How To Turnaround and Save A Struggling Business By Taking Your Profit First

Thank you. So I received a speaking tip. They said when you're at a conference, always open up with like a powerful tip. So I was like, okay, that's what I'll do. So I have a powerful tip for you. Don't dress like this in Las Vegas. I was outside this morning in the casino walking over here and two people said, excuse me, barkeep, can I have a Bloody Mary? So this is a bartender's outfit. We're gonna talk about profitability today. My goal is to make you permanently profitable. In fact, I have a pretty bold promise. Within 24 hours, by tomorrow morning this time, I commit to making your business more profitable than ever before. A hard commitment, like you'll actually see it on a cash basis. I know it's a big bold statement, but I think we can do it in our 60 minutes or so together. I do wanna start off with a question though. Has anyone ever here been lied to? And I wanna see hands on this. Have you ever been lied to by someone who cares for you, who loves you, but lies to you because they think it's in your best interest? If you've experienced that, raise your hand nice and high. Okay, okay, interesting. I'd say 50% of the room. I'm actually a little bit surprised. I thought it'd be everyone. I wanna just— I'm going to do another question for the room to see who's participating. By a show of hands, who in this room has hands? 50%. Okay. Oh, this is the Handless Financial Advisors Conference. This is interesting. Okay. Okay. I just wanted to gauge participation. I think there's these certain lies that perpetuate through society, and one of them is around profitability. But I think we're sometimes told these lies because the person telling us thinks it's in our best interest. Now, the ground zero for this, as I was doing my research, I found the ground zero. It is the tooth fairy. The first time someone who loved you lied to you because they thought it was in your best interest was the tooth fairy. And this is how it happened for me. I grew up in the '70s. And if you grew up in the '70s or '80s, that was the stranger danger generation. Do you remember that? My mother and my father would tell me, Mike, when you come home from school, go right to the house. Do not ever look at a stranger. Walk right into the house. Put the slide chain lock in, the slide bolt. Take a chair, wedge it under the doorknob, and then go watch an episode of CHiPs. And when my mother come home from work, my father come home from work, they say, "How was the day? Did you follow the rules? Stranger are danger." "Yes, Mom, yes." What happens when you're around, I don't know, 5 or 6 years old, usually around kindergarten, we start losing our baby teeth, we're getting our adult teeth. And I remember in kindergarten, one particular day I was losing my tooth, my mother said to me, "Hey, Mike, do you know that stranger danger thing?" I said, "Yes, Mom. Never make contact with a stranger. Don't look at them. They're dangerous. Just walk straight home." She goes, "Exactly." She goes, "That's what you should do. But there's one stranger who's okay." I said, "There is? Who is it?" She goes, "When a child loses their tooth, there's this woman who in the middle of the night will crawl into bed with you, steal a body part from you, And then leave some hush money so you don't talk about it. I'm like, that's wonderful, Mom. And it was in retrospect, that's when I realized, oh my gosh, sometimes someone who loves to us lies to us because they think it's in our best interest. There is a formula that you have heard of, you've heard of countless times. It's taught in thousands of books. It's actually now in our vernacular. And the formula is this: we've been told in your business, the revenue you generate, the commissions that come into your business minus the expenses you incur to operate your business results in profit. It's in fact the foundational formula that all business owners, entrepreneurs use. Your sales minus expenses results in profit. I'm here to tell you that this is a lie, a belief that just gets perpetuated year after year, generation after generation. In fact, certain beliefs become so established, they become axioms. Our vernacular changes. We call profit the bottom line, the year end. But of course, if we— something is the bottom line or year end or the last consideration, Doesn't happen. When something is last, it's not important. That is the behavior of most people. I was reading a study that was conducted by the SBA in conjunction with this, with a major bank. They identified that 83% of small businesses in the US are surviving check by check. And to give context around this, a small business is defined as a company that does $25 million in in annual revenue or less. Perhaps you're a small business too, like I am. And of us, 83% of us aren't making enough money to pay the bills, to pay payroll, to pay the rent, let alone pay ourselves an appropriate salary. And none of us have any money left over as a bonus, as a profit distribution. This study went on to become a global study. There's 350 million small businesses globally, and the statistics stayed the same. 83% of small businesses are surviving check by check. I want to give a little context around this and why this formula was kind of a shocker to me. Um, as it— you saw that little intro video, whatever. I too am an entrepreneur and, uh, I've had multiple businesses and, uh, I actually lived by this formula. I thought the only way to make this successful was to sell sell more, that if I kept on selling and selling, selling, finally I'd have enough growth that surpassed my expenses and profit would just present itself. My first business was in computer systems. We were installing computer networks, trying to grow that business. Ultimately, I sold it to private equity, and I never made money running the business, but the day I sold it to private equity, I made some money. And it was not like F-you money, but it was F-me money. Yeah, I don't even know what that means, but you know what I'm saying. You know what I'm saying. Somewhere between F you and F me is good money. And I then went on to start my second company. My second company was in computer crime investigation. If you're familiar with the Enron trial, my company was the lead investigator in the Enron trial, not the prosecution investigator. That was the FBI, the CIA, and so on. And so forth, we were the defense lead investigator. So if you remember names like Kenneth Lay, Andrew Fastow, they were our clients. And, oh, a lot of people ask me about the Enron case. It's now at a point where the evidence is no longer sequestered. I can talk openly about it, so if you're curious about it, we meet in the hallway after, I can give you any details about it. I'll give you a summary. They were guilty. They were guilty. And I was their defense. Thank you very much. Thank you. I sold that company to a Fortune 500, and in that time it was fu money. But I never, never made money running the business. In fact, I had refinanced my house twice to cover payroll in two circumstances. I was barely getting by. But I thought, oh, for this formula to work, I need to sell at higher and higher levels. And maybe, maybe you feel that too, that the only way to become profitable, to achieve the financial goals you have is to sell more and more. So just to put a little wrap to my story, my third company, I became an angel investor. I built and sold a couple businesses. Clearly, I thought I knew what I was doing. I now lovingly call myself the angel of death. I was perhaps the worst angel investor ever. I didn't know what I was doing. If you had an idea, I said, hey, I got some money, and plus this genius is here, I can build businesses. We're going to be rich and we'll do something together and we'll do something together and you and I will do something together too. We'll make millions. I was blowing money. But also, once you sell a couple businesses, one of the things you got to do is, you know, show your success. So, uh, the day I sold to Robert Half— that's the company that bought my second company— the day I sold my second company, uh, I bought a BMW, a Land Rover, and a Dodge Viper. All within 4 hours. Yeah, I know, I know, I know. And you can actually do that, shockingly. I got a place— I'm in from New Jersey. I don't know if everyone here is familiar with New Jersey. I moved into a town that's relatively wealthy called Mountain Lakes, New Jersey. If you're not from New Jersey, you know this about New Jersey: we don't have mountains, we don't have lakes. But I moved to Mountain Lakes. I also got a place for a sabbatical out in Hawaii. There's an island called Lanai. It's a private island. And decided this was gonna be my new lifestyle. And as long as I kept on selling my way out of this, as long as I kept on building these businesses as an angel investor, I would make tons of money. By the way, I looked up in the Webster's— it's in the Webster's Dictionary. I said, what is the word for someone who admittedly is chock-full of arrogance and admittedly full of ignorance and has to show off their success and do all these kind of crazy things. Like, what's the word? And the Webster dictionary has it. It's dick. Thank you. Thank you. Yes. Some applause for the dick. I appreciate that. Yeah. I become a dick. And apparently, apparently the Dodge Viper is the winning trophy of dicks. Apparently. So, mm, I gotta show off my success. I become an angel investor. I start all these businesses and within 2 years all these companies, I had become a self-made millionaire in my early 30s, all of these businesses had gone out of business. I was paying bills for companies that didn't exist. My accountant, Keith, called me. And I'm sharing this story because perhaps you've been there too. My financials, I saw the money dwindling logically. I could see the accounts draining fast, but I wasn't ready to emotionally accept it. I thought that moment would come and things would just turn, that moment would just happen, that things would be a-okay, and it wasn't happening. And then the call came. I'll never forget the day. It was February 14th, 2008. My phone rings. It's Keith Mykown. He said, Mike, we've been going through your finances. He goes, I've been with you through your exits and all this stuff. He goes, I can't believe I'm going to say this to you. It's our professional recommendation that you declare bankruptcy. I was like, I couldn't believe it. I felt that my creditors were not responsible for me not being fiscally prudent, not understanding finances. So I said, what's the alternatives? And he said, oh. There's another option. You can skip your taxes. Now, I don't know if you ever heard an accountant make a joke, but when they make a joke, they think it's so funny they start laughing and the laughing reverts to maniacal snorting. Have you noticed this? This is true. I'm in the darkest moment of my life and Keith, the accountant, says, oh, Mike, if you can't— if you wanna get out of this, just don't pay your taxes. I said, What happens if I don't pay my taxes? He says, you go to jail. I'm like, are you kidding me? He goes, yeah. I drove home that day to my family, my wife, I have 3 children, and we celebrate Valentine's Day, a little bit like Thanksgiving, and I pulled up. I was afraid to walk in, 'cause I had to tell my wife and children we're gonna lose our house. We lost it 30 days later, 'cause I was not gonna declare bankruptcy. I had to liquidate my remaining assets to cover my debt, my irresponsibility around cash. My wife didn't know. I'd been lying by omission. How's things going? How's business? Great. I think we got the best investment yet. I sat down, I came in super late 'cause I didn't know what to say. I was sobbing and crying. My wife sits me down right away and she said, "Did someone die? Who died? Are your parents okay?" I'm like, "No, it's worse. I think I died inside. I think we're done." Food was cold. My 3 children were sitting there, my wife, and I know this. I know we may not know each other personally, but I do know this. You and I, we have decided to be providers. Providers through our vocation, through the work you do, providers for ourselves, for our clients, for our family, our community, our globe. Like, I know you've decided to do that. And the one job I gave myself was provide for my family, failed. Abject failure. I told my wife we were losing the house, we did. The car stuff is gone. See you, Viper. I was grateful to get rid of that. And my daughter, she was 9 years old at the time, I looked at her and I said, I'm so sorry, but life's going to change a lot. She goes, but can I keep doing my horseback riding lessons? That was her favorite thing to do. And I looked at her and I said, I'm so sorry. Now, horseback riding lessons were $20 a session for 5 kids. Doing their stuff for a half hour. I said, we just, we can't do that now. We can't afford it. My daughter stood up and ran out of the room as fast as she could. I mean, just as fast as skinny legs could take her out of the room. And I remember the depth of the pain, because I don't know if you've had severe financial challenges or trauma, but I do know every person in this room has experienced something severe, and perhaps a lot worse than financial trauma. And in those moments, the solution is to run away, is to go where no one knows us, start anew. And now I saw my daughter running away from me. The thing was, she wasn't running away. She was running to her bedroom to grab her piggy bank. And she ran back to me as fast as she could, and she put it on the table, and she looks at me, these big blue eyes, my eyes, and says, He says, "Daddy, Daddy, I know you can't provide for us anymore, but I can do it. I'll support the family." I know. If you effing cry, 'cause I'm starting to feel right now, I'm a co-cryer, right? So you cry, then I cry, we start vomiting, ah! Like, let's not go there. Let's get through this quickly. That was the darkest moment of my life. And I'll never forget it. I think the final breath I'm gonna take on our planet will be that moment remembering that. I'm so ashamed and embarrassed of who I was and what I'd become, but I also believe it was divine intervention. I believe there was a greater message here that I didn't really understand this. And that's what we're gonna discover is something new I found. Now, here's a little bow tie. Once you go through that darkest moment, it's not like the next morning you wake up and it's like, Brand new life, let's get to it. Next morning I wake up and go, "Where's the tequila? Give me some booze." So, I drank my fair share for a couple years, not proud of that. Went through depression. I am honored to share that but not proud of it necessarily, but honored to share that because the most afflicted community in the world with depression us, business owners, business leaders. I— but during that period, and with help, I started to re-explore my understanding of things. And I remember one particular day sitting down saying, but I was doing this right, I was doing this right, I was selling as much as I could, I was growing as much as I could, and the profit never came. Why? And I looked at it, and I think you're gonna see it right now too. It's because profit is is at the bottom. It's last. We put profit last. If you're concerned about your health, you say, you know, my health matters so much, starting today, I'm gonna put my health last. Of course not. I put my health first. You love your family. I hope you do. I strongly suspect you don't say, I love my family. That is why I put them last. Of course not. I love my family, put them first. Is human nature what gets done first, or what is addressed first gets done, and what comes last gets ignored. The new formula I'm going to introduce you to— put on this board over here— is real simple. It is the sales, the money your business earns, minus the profit results in expenses. This is what I mean by this. Starting today in your business, On a cash basis, not in our accounting system, on a cash basis, every time money comes into your business, we're gonna take a predetermined percentage of that money out of the business, hide it from you, it's your profit, and then your business will tell you what's left over. This is the pay yourself first principle applied to business. And by tomorrow morning, I think you're gonna have it mastered. Now I do have a worksheet, I think I put it in my pocket here, yeah. There's a worksheet that's been sent around or shared. On your desk. It's a fill-in-the-blank. I will give you the answers to this worksheet. We answered number 1 already, so just so you have it: society is addicted to axioms. Remember, an axiom is an established belief. We are told that sales— I mean, profit comes last over and over. It becomes established, an axiom. We call it the bottom line. So society's addicted to axioms. The next blank is: if the prior generation says it's true, the current generation assumes it to be true. As a result today, the SBA identified this, 83% is the number of businesses under $25 million in revenue survive check by check. 83% of businesses globally don't have enough money to cover the bills next month in their coffers. They desperately have to sell their way out of it. What we're about to discover is number 2, profit is not an event, an eventuality, Profit is a habit. We're gonna bake it into every single transaction of your business. Now here's how we're gonna do it. During my depressive period, we moved into a house that our neighbors effectively granted to us. They knew the financial circumstances that I brought my family into. They were heading away on a sabbatical to Europe and they said, "We need a house sitter. Do you want to be the house sitter?" I, we volunteered. Couldn't afford cable television. I mean, I was broke. So, I don't know if you know this, they still broadcast in high definition over antenna. But around midnight, the TV shows turn off and they just go into infomercials. And I was sitting on the couch one day, tequila, beer. I was wearing a white t-shirt. With Cheetos stains all over it. And I wasn't even eating Cheetos. And I'm looking and on the TV one of these infomercials come on and it's a fitness instructor telling principles to transform our fitness and she gave these 4 physical fitness principles that translates to fiscal fitness principles. It was the most profound show I ever seen in my life and I'm taking notes, I'm like, oh my gosh, This translates to our money. The first principle she shared was to use smaller plates in our house. If we want to consume less, use smaller plates. I don't know if you know this, societally, 300 years ago, plates were about this size, an entrée plate. What we'd consider a dessert plate, back in George Washington's day, that's what they ate their entrées off of. And humanity hasn't changed. Back then, you filled up your plate and you'd consume what's on it. I went to the buffet here at this casino, my God, the plate's like this big, and I filled it up. And what happens? Well, our moms told us to clean off your plates. So as the plates have gotten bigger, our servings are bigger, our consumption's bigger, and societally, our waistlines, bigger. The fitness instructor says real simple, reduce the size of the plates at your house. I'll give you an example. Does anyone here, just by a show of hands, anyone here have teenage sons, teenage boys? Okay. Lots of hands. I'm sorry. I am sorry. I'm deeply sorry. And your hand's still up. Here's why I'm so sorry. Because they're not called teenage boys. They're called creatures. I have two of these monsters. And they've outgrown it. But here, tell me if you can relate to this. My two boys get up somewhere around the ass crack of 2 in the afternoon. Right? Oh, yeah. You feel my pain. They come out of their lair, their bedroom, right? There's the only way you know they're coming is the stink in front of them. And they come in and they cannot speak any language. It's some kind of creature language, like, "Gah." And they come into the kitchen and what they do is they take out a bowl. And at our house, my two teenage boys, we go through a box of Cheerios every hour at our house. They pour it. There's this heaping serving. There's Cheerios all over the kitchen table. Sometimes they're nice and they reassemble it on this heaping mass of a bowl. Then they add milk, explosion of milk, stickiness everywhere, and they return to the lair. "La, la." It's true. Now, here's what I want you to try. I want you to try this with your boys. All of a sudden, Daddy over here got super clumsy. I dropped the bowls. I broke some. Oh my God, what am I doing? I am breaking all the bowls in the house. I rushed to the store and got bowls that were slightly smaller. I didn't get like these little ramekin dessert trays. They wouldn't notice that. I got some bowls that were slightly smaller and those goons never noticed. Ass crack at 2 in the afternoon, woo! They come in, do their routine, Cheerios everywhere and back in. A month later, got the bowls smaller. It took me 4 iterations over 6 months. I got the bowls to half the size. They never noticed, but our food consumption reduced. A box of Cheerios now was lasting like 3 days, which with teenage boys is a miracle. It's a miracle. The lesson is this: when we compress the availability of a resource, when there's less of it available, we are forced to consume less. It's called forced frugality. So it's interesting, but how do we apply this to our finances? Now by a show of hands, I have a question, two questions for you, and I'm even encouraging the handless people in this room to participate if you can. Here's a question. Even though, uh, your accountant may say never log into your bank account, read the profit and loss statement, the balance sheet, and know your metrics. Does anyone in this room log into your bank account to see what the balance is anyway, at least once a month? If you check your bank balance at least once a month, hands nice and high. Okay, keep your hands up. If you have your hand raised right now, I promise you, you'll be profitable by tomorrow. You can put them down. Anyone check once a week, by the way? Put your hands high. Okay, once a week. Okay, great. Any, any once a dayers? There's one dude back there. Are you checking right now, sir? I can see because he's doing it. I get it. I feel you. I feel you. He's like this. He's like, ooh. When you see that face, ooh, they're checking. What you just demonstrated by raising your hand is you are demonstrating the natural behavior of business owners and entrepreneurs. What I am arguing is do not change who you are. We're gonna channel who you are. We're simply gonna put constraints in that allow that behavior to give the result you want, more profit. Permanently. Second question here: how many people here have what's called a primary checking account? Your, your money goes into it and you pay bills from it. Raise your hand if you have a primary checking. Okay, awesome. If you just raise your hand, promise you, you'll be wildly profitable because you've already started setting up the system for it. Now here's the tweaks we're going to make to channel profitability in your business. Instead of having one account at your bank— you, you already go to your bank— we need to set the accounts there. This is a principle I learned when it came to fitness. It's interesting how physical fitness translates to— physical fitness translates to fiscal fitness. I realized about 20 years— 10 years ago, I start— I need to start working out regularly, and it's not a natural habit of mine. And I'd noticed the routine I'd follow is I'd wake up in the morning, go to the bathroom, make a cup of coffee, scroll through the news. The day was getting away from me and miss yet another workout. In that pattern of always going to the bathroom, making coffee, I was like, oh, I can put a behavioral intercept. What I did was I put my sneakers on top of the toilet seat, to my wife's chagrin, but when I'd wake up in the morning, the only way I could use the bathroom was by grabbing my sneakers, and that was enough to say, "Just put 'em on my feet," and that was enough to continue that momentum. You already log into your bank account, you, you, all the hands went up, or most did. If you log into your bank account, that's us walking to the bathroom. We need a behavioral intercept there, And this is what it looks like. We want to set up 5 accounts at your bank, and I'll explain what each one does. These can all be checking accounts. Uh, they can be savings accounts if you think that's appropriate, but checking accounts is what I suggest. First one's called, uh, income. The second one is profit. Third is owner's comp. Fourth is tax, and the last one is operating expenses or opex. This is the answer to number 3. 3, if you want to follow along on our worksheet. Here's what these do. At your bank, we're going to set up lots of small plates, those bowls, right? So we can constrain the cash. The income account in your business will be what's called a depository account. Starting today, when money comes into your business, any kind of income you earn, it goes into this. And this account's job is to act as a a serving tray of cash for your business. Thanksgiving was only a few months ago. How quickly time goes on. We hosted at our house, we had about 15 guests over. My wife and I pulled the turkey out of the oven, perhaps you did the same. You plop it down. And here's what I didn't say. I didn't say, "Hey, everyone, just grab a knife and fork. Everyone for themselves, fight for it." No, instead, carve the turkey. Perhaps you participate in that tradition. And why do we carve the turkey? So that every guest at the table who wants to partake in turkey gets some. It's a way of apportioning. What we have to realize and what I needed to realize is my business has many guests at the table. You're earning money to pay your bills but also to pay yourself, to, to cover taxes and other components. So we're going to talk about those 4 guests at the table. So this is a depository-only account. What we're going to do then is carve the turkey the cash turkey in this case, to fund the subsequent accounts. The profit account, what is that? Profit is a reward to a shareholder for taking risk. Just again, by show of hands, who here owns your business? If you own your business, raise your hand. Okay. You are a share— everyone raise your hand. You are a shareholder in your business. I first want to thank you. So I don't know if you know this, very few people take the risk of starting a business. It's less than 18% of the population will ever start or operate a small business. 18%. So thank you for taking that risk. You are contributing to our economy in a big way. You deserve profit. I invested recently in Ford. This is not a stock tip, by the way. And, uh, 100 shares. Last distribution check I got was $13.23. Remember the envelope came and said, here's your quarterly dividend. Profit distribution. I didn't say, oh shucks, I don't deserve this, Ford. I'm gonna return it to you. I'm gonna reinvest in Ford. Let's grow, grow, grow. And I didn't say, oh my gosh, I need to head down to the factory and earn this one off. No, I said, show me the money, Ford. That's why I invested in you. You invested in your business. A profit is a reward for taking risk, which is different than owner's comp. If you work in your business, if you do sales, if you do service, if you do administration, whatever you're doing, you're what's called an owner-operator. Profit is a thank you for what you do. Owner's compensation is the compensation for what you do as work. So it's a real simple question. I'll ask this rhetorically. You can just answer it in your own mind or write it down. If you had to hire someone to replace you, what would you have to pay that person? $50,000? $100,000? Hundreds of thousands? More? I bet you it's a big number. I bet you do extraordinary things. I bet you sacrifice time with your family and friends. I suspect you've skipped vacations and holidays. I suspect you work sometimes grueling hours. I suspect you care for the customers more than anyone else does. I suspect you know the ins and outs of your industry better than anyone else in your organization does. And if that's true, Why aren't you paying yourself that salary for the person that would do that? Your company has scored you. It has you. The greatest employee it could ever engage has come on board. It's you. Imagine me saying, hey, I got an idea. Leave your company, come to New Jersey. Win right there. Thank you, thank you. I'm from New Jersey, so I can insult New Jersey. Come to New Jersey, work with me. I want you to sacrifice time with your family and friends. I want you to work grueling hours, do whatever it takes to support the company, and by the way, I'm not gonna pay you anything. Are you on board? You would spit in my face. But many of us do this for our own businesses. It has to stop, 'cause if it doesn't, we're ultimately gonna resent our business. But no matter what, our business isn't operating appropriately, 'cause it needs to pay the most important employee that right salary, and I think that important employee is you. Tax, you know this, the number 1 bill associated with operating a business that business owners are least prepared for. You're a business owner and you work with tons of them. Taxes, it's coming. April 15th is around the corner. The phones are gonna start ringing. I owe, I owe how much to who? Oh my God, where am I gonna find this money? Collections calls, discounts, whatever it takes. Your business can pay your tax bill. Regardless of the formation of your business, you can have an LLC, LLP, hybrid, S-Corp, C-Corp, anything in between, nonprofit. Your business can always pay your taxes. Structurally, you have to do it in different ways. So talk with a professional. We have what's called Profit First professionals that can guide you, but, but your business can pay your taxes. The last account is OpEx. OpEx is the money available to operate your business. Now I'm gonna give you a hypothetical, and this is just a hypothetical. Uh, if you want, on the back of the worksheet, my company conducted an analysis of 1,000 companies, and you're going to see in the top left, I think it is, a chart that shows based on different revenue ranges what, um, some of the fiscally elite companies do. By the way, you're going to see a word called real revenue. We don't have time to dig into that, but for now we're going to— let's call it income. Let's just say we'll pick an example here. We'll pretend you have a, uh, a $2 million company. In, in your annual income. We'd be in column C in this— I'm sorry, column D in this case. And that means 10% of the money goes to profit, 10% is going to owner's comp, 15% is going to taxes, and the remaining, the operation of the business, which is 65%. Which means in this case, $2 million, that's $200,000. At the end of every year, if you have a $2 million business, you can be taking home a $200,000 bonus check as a thank you. Additionally, paying yourself a $200,000 salary, plus if you're making income like this, you're gonna have a big tax bill, so we're gonna reserve up to $300,000 for that, and then the difference is $1.3 million to operate the business. Now, I know what you may be thinking. You're like, this guy knows nothing about financial advisors. He's clearly clueless and a little bit loco. I mean, he dresses like a bartender, for God's sake. Who does he think he is? A lot of people say to me, in our industry to generate $2 million, we spend $2.5 million to make it happen. If you got that joke, you're really in trouble. But let me tell you this, these numbers or better can happen for everyone in this room, I know of it, if you apply the smaller plates principle, the Cheerios bowl and shrink it. And the reason is, is because of a theory called Parkinson's Law. So I wanna give you a quick behavioral lesson And once you— if you understand, if there's nothing else you understand or want from this presentation of value, this is the one to take home. This is the game changer. Excuse me. And it's called Parkinson's Law. Parkinson was a theorist in the 1950s, has nothing to do with Parkinson's disease, was studying human economics. And what he discovered in his research is what's called the supply and demand curve. And he challenged it. The traditional curve that you're familiar with Says as supply— I'm sorry, as demand increases, this is demand, supply will increase to meet demand, right? So the more people who want your offering, what you have to sell them, the more people will buy it. It's Economics 101. But also, maybe this is an established axiom. It's simply said because that's what everyone else says. Is it really true? Does profit really come last? Does supply dictate demand? And Parkinson in the 1950s said, no, it's not true in most cases. He goes, in the vast majority of cases, particularly with human behavior, it is supply that's driving demand. And we already talked about it. The more food put on the plate, the more supply, the more we consume. The more time you're given to do something, the longer it takes. Supply, supply and demand. So what Parkinson stated was, if we constrain supply, meaning we make less available, smaller bowls, it reduces demand. It's called forced frugality. The less available we have of something, the less we consume. The less money you have available for your business, the less you'll consume. Forced frugality. So we actually want to constrain the money available. But there's another benefit he shared, and it's innovation. He goes, when we have less resources available, we become more innovative in how we approach it. We act more sparingly. We find ways to work around it. I suspect there was a time in your life you had less income than you do today. I bet you life was still pretty good in most cases, and you found a way to get by. I bet you Parkinson's Law is wired into you right now. In fact, I guarantee it, because it's wired into every human. And if you understand this, you'll see how this starts working. And I'll prove it. Tonight, you're going to experience Parkinson's Law. When you get ready for bed and you brush your teeth, observe yourself. Here's what's likely going to happen. We'll pretend this is the sink. You walk up to your sink, grab your toothbrush, and there's going to be one of two scenarios. You're going to have a full tube of toothpaste or you're going to have an empty tube of toothpaste. And the full tube of toothpaste, what happens is you pull it out and you put that long bead on there. Pffft. I did that last night. I don't know much about Las Vegas, but I know the water pressure here is off the charts. Because when I turned the faucet on, the water goes kkkk, and my toothpaste went flying across the room. So what did I do? Pffft, new tube of toothpaste. When you have a full tube of toothpaste, we can keep using it. It's available. We use it excessively. But someone in this room tonight is going to have an empty tube of toothpaste. And that's the scenario where it's like a shriveled-up prune. You know what I'm talking about? You come in the bathroom, pull out your toothbrush, pop it down, you pull your tube of toothpaste, you're like, "Oh gosh, I forgot I need to get a new one. Oh, thank God, I've been working out. This is my moment." And then you start that twist and turn, you go, "Grrr," right? You're, "Grrr, you filthy son of a bitch, come on. You wanted this, you cunt, you wanted this." A tip. Do not yell that in a hotel room. Guilty? Guilty as charged? Sir, there's a— sir, this is security. I'm like, what's wrong? It's just me and my tube of toothpaste, I swear, you son of a bitch. Some of you maybe have found a very innovative technique to extract toothpaste, which I recently discovered, is you can roll the end, you know, Yeah? Nod your head. Where'd you learn to roll like that? Was it in college? Apparently so. Some people cut off the back end of it, you know? We find a way to extract toothpaste. But one person, one person tonight will have an empty tube of toothpaste, they'll be squeezing so hard, and all of a sudden they say, "Oh, the only way to extract toothpaste is by doing the turtle head of toothpaste." And that is when you put two thumbs behind the tube and you start grinding down as hard as you can. You have to put your toothbrush down, but you start pushing real hard, like, "Come on out, you son of a bitch!" And all of a sudden, with all your force, the turtle head presents itself. "Hey!" It's like, "You looking for me?" And you're like, "Yeah, you son of a bitch!" God! But this is a very precarious situation. The only way to get the toothpaste is by releasing the tube. You have to grab your toothbrush. Turtles are smart. I don't know if you noticed this. I was pushing, the turtle's coming out, I was like, "Hey, you talking to me?" I'm like, "Yeah, you son of a bitch." As fast as I could, meh, I go for my toothbrush And the turtle goes, did you call me a son of a bitch? Because you're a son of a bitch. And it knocks my water down. Since you're laughing at that, I suspect you've lived it. If you've lived it, you're the human walking definition of Parkinson's Law. As constraint gets— as we constrain supplies, there's less available, we start to change our behavior. Here's the final proof. New tube of toothpaste, lasts a month or so. Empty tube of toothpaste, you can stretch it for a month or so. I bet you can. One more, I can get one more day out of this thing. That's why this works. What we're doing is intentionally serving up an empty tube of toothpaste to your business. Less supply, our business has to find a way to work, and innovation kicks in, twist, turn, And apparently with you guys, lots of rolling. We answered number 4, by the way. Number 4, the income account acts as a serving tray of cash. It's the cash turkey. You only deposit income into it and then allocate money to the other accounts. We also answered number 5, the concept of Parkinson's Law, wired into every person. OK. Remember, we're talking about the 4 physical principles. First one was smaller plates. The same fitness instructor I'm watching, an infomercial, says the second principle to transforming yourself is the sequence of how we serve things. In most diets, if you eat lunch today here, if you had breakfast, usually food is served all at once. For dinner, I love my steak and my potatoes. And they'll serve it with some vegetable medley. And what do I do? I divert to what I prefer. When everything's put in front of us, we go to our preference: the steak, maybe the potatoes. I don't eat the vegetables. Kind of COVID them up with my potatoes. The most wasted food item at all restaurants is vegetables. It's the most discarded food item. And here's the irony: everyone in here knows the logic. Vegetables have vitamins and nutrients and fiber. It has all these things that we need, Yeah, it's not our preference. So this fitness instructor said there's a real simple way to bring balance to our diet. Only serve vegetables first. So for dinner, serve the vegetables and let that sit out there for a half hour and eat a little bit of that, then serve the meat and potatoes. And now you'll consume less of the other elements and more of the vegetables, and it brings about automatic balance. The sequence matters. What I wrote up here on this board is this sequence matters. We're doing this at your bank. You told me you already log into your bank accounts and that's awesome. Now, money's gonna come into this account, income. We're gonna first transfer money to profit. I realize these are percentages, meaning it's pieces of a pie. So mathematically, logically, the sequence doesn't matter, but behaviorally it matters a lot. You first allocate money toward profit. I'm putting the letter R here in a circle. It's a reward mechanism. Serotonin, dopamine's released. Because perhaps maybe for the first time ever on a cash basis, your business has profit sitting in your bank account waiting for you, the shareholder of a small business. Thank you. The second thing we're gonna do is pay you. We allocate money to pay you your salary, the appropriate salary, another reward mechanism. It starts building the muscle around this. All right, the business is taking care of me. The next thing is we're gonna allocate money to pay the government taxes. That's not a reward. Ugh, but it does protect you from going to jail apparently. So it's a protection mechanism. Reward, reward, protect, and the last account, S, serves the business. By doing it in this sequence, every time money comes in, we periodically allocate money out. We reward, reward, protect, and serve. It starts building our muscle around cash profitability. The funds here in the OpEx end, is the empty tube of toothpaste. This is what we use to pay our bills. And Parkinson's Law works to our advantage. Taxes are used to pay the government, our responsibility, and we're paying ourselves profit and owner's comp. So the second principle is vegetables first. The sequence matters. The third principle— excuse me— that the fitness instructor shared was removing temptation. I don't know what your temptation is when it comes to food items. But for me, it's chocolate chip cookies. I'm addicted to them. And my son, he's now 22, he calls me up, this is about 6 months ago in the fall, and he goes, hey, Dad, do you want to do this thing called the Spartan Race? I'm like, I don't know if you know what the Spartan Race is. I didn't know. I'm like, yeah, I'm in. Like, what is it? Like, do we run like a couple miles? He goes, no, you run a couple miles while getting electrocuted. I'm like, this is— and then beaten by other people and dunked underwater. I'm like, what? So I didn't realize I signed up for an insane race, but I did. I hired a coach. I'm like, what do I do? I gotta, like, turn into a Spartan, apparently. And he says, the first thing we're gonna do is we're gonna start talking about your diet. He goes, do you have, you know, any bad carbs? And he's like, yeah, I eat cookies. Like, you gotta cut that out. I said, okay. I'll cut out cookies. He's like, no, no, no, you won't. Because temptation, we use willpower and it's like a muscle, it fatigues. I'll say no, no to the cookie and I'll say, well, you know, a little waft didn't hurt anyone. Little nibble. Give me all the effing cookies. That's how I roll. So he said the only way to control is not to make it accessible in the first place. Out of sight, out of mind. So there's no cookies in the house and You won't be surprised, I can't eat them because they're not there. What we need to do, whatever bank you work with today, we're gonna call this Bank One. Over here we're gonna call this Bank Two. And yes, it has to be done at the bank level. Remember, a behavioral intercept, sneakers on the toilet. So this is Bank One. Money is gonna start piling up in your profit account, and the day's gonna come where you're not going to be able to maybe pay all your bills. You allocated money to a profit, you're paying yourself, and you're like, oh my gosh, I don't have enough money to pay my bills. Here's the golden lesson: if you can't pay your bills, your business is telling you you can't afford those bills. There's something fundamentally flawed with your business. If you want to have 10% profit, if you want to pay yourself appropriately and take care of taxes, this is what you must do. It's reverse engineering it. But the temptation is, well, I can just borrow from my profit account. I've done that. It unwinds the whole system. So you have to find a second bank. I found a second bank that was about 3 hours from my house out in central Pennsylvania. I'm in New Jersey. I call it the drive of shame. So far away. I store money there, and the reason I call it the drive of shame is if I'm driving there because I desperately need money, shame on me. I need to work off my empty tube of toothpaste. I went to this bank and I set up 2 accounts. One is called Profit Hold. The second is called tax hold. What I do is as the profit accumulates, I first allocate it. You allocate the bank. You need to feel that serotonin release. You're like, "Okay, I allocated the money." Invoke a transfer. Sometimes it takes a day or two, but you probably have enough temptation to not steal from yourself. Then the money's hidden away there, out of sight, out of mind. The president of our company, Kelsey, and I, have online access to this, but again, we wanna remove temptation. So I have the username for the account, Kelsey has the password, and we don't have the other. It is like turning the nuclear keys at our office. I will enter the username and then block it out, and then she'll enter the password when I'm not looking, and then we're like, 3, 2, 1, and it opens up. This way I can't take our profit. The only time you take profit, and we'll talk about it in a little bit, is quarterly to reward yourself. The only time you take taxes is when the tax bill is due. Out of sight, out of mind. Remove temptation. Just a quick aside. I was sharing Profit First. I travel the world. As you can tell, I'm very enthusiastic about this. I believe every company in here must be profitable. You deserve it. We deserve it. You have to be profitable. And I get enthusiastic. I was in Iowa, to a small group, it was maybe like 50 or 60 people talking about this. I talked about my love for chocolate chip cookies. During the presentation, one entrepreneur in the room picks up her phone, she goes, "Oh, you can do that now? That's fantastic." I thought it was peculiar that she didn't step out, but hey, if business strikes, go for it, I totally get it. She goes, "10 minutes, perfect," hangs up. So I'm sitting there, I continue my presentation. 10 minutes later, the door opens and this dude comes in with 3 pizza boxes steamrolling out, he's like, He kind of Frankensteins his way and he goes, "Who ordered this?" And she's like, "I did." And he goes, "Is this for you?" She goes, "No, it's for the speaker guy thing." That's me, I'm the speaker guy thing. He goes, "Ugh." He brings it to the stage, this is true, brings it to the stage, opens the pizza boxes, and it ain't pizza, it's fresh-baked chocolate chip cookies. My addiction. And I looked at her, I'm like, "I just told you my addiction and you put it in front of me?" And of course I ate it. I asked her in front of the group, I said, "What if I told you my addiction was cocaine?" I tried that joke in Miami, did not go well. Lucky to be here today, thank you. OK. And we continue. So step 3 is to remove temptation. We have to hide money away from ourselves, otherwise we start stealing from Peter to pay Paul. It unwinds the system. Run off of your empty tube of toothpaste. Force innovation. Find new ways to extract value. And you will, and you have in your past. We have to invoke that again. We answered number 6 and 7. So 6 is the sequence of how things are presented. 2S dictate our use of things. We also answer number 7. If something is not available, right, remove temptation, we don't use it. So sequence is 6, available is number 7. The 4th and final principle this fit— physical, I'm sorry, this physical fitness instructor shares with me, or for the program, she says we need to change our frequency of our diet. Most people eat 3 meals a day. And she goes, what happens is we go into kind of peaks and valleys. We eat something, then we go into what's called a gluttonous state. We actually will overeat and say, "Oh, I can never eat again." And then by afternoon or evening, we're starving to death. We overeat. It causes peaks and valleys. She goes, there's a real simple way to normalize consumption, which actually reduces your caloric intake if that's your goal. Eat 5 meals a day, 5 small meals a day. And as I was listening, I was like, oh my gosh, in business, when it comes to our finances, many of us go through peaks and valleys. We're flush with cash or not. Money's in, like, oh my God, this is amazing, we can now hire that person, get that equipment, do these things. Or more often, my gosh, where'd all the money go? Oh my gosh, what are we gonna do? And it's these peaks and valleys. We need to normalize it. And what we need to do to normalize it is get into this rhythm that I call the 10-25. And this is how it looks. This is a, a time chart and in this vertical axis is income. That serving tray of cash we talked about. Here is the 10th and 25th of the month. Today is the 19th, so the next trigger day is gonna be the 25th and then the 10th. Then the 25th. And this is going to repeat on into perpetuity. And here's what happens. Today, money hopefully will be deposited into your business, into that income account. Now we just let it sit there because it's not this trigger day. Then the next day, money hopefully gets deposited and so forth. We keep allowing money to sit in that income account until the 25th. On that day, all the money in the account gets allocated out Based upon percentages in that order to all the different accounts. Money goes into profit, we hide it in the profit hold. Money goes to owner's comp, it's used to pay your appropriate salary. Money gets reserved in taxes, hidden away. And OPEX, empty tube of toothpaste, we're gonna start running the business off of this. Can't afford to pay bills, there's something flawed in our business. We gotta figure out what the fix is. Then starting on the 25th, money flows in but it just sits in the income account. and on the 10th gets allocated out. And the chart may look something like this. You know, 'cause cash is variable. Here's what's interesting. When I, when I asked you who logs into your bank account, you know, monthly, weekly, with checking right now, that's awesome. Because what's gonna happen is every 10th and 25th, I want you to just make a note in your mind of how much money is typically in there. So today I own a few businesses. One business we expect every couple weeks about $50,000 in there, and I look for that. Sometimes the money deposited is in excess of what I normally expect. I log my account, I see $75,000, there's normally $50,000. What you do then is you call your accountant or bookkeeper, whoever your professional is, and say, this is amazing, what did we do right? I'd like to do more of that. Other times there'll be woefully less than you expected. And on those days I call my accountant and say, "Normally it's 50, but there's only 10 in there," or whatever. What went wrong? Now the power of this is this is what a cash flow statement is supposed to do for you. I don't know if you know how to read a cash flow statement. I don't. I question if Keith, my accountant, knows how to read a cash flow statement, to be honest. Kkkk. If he's watching the video, it's back at you, Keith. But I do know how to log into my bank account and I do know when something is outside of what I expected. That's real simple and we all can do that. So by monitoring this and when there's volatility or changes from our expectation, it's a call to action. Call a professional who can read the tea leaves and tell us what to do. The question that comes up is why the 10th and 25th? What's magical about those days? Nothing really particularly magical. It's a 2-week interval, but I think what's, what's interesting is when we do this on the 10th or 25th, money gets allocated out. The OpEx account gets funded on that day. That empty tube of toothpaste, that's when you pay bills. When you pay bills on the 25th, they'll arrive by end of month. Probably about half your bills are due around end of month. When you repeat this process on the 10th, you'll pay your bills. It'll be all processed and done usually by the 15th. It's usually when the other half of your bills are due. So it's a great way to get into a rhythm paying your vendors on time. They deserve to be paid on time just as much as you and I do. So it's a great way to care for your vendors, but it's a greater way to care for monitoring your cash flow. There's one other part of this frequency rule. We call it the 90-day rule. It's my favorite rule. Every 90 days, we do it on the calendar quarter, so end of March will be the next distribution. Every 90 days we go to our profit hold account and it's profit distribution time. We say, "How much money's here? Uh, let's take it out." Now here's the key. When profit comes out, it's used to reward the shareholder, just like that Ford factory. We don't reinvest or plow it back. If you're putting money back into the business that was designated as profit, it never was profit. It was just a delayed expense. We're playing mind games. Profit is used to reward the shareholder. Every 90 days. We answered number 8, peaks and valleys is the answer. Um, and we also answered number 9, profit is used to celebrate. If you reinvest or plow back the money in your business, you're training yourself to completely disregard profit. What we're avoiding is the call for this, the empty tube of toothpaste, which brings about Innovation, efficiency, and frugality. So, uh, the answers for number 9 are celebrate, reinvest, plow back, innovation, efficiency, and frugality. Here's the deal. As we're racing through this, you may have missed some. I know I'm speaking relatively quickly. We have a lot to cover. Uh, you may have not noticed all of the answers already on your worksheet at the very bottom. Right there. Yeah, yeah. Sorry, I'm sorry. Hold on. I'm in Vegas. I could have been gambling right now and not listening to the clown in the bartender suit. Yeah, yeah, he could have been. So the answers are there. I was in Copenhagen. There was 5,000 people in an audience listening to Profit First. This, this challenge with profitability is not a US challenge. It's a global challenge. Challenge. This was pre-COVID, this is back in 2018, teaching Profit First. I asked same questions, you know, who checks their bank balance? At the end of the conference, I had the privilege of talking with a lot of people, and a lot said, I am struggling surviving check by check, I need to, to do this, whatever I'm doing right now is not working, I need a cash management system, and I get it, it runs my bank account. And, and can you come back next year and give us the advanced? In an hour we're going over the most basic stuff. I usually spend 4 4 hours on the basic and another 4 hours on the advanced. So I said, "Yeah, I'd love to come back." I came back 1 year later, 2019, same 5,000 people in the audience. I open up, I say, "Hey, who saw me speak last time?" All the hands went up, obviously it's the same people. I said, "Great, I spoke with so many of you, you said you were starving for Profit First, it's a year later, how's your business been transformed? Are you doing Profit First?" And that's when all of a sudden everyone had to take notes. Like, do not look at this guy, Just doodle, just keep doodling. And my face turned beet red and I said, are you kidding me, Copenhagen? I just taught you how to be permanently profitable. You said you needed it and you're not doing it? What's wrong with you? Which, I don't know who in here is a professional speaker. Professional speaking tip number 1, don't yell at the audience. That's a good tip, but I did. It was in that moment that I realized, holy cannoli, I taught this system incorrectly. In fact, what I just shared with you is not complete. I just promised you by 24 hours, by tomorrow, you'd be permanently profitable. And I realize I just drew out the Spartan race for you. This is a lot of stuff. We went over tons of paperwork here and all these things you need to do. And you're probably skeptical if it's even gonna work. I was. I started this now 16 years ago. I've had over 50 something, quarters of consecutive quarters of profit. But I didn't do it because I believed in it. I did it because I was desperate, because I'd broken our family financially. It was at Copenhagen I found the last element I want to teach and share with you. I have a little story that goes with it. There's a great book out there called Decisive. It's written by two brothers, Dan and Chip Heath. It's a study of how entrepreneurs and business owners can flip a switch in their mind, how they can make decisions decisions and stick with them. And they found that we're often told to raise the bar, to set these big Harry Audacious Goals, to go bigger than anyone else. And yet they said, what if there's more success by lowering the bar? They ran a fascinating experiment. They took 200 people who were looking to get physically fit. It's interesting how physical fitness translates to physical fitness. And these 200 people came in. The first group over here was what's called the control group. The control group are people that are given the standard regimen. Now, this was around cardiovascular fitness. And the researchers said the standard cardiovascular fitness is to run 5 miles 3 days a week at a 10-minute clip per mile on average. And they said to this group of 100, do you want to get physically fit? And the group's like, yes. And the researchers said, how badly do you want? And they're like, so badly. They said, great, we have an exercise regimen for you. "Run 5 miles 3 days a week. Go, go, go." And they kick them out the door and the group goes running out. They then went to the test group, the lower of the bar group. And the researchers come to this group and say, "Do you want to get physically fit?" And the group's like, "Yes!" "How badly?" "So badly!" They said, "Great. We have an exercise regimen for you, but before we give it to you, we have one question. Do you like to watch television?" And the group's like, "Uh, yeah?" Ted Lasso changed my life. Yeah. If you saw Ted Lasso, it changed your life. The researchers then said, do you sit on the couch when you watch television? And the group is like, we do. They said, okay, here's your exercise regimen. The next time you turn on the television, instead of sitting on the couch, we challenge you to stand in front of the couch. Talk about lowering the bar. That's below the Earth's crust. Like, you can't go lower. 2 weeks into this experiment, the control group comes back. Out of the 100 people running, it was 93— 94% were unable to do it. 1 person had a heart attack while running. Yeah. Thanks for laughing. I'm sure he appreciates that. So what happens, the researchers raise the bar, big hairy audacious crazy goals. They say, "Okay, you're the last 5 or 6 people, represent the group, go run, run, run." They go hobbling out there, "We got this, we got this." If you don't currently run 5 miles 3 days a week at a 10-minute clip, don't start that way, here's the big tip for you. They go back to the test group that was staying in front of the couch. And they said, "Hey, now that you're standing in front of the couch," which by the way, they had 100% success rate, they said, "Are you willing to march while you're in front of the couch?" Lower the bar. A month later they come back. This group, the control group, had 100% failure rate. No one could keep the pace. But this group, after one month, had a 98% success rate. They're marching in front of the couch. Which begs the question, those two people, Like, we're like, uh, did they say march in front of the couch or sit back and eat Cheetos like Mike? I think it was the Cheetos. But the experiment continued. Marching in front of the couch became doing jumping jacks when the commercials came on, which then became doing sprints in and out to the mailbox when there was a commercial break. Ultimately, it did take 6 months, over half this group, it was like 58, 59% were able to run 5 miles 3 days a week at the 10-minute clip. The majority succeeded by lowering the bar, and everyone failed when we raised the bar. And that's why I realized, I realized in Copenhagen, this is raising the bar. Here's my promise. I said I'm going to make you profitable by tomorrow. I have 2 steps, so simple, so low, that if you do these 2 simple steps, I guarantee permanent profitability in your business. But you have to be bold enough to be willing to stand in front of the couch. Here it is. Step 1, what do Whatever bank you work with today, if you like them, keep working with them. Set up one account there and call it profit. It's a quick phone call. You got to visit. You get a savings account and call it profit. Step 2, allocate 1% of any deposit that comes in into profit. Because 1% is inconsequential. If you got a $1,000 deposit today, I'm saying take $10. That's 1%. Hide the profit because if you can run your business off of $1,000, you can run your business off of $990. That's the key. We have been told since the beginning of accounting that profit comes last. How's that serving you? Most businesses are never profitable because it's the last consideration. Now you know to take it first, and that's our answer to this final line. What comes last gets ignored. It gets delayed. It's the mañana syndrome. What gets first gets done. All you have to do is start taking your profit first. Thank you for having me this morning. Appreciate it. Thank you, my friends. Thank you.