Those components were big learning lessons. I now define a successful business as something that is an amplification of the self. Now, I can really live into the true me and have my business be an expression of that. It’s a platform where I’m so excited every morning to go to work. It’s cool that I get to do this. And when I’m heading home, I’m so excited to go home, too. It’s not an either-or. I’ve been in the perverted other thing, where I can’t wait to work, and all I’m going to do is work. That’s a disease, that’s being a workaholic. I’m not going to say I’m past that as I enjoy work so much, but there’s more balance and purpose. It’s way more joyful than I ever anticipated. It’s way more profitable, too. That’s the funniest part. When that’s not the primary focus, it just naturally happens to support and sustain the mission that we’re on.

Robert Leonard  05:30

Yeah, I have to say, I think I’m falling into that workaholic camp right now. I love what I do, so I spend a lot of time working on it. I think that’s probably where I would fall at this point. So, as I said, I’m reading through all your content. I’m picking up that concept that you’re talking about. It’s something that I’m learning, and I’m working on myself.

Mike Michalowicz  05:47

You sound human.

Robert Leonard  05:48

Yeah, yeah. I mean, it’s one of those things, right? We’ve got to work through it.

Mike Michalowicz  05:51

We’ve got to work through it. Yeah. That’s what I think is such a great lesson about life itself. All the advice exists. If we want to know the best journey, it exists. The evidence is around us. It’s in books. Other people can tell us. We can seek our mentors. But part of life’s journey is the journey itself. We may have heard something, but it doesn’t mean we’ll act on it until there’s a shift in us, like pain, or trauma, or joy, or something else. Something’s going to cause a shift to happen, and that’s when all the learnings and lessons we heard from the past come to light, and we realize, “Oh, they were right.” I guess that’s just the necessary path of how we live life.

Robert Leonard  06:32

I was honored to have received an early copy of your book. We were talking about this before the show. Your new book, Fix This Next, is coming out soon, and it’ll actually be out by the time this episode goes live. We’ll definitely talk about the concepts in that book, but before we get there, I want to work our way up to it by discussing some of the topics from your other books that lead up to Fix This Next.

Let’s start by talking about your book, The Toilet Paper Entrepreneur. You wrote that book saying, “Never started a company before? Struggling with little or no cash? Have no experience, no baseline to judge your progress against? Well, that’s good. You’ve got a shot at making this work.” I love that because I think that fits not only the audience of the show, but also a lot of people who come at side hustles or startups. Why do these situations give someone a chance? What do you mean by that? Most people would think that their chances are actually less likely because of those. Secondly, how can someone start under those circumstances?

Mike Michalowicz  07:32

This has become an underlying principle to most of the books I write. The realization that the lack of a resource, like money or network, actually inspires more innovative thinking. It’s based upon this theory called Parkinson’s Law. This Parkinson has nothing to do with Parkinson’s disease. It’s a totally different guy. His first name’s an awesome name, Northcote. Northcote Parkinson.

He studied human behavior, which was rattling around that time. He argued that as we’re given more time to complete a task, the longer it takes us to complete that task. So, if you and I, Robert, are discussing a contract and I say, “Hey, I’ll give you that contract today,” I will likely take a day to get to you. But if you and I have the same conversation on the same agreement, but I say, “It will take me a week to get to you,” it will likely take me a full week to complete it.

This is true for time, and it’s true for all elements of life. The more money we have, the more we spend. I have practical first-hand experience of this as I’ve done Angel raises and VC roadshows. While I never got VC money as I went for a roadshow or raise, but didn’t do it, I did raise Angel funds. That money was so easy to blow as, all of a sudden, there’s a big amount of cash in your bank. It’s easy to say, “Okay, here’s what we’re going to do,” and I could justify all of it because I was using other people’s money. When there was no money, things shifted to: “Okay, we have to make this business work.” The pressure was on.

When I didn’t have my network of contacts, and I was entering a new market, I had to reach out to strangers and sell to strangers. If you can sell to strangers, you know you have a good product. When you’re trying to sell to your established network, some of them are just trying to be gracious and give you a sympathy sell. You think your price is valid and strong, and then no one wants it.

So, there are a lot of advantages to the perceived disadvantages.

Robert Leonard  09:13

I love the law that you talked about, Parkinson’s Law. I’ve been studying it a little bit lately because I fall victim to it all the time. I have these deadlines, and I have time to do them ahead of time, but a lot of times, I wait till the deadline because I know that I have till the end. I procrastinate. That’s the simplest way to explain Parkinson’s Law, right? It’s just procrastination. I think it’s something that people should really get familiar with, and spend some time studying because it can help you with your business, your life, and in so many different ways.

Mike Michalowicz  09:43

It plays out in two directions. So, on one extreme, it’s procrastination. Given a full week or month to do something, and I wait till the last minute. It’s funny. If you ask people to reflect on their college days, “Were you the type person that really did best when you crammed for exams?” The vast majority will say, “Absolutely!” Because that is human nature to cram at the end. But the other side of Parkinson’s Law is not procrastination. It’s innovation. As we’re given less time or fewer resources, we become more focused on maximizing the utilization of those resources, and often, there’s innovation.

An example I use is on toothpaste just because we can all relate to it, but it plays out in all aspects of the business. When you have a brand new tube of toothpaste, it’s natural human tendency to use more toothpaste, putting on long beads on the toothbrush. If some of it drips off onto the sink, we find it disgusting, and use some more toothpaste, too. But when that tube is all shriveled up like a prune, now, all of a sudden, one little droplet on one bristle hair is all we need. We become scant in the use. We also become very innovative in the way we can twist and turn, put it in the door jamb, squeeze it out, or do a double-thumb grip to push it out. We start using new ways to keep on extracting toothpaste. An empty toothpaste tube can last some people weeks, or at least, for a long time.

And so, what’s important is that as we constrain the availability of resources, money, network, and all those things, we become more innovative in stretching what we do have. That’s the essence of a good business. A business that can extract every ounce of value out of its resources continually will beat the competition, who is fat and happy and just living off someone else’s dollar.

Robert Leonard  11:17

Let’s talk about that. How can someone who’s just getting started, whether on a full-fledged startup or just a side hustle business, spot the next big wave of consumer demand before it becomes common knowledge?

Mike Michalowicz  11:30

It’s timing markets. When I wrote Surge, I was looking for the most powerful marketing mechanism. What’s the one surefire way to get tons of business time and time again? As I looked at all these different companies, the one I settled in on and investigated deeply was UGG. I spent some significant amount of time interviewing Brian Smith. What I found is that the best marketing is to position offering in front of surging demand. It’s the classic supply-and-demand curve. If there is low supply, high demand, that low supply will get all the demand because you’re the only supplier, putting you in control for capturing customers very quickly, and perhaps, increasing margins. There are a lot of advantages to it.

The technique is to put yourself in front of demand. The question, of course, is how do you do it? What I found is that, in any market, there’s continual churn and turn. If you look at a market segment, a niche could be a community of people, demographic information. It could be vertical, like a business industry. 

For this example, I will just pick a business industry because that’s pretty easy to envision. I did this with accountants at one of my recent businesses. I looked at the accountants, and asked, “What are accountants experiencing now? And what is the coming change?” You can also just search Google for this. You can type in any community, and “How is this community changing?” Or “What are the big changes happening in accounting?” What’s very clear is that there is a rise of artificial intelligence, sophistication of accounting software, and that the traditional basic core accounting services were less and less necessary. That was the change, that downward pressure.

But along with any downward pressure, is an equal upward result or pressure. The reaction that’s coming back up is that accountants are shifting to a more consultative model, where they’re working with the clients, interpreting what the numbers say, and giving strategic direction. There’s a rise in this. Accountants are basically becoming sophisticated business coaches as they can understand and interpret the numbers. When I learned this, I thought, “Ha! Accounts will want to become business coaches.”

And so, when I wrote Profit First, one of my books, I started an organization called Profit First Professionals, specifically with the intent to give accountants a tool, a pathway, to become consultants, and to serve clients in a whole new intimate way because they know the numbers so well, and can give the customers very specific directions on what to do. We caught that market. The business exploded without even truly extraordinary or special marketing. We’ve tested some Facebook ads, but we did very little. It just boomed on the need, being in the right place at the right time by design.

Robert Leonard  14:09

One of the ideas that you’ve written about that I really liked is how a business plan is a waste of time. Why do you think that is? Do you believe it’s one of those things that makes people feel productive in becoming an entrepreneur, when in reality, it isn’t doing anything to move their business forward, like business cards or t-shirts?

Mike Michalowicz  14:29

I think that most of the content or research of a business plan is of no value. It’s insignificant, in its big picture. The value in a business plan done right, though, is a vision. We want clarity on the outcome. What I don’t like about the business plan is the projections and the actions we put into it. I think it was Gen. Colin Powell who said that everyone has a plan going to war, but when the first bullet flies, everything’s out the window. That’s the idea of business too. There are so many variables. When you open those doors on the first day, it’s all out the window. You’re now in a fight, and you have to act and react to all the changing dynamics around you on a daily, weekly, or monthly basis. We have to adjust.

So, what goes into a business plan is all strategic planning. One of the laughable components is the financial plan. When you’re starting a business, you plan, “In Year 1, we’re going to do like $500,000. In Year 2, probably $3 million. By Year 5, we’re a billion-dollar company. We’ll be the next Amazon. And, by the way, those are pessimistic numbers.” But we have nothing to base it on. The business doesn’t exist. If we could predict the financials for a public company just for one day, you would become a billionaire. So, if we can’t predict it for established companies consistently, what gives us the right to believe we can project three or four years for a company that doesn’t exist? The answer, from my experience, is we absolutely can’t. Yet, we believe it believe it to be true, and we set ourselves up for disappointment when the first year out of the gate, we’re lucky to do $25,000 or whatever the number is.

Business plans have arbitrary components that are not rooted in realism. That’s why business plans are such a waste. We put value in them when they’re actually a disservice. But there are these components that you want to extract. Vision, to me, is the biggest one, because that becomes a beacon. What do we want it to be? I’m not saying it’s going to be that, but at least we’ll know where we want to go. Then, when we’re in the daily fight, we can start making decisions that are consistent with moving us toward that vision. We also need something that’s dynamic and changes with us as opposed to traditional business plans, which you write then let sit on the shelf for years. It collects dust.

In The Toilet Paper Entrepreneur, I talked about the concept of called Tacking. Tacking is having a clear outcome with vision, serving that or moving toward the goal as best we can over a short time, usually in three-month increments, and taking intentional pauses every quarter to reassess: Where do we stand? What do we need to do? In fact, April 15th is our Q2 meeting. It’s a little bit later in the quarter, but what we do in our own business is we have a full all-hands meeting where we all sit down, and we contemplate and challenge ourselves. What happened last quarter? What competition has risen or collapsed? How are things changing? What do we need to do in this next quarter to most move toward that vision? Every quarter, we keep on realigning again and again to that vision. To me, that’s a living plan. It’s far more effective than just the traditional business plan.

Robert Leonard  17:21

Yeah. At the beginning of that, when you were talking about going to war and everything going out the window, I was reminded of one of my favorite quotes from Mike Tyson, and that’s “Everybody has a plan until they get punched in the mouth.”

Mike Michalowicz  17:31

Yeah, took me by Mike Tyson.

Robert Leonard  17:33

Yeah, exactly, it’s particularly by him, but really, any punch in the mouth is not going to feel great, and your plan’s going to go out the window. There are just so many things you said in your response that I think are so good. I guess my biggest issue with business plans is that although being prepared and having a vision is great, and you need that, it’s almost like a waste of time. You spend hours, months, or however long it takes, to write the business plan, and then you go out there, and then nobody cares about what you’re doing. You might have a bad product or bad service, and nobody wants it. You wasted all that time, whereas if you had skipped the business plan, went out there, tested, and realize that there was some demand, and people actually want what you’re doing, then you can go back to strategically plan, and start to go forward then. But until you know that people even want what you’re doing, it’s kind of a waste of time.

Mike Michalowicz  18:16

What you’re talking about is the power of pre-selling. If I can convince a stranger to depart with money, to open that wallet of theirs, and give me money on a concept, that means I have something persuasive. I have something that’s really going to be impactful and of service.

There’s this concept I like, called Minimum Viable Product. The first time I heard about it was in Eric Ries’s book, The Lean Startup. Basically, it’s what’s the smallest, most basic componentry I need to make in my product or service offering that is persuasive enough for someone to open their wallet? Because once clients are opening their wallets, then we can pay attention to what they want, and enhance our offering to cater to their needs.

Now, the one thing I don’t like about that concept is the concept of pivoting, of adjusting the offering to always ensure customer happiness. I’ve seen businesses pivot to a point where the business owner does not enjoy the process. That’s a real problem. I believe more in alignment, meaning we offer this base viable product or offering, and once the customer is consuming it, we do need to satisfy their needs, and adjust accordingly, as long as it’s still congruent with our core desires and core competency. As long as we stay aligned, we’ll be the best at it, and the customer will be best-served. But that’s the approach. Sell it before you do it.

Robert Leonard  19:33

Yeah, there’s a gentleman named Nathan Latka, who wrote How to Be a Capitalist Without Any Capital. We had him on the show, I think it was episode 3, and he talked about this exact idea. He started a business back when he was in college, and he was selling Facebook pages, businesses, before it was super easy to build. He basically needed to sell 70,000 of them for him to actually go through and learn how to do the business. He didn’t even know how to do it. He was pre-selling everything, making sure that there’s actual demand, and then once he was able to sell that, he went through it. He made a business plan, learned how to actually do what he needed to do, and he told them that he’d have a product for them in six months. If he delivered on it, he’d keep the money. If he couldn’t deliver on it, he’d give them their money back.

Mike Michalowicz  20:15

Yeah, that was so powerful. The modernized version of that is through things like Kickstarter, and these other group investing sites, if you will, where they very specifically lay out their visions. Some already have offerings, but some just lay out their vision, and make a promise that if a certain dollar amount comes in, that’s your financial commitment to doing this, we’re actually going to deliver on it. I think it’s a fantastic model because, now, you’re judging the only thing that really matters for business, which is the wallet of the customer.

There’s a real danger in trusting just words. I have a saying, “Trust people’s wallets, not their words” because it’s socially appropriate to say, “That’s a cool product. I would definitely buy that. Yeah, I love it. Go for it.” But then, when it comes to buying times, they say, “I don’t really need that. No way can I afford that.” You want the financial feedback first, not the rah-rah. If you believe in the rah-rah’s, you fall victim to it. It can crush your business even before it gets off the ground.

Robert Leonard  21:11

Yeah, that’s such a good point. Pretty much everybody will say that they like your product or service. I’ve had so many ideas that I’ve run by people over the years, and I don’t think I’ve ever been told that they didn’t like my idea. Then I come to find out that they were not good ideas. It’s really about spending that money. People work hard for their money, and they’re going to be protective of it, so if they’re willing to spend it on your product, then that’s confirmation for you.

So, if we’ve decided that maybe a traditional business plan isn’t super important when you’re getting started, what are the three sheets of paper we need to successfully launch, manage, and grow a business?

Mike Michalowicz  21:45

We talked about the Tacking strategy. That is the core document. What’s the X in the sand? Where are we going? Or where’s the island out in the ocean that we want to head to? Then we throw up the sails on our boat, and we start sailing out that way in this zigzag pattern. No boat goes directly toward its destination because it’s a sailboat. You have to capture the winds of, in this case, the economy, to avoid the obstacles and so forth. You may go slightly off-kilter, but you’re moving toward it. Every for short period, you realign your boat, and you move in the other direction. You do a zigzag pattern that inevitably gets you to the island, but you don’t go direct. That’s how businesses are like, too. You set that destination, that vision, and then start zigzagging our way there.

The other document is really just metric measurements. It’s really keeping our thumb on the pulse of our organization through numbers, empirical data. In my new book, Fix This Next, I talk about this and the danger of trusting our gut.  Business owners constantly say, “My gut says, ‘I need to sell more.’ Or ‘I need to hire that rainmaker.’ ” Or whatever the gut decision is. But we don’t look at the empirical data.

Our gut could be a beacon for consideration, but we shouldn’t rely on it because we’re not neurologically wired into our business. Trust your gut instinct when it comes to your safety, like walking down a dark alley and you get the heebie-jeebies, please do turn around and leave because harm will come upon you. It’s your senses of sight, smell, and touch that’s triggering your body to feel that sensation. But we’re not neurologically wired into our business. When we have that feeling, “Oh, we got we have to double prices.” You have to check: what was that based on? Where’s the empirical data? So, that’s the second component.

The third component, what we use and have in our offices are immutable laws. These are values that we make very public, that become the foundational rules for the entire organization. Saying that it’s an immutable law means it cannot be changed. It must be adhered to. There is no excuse. These rules are for everything.

To give an example, one of my rules is positivity or death. That means that, for any situation, including the macroeconomic crisis we’re experiencing now, where we can look at it negatively, neutrally, or positively, if we choose a positive position, that presents opportunity. I’m not saying be unrealistic, but to look at the potential. Because if we look at the other sides, it starts a downward spiral, the death of an organization. That’s why it’s called positivity or death. That also means every element of our business must be congruent with it.

If you visit my website, you’ll see our whole orientation is toward positivity and engagement. If you meet with any of our colleagues here, you’ll see they are engaged positive people. If you read our contracts when we negotiate with our clients, it looks at the upside as opposed to only looking at it if things go sour. So that, among other immutable laws, is the guiding principle for the business. It establishes a consistent culture that makes an organization very powerful and very efficient. That may be a little different than what I wrote in the book, but that’s the third sheet. It’s adhering to these rules, these laws. 

Robert Leonard  24:40

Why is it important for us to use a pumpkin plan to grow a business or a side hustle? How do we plant the right seeds, weed out the losers, and nurture the winners?

Mike Michalowicz  24:52

I’ll give you an interesting perspective on that. The Pumpkin Plan was my second book. I was studying entrepreneurship, and I wanted to use this technique called biomimicry. Biomimicry is where you take something in nature –and nature has spent eons mastering her process, and we take that established process, and translate it into business, in some capacity.

There are stories of this happening over and over again. The invention of Velcro, for example, which is ubiquitous now, was by a Swedish inventor who was out in the woods, trying to figure out a way to make things stick together, pull them apart, and stick them back together without it getting sticky. That was the goal. He walked through the woods. He knows that if a bur were to get stuck to his dog, he could pull the bur off his dog, and put it back to the dog, and it would stick right to the dog’s fur for again. That became the observation. He looked under the microscope and saw nature had figured out this hook and fur system. By mimicking that via biomimicry, he created Velcro.

I was looking at what makes businesses grow organically quickly. I started looking at different methods of growth, and I found that in pumpkin farming, and they do this in other areas, too, there’s a certain faction of farmers that know how to grow these colossal vegetables by just changing the process by a little bit. They’re not injecting hormones or steroids or whatever. They found a way to naturally trigger this colossal growth. It became a little bit of a weird passion for me as I just had to figure this out, and then I translated it to business.

Basically, it’s rooted in what’s called the Pareto principle, the 80/20 rule. 20% of your client base will likely yield 80% of your profitability. 20% of your products will yield 80% of the organization’s profitability. And so, what we do is we become selective of our client base. We become selective about our offering. We start to narrow in on serving our best clients the best things, and we also have the courage of jettisoning the no good clients. I see this in every organization. Your top clients are the ones who love what you do, will pay top-dollar, never question, and just adore you. They’re very invested in successful outcomes, and they support the process.

On the other end, we have the clients that are never satisfied, complain about everything, threatened to sue you, or slam you on Yelp. Those clients can actually pull the organization down, not just financially, but also have emotional costs. Those are the ones that, when you’re trying to sleep at night, just roll through your head, and you say, “I cannot believe I’m dealing with this person.”

So, the pumpkin plan, and what farmers do, is you carve out and cut off the rotten pumpkins. Anything that’s allowed to sit on the vine, even momentarily, is taken away nutrients, energy, and attention from the colossal growth. The pumpkin plan is a strategy of maturing and protecting the strong stuff, while jettisoning the weak stuff, and making that into a regular discipline. Sure enough, businesses will grow, as a result, healthily and quickly.

Robert Leonard  27:48

Yeah, what’s interesting is it’s almost a reversal or a dynamic where you cut some of your revenues in the short term, but in the long term, it actually leads to more growth.

Mike Michalowicz  27:58

It confuses people because humanity puts a disproportionate significance in the immediate impact of something, and a very low amount of significance in the longer-term impact. At least, that’s the natural wiring. We have to be very deliberate of true contemplation of short-term versus long term considerations. The short-term impact of firing that client is: “I don’t want to lose revenue. I can’t do that.” That’s looking a day down the road, or maybe a month or two. But if I think long-term, “If I get rid of this client whom, honestly, are not profitable, they’ll have no impact on my profit, so that’s not a bad thing. I won’t lose profit. In fact, if I save on the resources it takes to support them, maybe I’ll make some more money.” And, if I look down the road even further, I now have the time to start catering to my better clients. “Maybe I’ll grow further, start soliciting more great clients, and won’t be worrying at night about taking care of client I just will never be able to satisfy.” Those are the elements we don’t naturally look at, yet that’s where the real impact for growth is.

I can tell that a business is very short-term-focused when they hit the ceiling, whatever their ceiling number is. “We can’t get past $500,000.” “We can’t get past a million dollars.” Whatever the number is, they’re just stuck there year in and year out. The reason, typically, is having a very short-term focus for the short-term reward, without the long-term concession consideration. We tend to make short-term relief measures, but, in effect, have long-term agony by keeping unfit clients, and delivering products that aren’t making us serious nor significant profit.

Robert Leonard  29:26

Why do you think many people are so concerned with that revenue number rather than the profit? You’ve talked about how one might see a decline in revenue, but actually see profits climb when they cut out those unfit clients. Why do you think people are more invested in the revenue figure than the profit figure?

Mike Michalowicz  29:41

The human ego. I’m part of the problem. Hopefully much less now, but for well into a decade in my first two companies, it was all about top-line. I could go to other entrepreneurs, pound my chest, and say, “I’m doing a million or two.” When they were doing less, I’d feel great. When someone says, “Well, we’re doing $5 million,” I feel the need to do $5 million, at least. And even if we’re on a run for $7 million, if the other company says, “Oh, we’re doing $10 million”, I think that I do poorly. There’s a perverted tendency for comparison.

It’s also perpetuated by this celebrityship’s natural affinity. They still do it. You can walk down any aisle with all those magazines like Inc. and Fast Company magazine. I love those magazines, but on the covers, there’s always the message to look at how the fastest companies are growing, to look at the numbers in these companies’ revenues. And so, revenue becomes a big vanity metric. It’s all about the size. The reality is that there’s very little value in revenue. It’s the relation of revenue to profit that matters. If I only had to pick one number, profit is it.

In networking events, the two most common questions are: What’s the size of your business? This is usually a revenue question, but that’s a little uncomfortable, so people might say: How many employees do you have? Which is a softer question, but asks the same thing. If you have two employees, chances are that you have a $300,000-400,000 business. If you have 50 employees, chances are that you likely have $5 million minimally. You probably have a revenue of $7 million to $10 million. People run the numbers. 

I used to play in that game, but now I’ve changed the story. When that comes up, I say, “Hey, let’s talk about the health of our businesses.” It’s amazing to see the looks you get at times, like a deer in the headlights. “Let’s talk about profit. Let’s talk about the percentage.” I think those are the numbers we should be “competing on”.

I had a friend who had a $250 million-dollar company. He’s an extraordinary human. I adore this guy. The company went under. It was a very beautiful, wonderful company from the outside, but they haven’t achieved certain fiscal discipline components, and one mistake took him out. Yet, he was heralded as a Super Entrepreneur. If you look at the cover of like the Inc. 500, not to pick on it, but picking on it, they rate on the growth of an organization based on revenue year to year. I never see the listing of how those companies went out of business, or how many companies the owner is surviving check-by-check at home, and has lawn furniture as their internal decor because they can’t afford anything else. I really actively try to change the conversation to how healthy is our business. That’s where it needs to be for all of us.

Robert Leonard  32:00

I think about things the same way. I think I was shaped that way from a combination of you, Mike, but also Warren Buffett. He’s a value investor, and he’s how I got my start in investing, so I’ve just always been focused on profits. I don’t really even care about the revenue figure that much, or, at least, I don’t really focus on it. That was driven, really, by Warren Buffett first, and then, as I said, being on your kick lately, you’ve just driven that point home so much further.

You see it all the time in public markets, like Uber and Lyft, and all these companies that are doing great in terms of revenue, growing market shares, and things of that nature, but they just can’t turn a profit. We see it all the time. We see it in private businesses, as well as the public markets. It’s one of those things, as you said. I think it’s just really ego.

Mike Michalowicz  32:46

Oh, it totally is! It totally is. It’s ego because it’s perpetuated by the media. I’m not picking on the media here. I’m just saying it’s perpetuated there. It’s the first number we look at. It’s actually so foundational, the concept of revenue. It’s at the core formula or gap that says: Sales – Expenses = Profit. The very first number we talk about is sales or revenue, so it’s always at the forefront of our minds. It’s necessary, but it’s surely not the only thing. I dare say it’s not even the number one thing. I really believe profit is.

Robert Leonard  33:15

Maybe we should flip that equation around and make it: Profit + Expenses = Revenue.

Mike Michalowicz  33:20

Yeah, maybe we should. We should write a book about that.

Robert Leonard  33:23

So, let’s assume that we’ve gone out on everything we’ve talked about so far throughout this episode, and now we have a successful and growing startup or side hustle. Unless you’re in the accounting profession, which is likely not one that most people will enjoy, how does someone manage their cash appropriately? How can they achieve instant sustainable profitability?

Mike Michalowicz  33:46

The core premise that I found is that most entrepreneurs revert to what I call: bank balance accounting, meaning we have an accounting system, but we’re not looking at the profit and loss statement (P&L), nor the balance sheet, nor the cash flow statement. We’re truly not tying them in together, and we’re following a shortcut. Most of us log into our bank account, and if we see that we have money, we know we can spend it; if we don’t have money, we’ve got an issue. I call that method, of looking at the bank account and making decisions, bank balance accounting.

What to do is to channel that behavior to our advantage. Don’t try to change it. For eons, our accountants and bookkeepers, financial professionals, are saying, “Please, please, don’t look at your bank account. Use the accounting system.” But we don’t, so it hasn’t worked for eons. Why is it going to work now?

So, the first step is to set a system at your bank. Set up multiple accounts at your bank with different names associated with the responsibility of that account. Profit is one. Compensation for the owners is another, which is definitely different than profit. Profit is a reward for being a shareholder in the business. The owner’s compensation is a salary for being an owner-operator. Tax reservation for your tax bill, which is the biggest bill associated with operating a business that the entrepreneur is the least prepared for inevitably. When tax time rolls around, we’re usually taken aback with how much we owe. But your business, regardless of the formation of it, can pay your tax. Then, also have an account for the operations of the business itself.

With that setup, when the money flows into the business, carve the money up into these different accounts before we spend a dime. That way, you know very quickly, before you do anything, how much money you have available for profit as you’ve taken your profit first. There are advanced techniques you could do here, but you hide that money away, you have salary reserved and have your owner’s compensation, your taxes are reserved and hidden away for until taxes are due, and then you see what’s left for operating expenses. If a $1,000 deposit comes in, we used to think we have $1,000 to run our business, but now you see that that’s probably not true. When you carve this money up, it may reach $400 in operating expenses, and the rest has its other responsibilities. Profit, for us, has become a cash management tool that drives and forces profit, which is the number one number, in my eyes, for business consistently. It’s always the priority.

Robert Leonard  35:46

What if the startup or side hustle is just starting out and doesn’t really have much in terms of revenue? Can this system not be used until substantial revenue is being generated?

Mike Michalowicz  35:57

Now, it’s actually better to start the system the earlier the business is moving along. So, if you have no revenue coming in, get the system set up so that when that first dollar comes in because it’s a percentage-based system, you can allocate the 5% or whatever it is, to profit, 20% to pay yourself, and so forth. The beautiful thing is a brand-new business doesn’t “know better”. You don’t have the bad habits of spending every penny that comes in. If you set this from the get-go, as your business develops, it will drive more and more profitability.

I’m saying this from experience. Every business I start now, I start bootstrap. I don’t put a single penny in it. The business has to prove itself. It has to sell its way into existence without raising funds on it, and we implement profit first. We set significant profit objectives from the get-go, and so the business has to develop itself around driving some serious profit. As a result, we build these very lean, but high-value organizations because that’s what we’re forced to do. If the day you’re born, you’re right-handed, you tie your hand behind your back, and you use your left, you’re going to get pretty good at using your left hand. It may sound like torture, tying your right hand back, but you’ll get pretty efficient at it. If a business goes in, and from Day 1, you’re committed to taking 20-30% profit, period, no matter what, your business is going to figure out how to make it happen. It’s Parkinson’s Law.

Robert Leonard  37:18

Let’s fast forward again. We now have a successful startup or side hustle that’s doing well. It’s profitable, and we have the cash management piece under control. But now, we’re stuck because we’re the main component of the business, and it can’t really run without us. How do we become unstuck? How can we get our startup our side hustle to continue without us?

Mike Michalowicz  37:40

What I’ve discovered is that in most small businesses, the business owner is so entrenched in the business that the business cannot exist without him. There’s this perverted relationship that’s almost like Siamese twins, or conjoined twins, that, as the business goes, so as the business owner, and so as the business owner, so as the business. They’re locked in status. When you first start your business, it is just you. You’ve got to be doing the work very quickly. Once you start getting some revenue stream in, guys are killing you out right away.

And so, what we do is we use this method of finding what’s called the QBR, which stands for the Queen Bee Role. There’s a core competency within your business that must be sustained. As a small business owner, often, we’re the ones doing it in the beginning, but all the surrounding work, like administrative or other necessary but distracting stuff, we outsource as fast as we can. As the business gets bigger, even the QBR, that core competency within the organization, changes, and we remove ourselves from the heart of the company, so that others can do the work.

The ultimate acid test or technique to do this is that once your business has been established to some great degree, take a four-week vacation. Take four consecutive weeks with full, digital, and physical, disconnection from the office, while the business has to run on its own. I’ve been doing this now year in and year out ever since I started studying and researching this book and preparing it. I take four consecutive weeks off from work, and what happens, by doing that, is your business must find a way to operate on its own. it’s not like your business magically does this. You, the business owner, will have to put the structure in place. I had to put other people to take care of the core competencies, to continue the revenue, and grow it even in my absence.

The beautiful thing is that once you’re free of the business in its day to day, you, as the business owner, have the right to re-insert yourself the way you want to, and do what gives you joy. For me, it’s being a spokesperson, like what we’re doing right now. This is stuff I love to do. I like to write books. I like to talk. So, that’s what I do. For the rest of the business, the president of the organization and my colleagues manage.

Robert Leonard  39:31

Unfortunately, the issue that we just talked about, with us being stuck in our business or side hustle as the main component, is only one of the issues we’re going to face. We also have stagnating sales, unhappy customers, or just any of the other issues that entrepreneurs and side hustlers find themselves facing. What do we fix first? How do we know where to start?

Mike Michalowicz  39:31

The funny component I’ve found is that, as you move further along, even the linchpin employees need to choose a 4-week vacation. So, the president of our company, her name is Kelsey, took off for actually eight weeks so that we could prove the business could run healthily in her absence. She had to build redundancy for herself, and now we’re doing it for the other employees too. It builds this powerful organization, and people are benefiting because they’re getting vacation time that we wouldn’t anywhere else. But really, the real benefactor is the business itself because that structure is put in place to protect the company.

This is what my passion project is right now, and that’s why I wrote Fix This Next. I surveyed my readers, and I’m blessed to have quite a few people respond to me nowadays. I had 700 or 800 people respond to an email that asked, “What’s the biggest challenge you’re having?” 700 or 800+ folks responded, and it was all over the place. I had asked the same set of people, only a month prior, “What’s your prior challenge?” They all answered, then we did a comparative analysis, and everyone’s challenges had shifted or changed. Some were stuck in the same challenge over and over, but what I found is that, effectively, entrepreneurs don’t know what their challenges are. So, the thesis of Fix This Next became “the biggest challenge business owners have is knowing what your biggest challenge is.” It’s pinpointing it.

So, I figured out that we need a tool to identify what to work on in our business. Just as I shared earlier, there is this hierarchy that the business has, but we are, instead, trusting our gut, saying, “Well, my gut says I need more sales. My gut is we need profit. We need these empirical data.”

I created what’s called the Business Hierarchy of Needs in Fix This Next. I found that, foundationally, the DNA for all businesses is the same. Your business and my business, when you peel back the skin, they’re really not that different. When we look at businesses, foundationally, every business needs Sales, the creation of cash, the oxygen for an organization.

But immediately, once there’s some degree of sustainable sales, we have to look at the creation of stability for the organization, which is Profit. If a business is focused on sales alone, you’re creating cash, which is wonderful, but you’re not retaining it, it’s a very unstable organization. You could hit the $250 million mark, like my friend did, and have a great demise. There has to be a balance. So, Profit is the equation of stability for an organization.

Once that is achieved, then we need Order, which is the equation of overall efficiency. And in the higher levels are transformation, which is through Impact, where we’re serving clients beyond transactions, we’re transforming. The highest level is Legacy, which is the creation of permanence, where a business can live into perpetuity despite the absence of the leadership or the founders. It’s designed to live on forever.

These work in a hierarchical structure. You can’t just go in your business and decide to work on impact and change the world. I mean, you could, but the business will collapse because it has no source of cash. There’s no stability. So, we always start at the base and ask, “Do we have sustainable sales here?” If the answer’s no, then we have a sales challenge. Let’s start working on that.

Once you have some degree of predictable sales, then we ask, “Do we have enough sales to support a degree of stability, some profit?” If you don’t have enough sales to have some profit, then you actually have a profit challenge. We’ve got to make sure that profits shored up.

When profit’s shored up, we start at sales again, asking, “Do we need more sales to support more profit and more profit efficiencies? Or are we really focusing now on the overall efficiency of the organization?” Which is at the order level.

This hierarchy is kind of like Maslow’s hierarchy. It’s a triangle. We cycle through these different levels and ask ourselves these questions, and we always try to find where’s the biggest need at the most foundational level. We have to sure that up, and we start building the structure up again. That’s what we talked about in Fix This Next, and that’s how you find what to fix next.

Robert Leonard  43:09

Mike, thanks for coming on the show today, and sharing all of your insight with me and the audience. I know I really enjoyed the conversation, so I’m sure the audience is going to, as well. Where can those listening to the show today go to learn more about you and connect with you?

Mike Michalowicz  43:25

I’ll give you two spots, okay? With Fix This Next, specifically, as I think it’s become the starting point of building healthy business regardless if you’re brand new or established. You can go to fixthisnext.com, and what’s waiting for you there is an evaluation. Click on the button to take the evaluation. It’s totally free, and it will ask you a series of questions and will pinpoint exactly what you need to work on your business right now. There are no downloads required or anything. You just answer the questions, and it spits up on the screen what we have to work on. That might be a good starting point.

If you also want to go into the Mike Michalowicz world, you can go to mikemichalowicz.com, which no one can spell, so you can go to mikemotorbike.com and it will take you there. That’s my nickname from high school. All my books are there. There are free chapter downloads there. I used to write for the Wall Street Journal. You can get those articles there. I have my podcast, too, called Entrepreneurship Elevated. It all resides at mikemotorbike.com.

Robert Leonard  44:15

I’ll be sure to put links to all of those different resources in the show notes. I’ll also put links to all of Mike’s books, that he’s written, in the show notes so you guys can go check that out.

Mike, thanks so much for coming on the show. I really appreciate it.

Mike Michalowicz  44:28

This has been a lot of fun, Robert. Thank you.

Robert Leonard  44:30

All right, guys. That’s all I had for this week’s episode of Millennial Investing. I’ll see you again next week!

Outro  44:37

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