Wednesday Aug 24, 2022

How to Apply the Profit First Mindset with Mike Michalowicz - Episode 279

This isn’t the first time Darla’s talked about Mike Michalowicz’s Profit First formula (and how interior designers can apply it in their business). But this IS the first time she’s had a conversation with the man himself! 

If you don’t know who he is, Mike Michalowicz is the author of The Pumpkin PlanClockworkFix This NextGet Different, and a Wingnut favorite—Profit First. In this episode of Wingnut Social, he shares how you can flip the script and turn your business into a money-making machine

What You’ll Hear On This Episode of Wingnut Social

  • [0:45] Housekeeping: Wingnut Webinars + Wingnut Academy Updates
  • [1:32] Mini News Sesh: LinkedIn is testing link stickers
  • [3:26] Learn more about Mike Michalowicz
  • [5:16] The story behind the first cover of Profit First
  • [9:10] Why entrepreneurs struggle to make a profit
  • [11:21] The pay yourself first principle applied to business 
  • [13:55] What happens if your business is carrying debt? 
  • [16:12] The optimal number to contribute to profit
  • [18:00] Generally Accepted Accounting Principles (GAAP)
  • [20:45] Using tacking to make quarterly adjustments
  • [25:06] How service-based industries should grow
  • [28:10] Why you should work with a Profit First coach
  • [30:13] The What Up Wingnut Round!

Connect with Mike Michalowicz

Resources & People Mentioned

Why entrepreneurs struggle to make a profit

Cyril Northcote Parkinson studied human behavior. His thesis was that as supply increases in availability, consumption increases. If Mike is given one chocolate chip cookie, he’ll eat it. If 20+ chocolate chip cookies are placed in front of him, he’ll likely eat more than one because the supply has changed. The same is true for money. When there’s more available, there’s more to spend.

It becomes a trap. Many businesses make tens of millions of dollars but are still struggling to get by because the more they make, the more they spend. They see money in the bank account and go, “Finally, I can do X, Y, Z.” Parkinson also points out that if you constrain supply, you can force frugality. You also become more innovative. You find ways to stretch it. When you have one cookie to eat, you savor it. When there’s less money available to spend, you’re more selective with how you spend it. 

The pay yourself first principle applied to business

If you take a portion of your income and put it toward savings, you will have a future of savings. Why not apply that to business? The first thing you do is allocate money to profit. With Profit First, the equation is sales minus profit equals expenses. Money comes in, you take profit, and then you know what’s truly left available for expenses. 

Profit isn’t an event or eventuality. Profit is a habit. When money comes in, take a portion and allocate it toward profit. You use the profit to pay yourself first. You preallocate money to its intended use. It’s a mindset shift. When you see what money’s intended use is before you spend it, you work within the confines of that.

How do you operate if your business has debt? Listen to hear Mike’s thoughts!

Using tacking to make quarterly adjustments

What is your five or ten-year vision? What can you do in the next 90 days to best get there? Tacking is a strategy that’s used by sailors. The boat has a desired destination. But you can’t go in a straight line to get there because you have to take advantage of the winds. So sailboats zigzag to capture the wind to get to their destinations. 

Businesses are the same. You don’t beeline straight to the end goal. Obstacles, like the economy, will present challenges. So take things one quarter at a time. What are the biggest movements you can make in your business to get to your end goal?

You also have to get into a quarterly rhythm of distributions. The only way you can grow is with fiscal discipline. The #1 rule of publicly-traded companies is to distribute profit to shareholders every quarter. They do that to maintain engagement and award risk-takers. Your business needs to follow the same pattern. It keeps you emotionally engaged in your business. 

Why shouldn’t you re-invest your profit? Why should you work with a Profit First coach? Listen to learn why!

Connect With Darla & Wingnut Social

 

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