143: Best Of: Profit First with Mike Michalowicz

This is a best of episode because it's so damn important. It came up today, well, actually yesterday, and we were talking about the value of this with myself and so many others. It's the value of profit first. If you're the owner and operator of a business or even if you're sometimes financially challenged in managing your own personal finances as a leader in the business, even not the owner, Profit first is a whole new way to think about things, to put profit first and run your business in a smart way. This show can make a huge difference in the way you run your business and your life. Listen in. Hello and welcome again to the Scaling Up Business podcast. I'm your host, Gazelle's business growth coach, Bill Gallagher. On the show with us today, Mike Michalowicz, who's going to talk about his book Profit First. So first of all, you got to know Mike is a prolific business author and he's a multiple time entrepreneur. So he's been it, he's done it, he's felt the pain and he'll share his failures as much as his successes in the process. And he's on a mission to eradicate entrepreneurial poverty. And if you've struggled with profit and cash in the past, this show is really going to help you. He wrote the pumpkin plan, he grew the multiple things. He wrote the toilet paper entrepreneur. He wrote Profit First. That's what we're going to talk about today. Profit First. He's a return guest on the show. He's a personal friend. So I'm just so glad to have you on the show. Welcome to the show, Mike.

Bill, it's always a joy to be with you. Thank you.

Thanks. So where are you today?

I'm back in the office. Ironically. I've been traveling nearly solid and will continue for the next three months. I'm in the office for two days. This is one of them. So it's good to be here and it's good to be talking to a buddy.

Well, thanks for giving me some of your time. I know that feeling. We see each other's updates and oh, I'm in San Francisco, I'm headed to Houston. And then every now and then I see you somewhere like, oh, here we are in Germany. Let's have a beer.

Yeah, yeah. That's the last time we met up was in Germany.

Was in Germany, in Frankfurt and you were just in Chicago. So let's talk about profit first. Tell us the story. Right? You have great stories. Tell us the story of how you your pain, story of how you originated the concept of profit first. Right. I think that's the place to begin.

Yeah, I think it is. I had grown by that point, a couple multimillion dollar businesses. And both of them, while it sounds great for the CV that they were multi billion dollar businesses, were not at all profitable. As I was growing them, I was surviving check by check. I had refinanced my house multiple times, but I made my money when I sold them. I started to believe the formula that Gap teaches us that sales minus expense equals profit simply means that profit is an event. If you stick it out long enough and push hard enough, that big client or that big moment will happen that puts you into the profit category. So I said, well, I'm going to do this 10 times over. I became an angel investor with the money I made selling my two companies and started 10 new businesses. And all of them tanked because I didn't understand the essence of profitability. I hoped I could just run long enough until they made money as opposed to baking it in. And within two years, I had lost every penny I had. It brought me to this moment that we're talking about. I came home to my family, my three children, my wife that day, and said, I've lost it all. It's all gone. I'd been lying to them by omission up to that point. So this is the first time I told them I was in tears. They were terrified. And as I sang it, my daughter, who was sitting right next to me, ran out of the room, sprinting as fast as her little legs could carry her. She was nine years old and I remember the feelings. Time slowed down. I was like, oh, she's running away. As much as that hurt, that was the answer not to be here anymore. I wanted to go to a place where no one knew me. I started new, but what she was doing actually was running to her bedroom to get her piggy bank. She ran back as fast as she could and she put in front of me and said, daddy, Daddy, I'll help our family, I'll cover us, I'll pay for, for everything. And it's a very emotional moment for me. I'll never forget it. That'll be my final thought before I die. I know it. But it also awoken me.

You know what? You have an emotional. Don't rush through it for a minute. Let people get it right. That's the beauty of humanity, right? There's an innocent child who's going to do their part, who's going to do whatever, and there's the father Whose identity wrapped up around being the provider, being the hero, is now like plainly on display, vulnerable in every sense, having failed at his core mission to be the provider. Right. Totally get it.

Was. It's a weird confluence of events. There was a hate, a hatred I had toward myself. This emotional. I felt disgusted because. Right. I defined myself as the provider. At the same time, I was honored that this nine year old little girl was stepping up in such a big way. And it did result, something I'm not proud of, but I think is important to share, resulted in depression. I went through two years of what's called functional depression. I suspect, Bill, 80% of people, that's just a number picking out of the air. But a vast majority of people listening to show have experienced depression because the most affected group by depression is entrepreneurs.

Yeah, hugely. So just to underscore that and to loop back around to another show, listen to our show with John Ratliff, a highly accomplished entrepreneur, talking about his battle with depression, which he wasn't public about, but he's been courageous and generous in sharing kind of his journey. I think whether diagnosed or not, we deal with dark moments, dark thoughts, feelings of aloneness and hopelessness in different ways at different times. And so you were in that at that point.

Yeah. But it also became the impetus for me turning around everything. It didn't happen instantaneously. A light bulb didn't flash off and say, oh, I now know the solution. But it did trigger a question. And as you teach, and so many elite coaches teach, you get bigger answers from bigger questions, better answers from better questions. And I simply ask myself a question, how do I make myself permanently profitable? And that's where I think I discovered that the GAAP formula as you introduced, it's totally flawed. There's an inherent lie to it that's hurting businesses.

Yeah. And I have to say that for a number of times I did better or worse in business because I had somebody else managing it all for me. But left to my own devices, I don't really want to think about or manage the money or I didn't. I'm actually enjoying it. Since I implemented profit first in our company, it's a lot more fun for me now. But I always like having somebody else worry about it. Tell me, okay, how much cash do I have? What's my budget? I had one controller for years who had what she called cookie jars. And she said, oh, you're good. I have that planned for. And I have that and kept me out of real trouble. But, but I still, I supported My life. But I also was dreaming of equity events. Right. Different things like, oh, we sold that company and we did that. I'm like, oh, give me the big payoff. In the meantime, I'm okay, I have a nice car, I have a nice life, but give me that big exit, right?

Yeah.

And then we see somebody goes in on the next company and then they lose it all.

Yeah. And I think it's funny, one thing you said almost as an aside there that I want to point out is I was looking for a big payoff, but I did have the nice car and the nice house. The reality is that is what we have. But the stress level I find for most entrepreneurs is they can't actually afford that nice car and that nice house. They're hoping for the big payoff and they're scraping by just to kind of live the entrepreneurial lifestyle they've defined for themselves before they can afford it. So there's two components that happen on. There's this hope that's kind of carried out in front of us that we never get caught up to. It's a carrot on a stick of the big payout. And then the constant stress of like, oh my God, if I don't have money come in today, how am I going to pay the bills tomorrow? I think that was the reality. I know that's the reality I was living. I think that's a reality for many entrepreneurs. Even big, presumably successful companies, they're living that lifestyle too.

Well to speak without naming some direct clients. The self funded, bootstrapped companies of a range of sizes will sweat payroll, will sweat big lawsuits, will sweat, sweat big events. And then the funded companies that I work with, usually more tech sector, but they stress the next fundraising round. Okay, we've got this much Runway, we're good until next December. But we've got to get a thing done this summer because if we don't, then we're going to have to make some hard decisions. That means we sell out to somebody else who rolls this company into some other play or, or, or we close the doors and, and turn off the servers and like that.

So, yeah, it's interesting. It's, it's two different perspectives. The same problem. We don't have enough. Yeah, don't have enough money. I'm actually on the board for a tech company and we have our quarterly call and it always starts off with the Runway conversation. And it's, it's horrible. It's like, how much life do we have left as opposed to aspiring to grow and push Forward. It's like we're dying here. Can we milk out a little more money from investors? It's a tough spot. I get it, I get. But it's a tough spot to be in.

Yep. So continue. Right. Tell us about the evolution of the idea and what happens. So your daughter, you're depressed for a couple of years.

So here's. There was kind of the next aha moment. I realized that up to that point and forevermore, I had been meeting with my accountant. And he would implore upon me to really understand how to read an income statement, a balance sheet, a cash flow statement, how to tie the metrics in across each other so they you can cross read. How to know how my KPIs, my key performance indicators, play into it, my budget. Know key metrics like the ocr, which is the operating cash ratio. Like know all these things. And while I would maybe placate him by saying, yeah, yeah, yeah, here's what I really did. I would go back to my office, I would log into my bank account and I'd see if I had money or not. If I had money, it means I could spend it. If I didn't, it means, you know, collection calls and sell anything to anybody. But I didn't do what he told me to do. I didn't learn how to read those statements. I couldn't. And he told me, by the way, never look at your bank balance. It's not reflective of where your business stands. My aha was this is that it is nearly impossible to change who we are, to change our behaviors. Pick any of your own habits or sayings you use to stop doing that stuff. To change it is extraordinarily hard. And what I found is it's far easier to build a system around us that complements and channels our behaviors to existing behaviors to get the outcome we want than to change who we are. What I started to realize is I'm never not going to log into my bank account and see my balance is can I set up a system that actually channels that behavior to get the results I want, which is profit?

That's brilliant. I just read the habit book recently to sort of rejigger some of my own habits. And it's really useful to think about that. So talk about that. What's the shift?

So the shift is this. When something comes last, like we're told in the old formula, sales minus expenses equals profit. We are deprioritizing. It's human behavior. When something comes last, it's insignificant. You would never say if you had a health scare that I'm gonna put my health last. You will say I'm put my health first. So first is priority. Last is insignificant. So I simply flip the formula, which is now it's sales minus profit equals expenses. Take your profit first. How this plays out with that bank account we're talking about, Literally at my business, I have a profit account. It's a checking account or savings account actually, that I've named profit. Then every time a sale comes in, I immediately take a predetermined percentage. My business, you know, we keep on increasing this and we're now up to like 23%. I take that percentage, allocate the money immediately to the profit account, and then run my business off the remainder. And at first blush, it may sound like a shell game. I mean, the money is the money. The incoming amount isn't changing, I'm just putting into a box first. But it changes our behavior extraordinarily. Or at least it leverages our behavior in an extraordinary way. Because now, since I've allocated my toward profit, I know what purpose that's meant to serve. I now look at my remaining money for my operations, my business, and I'm forced to find a way to run my business that way. I'm forced into reverse engineering my profit because I took my profit first.

Yeah, I think that's the brilliant thing. It's a set aside and it's a way to manage. In particular for the entrepreneur who is somewhat uncontainable, somewhat uncontrollable. The entrepreneurial mindset is don't tell me what to do. That game changing, rule bending, reality bending is part of what leads us to start companies and to innovate and so on. But. But it comes hard, crashing down when the money isn't there. The money is like gravity. It hits you whether you believe in it or not.

Oh yeah, you nailed it. We are ingrained to break the rules. That's the definition of entrepreneurship. And the master rule is stodgy traditional accounting. That's why we don't adhere to it and it doesn't work for us.

So you actually advocate you take the money so you have multiple accounts, right? And then twice a month, typically, you do your transfers by percentage into each of the accounts that you are running. Right?

Yeah, I can go through kind of at hyperspeed here. So I suggest for most businesses, there's five foundational accounts, an income account which is simply, I call it the serving tray. Money goes in there simply for display purposes. It's how you'll Measure how much income comes in, but you never pay a bill from there. Second account is called profit. This is a reward for, for the people that took the risk in starting the business, the equity owners. Just like a public company does quarterly profit distributions to their shareholders, I want your small business to do a quarterly profit distribution to your shareholders, which is usually you, the owner, maybe a partner. The third account is owners comp. These are for what's called owner operators. If you work in your business, you, I would argue, are the best employee for that business. You work extraordinarily hard. You've probably sacrificed time with your family, you probably sacrifice vacation time. You've probably done ridiculously good things for your business for ridiculously low amounts of money, perhaps even no money. That's the definition of the world's greatest employee. But we got to start treating you that way. So we're going to start allocating money to pay you. The fourth account is tax. That tax bill comes. We start our business in part for financial freedom. Shouldn't our business pay our taxes on our behalf? And the answer is yes. So the business is going to reserve our taxes for us and then pay them. And then the final count is operating expenses. You know, these five foundational. That operating expense account is what you run your business off of. And we allocate a percentage of money to each account. It's a static percentage once we define it. When money flows in, it gets divided up into these different accounts, AKA envelopes. Right. This is the envelope system. It's been around for centuries. People have done it in their private lives. I'm just the guy saying we got translating this into business. And now since you've pre allocated money to its purpose, when it comes time to utilizing the money, you know what purpose that money is intended for.

Yeah, that's really. My grandmother did a system like this, right. She had her money that she got. And I know my wife's family did similar kinds of things where they had a little reserve and somebody brought the money and the household money went one place. And then somebody made little reserves for stuff so that when they needed whatever they needed or the fun things or the necessary things, they had set asides for it.

Exactly. It's funny, I've been teaching a system for a while now and occasionally I'm so blessed I actually get gifts from readers. I got from the Netherlands, a reader sent me a safe from yesteryear in the Netherlands. It must have been 50 or 100 years old. And it was a safe divided up with all these different slots so the safe, once you actually open a safe, has many safes inside of it. And so you put money into a specific slot and it's reserved specifically for that purpose, be it, you know, the mortgage or food or for gas or something like that. So this concept's been around forever in every culture in every country.

So it's a safe little bucket inside it, or it's safer, safe.

All these little buckets inside.

At first, I imagine the Matushka doll of safes. Right, Right.

We're going to pop it.

Got it. Okay, good. So profit, opex, pay tax, right?

Yeah. And now your business. You know, I realize those. I want you to realize those are the foundational five accounts. Businesses can get more sophisticated than that. Meaning there's other needs. Maybe you have a business that sells products. Well, maybe you need a inventory account to purchase your inventory, set that up, allocate a percentage there. Maybe you collect retainers like my business does. People. Some people pay us a year in advance. Well, we haven't earned that money yet. They could cancel if they so desire. And with the refund, some money. So we put the money in the retainer's account and then we drip it into our income account in installments every. We do it twice a month. So on the 10th and 25th is our kind of rhythm. We put 1 24th of that money into those accounts. So we have a kind of a rule here. If in doubt, add another account. So if you have a special need for your business to address with cash, just have an account for it and then we'll pre allocate money to that purpose now.

Why not? So first of all, let's just tackle this one. Fake profit, real profit. I remember years ago, and one of the things that I tell people now, we've all heard some. Well, maybe we haven't all heard it, but many folks have heard this saying that revenue is vanity, profit is sanity. Right. And cash is king. Somebody else I love said, profit is an opinion, and cash is a fact. I learned that really painfully one year. I had a super profitable year years ago. I'm like, oh my God, look at how much money we made. And I started imagining putting money away and having money for play and all of that. I'm like, oh, hey, could you loan some money back to the business to pay the tax bill on this? I'm like, wait a minute, I owe a lot of taxes on this profit. But we don't actually have any cash. Oh, yeah, no, no, no. I'm like, okay, wait a minute. What happened now up until that point, I had run service based businesses, so I never dealt with inventory. And they're like, oh, the profit is all over there. Your cash is locked up in that other room that you call a warehouse. It was all there. But between work in progress and excess inventory and things like that, I had no cash. In fact, I was running short of cash. I had a massive profit and a substantial tax bill. That was my first bit of painful tuition in that role. Having profit, paper profit, profit as an opinion. In this case, we're talking about actual cash set aside for profit and that you're engineering. So by setting the side and by spending to the other, you're forcing the discipline on yourself to run your business in a profitable fashion.

Yeah, that's exactly true. Just to further take your story, I can't tell you how many times I experienced this. And now I've interviewed and talked with hundreds, if not thousands of entrepreneurs about this exact scenario. You go to your accountant and they circle at the bottom of the income statement and they'll either congratulate you and say, hey, congratulations, there's a profit, or oh, sorry, you fell short, maybe next year. So there's two things happening. First, there's this. Maybe next year. Literally, we, we consider profit once a year. We delay that consideration for 365 days. That's a fatal flaw. Profit needs to be baked into our business. It must be habitual. It must happen every transaction. The second thing is when they circle the number and say, hey, congratulations, you had a profit, the exact scenario you played out, I say, well, where is the money? Like, where's the profit? And then the accountant does that awkward laugh that, well, it's not a real profit, you've already spent the money. Money, it's a opinion what you're saying. It's just, it's just a paper profit, which is useless. So when we talk about profit and the concept of profit, first, what we're talking about today, I'm talking about cold hard cash for you to spend in your bank account to use in the way you see suitable and appropriate.

Now, if you're doing that a couple times a month, right, as part of your regular check and collection cycle, you're setting aside that then you always know what your profit is. And there is a temptation maybe to dip into that or either the profit or the tax. At some point you're like, oh, wait, I've got something, where should I grab from? You say, don't do that, Right?

Yeah. The day you take from your profit account to pay off your operating expenses. I tell people, please rename your profit account Peter and rename your operating expenses Paul. Because you're basically stealing from Peter to give to Paul. You start unwinding the entire system. The day you take from your profit account, put your operating expenses, it would never was a profit. Let's not play a game. This is now a shell game. It is always expenses. You just had it in a different bucket for a period of time. But it's an expense. So we have to. Well, actually one more part I want to share. If you can't pay your bills out of your operating expenses, that is your business giving you direct feedback that you're not in the position to reverse engineer your profitability. And that means you have to either cut costs or increase margins or more likely both. What are those unnecessary costs? You have get rid of those. What are the costs you're incurring where you're not expecting value, participate more, extract more value from that. And where can you increase margin? Meaning how can you make more profit per transaction? That's what we need to do. But we also have to hide the profit and the tax accounts from us. Because if they're sitting there at our current bank temptation, we try to use willpower, but willpower fatigues, it's like a muscle transfer that money to a second bank. And when I say a second bank, I mean no online banking, no starter checks, no ATM card. Literally the only way to withdraw that money is you go to the bank. Because we're only going to go there to pay our tax bill and do our quarterly profit distributions and make that bank far away. Because I want you to do the walk of shame if you got to take money out of your profit account to pay a bill. I want you to think long and hard about that. So make sure that second bank is way down the road.

One of the other things I like to do is start to imagine what that profit is going to go to. So I'm like, oh, that's going to. Some of that is going to go to this or that. And I think about the projects or the retirement or the. I mean I have set asides now for that that come out of my pay account. The profit I'm thinking of in this case is more like at least at this point with my current business, but everyone would be different. But whatever it is in your world, I like to think about, okay, well, so I'm going to use that to remodel the house. Or that is. That is a piece of. That is me and the Mrs. In, you know, on those stilts houses over the water in the Maldives or somewhere.

I love it. I love that visualization. And I think that's important. I think it's important to see what we're going to be gaining from that. And what you pointed to too is that profit is a celebratory account. Some people say, but Mike, when I have the profit distribution, can I plow it back or reinvest in my business? And I'm like, no. Those are all really soft terms for saying it's an expense. The goal here to have a profitable company is to determine how to run your business off the expense that you have allocated. So you have to be very frugal, but more importantly, you have to be highly innovative. If we keep on plowing back money into the business, we're just defeating the entire system. So I love what you're doing. You already have something accounted for, what you're going to do with it. And that's a beautiful thing because that means you're celebrating, you're not plowing it back.

This is not really for some of our companies whose investors demand them to run a deficit, to run at a loss for a number of years while building something. This conversation is not for you. This is for the people that own and operate a business that are. Even if you have some investors, it's the discipline to innovate and grow even while taking a profit, which is actually possible. I've seen it, you've seen it, but we don't always think about it. Here's the sort of, this is the bonus thing that you didn't point to, but I think about every time I've heard you say this, and that is that some of the best innovations that I've had throughout my career, whether I was in my own companies or working for somebody else or as a partner, they often came and virtually always came from scarcity. So it's not innovation is not creating brightly colored innovation center and hiring an innovation czar and throwing a lot of play toys around the thing and throwing design thinking terminology around without actually practicing it. It's look, take a guy, throw him in a cave with a stick and then bury him and say, okay, invent the lever because you're now constrained. I think about the best things were when I was up against the wall, when I had no other options, when it was lose or innovate. Those are the times when I did the cleverest, most interesting things because I didn't have it. When somebody cuts your staff, but you're not ready to quit. That's when you come up with a new approach to do something with less.

Yeah, I totally agree. So there's this theorem called Parkinson's law. And Parkinson's law states that as a resource expands, we actually consume it more. So the more time we have to do something, the longer it will take. The more money we have to accomplish something, the more we'll spend. But Parkinson's law has the other side, which is the opportunity. It says as a resource decreases in its availability, we become more frugal in its use. That's obvious. There's less money to go around. You have to use less or less time, you have to use less. But also become highly more innovative. We find ways to extract more value out of it. And one of my favorite examples is a tube of toothpaste. Tonight, when you brush your teeth, if you have that empty, shriveled up, prune like tube of toothpaste, isn't it miraculous how we can still extract toothpaste from it? We twist it, we turn it, we cut the backside off of it to get toothpaste out. It's highly innovative things, things that we would have never done. You wouldn't twist and turn, stomp on the toothpaste tube, cut it if it was full. We only do things like that when it's empty. And we'll do the same for our business. If we intentionally restrict how much money is flowing into our operating expenses, we will be forced to twist and turn and kind of cut off the backside part of opportunities to find new ways to extract value from what we're investing in.

Yeah, that's me, far from home, about to walk in front of a room with a group of new clients or speaking or something like that, and I look at the empty toothpaste that I didn't replenish in my travel kit the last time I came back.

Right, Exactly.

We'll find every last little bit. Okay, I've got to clean them up a little bit before I smile at people.

Yeah. The force and power we can muster. Yeah, it's a great lesson there. And it's kind of to put closure to it is a new tube of toothpaste. What does it last, three, four weeks? An empty tube of toothpaste can last like three or four weeks. It's not the volume of the tube, it's how we extract out of it that matters.

Yeah. One of the best innovations in our last business, well, each of them that I can think of in different stages, came after periods of significant hardship. So what did we do in 2009. Oh, that's lots of innovation, lots of new ways. So having less in there can actually lead you to do some interesting things. It's not having a lot of money to throw at things that is necessary to be truly innovative and growth oriented.

Yeah, that is 100% right.

So twice a month we're going in, we're setting aside the money. I now have this income account, right. And nobody, it's so rare that anybody gives me a check any. So I don't have deposit slips, I don't have stamps. I refuse to take on new clients that don't pay me either by ach credit card or wire. So everything's coming in through one of those. And maybe I'll add Bitcoin now. Right. And Ethereum and whatever. Send me anything, just not a piece of paper.

Yeah, not a check.

And it's funny because that'll come in. So then twice a month we go sweep the accounts, right? You say the 10th and the 25th are probably the best days for most companies to do it. You sweep from your income into your other accounts and then you pay your bills from those.

That's right. And it always has to be a sequence. The 10th and 25th aren't necessarily the perfect days for everyone. Some businesses do this weekly, others do it in synchronization of their payroll. The reason I suggest considering the 10th and 25th is this. If you sweep from the incoming account on the 10th, that means all the money in the income account goes to zero and based upon percentage gets allocated the other accounts. You now look at your operating expenses and you know how much money is in there. You pay your bills from there. Those bills will arrive by mid month. So it gets to pay half your bills off. That's when half our bills are due. You do this again on the 25th when you pay those bills out of OPEX, it'll arrive by the end of the month when the other half of bills are due. So it's a good way to get in rhythm with your vendors, which is great. But the real key here is that we start getting what I call cash flow waves. Your income account accumulates to a certain dollar amount and then on that trigger day, we'll say it's the 10 10th, it goes back to zero. It accumulates. The 25th on that trigger day goes back to zero. You see where your waves are peaking. It gives you a sense of what your normal waves are. Now, businesses vary. It's not always gonna be the same wave. Sometimes it'll Be slightly bigger, sometimes slightly smaller, sometimes significantly higher, sometimes significantly smaller. The goal here is, by doing what you always naturally do, you sit, you know, we log into our bank accounts and look at our bank balance every day you get to continue that behavior. And on those trigger days, you will see where your income accounts topping out, if it's far off where you expect it, raises a red flag and you're like, whoa, why is that way lower than I thought? Or why is it way higher? Let's do that again. Either way, when there's an abnormality, you notice. And the irony is that's what a cash flow statement is supposed to do. You read the cash flow statements and you can figure out the cash change. And if you have a red flag moment, the beautiful thing is you don't need to read a cash flow statement anymore. All you have to do is what you've already been doing. Log into your bank account, see where it's peeking out. Because you're logging in your bank account maybe every day now, see where you're peeking out on this trigger days. And if it's different than expected, then you investigate. And it's that simple.

Yeah. You know what you've got you what you're expecting. You start to see the patterns and you're moving the money around. So I think it's really great. And I've seen more and more. I've got a couple of clients using it now, and it's really given them more peace of mind in changing it. And some of them had profitable companies to begin with, but they had cash crises, so they got serious and they started to move it. I think the other thing to in your book, you've got by company size, you've got some recommended percentages for people to use, a starting point and an approach to analyze your current, current financials and make some targets. So you've got targets in there and then a starting place. And when you have people begin, they're literally taking 1% out for something. So they're not even stretching at all. They're just developing the muscle of honoring the process.

That's the key. You never go to the gym saying, I'm going to bench 300 pounds, and you've never worked out before and put in 300 pounds, literally rip your shoulders out. You start with the appropriate weight, whatever you think you can manage, maybe plus a pound or two so you can get your 12 reps in or whatever the magic number is. Well, the same thing is with profit first, like you said, we conducted a study, ended up being about 1,000 of the fiscally elite companies, and found the percentages that they effectively allocate to each account based upon the size revenue. So if you do 5 to 10 million, you're in this column. If you do 10 to 50 million, you're in that column. If you're a smaller business, you do 1 to 5 million, you're here. But those are simply targets of the fiscally elite. Most businesses that use this system, the vast majority aren't the fiscally elite, at least not yet. So they have to start off where they are today, plus a pound or two, if you will, meaning a percentage or two. So if historically your business has thrown off zero profit, and how I define profit, by the way, is not the accounting profit. That's an opinion. We're talking about the cash profit. So at the end of the year, did your company send you a big bonus check? If it was zero, then we're going to just. It did. Then we're going to add 1% and make it 1%, maybe throw you a bonus check accounting for maybe 2 or 3% of your top line. Then we're going to change that 2 or 3% to 3 or 4%. We're going to add a little more and start allocating that percentage to profit. And we do this for each account. But the goal here is you start slowly, you get into a rhythm, and you need to prove to yourself, hey, I can actually do this. I can take a percentage of my money and allocate to profit first. Then after you prove it yourself, maybe after a quarter increases, another percent, then another percent, and over six or seven or eight quarters over a couple years. Now you're hitting the fiscally elite goals. You have to start slowly and move slowly.

All right, so let's, so let's wrap it and give folks what to do. You can change this this week. You can make a difference. You can shift your whole world. This week. What there is to do is to go to profitfirstbook.com you can find the book, you can listen to the book, you can skim the book, you can read it, detail, you can pour back over it, whatever way works for you to get the concept and see the thing. And then there's also worksheets and downloads on the website as well that you can get and work yourself. So you'll assess where you are right now quickly and easily. You can do it in an hour, maybe or less. And then you'll begin to set some targets. Then you can look at where am I now? Where will I be in the next year, year and a half. You can lay it out quarter by quarter. You can. You'll move it down through that thing, adding a little weight at a time. To use the weightlifting analogy. You'll move yourself from where you are today to where you want to be over time. And you'll be surprised at how quickly you can make a real difference in that so profitfirstbook.com is the place. Mike Michalowicz is the prolific and engaging author. So great to have you again on the show. If you're also thinking about the growth of your business, profit, revenue, cash and time getting time back. That's the world of scaling up. And each week we have a guest, an author, a coach, a client, a case study of some kind or another on some aspect of scaling and growing your business and your life. That's all@scalingusiness.com on that we have free growth tools so you can get an overview of the scaling up methodology in the book and then and an agenda for how to run this kind of planning cycle with your team and a whole set of worksheets and tools there for beginning the scaling up process with your team. So getprofitfirstbook.com and start to figure out how to get your profit in line. Go to scalingupbusiness.com and get our growth tools. Come back here every time or wherever you get your podcasts every week and we'll have something new for you. Thanks again for being on the show, Mike.

Thanks Bill. I really enjoyed it.

Well, I want to give special thanks to our original growth guru, Verne Harnish. Our show is produced by Crystal Carson with the audio production by Podfly Productions and audio editing by Albert Burge. The show notes are compiled by Ein Codena with proofreading by Tim McGowan. If you got some value out of today's show, please share it, pass it along like it. Subscribe all that stuff. You know what to do and drop us a line and let us know the parts you loved. You can send it out to info@scalingcoach.com or find all our files, all our shows, all our recordings, blog posts like that@scalingcoach.com thanks again for listening and keep scaling up.