Mike Michalowicz - Ep. 6 - The Wealthy Contractor

This is the Wealthy Contractor Podcast brought to you by G4 Marketing. Interviews with today's top home improvement entrepreneurs about marketing, sales, money, mindset, and lifestyle. Now here's your host, Brian Kaskavalciyan.

Let me ask you, what if rather than you working for your business, your business worked for you? What if you could turn a guaranteed profit from your very next job? And what if you could not just guarantee that profitability, but make it permanent? This is Brian Kaskavalciyan from G4 Marketing Group, and I'd like to welcome you to Episode 6 of The Wealthy Contractor Podcast. One of the reasons I started The Wealthy Contractor Podcast is because I'm sick and tired of hearing about good, hardworking contractors not making the money they should from their business for all the time they put in and the risks that they take. My guest on this episode is Mike Michalowicz, author of the must-read book Profit First. I love this book and the amazingly simple process Mike outlines that helps entrepreneurs implement the pay yourself first system into their business so they are guaranteed to make the profits they deserve. Now, if your business isn't making enough money for you and your family to live the life you deserve, or if you've been working harder and harder investing in your business and then feeling deflated when you look at your bank account, you'll want to pay close attention to the information in this episode. By the way, Mike will also be our special guest expert at Accelerate 2017 Live, on February 22nd. Seats are still available but going fast. Go to www.accelerateevent.com to learn more. This is a really powerful episode, so you'll definitely want to take notes. So let's get right to it.

All right, Mike, welcome to the Wealthy Contractor Podcast. So you say—

Thank you.

Profit is the first thing we should consider in our business. But we've all been taught that profit is the bottom line. It's kind of the last thing. So how can you claim such a crazy thing?

At first blush, Brian, I agree. It does sound crazy because it goes against what we've been told. But what we've been told goes against how we are wired. That was kind of my big aha moment, is that there was a study conducted, I believe it was by the SBA, there were some other parties involved. They studied the 25 or 28 million small businesses in the US. And by the way, a small business is defined by a company that does $25 million in revenue or less. So it's absolutely my business. I suspect it's many people listening to this call, that it's their business. And the SBA found that 83% of small businesses are surviving check by check. Meaning, if a deposit doesn't come in this month, I can't pay payroll next month. If I don't get some money in this week, I'm not going to be able to cover the rent or buy the supplies I need or whatever. So there's this constant survival mode. What triggered in my head was how can— that means all these entrepreneurs, all these business owners are smart enough to start a business, sell their services and products, deliver on their promises, We get all the marketing, all the componentry, there's thousands of things we get all right, but we can't figure out the profit part. Most businesses are surviving check by check. Most businesses have this big top-line revenue, millions, and their owner is taking home nothing. They're taking home scratch, $50,000, $100,000 if they're lucky. That's when it hit me, because I was that business too. I had a business My biggest business was on a run for $7 million before I exited from it, but I was barely taking home any money. I was surviving check by check. What I always believed up to that point was that profit was the bottom line. That's actually the terminology we use. Profit comes last. It's the year-end. It's the bottom line. But then I realized behaviorally when we believe something comes last, when we call something the bottom line, we in our minds mean that, we translate that to being insignificant. So for example, back in the grade school days when they picked players for the kickball team or whatever and the captains were assigned, the captain would pick the best players first. And the players they didn't want were picked last. If you or I went to the hospital because of a health scare and the surgeon at the hospital says you need to exercise more, We're not going to come out of the hospital and say, "Starting today, I'm going to put exercise last." We'll say, "My God, my health is on the line. I'm going to put exercise first." And so what that translates to is we put priority in what comes first and we put insignificance in what comes last. And so what we're saying in the old formula where profit is the bottom line, sales minus expenses equals profit, we're basically saying profit is insignificant. And so we wait until the year end. It doesn't happen. We're disappointed. And then we say, "Well, next year we'll make it happen." So it keeps getting pushed down the road. 365 days at a time. What I'm suggesting is simply the pay yourself first system applied to business. This is something we have all heard about in our home life. Take your pay for yourself first. What I'm saying in our business, the business's pay is profit. Every time we have a sale, starting today, immediately take 5% or 10% or 15% of that money immediately as the deposit comes in, allocate it toward profit, hence the profit first, and then have the business run off the remainder. By taking our profit first, we are prioritizing it, but there's a secondary benefit too. When the remaining money is left over to run our business, we will have to adjust our business accordingly. We can't run our business excessively. We can't live— run our business check to check anymore because we've taken our profit first. We have to start living within our means. Businesses that live within their means bring about sustainability and they also bring about innovation. These businesses start acting more frugal, but they also find better ways to get the same results. They find ways to increase margin, delivering more value to their customer and dictating a higher premium to their customer without incurring more expenses. So that's why we need to take our profit first.

You know, and I love the message because— You know, this is something I deal with almost on a daily basis with our clients too. And I was also that guy too. It was all about driving the top line, driving the top line, driving the top line. But sometimes, so when you're so focused on driving the top line and there isn't that much left, you see that at the end of the month, "Shit, I didn't make that much at the end of the month." How do you then make the shift and how do you justify taking that money out every day, every week, every time a check comes in? How do you do that?

Yeah, and that's the most common response I get. It's like, "Mike, I haven't been profitable since I've had this business. Now you're telling me to take my profit first? It's absurd. I'm barely surviving now. You're insane." My response is, "You have already found a way to survive check by check." These businesses have been surviving months, years, sometimes even decades by just getting by. I'm telling you, if you can survive years of just getting by, you can just get by with a little bit less money because you're living within all the money that's available. There is a behavioral principle, and perhaps this is the most important thing I can share. There's a behavioral principle called Parkinson's Law. And Parkinson's Law states that economic theory where as demand for something increases, that supply will come to meet that demand is actually mistaken. It's— maybe it's appropriate for economics theory, but for human behavioral economics, it's wrong. Human behavioral economics says as our supply of something is greater, our demand or consumption of it will increase. The classic example is a toilet paper roll. If you see a brand new roll of toilet paper, You'll see that it depletes very quickly because there's tons of toilet paper. But when there's none left or there's only 3 sheets, it's miraculous what people can do with 3 sheets. This doesn't just translate to toilet paper, of course. It translates to money. When we have more money, we feel this freedom that we can use it to buy that equipment that we "need." We can use it to do that advertising that we think will bring "results." But we don't feel the pain because that Facebook ad we ran or the other things we did didn't bring results, but we still have a little bit of money left. When there's no money, we feel the crunch. So when our business is just getting by right now, we've got to realize we're living Parkinson's Law. We're expanding our consumption of money based upon what's available in that bank account. I'm saying when we take money out first, the profit, and there's less money available, We are basically reverse engineering profitability. We now have to find a way to work with that remaining money to support that profit. Parkinson's Law, supply dictates demand. Now there's less supply. Our demand for that money will be less. We'll find ways, more frugal ways to get things done. But the greatest thing is we always find innovative ways. I just want to share a quick story that really drives this home. There was a great movie called Apollo 13, and it's a movie of the true story of Apollo 13, the space capsule during the space race that the United States sent up to navigate the moon. And as they're circumnavigating the moon, the astronauts radio down to Houston and say, "Houston, we've got a problem, and this is legit, Houston. We are running out of oxygen." the filters they created that converted the carbon dioxide back to oxygen were failing. And if you've seen this movie, the pivotal scene is the lead engineer back in Houston has this big cardboard box. He calls an immediate meeting of the other engineers. And he walks in the room with this box and says to these other engineers, the astronauts up there have 10 hours of oxygen left before the filters will completely fail them and they'll pass away. They need 48 hours of oxygen because they have to return to Earth. And he dumps that big box on the table and says, "Make an oxygen filter out of this." And you see the engineers just start scrambling and thinking and working through it. And they actually created an oxygen filter. In real life, out of spare parts, they created an oxygen filter. Now here's the backstory. NASA spent tens of millions of dollars to create the original technically advanced oxygen filters, which failed. And then they used spare parts like MacGyver, and for a few hundred dollars of parts they made oxygen filters that worked and got the astronauts back. Now I'm not saying that if they originally made oxygen filters out of gum and tubes and wire that that would have been a prudent thing for that capsule. But what I'm saying is they could have made a different device clearly for a lot less money that would have been more effective. But because NASA had the means, they took the taxpayer money, your money, my money, they took our money to pay for that oxygen filter, their demand on that money expanded. They said, "We've got tens of millions to build an oxygen filter. Let's see if we can figure it out." Of course they did. But when they were given $200 of spare parts, in no time they found a solution. So in our business, when we take our profit first, we are living check by check because we're expanding. And it's a subconscious response. We don't see it. We just naturally say, "Well, this is the money I have to run my business." And like the NASA engineers, the smartest people in the world, we just expand to consume what's available. When we intentionally compress how much money is available, that will force that MacGyver side of us to come out saying, "How do I get this done?" The most innovative businesses inevitably are the garage stories. Apple, Hewlett-Packard, IBM, you know, just talking about computer companies, but Procter Gamble, Microsoft. All these businesses started off— Facebook— out of dorm rooms and garages when they didn't have the money, which forced innovation, which forces or enables you to crush the competition because you approach it in a whole new way and it puts you light-years in front of them. So you want to intentionally take your profit first and you want to feel that squeeze because you'll very quickly have to find a better way to get the same or better results.

Is, from your experience, is part of the better way looking at how you charge for your products and for your services? Because one thing that I will say is, again, dealing with our group, which is contractors and mainly replacement contractors, pricing is really a big issue. A lot of times they're just not pricing right. So is that one of the ways that you would become innovative?

Yes, it's a massive way. You also reverse engineer that. Cutting costs is the obvious thing, but it can only go so far. When you start thinking of profit first, people say, "Well, I'll keep cutting costs until I'm achieving these profit levels." But most businesses I find can cut costs by 10% easily. But you start cutting more than that, you start cutting your nose off to spite your face. You start losing that knowledge you're gaining by being a participant in some organization, for example. Or you start losing equipment that you need to do the work you do. I mean, you can go back to equipment from the '70s which is really cheap, but you'll be working at the '70s performance level. So you can cut some fat, but you don't want to cut the muscle. By increasing prices, you will start reversing engineering your value offering. So we actually have an exercise here when we work with folks. We tell them, "What is your pricing now for a certain offering?" They show their pricing. We say, "Okay, now let's double it." You'll hear them kind of swallow hard and say, "I've got to double my price?" Yes, double it. Then they double the price, and then we say, Now, how do you justify doubling it? What's interesting is even just by doubling it one time, you can't do more, but you have to start distinguishing your value. Maybe you're certified in something. Maybe your warranty is no longer a 5-year warranty. It becomes a 10 or 20-year warranty. Maybe you start analyzing what your clients need. We actually worked with a contractor who did interior redesigns. They specialize in kitchens and stuff like that. We told them to double their price and they did a hard swallow. "I could never do that." Then we started investigating. We started asking about the clients and we found in their case that the main consumer was usually a couple, husband and wife. The wife was typically the person that was making the purchase decision and was the person who was present when the contractors came. So we said, well, what are their biggest concerns? And quality work was up there, but right next to it was their safety, their personal safety. Because now you have these big burly men coming in with a woman that's home maybe with her young children. There's a sense of threat there. And when we realized this, we said, you know, what if our value wasn't that we just do these home contracting services? What if we told these consumers that what we're going to do is we will, when we come, we want to ensure your safety to a degree you've never experienced. So our team, when they show up, prior to arriving you're going to get pictures of the contractors that will be working at your house and who they look like in their background. Second, you're going to get a— we're going to install video cameras in the kitchen where they're working. So at any time, anyone in your family can look on their phone and see these guys working. The biggest thing was, We said, "We're going to bring a porta-john with us. Our guys are not going to be wandering around your house finding the bathroom. If they need to use the restroom, they're going to step out of the house and they'll be using the restroom." By implementing these subtle but significant changes for what the consumer wanted, they were more than willing to pay double the price because they knew safety is no longer a concern. Absolutely, the opportunity is increasing your prices, but you don't just increase your prices and do the same thing. You have to justify the value, and it starts with the internal conversation. What distinguishes you from the rest of the competition or what can you do that will distinguish you from the rest of the competition? There's big profits to be had there.

Yeah, I love that exercise. I love that exercise.

Yeah.

That's great.

Sometimes we'll double that. We'll call it the double-double. We'll double up and then if they're not swallowing hard enough, we say, "Okay, double it again." Now these prices, say they're bidding out a project at $6,000. We go $6,000, $12,000, $24,000. $24,000, these guys are shaking in their boots. They're like, "I could never charge $24,000 for this." Then we give them all the arguments until they finally say, "You know what? I can charge $24,000 if I do this and this and this." Then we say, "Okay, do all those things, but we're only going to charge $12,000." So the customer is getting extraordinary perceived value, and they are, and the price is extraordinarily reasonable for what they're doing, but the contractor is getting massive margins. Then it becomes a win-around for everybody.

Yeah, I love it. So how does this— How does this idea look? How do you practically pull this off? You know what I'm asking? Like, how do I actually move the money?

How do I move it? Where do I put it? Because I'm going to want it— because if I move—

so look, if I move some percentage of my money, and I know that it's there, and payroll is coming up, I could just go steal it for myself and from my family, and I can use it to pay.

You can, and that's how the system unwinds so quickly. So there's ways to prevent that. I'll give you the 30-second overview because I know we're doing a conference together, and I'll detail out all of this stuff. But the 30-second overview is this is in part, the envelope system. Someone in your family tree surely did this. My mother did this. The idea was as money came in, you divide it up to different intentions from the get-go. So she'd have money coming in. She'd put a little bit of money into the food account, a little bit of money into the mortgage, a little money to give back to the community, and so forth. In our businesses, we set up accounts for different purposes. A couple of the teaser accounts, profits one we talked about. Paying the owners. I would argue the most important employee is the owner of a business. Equipment might be another account. We pre-divide money up. The second component is once the money is divided up, we have to prevent ourselves from stealing from ourselves. There's a way to remove temptation by using a technique to hide the bank account. The idea is once it's out of sight and out of mind. Perhaps the biggest part is we're no longer going to rely on the accounting system. In fact, most of the entrepreneurs I meet with, even with businesses that do like $10, $15 million, most of the entrepreneurs I meet with don't rely on their accounting system. They rely on the bank balances. They log into their bank account and see how much money is around. This system we're going to use works with that exact process. If you naturally look at your bank account online, this will work for you because we're going to keep doing that. You don't have to understand the sophisticated accounting anymore. We're just going to look at different envelopes occasionally, and then act accordingly. So that's how we do it. Nice. So let's—

I'm going to give everybody a couple of resources. So one is you've got to go get this book. So just go to Amazon, Profit First. Mike's last name, you can get the spelling. We'll have a link in the show notes, but it's Michalowicz. I said that—

did I say that right? You nailed it. You nailed it.

You'll know the book because it has a little cute pink piggy bank on the COVID But you have to— this is one of those must-read books. I'm telling you, I met Mike. I said it in the intro. I met Mike a few months ago at an event. I devoured the book. I just love the simple principle. The other thing that I will say, and part of the reason why I love this so much, is that we as business owners sometimes we get get so busy and we get so lost inside of our businesses that we forget the real reasons why we're there. One of those reasons is to earn money. Earning money provides us with freedom. Freedom to spend time with our families. Freedom to live a better life. Freedom to have better relationships with people. We can't forget about profit. I think that this is such an important topic. Mike will be joining us at the Accelerate event in February. We'll also give resources, links to the event down below. But Mike, Thank you for your— this is a great introduction to Profit First. There's a ton more in the book and on the website, so I strongly encourage everybody to immediately go and get this book. Mike's message is a great one. I can't emphasize that enough. Any parting ideas here? Mike?

Yeah, I'll give the one kind of final action step. At the event we're going to lay out the entire system. We started digging into parts of it today. What I found, Brian, is so many people get overwhelmed. They want to do everything, but it's like saying, okay, I'm going to start running a marathon. I'm going to run 26 miles today. And it gives you a heart attack, or you just say, no way can I pull this off. And we resort resort back to the way we used to do things. Instead, as a departing thought, I encourage you today, literally, you listen to the podcast, call your bank and just set up one new account. That's it. One account. It's a checking account. We're going to nickname it profit. Then starting today also, every deposit that comes in, just put 1% into that bank account. What I'm doing here is instead of raising the bar and like you've got to turn up the heat here, I'm actually lowering the bar. It's such a simple, easy step. If you start allocating 1% to your profit account, I acknowledge you're not going to get rich overnight. You're not going to have financial freedom overnight. But you're going to start having the understanding of how you can pre-allocate profit in at least a small way. You'll build confidence in yourself. Then 2, 3 months from now, we'll change that 1% to 2%. 2% maybe becomes 4%, and 4% becomes 12% or 13%. Over time, and it happens pretty quickly, you'll see that by taking your profit first, you can drive a huge amount of profit in your business. There's huge profit opportunities there. You just got to start today by starting real slow. I love it. Great.

Well, thank you, Mike.

I appreciate it. Thank you.

I'll see you soon at the Accelerate event. Everybody look for the show notes for all of the information. This is Brian Kaskavalciyan. This is the Wealthy Contractor Podcast. If you enjoyed this episode, go to iTunes and leave us a great review. Thanks, everybody.