The Creative Entrepreneur's Financial Journey | Mike Michalowicz

The logical side is that crunch of numbers. It's the, it's the if, or, and statements, or if, then, else statements. And that in most cases is not inherent to an entrepreneur. And that's where you need an ally. But I also think it's a big mistake to say, since I'm a creative, I can't do or serve the logical side. I can't do numbers. So there's this avoidance mentality that kicks in with many creatives that I've known that says, you know what? I'm just not a numbers person, I never will be, and therefore I will struggle.

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Welcome to another episode of The Profitable Creative, the only place on the interwebs where you will learn how to turn your passion into profit. I am your host, Christian Brim. Joining me, the esteemed Mike Michalowicz. Welcome, Mike.

Minus the esteemed part.

I love it. Yeah. I mean, I could think of a lot of adjectives. Esteemed seemed appropriate.

Well, that's very kind of you, sir.

Thank you, sir.

And I'm honored to be with you, the esteemed Christian Brim, and on your show. So thank you for that.

Well, I just got back from, uh, you can see from my t-shirt, the Onward Summit. And, uh, it was a gathering of videographers, storytellers, and the energy was amazing. But it got me thinking and what I wanted to to talk to you about was this, uh, dynamic between the creative elements of business and the analytical parts of business and kind of marrying the two. Because I was doing a presentation on profit, right? And a lot of these people are solopreneurs, um, and it was like I was speaking a foreign language. And I had tried to dumb it down as, as much as possible, but there seems be like this fundamental disconnect in the brain between the way people think, and some people who are creative struggle. But it's a— to me, it feels like a communication, uh, thing at its essence. Like, it's, it's not that the, the ability is there to understand it, it's just, uh, like people speaking different languages.

Yeah, it's funny. We, um, we have a project we're doing outside. Uh, there's some trees that have to be removed, so I looked into tree felling, and which is, is cutting trees, and the complexity is like, oh, you need to come along and you need this jack and you need to do a reverse cut. And I was like, oh my God, I just thought you used a chainsaw. Yeah, I always use a chainsaw. Um, there are ways to safely remove a tree and there's really basic principles. These are dead trees. And I was overwhelmed by information. I said, I can't do this. And I had to have someone else do it for me. That's not true with profitability. I mean, it is true that we get overwhelmed, but you can manage the basics yourself. There's no question. Once you get that tree down, if you need to haul it somewhere, don't try to lift it out of your back. You're going to throw it out. There's a certain point where you need to bring a professional in, and there are certain situations that are dangerous., but there are some basic techniques. I think the problem is we're, we're overcommunicating. We're giving way too much detail. What entrepreneurs need is the basic compass, the, the guidelines, and that will get them 80% of the way there. And then they bring in an expert like yourself who guides them, keeps them accountable, helps the nuances. You know, there's, there's tax compliance and other stuff that, that is, is really heady but important, but they can do it themselves, but they need to find someone that can communicate it. In a tangible, consumable way.

Hey listeners, are you ready to turn your passion into profit? Then grab a copy of Profit First for Creatives. Click the link in the show notes to purchase a copy. And if you're not ready to make that full commitment, you can download a free copy of the first chapter. Check it out right now. So in your experience, you've obviously been in a creative space as an author and a speaker in your entrepreneurial journey. Am I imagining things that there is this continuum? I don't want to say it's a dichotomy. I don't want to say it's either or, but there's this continuum of creativity and analytical that shows up for entrepreneurs.

Yeah, I think there is. And I would say most entrepreneurs lean, if it's a spectrum, to, to the creative side, because you have to believe you can pull something off that most people believe they can't pull off and actually emphatically say, yeah, Of course the world needs this widget, and of course I'm the one to do it. If you think about it logically, that's absurd. Like, what's the real chance you have of success? And yet most entrepreneurs literally pull it off. They are able to do it successfully and sustainably. That's a very creative mind, and you have to adjust to all the dynamics that are going on. The logical side is that cruncher of numbers. It's the, it's the if, or and statements or if-then-else statements. And that in most cases is not inherent to an entrepreneur, and that's where you need an ally. But I also think it's a big mistake to say, since I'm a creative, I can't do or serve the logical side, I can't do numbers. So there's this avoidance mentality that kicks in with many creatives that I've known that says, you know what, I'm just not a numbers person, I never will be, and therefore I will struggle. And the reality is you do have the core competencies in that creative mind of yours to really improve your financials and get it on the right track and to use your emotion and reactivity to manage numbers really well. And that, that's what Profit First and Profit First for Creatives does. It allows you to work with who you naturally are and, and drive your business where you want it to be and it needs to be. Yes.

And I, I think the brilliance is when you have, not necessarily in one person, but in a company or an endeavor where you have both elements, right? Because I was having this conversation with my leadership team and, you know, they're all accountants, right? And we were talking about creativity and I said, well, Chelsea, you're creative. And she was like, well, what do you mean? I said, well, you're a dancer. She was like, well, yeah, but I haven't danced in a long time. And I'm like, well, that doesn't mean that that's not there. I mean, like, right. And I moved along and, and I said, well, Jeremy, you're a creative. And he goes, oh no, I'm not. And Chelsea spoke up and she goes, yeah, you are. You're a drummer. And he's like, well, yeah, I— yeah. And I think that's it. It's like we kind of get settled into what's comfortable and what we're comfortable with, and we kind of bury the rest of it.

Yeah, yeah, we do, we do. We are really good at affirming labels we've given ourselves. So if I say I suck at math, that's not necessarily the reality, but what I'll do is say, here's proof I suck at math. I don't study math, I don't practice math, I don't do anything at math. So just, we all need to be careful about the labels or identities we give ourselves because we will comply with it. So to do the reverse is very difficult too. If I've been saying for my life, I suck at math, and then the next morning I wake up and say, I'm good at math, my back of my mind will say, BS, dude, don't lie, because I have all this momentum. So what we do with Private First is our goal is not to convince ourselves we are accounting maestros. What our goal is, is to recognize we have certain abilities of instinct in that when I log into my bank account, in this case, if I know what money's intended for what purpose, when it's carved up, my instincts will kick in and I'll work within those confines. So we just need a simple system that leverages who we are without having to change who we are. The, the, the basic system that you and I are teaching is most creatives will collect money. Into their bank and they have one account and they see $1,000 in there and say, I have $1,000 to spend, or whatever they see. But the reality is some of that needs to support their lifestyle, that you gotta put food on the table. Some of it needs to pay taxes and liabilities we have to the government, which you can't avoid that. And some of it has to pay for the continuance, the operations of the business. And by carving this money up first on a percentage basis, now, gosh, your instincts become your biggest ally. You're like, oh, Okay, I, I don't have $1,000 to spend. I got $300 for the operations of the business. I got $400 to support my groceries this week, or whatever it may be. And now you can start working with who you naturally are very well.

Yeah. And, and, and I, you, that brings to mind a client I was having a conversation with to write the book. And he said that he was using one bank account and he did a lot of project work where he'd get a bunch of money up front and he had in his mind, okay, this is how much money I'm going to make on this project, and he had to pay this out to contractors, etc. But then he would get another job, and there was still some money left over in the one account, but then he got another big jump of money. And like, he was trying to keep this track in his head, like, but instinctually he, he was on the right track, right? Like, I'm gonna make this much money on this project. He just didn't have the structure to keep— get it out of his head.

There's a contractor in town, he got a, a, a house reno job and I know him, or of him I should say. And the next day after getting this, this job, he shows up in his brand new truck. And so the gossip's like, how do you afford this truck that went around? And, and they're like, oh, he got the new job and then he complete the job because he bought the new truck. So then the reputation now is like, this guy was stealing. The reality is he leveraged his normal instincts that all of us have. We see a source of income and we can take an action. He's probably been waiting for that truck for 10 years and said, oh, now I have the ability to get it. So he's not a bad guy, he just has a bad system supporting a good guy who's leveraging instincts. So he hasn't done this because I, I don't— I'm not friendly or in contact with him. What he could do is when that job and other jobs comes in, he could have set up a truck account and say every time a job comes in, 2% is to acquire the new equipment that I need, this truck. And over time, there'll be a trigger point where there's enough money in there to get that truck he needs. And the beautiful thing is, that's how this guy's wired. He saw enough money to get the thing he needs, but by, by precategorizing it, he would have been able to balance all of the responsibility that money had. So it's kind of normal. It's normal. We just want to work with how you normally work.

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And I think that's the brilliance of the system that you created, is that it meets people where they are and it works with the way they're naturally wired. And, and I find this strangely, I find so many accountants and CPAs that have this like almost visceral response to Profit First when their clients come to them and say, well, we want to do Profit First. And they're like, no, that's a bad idea. And it's because they're looking at it through the lens of the way they were trained. It's kind of like going to your doctor and saying, well, I'm going to try acupuncture, and they're traditional Western medicine doctors, and they're like, well, that's not going to work, right? And that's what I think is the brilliance of, of Profit First, is it's, it's designed for business owners, not accountants.

That's exactly right. And it's designed to work with accountants. So this is kind of the front line. It's the cash flow management for a business, but it doesn't negate the necessity for accounting.

No, no, absolutely not.

Yeah, supports it. So there's two forms of resistance I see. One is, to your point, is the programming. And most accountants, by the definition of the job they're in, are the Spocks of the world. They love the number crunching. They can see the tea leaves through the numbers. That's their job. But when we see ourselves as capable of something, we assume that's the nature of everybody. Isn't everyone just like me? So I think one challenge an accountant has is thinking that everyone's an accountant. I think the other challenge is that there is inherent resistance. Well, are you saying what I'm doing is wrong? Are you saying I'm not fit for you? Well, screw that. And we fight back. The perception that is wrong there is Profit First sits in front of the accounting system as a cash flow management system to be in the moment. So every time a deposit comes in, you know in that second how much money's been deposited today. Uh, you allocate it out to these different accounts, you know what's available, and you start working within these al— these allocations. The accountant behind the scenes, when she reconciles or he crunches those numbers, he still does the process and can give you a historical recommendation or a reflection of what you've done, and also a forecast, a recommendation of what you should do. So those key components still play in, but now we've given the entrepreneur a tool for managing money in the moment.

Hey listeners, are you ready to turn your passion into profit? Then grab a copy of Profit First for Creatives. Click the link in the show notes to purchase a copy. And if you're not ready to make that Full Commitment, you can download a free copy of the first chapter. Check it out right now. It was like my account executive came to me with a question that she got from a prospect, and he had started a business this year, but he hadn't made any money. And so he had this piece of equipment that he wanted to buy, and his question was— because we're accountants, and, and accountants have trained, uh, business owners to think this way. He came and he said— his question was, I need to spend $5,000 on this piece of equipment. Do I do it now or do I do it next year? And my immediate response to her was, absolutely the wrong question. That you're asking the wrong question. You have not made any money. Do you need another piece of equipment?

Oh my God. Hey Christian, anyone's listening in right now, whoever you're working with, hire Christian's accounting practice immediately. 'Cause that's exactly what you do not hear. The number one response, and I was like, oh, this is what accountants will say. Well, it's a tax write-off this year, right? Like if you spend the money now, you can post a loss. Good for you, you're losing money. In regards to tax law, there could be an advantage, but that is a cut your nose off to spite your face. I wish accountants would say, is this prudent for the health of your organization? Like, that should be always the first question.

100%.

Yeah. I love that you did that.

Well, it's business purpose. You have a business intent, any action you take, right? And then you determine what is the most tax-efficient way to do it. But the business purpose has to come first. It can't be secondary. You can't have tax wag the tail. Of the dog. I'm going to pivot here a second. I know your story, and for those who haven't read Profit First, which I highly encourage because Mike's a great storyteller, and then you can read Profit First for Creative. You need to read both.

Do you buy both at the same time? Get a two-for-one deal.

Tell us a little bit about your entrepreneurial journey and your money struggles.

Yeah, I grew some businesses early on as an entrepreneur, and was in hindsight lucky in regards to its financial success, but I was blind to it. I attributed it to myself. I said, well, I built and sold two companies. I'm like, oh, the only common factor I can think of is I'm here. You and I were both in the same organization, the community of entrepreneurs during that process. And you know the organization I'm talking about. It's a wonderful organization and there's a lot of bravado there. So to say, yeah, sold one, I started to buy my own BS. My third company, I became an angel investor. Uh, I decided like, I'm gonna help many companies grow, but I'm gonna have a piece of everything. And I was a disaster. I, I didn't know what I was doing. I wasn't capable. I blew money left and right. There was an interesting phenomenon I see in retrospect is as my money was declining, I logically saw losing money, losing money, but behaviorally thought it would turn around. I was rejecting that story. I was like, wow, I'm a moment away from the next big client. It's, it's just a matter of time. I'm here. I finally had to face the truth. I'll never forget the day. It was February 14th, which is Valentine's Day of 2008. And my accountant, he calls me and says, Mike, you got to declare bankruptcy. And that was the first time I heard it and it landed. I knew I was in trouble, but that time I heard it and it landed. I didn't tell my family up to that point of the struggles, and I'm ashamed of that. I was lying to them by omission. I told my wife, yeah, things are fine. We're one client away. Because I wasn't being truthful to myself. And the pinnacle moment was when my daughter asked if she could still go to horseback riding lessons. To give context, it was $20 for a group session for a half hour. They would do their practice and she was 9 years old and in tears sobbing because I was so ashamed. We were about to lose our house. We lost it 30 days after this. I told her, I said, you can't go. I'm so sorry. And she ran out of her room. I thought to run away from me. She ran to her room to grab her piggy bank. And came running back to me and plops on the table and says, Daddy, I'll save our family. Here's my money, my savings. And it was such a humbling and shameful moment for myself. It became this awareness that I didn't understand financial discipline or financial behaviors. It wasn't like the next morning I woke up and said, I got this. I started drinking hard. I went through depression again, not proud of that, but feel emboldened to share it because This is the struggle for so many entrepreneurs. It did set me on a path and it was a year or two later in reflection, I looked back at that moment and said, damn it, I can make this into something. I draw the line in the sand for myself and I will never allow myself to struggle financially again or anyone I'm privileged to have come in contact with. I, I am on your team. I'm all in on this. We are gonna make sure you're financially sound, period. That's become my mission. I, I call it eradicate entrepreneurial poverty. This perception of success, the reality of struggle, to close that gap. And that's the reason I do what I do.

I love that story. Thank you for sharing it, because I know that's not easy, even, even though you've probably told that story many times, because I'm envisioning myself and my own struggles as a professional that knew better and the shame and the heartbreak of those that you affect.

Yes. And the insidious nature of entrepreneurship is you can't wear that flag. It's the scarlet letter. Could you imagine going to a client saying, I'm washed up. I, my business is struggling. I don't think I'm gonna be able to make payroll tomorrow. And by the way, we're ready to serve you now. The client will walk away. We have to show our strengths. And so then there's this outward-facing facade, and then there's this internal struggle you cannot share.. And then it goes beyond that with your family and so forth. And it's, it's very lonely. And that, that's why it is painful to share it. I did race through it because I would start crying again, but I want entrepreneurs to know they are not alone, not even close.

Yes. I, as I was talking to these participants at the Onward Summit, I, I was— because some of them had, had been greatly impacted by COVID and they shrunk a lot and we had this comment. I made this comment that I didn't coin the phrase, but it's— I don't— maybe you, maybe you coined it— the revenue is vanity, profit is sanity, and cash is king, right? Did you coin that? Do you need a trademark? You need to.

No, I did not. And it goes— that may be a Jim Collins thing. Verne Harnish, who we both know, talks about that often, but it goes ways back. It definitely is not mine, but it's a wonderful term.

Phrase. Well, and it speaks to exactly what you, you speak. So when entrepreneurs get together, they always talk about the top line, the revenue. I, I, I sold this big deal, or we got to this size revenue, or I have this many employees. I have never gone into a conversation with a colleague as an entrepreneur and the, and the topic of, well, how much money did you make come up? Never, never.

Yeah, never. Yeah. Isn't that funny? So I started this program, if you will, just for myself. Whenever there was a conversation about how big is it, then that's the entrepreneurial thing. How big is your business? How many employees do you have? Which is a backdoor way of finding out revenue. How much revenue you make? I simply say, um, tell me how healthy your business is. And you gotta see the consternation on people's faces. They're like, what do you mean? How healthy is it? I'm like, well, tell me about your financial viability. And they're like, Well, you know, we're making $10 million revenue, but I missed payroll last month. You know, that's the reality. And the size of revenue, in fact, often amplifies the struggle. So if you don't nail the profitability at the early stage, as you get bigger, that profitability issue becomes much, much bigger itself.

I remember sitting in an event with Verne Harnish 13 years ago, and there was a group of 50 entrepreneurs, and he said, how many of you and all of these entrepreneurs had businesses of at least $1 million in revenue. He said to the— he said to us, uh, how many of you would rather have— you would shrink your business, work less, and make more money? And almost every hand in the room went up.

Isn't that funny? That's the 3 things we've always wanted. We want to have financial freedom, we want to have personal freedom, which is work when you want, when you want, and we want impact. Like work less, impact more, and have the freedom to do what we want. And yet it's the ironic thing is it's the reverse is happening. Most business owners are surviving check by check, so we don't have the financial freedom. We definitely don't have time. We sacrifice friends, family, holidays, anything to keep the business afloat with our efforts. And then impact, forget it, goes out the window. You can't be of service when you can't sustain.

Mike, I very much appreciate your time today. It's been my pleasure. Listeners, if you like what you hear, please rate the podcast, follow the podcast, share the podcast with somebody. If you don't like Mike and me, shoot us a message and tell us who you'd rather hear. Until then, ta-ta for now.

And that's a wrap for today's episode of The Profitable Creative. Until next time, you money lovers. And don't forget, Profit First for Creatives is live via Amazon. Link below.