I have to spend. Thats where the mistake happens. We think that the entirety of that resource is available and we use it in its entirety. $10,000 comes out, it pays bills, theres nothing left for profit. Next deposit comes in, it pays bills, theres a little bit left to make that investment weve been waiting to make, that we needed to make, and theres nothing left for profit. Money comes in, we squeak out a little bit for ourselves just to cover our own mortgage or bill or whatever, the rest goes to expenses, and theres no profit. We fall victim to Parkinsons Law. I want to tell you how to fix it because thats where I know everyone is on this call for. But I want to ask you a question. The nice thing, this is anonymous, but I want your brutal honesty here. I want you to share what your spending experience has been like. Do you feel that youve spent recklessly in the past? Not all the time, necessarily, but that you spent recklessly, that in retrospect, looking back, that you couldnt really afford it? Please answer these now. Do you experience constant cash fluctuations, which is typical for most businesses? Are you experiencing highs and then lows and/or have you had profit in excess of 5 percent or not? Or have you rarely had over 5 percent? Or in this case, are you all of the above? Please answer these questions now. Im really curious of where you stand. Not to reveal or to influence your choice, but studies show that all of the above is the most common answer for this. In one of the studies I conducted, I have 20,000 small business subscribers to my newsletter, and I sent out a variation of this. Upwards of 80 percent of the business owners that responded had spending occurrences where they spent aggressively because they thought they could, and then money didnt come. Then they realized that spending was inappropriate. It hurt them. Almost everyone was experiencing constant cash flows up and down and very few folks had consistent profit. As the results are coming in now, no surprise here that almost 40 percent of the respondents are all of the above and 55 percent, so almost everyone between those two, are experiencing constant cash fluctuations. Thank you for your honesty here. Thats pretty much a reality for small business. Heres the good news. There is a solution. Now, again, I want you to write this down: profits not an event, its a habit. How do you make it happen? Well, you actually do it by not changing how youre naturally ingrained. Instead of changing your habits, youd simply capture what youre doing and you make that habit your biggest ally. Remember those infomercials that cheesy guy selling something on TV, like the ab inductor or whatever that product was? You put a strap on your waist, itll electrocute you every ten seconds, and youll be in great shape? Those products require us to change our habits. They rarely work. They showed the before and after picture, but I wish they would show the before, after, and then the after, after picture, where people cant sustain the change. There are products out now these super, super intense workouts. Yes, they work, but they require us to work out in a way wed never worked out before, AKA change your habits, and then they quickly fail. So habits should not be changed. Theyre very hard to change. Ask a smoker if they should stop smoking. Theyll say yes, but changing thats a whole different thing. Habits, when the opportunity presents itself, should be leveraged. As we go along here, just answer this poll. With your habits, are you one of the few folks that can change habits easily or have you changed bad habits in the past and quickly slipped back to it? Or are you just one of those folks admittedly, Im one of them who just is stuck in my ways and dont change habits. Tell us where you stand right now. While you answer that, I want to tell you what I discovered from the health industry around habits and how it applies to our business. In the fitness and health industry, they discovered that there are four key procedures to follow that leverage our habits. First principle is small plates. Unfortunately, the diet in America has caused the size of the plates in our house to increase nearly double the size they were back in the 1700s. They are double the size they are now. As a result, unfortunately, we, as a population, have nearly doubled too. Why is that? Because our habit is to fill the plate. As mom said, Eat everything on it. Well, in the health industry it said, One of the biggest changes you can make is simply reduce the size of the plates at your house. Get rid of your current dishware, get smaller plates and smaller bowls, and that allows you to continue your habit. Fill the plate and eat whats on it. But now there are less calories because youre eating less, and because of t he smaller plate, you start to shed those pounds. Change the plates, not the habit. The next principle that I learned from the health industry is eat your vegetables first. If we simply just change the sequence, its the same foods, but just the sequence we eat the foods. If we eat our vegetables first, well eat more vegetables because were hungriest when we eat first, and it fills up space in our stomach, so we eat less of the next meal, which may be the main course. Then were way, way less likely to eat dessert. Talking about dessert, that touches the third principle in the health industry: remove temptation. I dont know what your temptation is. Mine is and I publicly admit this is Chocodiles. Thank God, Hostess discontinued making that. If you know what a Chocodile is, Im proud of you because thats a reference to all the way back in the 70s. But I was a huge Chocodile fan. If Hostess still made this product, I would be flying out of the room right now and running down the hall to get to one. I remove temptation. In our house, theres no soda. So, in the house, no one drinks soda. Whatever youre tempted by, dont have it on your desk, dont have it readily available, remove it, and youre less likely to eat it. The final principle from the health industry is to eat five meals a day. Most people eat two meals a day skipping breakfast or lunch, and just gorging in for another meal. Other people snack constantly, but they found the optimal diet is five meals a day. By the way, while sharing, the poll results came in. When I asked you folks on the call, whos stuck in their ways? A lot of us said we can change our habits 67 percent specifically can change their bad habits, but only for a little bit of time. Eight percent stuck in their ways. Surprisingly, 25 percent of the folks said you can change bad habits with ease. Well, thats great. If you have established habits that you cant change, the system will give you guardrails that you can change your bad habits. The system will support you, too. So, I think either way, youre going to find this to be a win. Those principles I just showed you lets put back that slide. These four principles small plates, vegetables first, remove temptation, eat frequently, five meals a day translate right to the bottom line of our financial health. I put the pictures here, but I also made a checklist. I think it will just be easier to go through, rather than the pictures, explaining how these four things tie in. In our business, we need to use small plates, too. Remember our reference to bank balance accounting: the propensity of most entrepreneurs and small business owners to log in to their bank account every single day, see how much money has been deposited, and then make decisions accordingly? Thats one big plate, that one checking account. Instead, we want to have multiple small plates. Ill explain that in more detail in a second. But that correlates to the plate size reduce the plate size, have multiple accounts for specific purposes, use smaller plates. When it comes to vegetables first, that prior principle I talked about in the health industry, in our business, we want to do something first too, and its not pay bills, not even taking some for ourselves. Its to allocate money to different plates. The first thing we do as money comes in is we move it to these different accounts, so thats very clear what that moneys intended purpose is. A single $10,000 check isnt $10,000 for expenses. Its a percentage for taxes, its a percentage for profits, its a percentage to pay the owners, its a percentage for operating expenses, and so forth. The third step is remove temptation those cookies or whatever your thing is. My Chocodiles, if theyre in the room, I only have so much willpower before that muscle of willpower fatigues, and Im going to be eating that treat. Well, if we remove temptation, we dont eat it. With profit, as we reserve profit and taxes, we want to remove and hide that money away so we dont end up borrowing from ourselves. And we want to allocate money on a regular basis. I found there are two particular days that work best. Heres the first step; by the way, this is highly actionable. Im encouraging everyone on the call today to implement this process immediately, if this resonates with you. Its very simple to do. This is a shot of an online bank account. Historically, most small businesses perhaps yours just has one account. Usually, that is called checking, because the word income is the same as checking, and the entire balance is there. In this case, you would see just one account income and if this was the balance, youd see $45,000 in that one account. What you need to do, following the Profit First method, is to set up four additional accounts, so you have a total of five accounts. One account is your income account, ones your profit, another is owners paid tax and operating expenses. Let me explain what each one is. The income account is a checking account with the sole purpose of collecting deposits. Any time you generate revenue from a sale you get a check written to you, you get cash or an ACH deposit, whatever it is it gets deposited into this account. The sole purpose of this account is to accumulate money. Thats it. Then, on a regular basis, we distribute all the money thats accumulated in the income account into the different profit accounts. From this account, you could see this is active, theres money thats piled up in here. At a certain point on a certain day, a portion of this money will be allocated to these different accounts. The other accounts you need to set up are a profit account. This is an account exclusively to accumulate profit in; a percentage of your income is going to go in here. Another account is your owners pay account. Shame on me for not doing a survey about this, but just in your own mind, if I ask you whos your best employee, tell me their name. Chances are youre thinking of your best employee not thinking about yourself but someone else. You are the best employee. Im sure you have a great team. Actually, its mandatory to grow a great company. You have to have great employees and great colleagues, but dont forget that youre one of them, too. Too many owners sacrifice themselves. By not reserving money to pay themselves, they dont pay themselves anything and very quickly come to resent their business. The business starts to control them, the business becomes the fiend that eats them. Therefore, we need to allocate money to ourselves immediately. We are a key employee. Then we need to have a tax account. We have tax responsibilities. Most businesses on April 15 are surprised that they have a tax bill and then scramble to pay it. If we reserve this money in advance consistently, youll never be surprised by it again. And the business should be allocating tax money not just for the businesss taxes, but yours, as the owners. The tax responsibility of the owner should be covered by the business. Thats why you started the business anyway for financial freedom. So, the business should be allocating for that. Then a percentage the remaining percentage is allocated to operating expenses. This is what you need to run your business off of. Step one, set up these five accounts. Step two is to do an allocation. First Im going to show you what it looks like, then Im going to go back to this chart on different percentages that you can use. But what we need to do is allocate money this is your best rules first. Allocate money from that income account to these different accounts first. As income comes in, you dont pay bills out of the income account; you allocate percentages of that income to these different accounts: profit account, owners pay, and so forth. Now, this pie chart I prepared for you, I call the Instant Assessment. I found that based upon the range of revenue that your business generates, the healthiest businesses that I researched I researched about a thousand companies are the percentages that theyre doing. For example, if youre a very small company a brand new startup doing between $0 and $250 you should be allocating, just like the healthiest companies, about 5 percent of your income to profit. A $1,000 check comes in, $50 goes into profit. Fifty percent of that money is being allocated to owners pay. A $1,000 check comes in, $500 goes into the owners pay account, 15 percent to tax, and 30 percent to operating expenses. Based upon the feedback I got, small and medium-sized business here, I suspect many folks in the call are more in these ranges: C, D, E, and maybe there are some folks in F. Lets pick D. This is a common range for small business. If you have a $1 million to $5 million company, about 10 percent of your revenue should be incoming sales deposits, if its being allocated into profit. So a $1 million company should be allocating $100,000 of that money into profit. The owners pay should be another $100,000. So, a $1 million company, the owner should be making, in a very healthy company, $100,000 in salary. If there are multiple owners, that money gets divided up amongst them. And then theres also a profit distribution of another $100,000. So, the healthiest $1 million company is distributing to the owner or owners $200,000 per year and allocating $150,000 of that income to tax responsibilities. So, the owners dont have tax above that that they have to pay on their own the business already a llocated that. Sixty-five percent of the remainder is being used to operate the business. So $1 million business is using $650,000 to operate the business. When I show these numbers to people, it is like a cold bucket of water to the face. Its pretty intense pretty quickly. These are the healthiest companies. Im not suggesting you start doing those percentages right away. You should start with a small manageable percentage. If you never have had profit before, allocate 1 percent into profit. If youve never allocated money for tax before, allocate 1 percent. If your owners pay was, maybe, representing about 2 or 3 or 5 percent well say 5 percent of your total income, now allocate 6 percent. Those targets I gave you are simply targets, not where you should start. By the way, with this webinar, was kind enough to provide all of us with a download of the first five chapters of my book called Profit First, which includes that chart in there. So make sure you grab a hold of that. Now, step three for the business is moving money to a second bank. Its removing temptation. Remember, when those cookies are in front of you, willpower can only last for so long. As you start allocating money to profit, it may be hard to see this but the $3,900 allocated to profit here, theres not a $3,000 allocated tax. If that sits there, the day may happen where theres not enough money in this operating expense account to pay your bills. When that happens, by the way, when theres not enough money in your operating expenses to pay bills, that is your business screaming at you, saying, You dont have enough operating expenses to pay bills. You cant afford these anymore. Stop incurring these bills. But when that happens, its easy to just temporarily borrow Im doing air quotes right now. Steal is really is what I should stay to steal from our profit account, to steal from our tax account, to cover bills. To prevent that from happening, I encourage you to set up a bank account with another bank. Whoever your primary bank is, set up these five accounts with them, but go to a second bank perhaps one youve never worked with before and set up two accounts there, also profit and tax account. This way, once you allocate money from your income account, as it comes in into these different accounts at your first bank. You then start a transfer of that money the profit into the second bank for it to simply accumulate there. The concept is this: out of sight, out of mind. And you dont want the convenience options on the second bank. You dont even want online banking, if you can avoid it. Simply set the second bank, send a check to them, transfer the money over, and do it consistently. When you withdraw money well talk about why or when you withdraw money and how you do it when you withdraw a profit and take a profit, when pay your tax bill, you simply go the bank, ask for the manager, and have t hem write out a bank check to you, and then you have the money available. You want to remove the temptation. Dont make it easy to borrow from yourself. The final principle was eating frequency. In the health industry, five meals a day is the optimal rhythm. Well, when it comes to business, most businesses are paying bills, managing cash flow once a month or even less frequently. Other businesses are doing sporadically. Money comes in, they look at what bills have piled up, and they pay bills. I actually found theres an ideal rhythm. Its twice a month for most businesses and ironically, there are two perfect days to do it on: the 10th and 25th. The reason these days are so good is, if you pay bills on the 10th, those bills that you pay will arrive to the vendors by the 15th. Usually half your bills are due mid-month, and if you pay bills on the 25th, those bills will arrive by the end of the month when bills are due. This process of doing it twice a month on 10th and 25th will keep you within terms with your vendors. Im sure you would argue the same thats very important. We have to treat our vendors well. Theyre companies just like o urs. We want good vendor relationships. But theres something even bigger going on here. If you do bills on the 10th and 25th, you can watch the cash flow of your business, like you can watch tidal waves. I dont know if youve ever gone to the ocean. If you put your chair down at the ocean, chances are you like to put your chair down where the waves come up and touch your feet. Well, if you notice the waves arent touching your feet anymore, you may move your chair forward to touch the waves again. Conversely, if the waves are coming in too high, you push your chair back. That simple adjustment of our chair is adjusting to the tidal conditions. Were actually adjusting to the tide. Well, by paying bills on the 10th and 25th, its the same thing. We see the money accumulate in the income account like a wave. Then, on the 10th, all that money gets first allocated remember thats the first, vegetables first. We allocate the money to different accounts profit, expenses, owners pay, taxes then you pay the bills from the operating expenses you have. You then, at the same time, move your profit over to the second bank and your tax reserve. You then take your owners salary out of the owners pay account. All that money accumulated up to the 10th in the income account has been now allocated and that moneys been addressed. Then, all the money accumulates again. It piles up to the 25th in the income account. It then gets allocated all the money gets depleted out of income and then they accumu late, again, to the 10th and 25th, and you keep this rhythm going. Whats great about this rhythm is you get to start seeing the cash flow waves. As money accumulates, you see how much money youre making, and as it disperses, you start again. If you see that less money is coming into your income account, its an immediate red flag and you know you have to take action. Problems with your sales or youre not making collections it raises the flag. Conversely, the more money comes in than youve had historically, that may be a reason to celebrate, but its definitely a reason to replicate where youre doing right thats working, that you can do more of. By doing this twice a month, you see the waves of income a very important tool. Theres one other thing I want you to do on a rhythm. Once a quarter, youre going to take a profit distribution. How many times have you done that? As a small business owner, how many times have you taken a profit distribution? Once a year, if youre lucky, right? Many businesses are break-even, not taking anything. Well, on the news, youve seen this on the Bloomberg radio or the news radio, at the end of every quarter, those public companies announce another profit distribution. Well, now that youre taking your profit first youve applied this new formula of taking your profit first youre now going to take a profit distribution. That money thats accumulated at the second bank, take it out on the end of each quarter. By the way, I suggest, as a little caveat, dont take it all out. I suggest taking about 50 percent of it out. Say you saved up $10,000 in that profit account. Take out about half of that. The reason I suggest that is sometimes a rainy day happens, sometimes disaster strikes . I was working with a company and literally, from a snowfall in New Jersey, where they were based out of, their roof collapsed. They had to close down the business for two or three months, but they had money piled up in their profit account, and they got by because of that. Thats why I suggest not taking it all out. But at the end of the quarter, take a profit 50 percent of the money thats accumulated at that second bank and use it for yourself. Heres the rule: you may not plow it back into the business, you may not reinvest it. If you do that, that defeats the entire system. The reason youve started the business, in part, was to live a life of financial freedom, as we shared in that poll. When that money comes out, you use it to go out for an amazing vacation with your family or if you just started the Profit First system, and youve just piled up a little bit of money, maybe its a nice dinner out or maybe its an amazing trip to Starbucks or something. But you must use it to celebr ate. You must use it for yourself. Now, I recognize some of the folks listening in right now may have some degrees of debt. I did when I implemented this system for myself. I actually had a tremendous amount of debt. What I did, and what you need to do, is start with a debt freeze. Realize any expenses you have any recurring expenses that youre collecting right now are simply terms for a future debt. This will be debt in the future. We need to cut any expenses, and you may have to make hard decisions. You may have to ratchet back on your space. Maybe you cant afford that nice space you have. Maybe you cant do some of the things youve been doing, but you need to get that back under control. The second strategy, or the second part of this, is you need to use whats called a debt snowball. This is a term deemed or coined by Dave Ramsey. Dave Ramsey said this, Its the propensity for us to say, when we have debt, to go after the highest interest rate debt, but in fact, we want to go after the smallest debt. So, take all the debts you currently have and sort them out by size with smallest debt first. The reason we do this is we target getting rid of the smallest debt first, and its a small victory. When you sort your debt out this way, continue to maintain the minimum payments that are required for all your debt, but any money thats leftover goes after that smallest debt. By the way, yes, you continue to do the profit, you continue to follow the Profit First process, this exact process I outlined even if you have debt because we need to ingrain this new process to really capture a profit. Now, when that quarterly profit distribution comes out, that money you take, 95 percent of it is going to go to pay off that smallest debt or maybe a few debts. Youre going to hit that debt hard. Youre not going to use all of that money. The small remainders going to be used to celebrate because we need to reward ourselves. This is a behavioral system and this is how we capture our behavior. When profit comes out, we whack out that smallest debt to small win. Its a good behavior, it gives us a reward, we have more momentum, more muscle to beat up more debt, and youll still have a small profit for yourself. You may not be going on a vacation were eradicating debt here but youre going to have a nice dinner out or to do something with that profit. Youre still going to c elebrate. The last and probably the most important component. You now know the Profit First system. Its a simple system. You can start implementing it literally today. I encourage everyone to do it today. But theres one last component and sticking with it. There will come that tough time trying to get through this. There will come those questions you have, saying, Well, how do I navigate certain things? You need to work with someone that can support you in this. Sure enough, the health industry teaches this one, too. People that are looking to get fit work with dietitians. People that are looking to gain their muscular strength, work with the trainers. Inevitably, the most successful people work with an expert that supports it. You can do the same thing. If you want Profit First to work for your business, you can work with your accountant or bookkeeper to help you with this. Theres a group of people out there theyre called Profit First professionals that are trained on Profit First who can gui de you through this. But maybe you have an existing accountant or bookkeeper that youre thrilled with; they can be trained this system. At the end, I will give you my contact information. But if you want to try Profit First, and you want your bookkeeper or accountant to support you in this, by all means, reach out to me. I will gladly talk with him or have one of my team members talk with them and bring him up to speed on Profit First. If you want to find an accountant or bookkeeper that does already support this, by all means, also reach out to me. I want to connect you to one of the folks. Implementing the Profit First system results in tremendous benefits. You have more money to grow your business. But heres what more money does. Beyond giving yourself financial freedom, it also gives you confidence and your staff confidence. In fact, when I tell employees people that are using Monster, for example, looking for jobs one of the questions that I tell them is to ask the owners of these businesses, how fiscally healthy is this business? What employee would want to go to a business thats on the brink? By putting Profit First, you establish fiscal confidence, you have financial strength, and that exudes itself in your own confidence, but also you can attract some of the best employees because they have confidence in you. Its more than just your own financial freedom; you can attract the best people. It also brings about momentum. Profit First is a system of small wins. Once you start becoming a profit, literally from your very next deposit starting today you can do this. If you start allocating a percentage for profit, youll start accumulating a profit. Small wins strung together at the end of this month, at the end of this year, at the end of a few years, youll maybe even surprise yourself how much profit youll accumulate. And, of course, it brings stability. I shared that story of that company I worked with that had their roof collapse. Im sure youve had your dark days, too. It may not have been a roof collapsing, it could have been your business collapsing in another way, but if you put your profit first, the money will accumulate and youll have a safety blanket there, too. And as I already mentioned, the best people are attracted to the healthiest companies. So, by all means, put your profit first for them, too. Its been an absolute pleasure. Were going to open up to questions in just a moment, but I wanted to give you some information about me, if you want to dig in deeper. I do have a book out there, its called Profit First. Its readily available on Amazon in Kindle format, audio format, and of course in printed format. It digs into this entire process we went over in detail plus advanced strategies. My other books are The Pumpkin Plan and The Toilet Paper Entrepreneur I wrote those as a trilogy, so they all complement each other. But if you really want to dig in the Profit First, I suggest you get started there. My websites right there: mikemichalowicz.com. Email me at mike@mikemichalowicz.com, and Ill gladly answer any questions you specifically have for me and help your accountant or bookkeeper get up to speed on Profit First or make an introduction for you. We have about five or six minutes left, Connie. If theres QA, Id love to dig into that right now. Thats great. Thank you so much, Mike, for that wonderful presentation very informative. I do have a little bit of bad dietary news for you, Mike. Okay. Audrey, one of our listeners or participants, very helpfully sent a message saying that according to the LA Times, Hostess is planning to reintroduce the Chocodile. Oh, my God. Really, Audrey? Wow. Watch out. Connie, I think a little sweat is coming down. Im not kidding. Oh, my God. Lock it up, Audrey. Lock it up. Hide it from me. As Mike mentioned, we have a few minutes now for your questions. Please use your QA module to submit a question, or if youre listening over the phone, our WebEx Operator, Donnie, will help explain right now how you can submit a question. Donnie, if you could do that. Certainly. Ladies and gentlemen, if you would like to register a question, please press the one followed by the four on your telephone. Youll hear a three-tone prompt to acknowledge your request. Your line will then be accessed from the conference to obtain some information. If your question has been answered, and you would like to withdraw your registration, please press the one followed by the three. If youre using a speakerphone, please lift your handset before entering your request. One moment, please, for the first question. Ladies and gentlemen, as a reminder, to register for a question, please press the one followed by the four on your telephone. Im showing no questions on the phone lines. All right. Well check right back with you, Donnie. We did get a few questions, Mike, that came in during the presentation. One person is asking about the whole operation of the separate accounts. They say that their bank limits the number of transfers that they can make into a savings account, and wondering if they should just go ahead and find a different bank to work with. Perhaps. Some banks will limit the number of transactions, particularly for a savings account. So, I suggest, for the profit and tax account, but you set them up as savings account because they collect a little more interest. But with all the transactions going on, the interest may be so low that one option is dont set up savings accounts; use checking accounts for all the accounts. They should provide unlimited transactions. If you are capped in another way, maybe do want to check out a bank. Ive had great success personally with federal credit unions and some small banks. They seem to be able to offer a little more flexibility in their product offering. Regardless of what bank youre with, just mention it to the bank manager, and they usually will work with you. Worst case, just go to just checking accounts, and I think youll be successful. Great. Okay. Heres another question that came in. I think that will resonate with a lot of small business owners. I work hard to own my own business. And should I be the first one to take a pay cut in order to keep my business falling? No. Its funny is why I said no because there are certain circumstances where maybe you have to, if you were overpaying yourself. But I think all business owners work hard. I think all business owners have to realize theyre also employees of the business, and that if they compromise themselves, that they will resent their business. I cant tell you, Connie, how many business owners Ive met that say, Ive had a business a long time. I cant stand my business, I want out. So, realize the emotional consequences and the financial consequences. Often, cutting our own salarys easy, because theres no negotiation just us. Instead of cutting your salary or your employees salary or cutting employees, instead look at the other hard costs you have. Rent is often a large cost and you can renegotiate or move to a smaller space. Often, there are some recurring bills you have maybe software use or something you can negotiate down. So cutting ourselves is usually an easy step, but its way too painful and the consequences are too dire. I would not cut my salary and I wouldnt cut my employees salaries either. Ive experienced that myself; cutting employees salaries can demoralize employees. So look for other costs. There are a lot of those other ones out there that are just easy to look over because its not as easy to do, but itll have a big result if you do target those other ones. Great. Donnie, just quick check again if we have any phone calls that have come in. The sign is still showing no questions on the phone line. Great, thank you. Time for one more question, I think, Mike. Someone whos writing, Weve diversified our product offerings, but were still struggling to make ends meet. Should we reign in our services to become more profitable and be more competitive? Yes, you should. The propensity for most businesses, especially small businesses, is to believe, We need to diversify, that, We have a captive client. We have one client. Lets just sell more and more different things to them because theyre a great client. The problem with diversifying is you dont become masterful in any one thing. The great analogy is a general practitioner doctor versus a surgeon a heart surgeon. If you have you a little of a chest pain, you go to a general practitioner. If its identified as a heart attack, your general practitioner will send you to a heart surgeon, and you want the worlds best heart surgeon. So, for acute pain, for very specific things where were willing to pay a premium because its that important to us, we go to a specialist. Where its a very surface-level kind of nuisance, we go to a general practitioner. The same is true in our business. If you offer a diverse set of things, you cant be masterful in anything. Youll generally get clients that are just scratching the surface. They have this little nuisance. The best clients, the ones that have the problems that need the most attention are willing to pay the most, are the ones looking for the equivalent of the heart surgeon, the specialist. So, it definitely pays to focus to be the best at a very few things, as opposed to a general so many things. Great. Great. Well, that brings us to the top of the hour. Thanks again so much, Mike, for a wonderful presentation. I really appreciate it. Just a reminder, all registered participants will receive an email with a direct link to the presentation, and we invite to you visit hiring.monster.com and the Resource Center, where youll find a library of resources for your recruiting, hiring, and management needs. Again, thanks to everyone for joining today. Bye-bye.