The Science of Flipping - Episode 104: How to Profit First with Mike Michalowicz

Episode Date: August 18, 2017

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Welcome to the Science of Flipping Podcast. I'm your host, Justin Colby. Hey guys, welcome back to the Science of Flipping Podcast. I am your host, Justin Colby. And if you are watching this on iTunes, you will see I have a very, very special guest with me today. Mike Michalowicz, author of several different books, which we'll talk about, Profit First, Pumpkin Plan. You can see him behind him. This guy is a revolutionary in terms of what he's been able to put out there. And so before we get to him, I do my best each and every episode to bring you all of

the content, tools, systems, strategies to become a real estate investor and successful real estate investor at that. That brings me into what we will end up talking about today. If this is your first time on the podcast, go to thescienceofflipping.com. I give away a ton of stuff for free. My book that I sell on Amazon every single day, I give away for free in an e-book version. All you have to do is put in your information

and you can download it for free. We have people asking about our masterminds that you can go fill out an application. There's just tons and tons of content. Go to the scienceofflipping.com. Get my free book. Learn the strategies of what it takes thescienceofflipping.com, get my free book, and learn the strategies, what it takes to become a real estate investor. So with that kind of intro, I just always want to be able to give you guys and provide you with a tool chest of knowledge and helpful

opportunity systems, tips and tricks to get into the real estate investing industry, but also to succeed when you are. And that's why I've been hounding this man to get on this podcast because what he has done in his books, and very specifically, I want to talk about profit first, but he has brought to light the importance of randomly profiting first. And so, Mike, I just want to bring you on and say welcome to the Science Flipping family, man., I just want to bring you on and say, welcome to the science flipping family, man. I'm so happy to have you on. It's awesome to be here, Justin. Thank you. Right on. So listen, I want to make this pretty organic. I want us to just have a conversation as we normally would with two entrepreneurs, but I definitely want to really focus in

on this book, Profit First. And when I read this about two and a half years ago, my world changed. And it was because I was definitely in the bucket that you talk about in this book where making a lot of money, where the hell's my money, right? I don't get it. And so I want to get there. But first, I would love for you to kind of just introduce yourself, where this all came about. Do a quick background for us and how you've been so successful at building these books and the series of books that really are so great for all entrepreneurs, no matter the industry. Obviously, the people listening to us are real estate investors or desire to be a real estate investor. So why don't you just start off by giving a background in where this Profit First book came from or all of them. The Toilet Paper Entrepreneur is a great book, right?

Yeah. So while I don't have a real estate background, I do have an entrepreneurial background. I've had quite a few businesses. Two of them I was able to start and ultimately sell. One to private equity, one actually coming I sold to Fortune 500. But I also have had the other side where I was an angel investor, started about 10 companies, and they all collapsed. The interesting thing I think or the relevant thing is throughout all those businesses, none of them were sustainably profitable. Yes, I did exit out and made a little money or a lot of money at the end in one of my businesses,

but it wasn't when I was running the business. And it actually triggered my desire to become an angel investor because I thought the mentality was that profit was something that was an eventuality. It would happen one day if we just kept this grow, grow, grow mentality. But as an angel investor,

starting 10 businesses all collapsing, that became an awakening, a grand awakening because I lost so much money. That profit shouldn't be something that's kicked down the road. And yet most businesses do that. And I also found that I was living the life of the bravado of an entrepreneur where the outside shell looks like success. Like, yeah, business is great. I got the nice car. I got the big house. how fantastic i am but really the stress behind the scene i was like shaking every night hitting my head against the wall going i don't know how i'm gonna get by tomorrow and then

the next day someone say how's business like this is fine i don't think it's great i got 20 employees look at me you know and uh at a certain point it wasn't sustainable for me. It all collapsed. In one occurrence, it didn't all happen one day, but one occurrence, I had to let go of half my staff. I couldn't survive anymore. I was waiting for that next big deal to come through, and it wasn't. So I got rid of half my employees. I remember that day. I cried the entire day. I fired people that I admired and respected and said, you have to leave because I'm an idiot.

I don't know how to run a business. So that suddenly turned into a new belief that profit can be baked into every transaction. It can happen every moment. It can happen every day. And the principle is real simple. It's the title of the book. Take your profit first. Every transaction happens immediately to get a percentage of that money and allocate it

toward profit. And by doing this, you will force your business to be profitable because you're taking it first. Now you must reverse engineer what works. Yeah. And so, and if you see me look down, it's because when I knew I had this interview with you, this book literally, I think I've read it now two times. I'm thinking about running it again towards this last quarter of this year. Just want to make sure we're still dialed in. I literally wrote notes down. You know how you use your phone for the notepad. So I've, I'm like, I want to make sure I hit certain things because guys, if, if, if you take anything at all, go get this book immediately. Right. Um, I'm not going to be able to do it justice with this interview with Mike. I mean, we will do our best to be able to show you the value of this book,

but this book is life changing and you can see me or hear me laughing when he talks about it because that two and a half years ago was that mindset shift where I was, you know, maybe not as large as Mike and you were, but we were doing, we were making money and we were crushing it. Right. And then we thought we, our shit didn't stink and we were doing, we were making money and we were crushing it. Right. And then we thought we, our shit didn't stink. And we were like, Oh, we can do anything. We took on this huge project. Um, and we lost almost at all to the point where me and my business partner almost got a divorce because money was gone. Um, like gone. It was just a tough, tough thing. Right. And so this, the concept of being able to, and we'll talk about the different bank accounts and opening up different bank accounts and

starting slowly with maybe just 1% coming over. Um, there's just so much behind that because I think one thing you do a great job in your book is we talk about that ego, right? And that's what a lot of times gets in the way of us entrepreneurs is we want to build this massive, huge business. And when I first got started way back in 2007, I thought we were going to be national. Like, oh, we're going to be national. Sure, sure.

That's happening for sure, right? And as you start to go through the process of growth and the ego gets in the way. That's a real thing. And now looking back on it, dude, there's enough to eat here in Phoenix. I'm in Scottsdale, Arizona, and I can have a very successful, very successful business just here. I don't even need to be in one other market. Right, right.

And the irony is by staying in that market, Justin, you'll learn the intricacies of it. How you do business in Scottsdale, you'll be able to better evaluate the market, better understand it than if you were in these dispersed areas. And I just want to go back to that one point you talked about, the ego and the bravado. I call it the Midas touch moment. I think, at least it happened for me, I don't know, Justin, if it happened for you, but I know there was a moment moment my business that someone said to me says mike you're the Midas touch like every business opportunity you you get involved in it goes it grows and the second i believed it that actually became the downward spiral i was like oh my god i am Midas i'm an effing genius look how smart i am i know

everything and therefore i can do no. And that's when my business started going, and it collapsed. So I think the word of warning from what I'm hearing from your story, what hopefully you're hearing from my story, is the moment you think you got all figured out is usually the beginning of the end. And we have to realize that growth does not translate to profitability. That if we're sitting hoping that that one big deal will come through and that's the turning moment, you absolutely don't understand profitability. It has to be, like we said earlier, baked into every transaction. And you talk about this kind of ego bravado, but then that monster, right? Where we've, we stereotypically per your book, right? We became that transactional monster. We got so big that we had to get the next sale

and we had to increase sales to be able to just cover our overhead, to be able to pay our bills, to be able to, you know, not go upside down. And that is such a dangerous place for people to be. Oh my God. That's the day the business controls you, right? So the dream is I'm going to start this business. It will be like my little chessboard. I'll make some strategic decisions and moves and push pieces around and these wonderful things will happen. I'll win at the game. But there's a moment in business, ironically, where it flips, where the business all of a sudden starts controlling us. And it's the moment where we are selling to actually cover expenses. So the old formula for profitability is sales minus expenses equals profit. That's the established formula. But how it translates in our head is we say we have to sell, sell, sell,

and then we have to incur expenses. But we don't use that word. We used to say growth. I need to sell as much as I can, and I need to grow more. I need to put more back into the business, plow back and push back. But then we get caught in this trap, and there's a moment where now if we don't keep putting money in the business, the business will implode. So now it becomes a desperation of just make money any way you can. We literally start whoring ourselves out. Totally. Like offering new services, new products, discounts for whatever, quick deals, ramping up the credit card debt. And that's the minute the business controls us.

And then we're out of control. So the nice thing is you don't have to shut down your business and give up to and start anew you can start putting the reins back on this because i will tell you one thing if your business controls you the least you have a business that's doing something no doubt it's not doing it right so we can put the reins on that and start kind of controlling that and put in the direction we want to. So let's break this. We have roughly another 40 minutes or so to be able to really provide as much as we can on this.

And again, I just want to thank you from myself and the entire Science of Flipping world out there. This is, couldn't appreciate you spending your time with us. You could be doing a lot of stuff. Oh, it's a joy for me. It's a joy for me. Let's break this up into two parts. Let's break this up into the people who are listening to this episode, aspiring to become

a real estate investor, just getting going there. They might be listening to all my podcasts, or maybe they're a client of ours on our coaching. I'm like, okay, I'm ready to send out mail and I'm ready to spend money and I'm ready to get my first deal and do all these things. So let's break it up into the beginner, how you would advise them to start. And then in about 15, 20 minutes, let's go to a part two. Let's go. Those of you who are crushing it, you're already in the game. You're already doing deals. You're already making six figures, seven figures, 500 grand or more.

And you're thinking to yourself, like I was roughly three years ago, holy hell, I'm making a ton of money, but I have no money. I don't get it, right? Those people, because I don't think you know this, and you and I have been able to have brief conversations, but we run a mastermind series, which means we have 15, 20 people in a room. We're trying to have all of the minds work together to become better real estate investors, right? We have the entry level. We have the kind of medium level where people are making a quarter million dollars a year already. And then we have the billionaire level where they're already making high six figures into the seven figures, right?

And in that medium level to that high level would be the part two. Those are the people who are already doing it. They get the systems, but now they've got to figure out level would be the part two. Those are the people who are already doing it. They get the systems, but now they got to figure out how to actually make any money or at least not pay themselves every red cent to keep up with the Joneses and keep this lifestyle that they've now created. Yeah. Yeah.

So if we start off with the beginner, uh, the nice thing is we have a fresh pad. So I'll tell you, I get started the, the base system. So you understand about profit first is the envelope system. And this is just nice. I'm convinced someone in your family tree did this.

Maybe you did it. My mother did this system. Most everyone watching someone in your family tree has done this. And what the envelope system is, is literally physical envelopes. And what my mother would do, she worked at a factory down the road from here. She would go to work part-time. She would come home, cash in the check, and then divide the money up into different envelopes. So she literally had the food envelope, one for the mortgage,

one to give back to the community and the church, another one for vacation, and so forth. And when she went food shopping, for example, she would literally grab the food envelope, drive to the food store, and shop with what was in there. She always had enough money. The key here is she didn't have the same amount of money. It varied based upon if she was sick that week or not. The percentage she contributed to each envelope was consistent. One week, she'd maybe work overtime, and she'd make $200. Other times, she was sick, and she only made $50. If it was 10% going to the food envelope, if it was $50 and she'd make $200. Other times she was sick and she only made $50. And if it was 10% going into the food envelope, if it was $50, that would be $5.

If she made $200, it would be $20. And then she went shopping with what was in there. But she always made do with what was in there because the only way she could sustain the other envelopes was by working with what was in this envelope. The whole system falls apart if you start stealing from other envelopes. She had to pay the mortgage. She felt compelled to give back to the community and the church. She had to do those things. So in business, we can do the same.

I found for if you're in the real estate business or any business, there's five foundational accounts to set up. You do this with all your existing bank. The reason we do this at our bank, by the way, not in a spreadsheet, not in your accounting system, is most people revert to, I call it bank balance accounting. I got my cell phone here. Most of us hop on our cell phone, go online on the internet, on our computer, see what our bank balances are. The lesson here is, if that's your natural behavior, and I suspect this for most people watching in right now, if you naturally log into your bank accounts, we must put a system that works with what your existing behavior is. So that's where I'm going to set these accounts up. So five accounts. First account is called

the income account. It is what I call the serving tray. All the money goes in there. We never pay a bill out of there. It simply piles up. It allows us to monitor inbound cash flow. Second account is called a profit account. That is where we put a percentage of that income into for profit. Now, we've got to be very clear what profit is. Profit is a reward for you, the business owner, for taking on extraordinary risk. You started a company. 99% of the world does not have the balls to start a business. No doubt. Yeah. So congratulations. You did it. So we're going to reserve profit for you.

The quick analogy is if you own public stock, I own some stock on Ford. When they send a distribution check, I take that money and say, that's a reward for me for buying their stock. It could go down. It could go up. I took on risk.

And I'm going to go out for dinner or lunch on them. Yeah. I never say, I never say, oh, Ford really should have this money back. I'm going to give it back to Ford management. Never. So your profit is never to be pushed back,

plowed back, given back to your company. Your profit is your reward for having guts. Right. Okay. So third account is the owner's compensation account. This is your salary for working in the business. Not only are you an owner, you're an operator.

It's called owner-operator. So the owner's compensation is a payment to you for salary. Real simple thing is if you had to hire someone to do all the stuff you do for your business, what would you have to pay someone that does all that stuff? $100,000 a year? $70,000? $200,000 a year? $70,000? $200,000? I don't know. But you probably know the industry standards to get someone like you as an employee.

That's the money we want to put into the owner's comp account. That's what we're targeting. So we put a percentage of the income in there so that you get a salary that's reasonable for your role. So that's different. Salary is for your role. Profit is for being a business owner. Fourth account is called tax. We're going to reserve your tax liabilities. Your company will reserve your taxes for you. So when that tax bill comes every quarter or year end, April 15th,

you don't pay your taxes. Your company takes care of this for you. And then the last mandatory account, these are the foundational five accounts, is an operating expense account. What this account is is how you run your entire business. So just to summarize, as a new business, we may say starting today, we're going to put 5% to private. We're going to put 20% into covering your salary. We're going to put another 15% to paying taxes. And then the difference, which is I think 50% goes into operating expenses. And so when you have a thousand dollar deposit come in, you don't have a thousand dollars to run your business and

spend on your business anymore. You realize you have $500 to run your business. That's the foundational setup for a new business. Yeah. And one thing I know you have on your website, so go to your website, right? Yeah, it's mikemichalowicz.com. And that's a doozy spell. My nickname in high school is Mike Motorbike. So go to mikemotorbike.com. No way.

You actually have that URL? Yeah, mikemotorbike.com. I'm the guy. I'm the guy. That is fantastic. Okay, so go to mikemotorbike.com. But give them your full smelling. And hopefully these guys can write down your, it is a doozy, but I know it's M-I-C,

let me try to do this from, what do I think, M-I-C-H, yeah, H-O-W-L-I-T-Z. So close, so close, but no. So first name, so my website website is Mike Michalowicz. Mike, you know how to spell. Michalowicz is M-I-C-H-A-L-O-W-I-C-Z. Now, here's the other shortcut. If you go to Google and just type in Mike, my first name, space bar, Mick, M-I-C, you'll see the longest, most Polish name ever.

That's me. Just select it and it will bringI-C. You'll see the longest, most Polish name ever. That's me. Just select it, and I'll bring you there, too. Perfect. So get there, guys. Again, I'm not. I'm going to. I don't do it often, but when I believe it, I'll pump it. You need the book.

Buy the book. But he has free resources, and I know this because two and a half years ago when I read the books, I downloaded something. And you have an instant assessment, correct? Yes. Speaking directly to these bank accounts about percentages and where, you know, cost of running your business. Exactly. So I ran a study in preparation for the book of about 1,000 companies that were what I call the fiscally elite, companies that were achieving high levels of profit.

And it was across all industries. Actually, there was a flipper in there too. There was a bowling lane, multiple professional services, lawyers, accountants, medical doctors, retail stores. And what I found is they have certain allocation percentages for these accounts. Now, they don't necessarily have this exact same system. But when I reverse engineered what they were doing, they were allocating money toward profit and taking a certain degree of profit at the end of the year. They were paying their owners at a certain level. So I have all those numbers. And the instant assessment, there's a chart you can get for free on my site.

You can get – and you don't even have to subscribe. You can just download it. You can get what these different companies do, and you can pick what category you're in based upon your revenue. Then we run what we call the instant assessment, and it's real simple. You don't have to be an accountant. You don't have to be a mathematician. We just say, you know, what revenue did you have last year? You probably know that.

Did you do your two mil? Great. We put two million in there. And then we do some other calculations, real simple stuff, plug it in. And then the chart shows you here's where you are today. Here's where a fiscally elite company that would be at the same revenue as you is doing. Here's the difference. And then we simply start stepping toward achieving what the fiscally elite do.

Yeah, which obviously all of us want to be fiscally elite, right? And so I think one of the things that a while ago I started doing in our business is that bottom line. So I have a very close connection with Fidelity National Title, which is a Fortune 100 company, I think. Yep, I know them, yeah. So I speak for them and I'll go to their events and they'll ask me to speak and all this stuff. So I have a good connection. Part of their, when they talk to me on the side, part of their big bravado about what their business does is after expenses, they're a net 20% profit company,

which is, I mean, they have overhead, right? They have a lot of property. They have, I mean, to be able to do that at that business level is quite impressive, right? It's quite impressive, and that's profit, right? So that means they're paying all the executives of that business before that. Correct. I'm sure the business has some tax responsibilities.

It's paid before that. I mean, this is earnings after income tax, after paying the key critical employee. This is what they tell me, right? I'm not in their books, but they tell me their key to success is that that's their line. If they can be net profit 20% a year, they have to be there, right? Yeah. And one thing I found about large companies like Fidelity, other companies, all of them started tiny, right? All of them were in a garage, in a living room. They all started small and now they've grown to their their size. I'll tell you, I actually am a fan of small business. I just love the edge of a small business and how nimble they are. But I do respect big business because of what it's accomplished,

and they do know fiscal discipline. The only way you can get to that size is with financial responsibility. One of the elements I noticed that every large corporation does is they do quarterly profit distributions. They realize it's an important mechanism is you must reward the risk takers, the shareholders, the owners, on a quarterly basis for taking on that risk. Too many small businesses, Justin, wait until the end of the year and say, do we have any profit? No. Damn it. Maybe next year. And we literally kick the can down the road another 365 days and it doesn't happen again. We're like, oh, maybe the year after.

That's bull. Let's learn from these large corporations and every quarter, literally every 90 days, and we're recording this in August, the next quarter is right around the corner. It is. It's less than 60 days away. I have a profit already accumulated, and I know it's going to be coming out of my business. We all need to be doing that. I'm looking forward to the completion of the quarter and the start of the new because there's a regular profit distribution. One of the biggest takeaways that I had from your books was actually that. Oh, cool.

We used to just – so me and my business partner used to just pay ourselves a very nice salary, but then we wouldn't the whole profit first. So now we pay ourselves a good salary, but then we quarterly look at what did our business do and how big is that distribution? Is that a very nice quarter that we had? And we give our distribution based around that, or, Hey, listen, we got to run a little bit tighter because we didn't have a great quarter. We don't have the ability to give those distributions. So you don't get to go do X, Y, and Z. Yeah. And so there's the irony too. I shouldn't say irony. There's a second benefit is now you

get to actually track the trend of your business. Because we start anticipating the profit and we're like, hey, the profit's less than it was. What's going on? And we start investigating our business every 90 days. When it's more, we're like, hey, we're doing some things right. So it's a reward mechanism. It gets us excited, but it also is an investigatory mechanism to see are we on track or not. Absolutely. And so let's keep in line with the startup business. If you were to give my industry runs like this, right? How I coach and the industry as a whole, there's a lot of the coaching mentors and platforms out there for real estate investing. Direct mail marketing is how a lot of the leads come in, meaning there's a cost, right? Bandit signs, pay per click on Google. Hey, we buy homes cash.

We buy homes fast. that's kind of the industry uh people see myself or some of my business partners like sean terry or kent clothier and they see offices and they see i have a personal assistant they see all these things and they're like that's what i want right now they have no idea that i started back in 2005, I've lost it all twice, right? Like they don't get the road I've been on. Let's bring them in your world and say if you're starting this industry, how do you start this industry?

Now again, I'm not asking you to talk about the marketing, but there's costs that I put in my business because I can afford to at this point. I could always afford to. So yeah, so that plays into a principle called Parkinson's Law. And the first thing I want to say is don't get caught up in the mythology of where people are today until you know their story of getting there, right? I mean, this is exactly what you said. My business, if I tell you a tour of my office, it's a real nice loft office right now.

We overlook Manhattan in the distance. We have 12 employees. I'll tell you, six years ago, I was in a cookie factory without windows above the ovens because I got the place for free. And when it was 90 degrees outside, it was 96 degrees in my office. It was brutal. But I will tell you what I learned during that period

and I still implement is innovation. The greatest way to grow a business is not by putting money into it and getting the finer accoutrement. The greatest benefit to growing a business is seeking ways to be innovative. And there's a behavioral theory around this called Parkinson's Law. This was a theorist from the 1950s, studies how people use things, and he declares that the more available a resource is, we consume more of it. And the less available a resource is, we actually become more frugal, which is kind of obvious.

We use less. But we also become highly innovative. And my favorite example is around toothpaste. And this will happen tonight, Justin, for everyone watching the show. Tonight, when you brush your teeth, if you have a brand new tube of toothpaste, you put this long bead of toothpaste on it. You turn your faucet on. It blows that toothpaste in the sink you're like that's disgusting down there in the sink who cares i got my new tube of toothpaste

we put it on but the reverse is so funny when there's no toothpaste when you open the drawer you're like oh my god after i get a new tube it's like almost empty it's that twisted up gnarled shriveled tube what happens all of a sudden we become a hercules we twist it we turn it we hit it with the door jam we use our knee pit as a leverage point we bite it we cut off the end you know my favorite is when you do the double thumb push yeah and you try to you try to catch it you know we do extraordinary things and and if the toothpaste falls in the sink when we turn the water on we dive in after it no doubt so the the funny thing is we use less because there is less we're frugal but innovative twist turn squeeze push cut we do things we would never ever even consider once a

new tube of toothpaste when we intentionally don't have money for our business or we just don't we serve our business up with an empty tube of toothpaste. And what that does is it mandates innovation. I have such appreciation for someone who starts out of the basement and finds a way to compete with the bigger players. Right. That finds a way to advertise when you can't run the Facebook ads. You can't do the pay-per-click. How do you still get the word out?

You can. You just got to think stronger and better than the competition. The innovators change industry. It changes the entire industry because they challenge it. And the great thing about profit first is as you take your profit and you keep tucking the profit away, less money flows to operating expenses. So you delay that ability to do the paper clicks, not just when you start up, but maybe for years going into it, you can't do it. You have to continue to be innovative. And what I found is businesses that do profit first, and we have now thousands of case studies that we've gotten feedback on, thousands of businesses, inevitably, not all of them, but most of them outpace the industry in growth because they challenge the industry norms. They approach it in a new, innovative way. Yeah, and using your analogy of the toothpaste,

the way I look at that is when you're twisting, you're double-thumbing, and you're doing all, that's effort, right? You're putting in more effort to get out that little amount of toothpaste than you normally would with a full, brand-new tube of toothpaste. The difference that I relate that to is

if you don't have the money because you don't have five huge relate that to is if you don't have the money because you don't have five huge tubes of toothpaste around because you didn't have the money to go buy the five, and you only have this little, you got to put forth that effort to get out every little, whether it's innovative or not, or it's grunt work or grassroots or guerrilla marketing. It is the stuff that most people,

until you're at that point, you don't have the option, right? I didn't have the option. I started my business by cold calling because I didn't have point, you don't have the option, right? I didn't have the option. I started my business by cold calling because I didn't have it literally, didn't have a dollar. I was sleeping on a couch because I just lost it all. I lost my $500,000 condo, my $90,000 car, $40,000 on revolving credit. I lost it all. I didn't have the tube of toothpaste.

So you have to put forth the effort. I totally respect that, what you're saying. And it does cause that going back to the grassroots. Here's the great irony. If we take this toothpaste full cycle, if we have a new tube of toothpaste, maybe it lasts three to four weeks. An empty tube of toothpaste lasts three to four weeks.

So people say, but without the money, I don't have the runway. That's bull. You do have the runway. You have to approach it by doing call calls or something different, just as you suggested. Absolutely. Absolutely. And, and the way I kind of phrase this is you're either going to spend money or you're going to spend time. You have to spend something. And if you're just getting started, I don't, again, to your point, you have a great analogy, or not even an analogy, but I think it's an example of a law firm. I don't know if it was yours or a client of yours, but it's a great example. I'm sorry? Is it the Integrated Council?

Is it that one? I think so, where they were making a bunch of money, but they didn't have any money. Oh, yeah, well, okay. So I'm thinking of a different story, but they didn't have any money? Oh, yeah. Well, okay. So I'm thinking of a different story but it kind of plays into the innovation. So I'll share. It may be a spin on the one you're thinking. Yeah.

So I worked with a law firm that did not have money. And we implemented Profit First in them. And they said, we don't have much money to spend. We can't be profitable. And that, that's a big mistake, by the way, when people say I can't be profitable yet, they're doing something wrong. So we said, we're implementing private first. And we said, if we do this, the only way, the only way we can achieve these profits is if we don't have this grade a office space anymore. Um, so here's what we did. This law firm is small. It was like four partners. We know we actually abandoned our offices. Everyone went virtual, but not in their own homes. We would dispatch a lawyer to someone's office, one of their clients. And what we said is we're actually going to staff our lawyer at your offices so they can get a sense for your culture. And when we write your legal documents and all that stuff, it will actually speak to

the culture here. And that way, they won't be just these generic templated documents and agreements and so forth. Clients went crazy over this. They said, I've never heard of a law firm that dispatches lawyers to come out and just observe what's going on. And by the way, we didn't charge any more or any less. We were the same as any other attorney.

This was just a different service. The benefit to us is we didn't have the office space anymore, so we had free office space by just sitting there. But the client saw the value in it, so we started getting a reputation for being what's called – we call it the integrated counsel. We came up with a new label that we integrate into your culture, and this company exploded in growth. Altamont was able to dictate a premium too because it's such a unique service and actually cut their costs extraordinarily by doing this unique approach. Yeah. And I think that's the innovative slash.

Hey, well it's doing what others aren't willing to do, whether that's true or not. I mean, that's true in our industry. Again, the door knocking, the cold calling,

nobody, including myself likes it or loves it. But when you have the ability to say, I have the time, I don't have the money, I have the idea, but I don't have the money, figure that part out, right? Because that idea can go get you into a profit center where other people don't, right?

So I kind of want to leave that segment. I think that was a great way to help people get started and understand. I love that you broke down the bank accounts and how to start that. So now let's move into, let's call it part two. I want to talk to the people that are in the higher level masterminds that are making $500,000 or more in their business. They're doing deals. They have some marketing budget.

Things are rolling. But my assumption, if they haven't read the book, is they probably don't really know where their money is going. My assumption is they make the money, but they probably pay themselves a little more than they should. Let's start by this question. Per your research, a strongly profitable company doing good business is what percentage profitable?

Meaning we just gave the Fidelity example of 20% bottom line that they have to hit. Where's that mark? Is it 20% that makes it an extraordinary company? What have you seen in your research? Yeah, minimally it's 10%. Maximally, I've seen companies do up to 80%, 90%. But that's maximally. I'll tell you where the mark is not and where most people think it actually is. It's the industry average. Most people say, oh, I'll just look at my industry and whatever the average in the industry is, that's my mark. That is a fatal, fatal mistake.

If you have children, that's like saying to your kids, hey, what's the average grade at your school? We're going to target the average student. That would be absurd. You likely tell your children, I want you to be the most of who you are. I want you to be the best of you. I want you to apply everything you've got to achieve your highest standard that you have for yourself. Well, that's what we need to do for our business. If we're trying our business out,

just do the average grade of the industry. We're just saying pursue a random number. Instead, we get to pick a high standard for ourselves. So don't be distracted that, well, my industry only does 7%, therefore I have to. That's bull. That's bull. Set a higher goal.

And like I said, 10% is usually the minimal, but I would push it as high as you can go. I would look at your top 5% of the businesses in your industry and set that number. Yeah. Okay. And at least have the baseline of 10%. At least. Running, that is your minimum. That is like, it's no longer just good enough to be there, right?

That is like, if you don't, you're in trouble type of idea. That's right. That is like, if you don't, you're in trouble type of idea. That's right. That's exactly right. Right. So let's now jump into this idea of we're making money. Things are going good. Whether it was a law firm or not, I don't know why the law firm keeps getting, you gave an analogy about a seven-figure earning company, gross top line, but they were paying themselves almost 200 grand a year out of that million.

Yeah. I don't remember if it was the law firm you're talking about, but there was partners basically, and their salary was roughly 20% of the gross revenue, right? And you were like, they were making too much. They really need to cut their overhead, their salary by 50 grand or whatever that was, right? Yes. I didn't know what you're talking about now. That's one of the examples in the book. So profit and owner's compensation, regardless if you're an established business or not, you have to be very clear on this.

Again, profit, we talked about earlier. Profit is a celebratory account. This is a reward mechanism for owning shares of your business, for starting it. Owner's comp is representative of your salary. And what most businesses do, if they don't have profit first, they put everything into their salary. They don't necessarily call it salary. They may say it's distributions or whatever, but they put it on their salary. And what happens as their salary increases, their personal spend shoots up and matches it perfectly and the second there's another bump up in income in their personal income their expenses jump up

again oh now i can get that hiring car and jumps up immediately ironically or sadly if our income our personal income drops we've achieved a new standard of living so our we can't drop our standard of living we have to stay there i gotta keep that p keep that Porsche I bought. I can't afford the insurance anymore. I can't afford the payments. I'll just leave it in the garage until I can start paying for it again. So we're not willing to ratchet back our lifestyle. So in our business, we need to decrease in certain circumstances the income that goes to the owners of the business as regular compensation so that they can get a normal lifestyle, not an excessive lifestyle, but a normalized one. Then when the profit comes out, it's a bonus on top

of it and you use it to celebrate. The key for established businesses is this, as opposed to a new business. If you're an established business, you have had some degree of profitability over time. I mean, it may be 0%, maybe it's 1%, maybe it's minus 1%, but you've gone full cycle. If we instantly say, starting today, you got to do at least 10% or 20%, it may be such a fast, abrupt change to your past that it'll actually damage the company. It could crush you. So in an established business, Justin, we do incremental improvements. We look at what your history was. We can use that instant assessment report to do that. Then we say, historically, you've actually had a 0% profit. That's cool. Then starting this quarter, we're only going to do 1% of your top line money

allocated to profit to see how you do. Then next quarter, we'll do two. The quarter after that, maybe we'll do four or five, but you slowly ramp it up. Last analogy, it's like going to the gym. I would never go to the gym for the first time and say, I'm going to start bench pressing 400 pounds today. It would rip the sockets out of my shoulders. My bird chest would just collapse. So instead, I bench 30 pounds. And yes, everyone makes fun of me. But at least I start bench 30 pounds. And yes, everyone makes fun of me, but at least I start at 30 pounds.

And the next time I go there, I'm benching 40 and then 50, and I build up that muscle. And I can get to maybe 450 or something. I'll never do. I probably would never. But I can build the strength. It's something you have to build over time, and that's what you have to do with profit too. Yeah, and so I think that was the next question is I love the 1% analogy. Is that where you'd recommend these guys to start?

So for example, they're making, let's just use a million years to keep Bubba Math easy, right? Because a lot of these guys who are at this other level, they've built close to, if not above, a seven-figure-a-year gross top line. Where can they start? If they had to start today, let's direct them today. Do the same thing we did with the beginners.

Tell them today where to start, the bank accounts, percentages if you can, if you're able to give a percentage that should be in each bucket. So, yeah. So the absolute minimal startup that you can do and you have to do literally right now while you're watching this podcast immediately is call your bank and set up one account. I am lowering the bar here. It's so easy. You can go online and say, I want to set up a checking account or a savings account. That's it. Allocate 1% of your total income to profit. And the reason that that works is if $1,000 comes in today, I'm saying take

1% of that. That's literally $10. So if you can run your business off $1,000, you can run your business off $990. There's no consequence there. But you'll start allocating money to a profit. A million-dollar company, 1% of that is $1,000. If you can run your business off of a million bucks, you can run it off of $999,000, right? I mean, it's so insignificant. But what is significant is you'll start seeing

hey if i can do a thousand dollars profit maybe i can do five or ten right so that's where you get started then i would go to the next level and set the remaining accounts just as we talked about in the other part of this interview uh in our discussion here the core accounts are income profit owner's comp tax and operating expenses operating expenses. Set those all up. Now, when it comes to the right percentages, you've got to use that chart, Justin, that you shared, because there's all different range businesses. I'll give you an example, but I want everyone listening.

This is just an example of what it could be like. I'm not saying this is right for you. You have to go through that chart. I call these TAPs, by the way, the Target Allocation Percent percentage. But it may be 15% toward profit for a million dollar business. It may be 20% toward the owner's comp. It may be another 15% to reserve for your tax liabilities, which would be, then that would be 50 total, and then 50% will go to the operating expenses. And what happens is money flows in, we allocate it from the income account to these different accounts,

15, 20, 15, every single time. So the money's in these envelopes and we know before we spend the money what purpose it's meant to serve. Profit distribution, pay for myself or whatever. Paying the bills of the business, that's the operating expenses. The key here though is that is a target,

not the starting point. And I'm not even saying the targets I gave you are right for you. They're in that chart, but start wherever you historically have been plus one. So if you've had no profits in the past, we're going to start by allocating 1%. If you've been paying yourself on average, 15% of the income has been actually paid out to the owners. Now we're going to go from 15% to 16%. If you've never paid tax out of the business before to pay your personal tax liability, which most businesses never have, that would be a zero. We add 1%. It's now 1%.

And the operating expenses, which was 50% before or whatever it would be now, drops down by three. Now it's 47%. And you start this slow change. It's like spinning up a flywheel. You're not going to get rich quick this way, but you will get rich in confidence very quickly. And over time, you'll see you'll be more profitable than ever before. We could probably just end it right there, my friend.

We won't, but I mean, that was, that's to drop the mic. There you have it. Good night, right? That's such a big transformation for a lot of the individuals that I know are in this space, right? Because this space is very much the ego, the bravado. This space is cars, houses, that. And so, which I think a lot of those spaces are.

I think anyone who's making money, especially on the male side of the world, we tend to have that part of us, right? Yes. To your point, I think where I got caught very early on, and I continue to have to check myself because as money gets better, you do things that you're like, oh, wow. Sure. You know, what's this? Oh, wow. Right?

But as income goes up, lifestyle goes up. Whether it's a car, the type of clothing you're wearing, the vacations you're going on, it's something I still work on monthly about like, you know, because I enjoy my life, right? So it's something that's very important, the message of what you're talking about. When you take away those one percentages, all of a sudden you're not making less.

You just don't have the ability to spend as much. That's exactly right. Right, and that's the point that I really want to hit home with people is the money's still there, but it's allocated differently so you don't have the opportunity to say, I'm going to go to Vegas

and I'm going to run up a $10,000 bill there because I can. Because that $10,000 really is only $3,000 now because you put $7,000 in all these other areas, the taxes, the operating, the profit, the income. You don't even have the 10 grand to go do that. It doesn't mean you're broke. It just means you're allocating your money more appropriately as a business owner and an entrepreneur. Yeah, exactly. You've pre-allocated money to its purpose. And the one thing I've learned about Bravado, and I hope for myself, I finally tore that part of my life out of myself because I got

ugly with it, was I had the Viper, the Land Rover, the BMW. I lost them all. And I can guarantee, Justin, you didn't, nor did anyone that's watching right now shed a tear over that. Actually, you didn't even know it happened. I had this stuff and I lost it. What I found is there's that saying, the people who care don't matter and the people who matter don't care. They don't care. And it's really true. those effects uh really were just trying to feed something that was empty and found that i'm better served by living a life within my means and using my money to to have bigger impact on others in my business that that's actually generating more income and it continues this process so my means

of my lifestyle it's expanding there's no question i'm experiencing life to its fullest. But it's not these three cheap effects. They're through more experiential stuff. And it's naturally growing and getting bigger and bigger because I'm using more profit than ever for impact on others. Which is great. And if we can kind of wrap it up with this. Give a little back story about this kind of bravado. And I just really want to hit home here because now we're kind of in this part two where we're talking to people who are doing well um i myself just like

you that bravado took control of me and i was spending as if you know it literally grew on trees and you know i think hearing your voice they know my story i mean we're on the 120th episode or whatever we're on right So give them a little of your story about what you built, how you irrationally spent the bravado that was involved and how now looking back who you are today, the difference in mindset slash, you know, lifestyle. I think if you asked, you know, former Mike, um, what was your passion? I've been like, Oh, my passion is making money. I don't care how I make it. I just want to make freaking money, man. I'll do whatever it takes.

I want to have the biggest house in town. I want to have the nicest cars because I got to show my success. Like, this is what life's about. And that's truly how I acted. But the really insidious part was inside my head where if I looked at you, Justin, or anyone else, in my head, I was like, I'm better. I'm better than Justin. I'm better than any listener. I'm better than anyone because I am the shit. And, uh, a, that's totally effing wrong. B I'm embarrassed. I even thought that ashamed actually of that, how I lost it was by

losing all my money. Some, you know, similar story, uh, to you. And today what I pride myself on is purpose. I truly believe my life's purpose is to eradicate entrepreneurial poverty, this air of success, but this fear and stress behind the scenes. I think entrepreneurs can change the world, but we need to be stable first. We need to have that oxygen mask on first, right? So I've devoted my life to that. And now as I build my business and my businesses are growing bigger and bigger, it's all rooted in eradicating entrepreneurial poverty.

And that's where I get my satisfaction. That's where I get my joy. And don't get me wrong. It's not like I want to live like a pauper, nor do I. I have the effects that I like, but I have them because I like them, not because I want to impress anyone else. I no longer care about what others think of it. I just care how I feel, how my family's protected, and am I really, really serving my customer better than I ever could in any other way. That's awesome, dude. Dude, again, thank you so much, dude. I mean, that was a great finish to

this podcast, man. Listen, again, what was the best URL? Mike? Mike Motorbike. Mike Motorbike.com. Mike Motorbike.com. All of his books are incredible. If you're an entrepreneur, if you're an inspiring entrepreneur, this will get you in the right mindset from the beginning. If you're already running, this will reshape your business. I mean, it literally reshaped my business. Immediately, I'm sitting down with my business partners. We're looking at cost. We're looking at profit. Dude, you are an incredible person. You're an incredible entrepreneur. And this message needs to be out there. So thank you again for coming on Science Flipping. Justin, thank you. Good luck to everyone. Yes. All right, guys. That is it. We will be back with another episode next week. Thank you for being loyal listeners.

Get over and get the free stuff. Scienceofflipping.com. I just give. I just want to give and help. To Mike's point, eradicate the entrepreneurial irrationalism and just help you guys get into the game and profit while you're in the game. Peace out. We'll see you on the next episode.