KGCI: Real Estate on Air - Profit First with Mike Michalowicz

Episode Date: July 1, 2024

Welcome to episode 16. Today we have an incredible business mind with us, Mike McCallowicz. Now, by his 35th birthday, you guys, Mike had founded and sold two multi-million dollar companies. Confident that he had found the formula for success, he became an angel investor and then proceeded to lose everything. He started over again, driven to find better ways to grow a healthy, strong company. And among that, to also identify innovative strategies, Mike had created, the profit first formula, a way for businesses to insue profitability from their very next deposit forward. Mike is now running his third million dollar venture, so he's definitely got a lot of experience when it comes to the business world. He is the author of Profit First, Surge, the Pumpkin

Plan, and the Tollip Paper entrepreneur. Today, he gets to talk with us about his journey, his lessons learned, and how easily you can implement this Profit First formula into your business. This is Unleash Your Inner Legend, a podcast featuring modern day legends, sharing their life choices, habits, and routines that got them through where they are today. Get ready to be inspired and to take massive action to unleash your inner legend. Hey, Mike, what is going on? What's up, Polly? Thanks for having me on your show. Oh, my gosh. I'm super excited that you're here. And I was introduced to your, I don't want to say, I guess you could say business model or business principle. like I would say about four or five years ago.

Okay. It's a game changer and I can't wait to share it with everyone else. So I'm super stoked that you're here on the show. And I love hearing that you've been doing for so long. And I'm happy that serving you. That lights me up. That's what I think my purpose on the planet is to help people. So I just love that, love that.

That's so awesome. Well, and I love how much you love to share too. So this is going to be a good one. Love Fest, quite frankly. Cool. So before we dive into that profit-first model and how listeners can implement it, let's kind of talk about you and your journey. So an entrepreneur my entire life. Actually, in fact, right after college, I thought I'd work for some big company doing something.

Couldn't get a job. So started my own business. I've had a good fortune of building and selling two companies. One was a private equity transaction. Another one I sold to a Fortune 500. I think, though, the interesting part of my story was not that. It was the fact that those businesses were never profitable when I was running them. When I sold them is when I made my money.

And so my third venture, I said, oh, I need to build more companies faster. I became an angel investor. I was horrible at it. I actually called myself the angel of death now. I was so bad at it. And I ended up losing all my money. I lost my possessions, my home, my car, everything about my family. And it became a very devastating part of my life.

But also that trauma, I guess, triggered a new perspective for me that I don't understand how to manage money in the traditional accounting sense. And actually, most entrepreneurs don't. And there's a lot of aspects I didn't understand about entrepreneurship that I thought I did. And I decided that I'm going to fix this stuff for myself and then hopefully for other people. And I declared myself as an author. And that was now 11 years ago. And I've been writing profit first and other books specifically to eradicate entrepreneurial poverty.

So what, I mean, like you have this college degree and a lot of people like yourself, when they have a college degree, you're like, okay, now I'm going to go into corporate world. What brought you into entrepreneurship, though? So it was a little bit of a drunken stupor, to be honest. This is not a big business tip. I do not get wasted to our business. But I was, so out of college, I couldn't get a corporate traditional job. I did get a temporary job effectively working for a computer store, you know, selling, you know,

a printer or whatever to get my $5 commission. And when one night I went out. with another guy that worked there, and we started lamenting the owner. Like, he sits in the back room, smoking cigars and counting money. It's all our sweat and effort that drives this business forward. I'm like, I'm going to start my own business. Now, I had like, you know, quite a few cool ones in me, cold ones. And like by the fifth one, I'm like, I'm so inspired this guy.

I'm going to start my own effing business, man. And my friend there challenged me. He's like, well, then do it, man. So I left a drunken, slurry message for the boss saying I quit. I'm starting a competing business. You know, and next morning when I had some sobriety around me, the, I called the guy back. I'm like, I was wasted. There was a whole mistake.

And he's like, F you, you're on your own. And so I started a business with no idea of what it took to be an entrepreneur. It's not just selling printers. It was all these different elements. You know, he's not in the back room counting money. He's stressing over vendors and building relationships. And I had no comprehension. But I will tell you, if I didn't have that night,

in that moment, I would never start a business. Yeah. The first few years, and I think many entrepreneurs listening in can relate to this, it is fear driven. And fear is a wonderful asset, I believe, in the beginning, because I was getting up at 4 in the morning, and I was working until 4 the next morning just to get a dollar in. And over time, fear becomes stress.

It's not sustainable. But the first few years, that's what fueled me. And they started to become a much better definition of the entrepreneur, not the person that's hustling and grinding all the time, by the person who's looking to organize the people and resources around me and start to build efficiencies systems and in business ultimately that would run itself. So, you know, we started out. Obviously, you burn the boats and you have no fallback, no nine to job. Yeah.

Nine to five, no J-O-B. What was your bad habits that looking back hindsight, you're like, oh my gosh, I could have totally turned that around. What are some of the bad habits that you as an entrepreneur and that you also see as a commonality with all the entrepreneurs that do once they start getting into business. Well, a good question. You know, the first thing that comes to mind immediately is the concept that I can serve everybody and they should serve everyone. So my first company was a computer business because that's the only thing I knew. And what I said is I'll serve any small or medium-sized business, which meant small business. If I didn't understand that, I said any kind of business that needs computers, I can do it. But what I discovered

now in hindsight is that makes me very generic. A, just picking random things, a company that manufactures, you know, tennis shoes versus a pizza shop versus a law firm, they have very different specific needs. And because I was trying to serve all of them, I was never able to become masterful of what they needed, understanding the software they need, understand the technology complements them. So I as a generalist, and when I, when you're a generalist, you experience downward price pressure, meaning the person is hiring you says, oh, you're a computer guy, but all computer guys are the same. and therefore are you cheaper than the alternative. So I was constantly battling against price and I was trying to increase it, but I couldn't and I was afraid of losing customers and so forth. I realized and I changed my business, once I picked a category to serve a niche and really

understood that market better than in my competition, there's no longer price competition. I'd walk in the board and say the niche I picked was hedge funds. I understand hedge funds better than anyone else that's going to walk in this door. I know the exact technology you need. I know the problems you're going to experience before you can experience them. By the way, I charge five times regular guy, but you're getting a heart surgeon in here as opposed to a general practitioner, someone that can save your business's life effectively. And the customer's like, great, that's what I needed. You know, there is a faction of, in every community that you serve, there's a faction of customers that value mastery skills over cost.

And if we cater to them, our business will grow explosively. I'm, shamefully, I didn't know that. And that was probably the biggest roadblock in my way for success of my business. but once I understood that and started catering to that, every business I've started on that premise has always grown faster than the alternative way. Absolutely. So getting through and it's understanding your buyer persona or I know a lot of people in the digital marketing war, they refer to it as avatar.

So you should be knowing where these people are, are they going to be on Google? Are they going to be on Facebook? Are they going to be on Pinterest, Instagram? Because if you're selling to somebody who's like a, say, a 60-year-old, 65-year-old grandmother, she's probably not going to be on Instagram, but she will probably be on Facebook connecting with her family and friends. So it's like absolutely how many times do entrepreneurs waste, you know, time, energy, effort, and money.

I mean, starting a business, you don't, a lot of people starting a business, I guess you should say, don't have a lot of equity just to throw it out there to see if it's not. Right? We have a few credit cards and a lot of panic. Maybe an uncle that's, you know, rich and just throws us a few bones. What you were talking about, call them congregation points.

Got it. Every community congregates. There's a saying birds of feather flocked together. And that's absolutely true. People like people who are like them. And so you go to the local pool club. You'll find there's these clicks, right? These niches of people that congregate together.

But the same is on Pinterest and the same is on all these different digital platforms. Until you know what community you're serving, you can't find the platforms. So step one is identify the community you're serving. And a shortcut to this, if you've existing customers, look at the customers who pay you the best. They're demonstrating their actions. They value you. And it's got to be the intersection of they pay you the best and you love working with them. Because that means you naturally can cater to them.

Sometimes you have a customer that pays you well, but they suck. They're a bunch of jerks. Those are not customers you want to replicate. Other times you've customers you love, but they don't pay you any money. In fact, they say, I can't afford you. I'm sorry, but I love you. That's no good either. It's the intersection of these two.

They pay you well and you love them. Then you define the avatar with absolute clarity to your point. Once you know an avatar, we have to find out where they're congregating. And the simple rule is this, appear where they congregate. Advertise there or if it's the pool club, drive over to pool club. And the funny thing is you don't need to be an extraordinary salesperson. You don't have to have slick ads or anything. Just be present and just educate.

Because when the community sees you repeatedly over and over again, that is the best marketing mechanism. Like, oh, Holly, I see you everywhere. You're everywhere. When people think you're everywhere and see you everywhere, the no like trust starts winning them over. They know you, they like you because they see you all the time and they start trusting you. And that's the essence of effective sales. Absolutely. So you guys listening, make sure you have a clear definition of your avatar, your buyer persona so that you guys aren't wasting your marketing dollars or your time or money down chasing people that are never going to buy for you or may not even afford for you in the first place, right?

Yeah, yeah, which is by the way is the worst client. I have a ranking of clients. The best client we just talked about, they pay you well, you love them. The next one we think down the rack is the one that we can't stand. They don't pay as well. But they are, our fact, there's someone in between that. In the middle is a no paying client or non-existing client. So we have a client that we love. Then we have these non-existing clients. And then we have these bad clients. A non-existing client is actually better than a bad client because a bad client takes your time and effort and they don't pay you well. So a lot of customers, a lot of I have businesses I work with, how does it's reversed? They say, the best client is one I love. The second kind of middle client is one that sucks and the worst client is no client whatsoever because I've no money. It's not true. No client is far better because you're not losing money and you're not taking up that emotional space where you can't sleep at night because you're pissed off about that bad customer. It's better to fire the crap customers and be in the no customer position than it is to retain bad customers and have no availability for great customers. And those people who can't afford your services, that doesn't mean that they can't be your raving fan

and they can't tell their family friends who could afford your services. That could be those amazing clients that can afford you and you love. Yeah, you can make them your marketing force for sure. For sure. So let's talk about your profit first model and then really how that whole thing was born. Because I know you didn't wake up one day and say, you know what I'm going to write a book and it's going to sell. Yeah, yeah. I did wake up one day and saying I'll write a book and make it sell and I never did.

Yeah. But I did wake up one day and had an epiphany. So I sharing my story. these companies. I became a self-made millionaire in my early 30s. And like I thought I was hot shit. I was like full of arrogance and ignorance, quite frankly, which I found the Webster definition of arrogance and ignorance combined. It's called being a dick, by the way. I became a big deck. I was like, oh my God, I'm so great. I thought he was better than other people, which is a horrible, horrible part of my life. But I actually believe that. And I'm now so

grateful that I lost everything because it reset my mind. I realized during losing everything that I didn't understand the fundamentals of profit. And I wondered what was wrong with me. I then heard a study of the countless entrepreneurs. There's 180 million small business entrepreneurs globally. 83% of us are surviving check by check. The vast majority of entrepreneurs, that means a lot of people watching right now

are barely making enough money today to pay the bills this month. So it's hand to mouth survival. And I'm like, something's not right here. We're able to start businesses. We have the drive to do that. We attract customers and prospects. We serve them. We do all these things.

We do hundreds of thousands of different things for the business. Right. But the one thing we can't get right to profit, like what's wrong with us? And that became the epiphany. There's nothing wrong with us. The formula that we've been told, the fundamental formula of profit is flawed. We're told sales minus expenses equals profit, which means profit comes last. In fact, our vernacular is it's the bottom line or it's the year end.

It is human nature. When something comes last, it means it's insignificant. I would never say, my health comes last. My family, which I love, comes last. Like, those all say they can weigh their insignificant. Profit, we've been told, comes last. And what it does is it waits. We wait until the end of the year, as our accountant, any profit this year.

And she's like, sorry, nothing. We're like, oh, shucks, maybe next year. I will still, you know, be in the survival trap another year, but I'll try to claw my way out. So what I did in profit first, it's real simple, but the change is wildly impactful. It's flipped a formula. It's now sales minus profit equals expenses. And what I mean in practice is every time a sale comes into your organization, every time there's a deposit, you take a predetermined percentage of that money, allocate it toward a profit account, hide it from your business and run your business off the remainder. It's the pay yourself first principle applied to business.

And this is the fundamental process, if you will, for profit first. The book, I explained the entire process. There's a lot more to it. But fundamentally, if you take your profit first, you're ensuring your profit and your business is telling you what's truly available to operate your business. that's like such a taboo thing in business too because people are like wait pay yourself first no that's greedy we got to put the money back into the company oh god it drives me nuts plow back push back return the money we got to grow grow grow so a couple things um when someone said i was doing a conference just last week um big audience about a thousand people and at the end of the conference this one entrepreneur

comes up to me and she says hey i loved the profit first presentation you just did like i tell you I had a 22% profit last year. I'm kind of nailing it. And I was like, wow, that's amazing. I said, what did you do with all that money? She said, oh, we plowed it back in the business. And that's when like kind of this screech, I'm like, hold on. You had a 22% profit, but you put it back in the business.

I said, what did you do with the money then? She's like, well, we bought stuff. We spent it. I said, oh, so you had 22% of this money here and then you spent it all, right? She was, exactly. Like, that's not a profit. That's called an expense. You're playing a shell game where you pretended it's a profit,

but your business utilized all that money to service the business. That's an expense. It is a very clear delineation. Profit is money that's left over and available for profit distribution to the shareholders. It actually goes to the benefit of the shareholder for their own celebration. Expenses are anything the money, any money spent by the business. So first we need to kind of bifurcate this. And that's the key, I think, the thing people don't understand. The second thing is people think that you need profit to grow. Like I need to put it back in the business to grow more. We have over 150,000 businesses doing profit first. By the end of this year, we're estimating over 200,000 companies while implemented this. We have 3,000 documented case studies. And here's the deal.

Businesses that take their profit first consistently are outpacing their competitors in growth, which I know at first blush like makes no sense. But here's what we found. And it points back to something we already spoke about. When you take your profit first, you remove that money from the business, the money then has only a reduced amount available to operate, which means the business operator, the owner, we need to be more selective on our spend. We can only spend on things that work and yield benefit. We can only cater to a very specific community because there's only so much money. We can't advertise to everybody. So we start to narrow down our focus, targeting community and targeting a product or service offering that services that community and not doing all these

other things, which by the way, it's called forced niche specialization. And niche specialists inevitably grow faster because they build a reputation in their community. So by taking your profit first, not only are you profitable, you start getting very focused, you achieve mastery, your niche specialized, and you actually grow faster. Absolutely. So, you know, when did the profit first the book came out? I mean, it didn't get released last year. It's been, it's been, well, it came on two versions. So the first version, I think is five years old. I re-released it. I have it strategically positioned over my shoulder right now. I re-released it, I think, two years ago. So the new version's only been out for two years.

But the entire concept has been circulating for about five years through books. I actually used to write for the Wall Street Journal. And about eight years ago, I first wrote this concept. That became the inspirational moment. I've been doing profit first for myself for almost 11 years. Actually, over 11 years. I've had 45 consecutive quarters of profit distributions for myself. Well, into this, about three years into, I'm like, wow, this works for me.

I'm going to write an article for the Wall Street Journal. That article hit, and I started getting emails, calls. I'm like, people like this. I'm going to make this into a book. it became a book and subsequently I did a re-release on it and you know it's it's I'm humbled to say this um starting to become a movement there are so many different factions and industries have taken this on I hear about profit first not because I'm telling people about it but they're coming back to me and saying oh our communities embrace this we have someone inside our community that loves it so much

they become the advocate for it and that just it just lights me up it lights my heart so the reason I had asked first you know about the book coming out and you kind of you talked about how you updated it or did a revision a couple years ago. Now, obviously the principle remains the same, but it does it, will it ever change that you foresee within like disruptions coming in, within whether it's digital marketing, whether it's, it's advertising or you have all these new revenues where people are finding themselves spending money. Are you ever going to see that changing or is it going to have to evolve? No, so the core principle has been consistent for 11 years now. It's never changed. And like I said,

we have 150,000 plus businesses doing it. We work with, I can't imagine one industry we haven't had profit first inserted into yet. It works for them all foundationally. Now, profit first is set up to have a foundational principles, but then it gets modified on the outer edges. If you're a digital agency, for example, you may have an ad spend. Well, profit first doesn't talk about ad spends. And so what we have is a simple system is that when you have a special need, you spend up a special account for it. Yeah.

A rule we say, if in doubt, add an account. So in profit first, there's what we call the five foundational accounts, but many businesses as they adopt the profit first principle start adding accounts, an ad spend account, or if you're a manufacturer, a raw materials purchasing account or cap X capital expenditure account. So there's definitely modifications at the advanced level of profit first that come into play. I think profit first one day as a concept may go away. But I don't know if that's going to be five years from now or 50 years from now. What I realized is, that is human nature, entrepreneurial nature, to not use accounting as much as what I call bank balance accounting. Most people don't look at their income statement or balance sheet or cash flow statement. They just log in their bank account. That's what I do and see if I have money or not. If I do, I spend it. If I don't, you know, panic ensues. Right. So profit first is based upon the core principle is that people don't change. Therefore, set up a system that captures our existing behavior and allows an existing behavior to drive the benefit you want. So profit first is based

upon bank balance accounting. If you log into your bank account to see how much money you have, profit first will serve you. If you're masterful at accounting, profit first won't serve you. And what I believe is one day accounting systems will get so sophisticated that we will start using accounting because it's just a click and it's automatic.

It'll be easier to do that than logging in the bank account. That's the day profit first and its current principles will probably go away. But I don't foresee that happening for at least five years and maybe it's another 50 years. So profit first in its core essence will probably stay around for a little while. For sure. And what really attracted me to the profit first model and I know a lot of other people

because as entrepreneurs, like we don't get in the business because we think numbers are sexy. Like it is one of the most like boring things ever. Like it's a snooze fest. And I think, you know, me being a creative, I like creating things. I like making things look good. I like making people feel good. You know, things like this. So it's like doing all these things. And then it's like, oh, you have to worry about the numbers. But like profit first for those. who haven't read it definitely pick up the book because it's literally a simple formula like he said it was a basis of it but it's like i had it literally kind of read it a couple of times to say wait is there am i'm missing something because i'm normally like i'm not i'm a high deep personality like i don't want

all the details i don't want to listen to everything just tell me point blank what i need to do to get there that's what i love about it yeah so there's a definition for that propensity that you have not looking in the numbers and so forth it's called being a human being like congratulations holly you're a human And I want to be able to realize this. We try to force ourselves to do stuff. Entrepreneurs, in general, some do love the numbers, but most of us, we love the creation of stuff, the serving. That's the stuff that lights us up.

And the numbers are necessary evil. So what we do with Profit First is get rid of worrying about the accounting numbers. We now just focus on the day-to-day management and make the management of cash actually fun and very simple. I mean, this is, when you get Profit First moving, most people spend less than a minute a day on private first days, logging accounts, see what's going on, and they're good. And the beautiful thing is this does not replace accounting. It simply sits on top of it. Profit First is a cash management tool. The accounting behind the scenes continues on, but you don't

even need to look at it. I would suggest when Profit First raises a red flag, you can't pay bills or something going on, then it triggers a call to your bookkeeper or accountant to discuss the accounting, but you just manage your day-to-day by profit first. Then the accounting system can be used on a quarterly basis or a year end to get into the details of minutia, but you don't need to look at that on a continual basis anymore. Yeah, for sure. So, you know, as far as profit first goes, you had mentioned that you have had like thousands and thousands of companies implement this strategy. So you guys actually have specialists or experts that are niche within an industry so that people can take it, speak to their, you guys, there's a title for, right? It's, um, yeah, thanks for mentioning that.

We call profit-first professionals. Professional, yeah. So how it came about, thank you for mentioning it, how it came about was, well, I wrote the first manuscript, this is, you know, five, six years ago. Before the book was published, I handed out to some of my most fervent readers of the pumpkin plan, other books I've written. And I said, what do you think? And the first email came back, I said, I like it or I love it.

Who's the accountant that supports this? And I was like, what? Another email came in. Mike, who's a bookkeeper? A phone call came in. Hey, I want a higher person that does this. was the epiphany for me that when people read profit first, many judges adopt on their own, and you can. It's that simple. But some want their accountant or bookkeeper to be versed in this

to do some more of the sophisticated stuff around profit first. So I was like, I need to start certifying people in profit first. Fast forward to today, we have over 400 certified profit first professionals that are currently active. We have a global presence. We have an office here. I'm actually at the office right now in New Jersey, but we also have an office in the Netherlands, Armist Fort is the city we have an office in Melbourne Australia and we certify specialists in profit first that are accountants bookkeepers and business coaches and they often take on a niche so if you you know are an online marketer or if you are an Amazon reseller we have specialized for both those markets if you are an auto mechanic we

have a specialist that services auto shops so we have people that understand your business that can do the advanced stuff like we were talking about earlier, ad special account, structured right way. Make sure you're getting the best value from your vendors and so forth. Yeah, like I know everybody from like home stagers to real estate professionals that are hiring these. Yeah. Yeah, that's very cool. Well, thank you so much for dropping all the knowledge that you dropped on today's episode.

I really appreciate it. So you've got a lot going on. You have a lot of content avenues, if you will. You have your podcast, your multiple books. You do public speaking. What's the best way that listeners? can go connect with you and consume your content. Thank you for inviting me to share that.

So the website is Mike McAllowicz.com. Here's the Delio, holio, hollio. Now you're holio, delio, hollio. So hollio, here's the dealio. Most people can't spell mccalowitz, including myself at times. So I made a shortcut.

The nickname I had in high school was Mike motorbike. The ironies I've never driven a motorcycle. But I need to learn how, I guess. but if you go to mike motorbike.com that will immediately bring them to my site and what i have there for you is all my books there's free chapter downloads for all of them so you can experience that i used to write for the wall street journal all those articles are free um i have other resources and tool i'm a podcaster and a blogger all that's at mike motorbike.com for free awesome you guys go and check it out and mike thank you so much again i appreciate your time oh holly this has been

the joy thanks for having i hope you enjoyed this episode of Unleash Your Inner Legend. For more inspiration, make sure to subscribe by going to Unleash Your Inner Legend.com. We'll see you guys next week.