In this week’s episode of The Secrets of Business Mastery Podcast, Mike Agugliaro interviews Mike Michalowicz, who is an entrepreneur, investor, and the author of Toilet Paper Entrepreneur and Profit First. During the show, Mike Michalowicz shares how to make massive profits and why everything you know about profit has been hurting you and not helping you.
Main Questions Asked:
- What is profit?
- Why should profit not be scary?
- What was your motivation behind writing the book Profit First?
- If people want to get more profit what do they have to keep in mind?
- Why haven’t more people used the Profit First approach?
- What is the best advice you’ve ever received?
- Talk more about niches and the uber focus concept.
- What is the one thing business owners should think about and do today?
Key Lessons Learned:
Traditional Profit Model
- Traditional GAP accounting profit formula: Sales – Expenses = Profit
- The issue with the above formula is that profit is an ‘after thought’ and is logical, but doesn’t match human behavior.
- The formula we believe we should follow for profit is wrong.
- The definition of profit is the money leftover in your business at the end of a period of time. It is often a quarterly distribution of cash that solely benefits the owners of the business.
- Profit is cash in hand and not money you plow back into your business. Using it that way is simply a delayed expense.
- From an accounting perspective, when you have a profit, there is a threat of tax liabilities. The more money your business creates the more taxes you owe.
Profit First Model
- Profit First is a ‘pay yourself first’ concept.
- The formula is Sales – Profit = Expenses.
- Take a predetermined percentage of profit and as every deposit comes in, immediately take that percentage and put the money away into a ‘profit’ account.
- In this model what matters is behavior.
- When you ask better questions about your business, you will get better answers. Ask the right questions to reverse engineer your success.
- Taking profit first will force you to break the rules your industry has been following, which in turn will make you the innovative leader.
- More people haven’t used this approach as it is uncomfortable. It is far easier to do the processes we are already familiar with.
- This is a behavioral theory. It is human behavior to consume the entirety or vast majority of what is put in front of us. Therefore, supply dictates demand.
- When you take profit first, you will face your business expenses in a completely new way.
- When we have money in our business to pay expenses, we use it all but when you take your profit first, you will become more conservative and innovative in how you run your business.
The Advanced Technique
- Most businesses should have 5 financial accounts.
1) Income account: All deposits go in here.
Twice a month take the money in this account and allocate it based upon pre-determined percentages: e.g. 15% profit, 20% owners pay, 15% taxes and 50% to operating expenses.
2) Profit: Have it accumulate over time, and once a quarter distribute to the owners.
3) Owners pay:
5) Operating expenses:
- The first step to starting this Profit First process is calling your bank and setting up an additional savings account.
- Nickname your account ‘profit’ and assign a percentage to it.
- Expert advice is dangerous, especially when it comes to defining what you will offer your customers.
- The best feedback you will ever get is your customer’s wallet.
- The riches are in the niches.
- A niche is a demographic, which is a definable outward indicator of a person. These indicators are sex, age, marital status.
- A psychographic is a mindset. These are defined by beliefs and feelings about themselves.
- The more often people see you in their target community, the more often they trust you.
- If you master profitability, then everything else comes into alignment.
- Flip the formula and don’t have profits be the leftover or wait until the end of the year.
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