Profit First Explained: New Cash Flow Insights for Entrepreneurs

I'm from Mountain Lakes. If you're not familiar with New Jersey, you know this about New Jersey: we don't have mountains and we don't have lakes. And so the proper name for my town is Hilly Puddles. New Jersey, we, you know, we have big beliefs. We want to roll big. I had a business coach who once said to me famously, at least famously to me, he said, Mike, when one person says a dumb thing, it's dumb. He goes, when 10,000 people say a dumb thing, it's still dumb. And yet it seems that societally we have certain beliefs that just perpetuate on and on, and we just repeat them because everyone else says them. They're called axioms. When I was in grade school back in the '70s— and I know you're thinking instantly, this guy's in his 50s? Like, he's 53? He doesn't look a day over 52. Thank you. Thank you. When I was in school, I remember in 3rd grade, I took my first test on the solar system. And the— I failed the test. I got a big F. And the first question was, how many planets are in our solar system? I put 8. Teacher said, there's 9. The next question said, which one of these planets does not fit? And it said Mercury, Venus, Earth, and Pluto. And I said, Pluto's not a planet. Before you're like, oh, this guy is like Carl Sagan? Like he knows, he's like a cosmic, you know, planetary scientist. No, no, no. I'd finish the sentence. I said Pluto is not a planet. Pluto is a Disney character. So the correct answer, by the way, is Earth. Mercury, Venus, Pluto are all Greek or Roman gods. Earth means, it's Germanic, it means the ground. So big F. But here's the funny thing. Today they've discovered that Pluto is not a planet. There's only 8. I was right. I was— I am Carl Sagan. Well, there's another belief that exists today. I'm going to find my markers here that we're going to fix together, me and you. There's a belief that's established and perpetuates societally, and this is what it is, that your business our businesses depend on this formula: the sales you generate minus the expenses you incur results in profit. This is a foundational formula. This is the foundational formula for profitability. I'm going to turn this this way so the rest— oh, actually, you can see on the screen. We all know this formula. It's taught in tens of thousands of books. It's in our vernacular. We call profit the bottom line or the year end or the final take. And I'm here to say this is like saying there's 9 planets in the solar system. It's a mistake. It's a lie. There was a study conducted by the SBA, Small Business Administration, in conjunction with one of the largest banks in the US, and they ran a study of the 33.2 million small businesses in the US. And just to give context, a small business is a company that does $25 million in annual revenue or less. So if your business is doing $25 million or less, you're called a small business. That's absolutely my business. I suspect it's many of us in this room. They identified that 83% of us are surviving check by check. 83% of us don't have enough money to pay the payroll, pay the rent for their facilities, cover all the expenses, let alone pay ourselves an appropriate salary. And profit, poof, that never hap— I just spit on the front row, I apologize. I apologize. Yeah, the fact you're wiping on your face is amazing. That was amazing. Okay. The vast majority of us are not profitable. We're not sustainable businesses. Now that means statistically in this room, you are struggling with profit. And continuing the equation, if it's not you who's struggling, it's the person sitting to your left. And to your right who's struggling. 83% of businesses struggle with profitability, and the question, of course, is why? And I would argue it's because we've been told a lie, that this is the biggest lie of all, because sales minus expenses does not result in profit. And why doesn't it result in profit? Because while this makes logical sense, it doesn't make behavioral sense. If you love your family, I know that's an assumption. This guy's clearly from New Jersey. Oh, you're family now, and I love you. If you love your family, do you say, I love my family so much, I've decided to start putting them last? Of course not. If you love your family, you put them first. Oh. I value my health so much that starting today, I'm going to put my health last. Never. I'm going to put it first. It's human nature. When something comes last, it's the mañana syndrome. It can wait. Not today. When something comes first, it's prioritized. And we are told in this formula that profit comes last. Yeah, it can wait. So for most of us, we wait until the end of the month the quarter, or for most of us, at the end of the year, and ask ourselves, is there a profit? When there's not, we're like, well, I'm just gonna kick the can down the road on profit, and maybe it'll happen next year. And so for most of us, it's no profit, no profit, just getting by, just getting by. We're gonna fix that, and we're gonna fix it really simply. I'm gonna introduce you to a brand new formula. I call it the Profit First formula. Works like this. Your sales, which is your source of revenue, of course, minus your profit results in expenses. Now, I know there's a couple of folks in here, probably many, that are pretty smart with math principles. Do you know mathematically this is the exact same equation We did what's called a variable swap. We took expenses, put below the line, move profit above. Logically, these are the exact same thing, but behaviorally it's radically different. What I'm saying is every time revenue comes into your firm starting today, you're gonna take a predetermined percentage as profit, allocate it, hide it away from your business, and live off the remainder. That's the expenses. This is the pay yourself first principle we all know about in our personal finances. Apply to our business? That's what we're going to learn together this morning. Now, I do have a worksheet that's handed out on the tables. If you can't recognize it, it's the one with the picture of that handsome fella in the top left. I did make that wallet size for you if you want. Okay. Oh, he's from New Jersey and egotistical. All right. We answered number 1 already. Society is addicted to axioms. An axiom is an established belief that we perpetuate because other generations said it was true. The solar system has 9 planets. That's what everyone says, has 9 planets. We're told profit comes last. Okay, profit comes last. So the first answer is society is addicted to axioms. If the prior generation says it's true, the current generation, us, assumes it to be true. So Axiom's Generation Generation, we also answer the rest of that. As a result, today, according to the SBA, 83% of small businesses are surviving check to check. So I'll help you fill this out as we move along if you don't catch them. But 83% of businesses survive check by check. We have been told that profit is an event, an eventuality. It'll happen sometime. I'm here to say profit is not an event. Profit is a habit. That's the answer to number 2. Profit's not an event, it's a habit. We're gonna bake it into every transaction of your business. And we're gonna do it following some principles, interestingly, from physical fitness. I too am an entrepreneur. I currently own quite a few businesses and have been an entrepreneur ever since I graduated from college. Because, because I couldn't find a job, to be honest. And my businesses struggled because I lived by this. The only way I saw as making a profit, taking home money, was if I simply sold more. So my early businesses, which were in the tech space, I kept on saying, I'm not profitable. Maybe when I achieve the first half million, or maybe when I achieve a million, or maybe, maybe it's when I get to $3 million. Ironically, it's when I got to $3 million after 7 years of effort, not being profitable, constantly being break-even, that I achieved my first profit. I got a call from my accountant. His name is Keith. He said, Mike, congratulations on all the growth and effort. I have wonderful news for you. You have a profit. And I'm like, are you serious? It's amazing, Keith. I'm like, how much is it? He goes, you have $15,000 of profit. I raced down to his office. He pulled out the P&L, you know, the profit and loss statement. You know, on the bottom says $15,000. He circled it with a big red marker. And I'm like, this is amazing, Keith. This has been my dream. Thank you for sharing this. And then I asked him a question I forever regret. I said, I said, Keith, where is the profit? Thank you. Clearly we are awake and participating. Yeah, thanks for laughing at me. That's a joy. So here's the— have you noticed between me and you, have you ever noticed how an accountant laughs? It's laughing that reverts to maniacal snorting. Have you? And mocking and mocking. Keith— when I asked him, I said, "Where is the money? The $15,000?" He goes, "Huh huh." Grrr grrr! You don't have any of that! Grrr! He goes, "You've blown it all! It's gone!" He goes, "That's an accounting profit." Who says that?! My accountant says that! This isn't accounting profit. We're— what we're gonna talk about, what I commit within— I got 50 minutes to do this— within the next 50 minutes, we're gonna make your business permanently profitable as we define profit. Cold hard cash waiting for you at the end of the day to do what you want with. And if you're already profitable, kudos to you, we're gonna make you more profitable. That's my commitment. We got 50 minutes, we have to move quick. I will tell you this, Keith, you know, as a beautiful, gracious gift, years later, after growing my business more and more, I actually became entrapped. I grew it to $5 and $7 million, and actually I was taking on more and more debt. There was a point, and I'm embarrassed to admit this, but it's the reality, I became insolvent. I lost all my money. And I called Keith and I said, Keith, I'm in real trouble here. And his response, you know, the professional accountant, "No duh," he says. Yeah. And I'm like, "Oh, thanks, Keith." And he goes, "Yeah, it's our professional recommendation that you declare bankruptcy," which was a dagger to my heart. I'd grown these businesses to become these behemoths that were cash-eating monsters, but not profitable, not money-making machines. And so I said, "Keith, I know I have a tax bill coming." He's like, "Yeah, you have a big tax bill." He's like, "You can't pay it." So I said, what do you do in this circumstance? He said, oh, it's real simple. He goes, just skip paying taxes this year. I said, you can do that? He goes, no. Here's the funniest thing. He's still my accountant. That moment, and I won't belabor the story, but that moment became transformative for me. I set myself on a mission to determine how to be profitable at any size. I am energized about the topic of profit, if you haven't guessed it already, because I want you to be wildly profitable. In fact, your customers are starving for you to be profitable. Listen, you'll never have one of your customers come up to you and say, hey, can you charge me a little more? Could you rip me off a little bit? Could you screw me a little bit? That's the screw gesture, if you didn't know. Sorry. Yeah, your customers will never say that, but they will say, "I want your undivided attention. I want to be your number one customer. I want to be taken care of. I want to be treated as your only customer." And you know the only way to take care of our clients to that degree is if you're sustainably profitable. If you're not, it's constant panic. It's constant fear. I gotta sell more, I gotta do more. We can't pay attention to our clients. Your clients want you to be wildly profitable. They just won't use those words, or hopefully those gestures. So how do we become profitable? Well, it's a lesson from physical fitness. I was watching television one day and the fitness instructor came on, shared 4 principles that were kind of out of the box to me around physical fitness. The first thing was about our diets. I don't know if you know this, but societally we are becoming a bigger person. And the reason, the fitness instructor said, was because the size of the plates we use at our homes. I don't know if you know this, 300 years ago a plate was this size. George Washington was eating off what we call a coffee saucer. Truly, that was their dining plate. Plates have doubled in size. We serve, just like we have in the past, fill up the plates. Our mom tells us clean up the plates, and because we have double the container, we have double the servings, double the consumption. The fitness instructor said the most simple way to control your caloric intake is to have smaller plates at home. Does anyone here by chance have teenage boys? Just raise your hand if you do. Okay, I'm deeply sorry. I'm deeply sorry because they're not called teenage boys, they're called creatures. Right? The food consumption is redonkulous. I have two of these goons at home. Tell me if you can relate to this. My boys wake up somewhere around the ass crack of 2 in the afternoon. Right? Oh, you feel me already. They come out of their lair bedroom. You know they're coming. They're— for such awkward humans, they're awfully silent. But the stink emanating in front of them. And so my two monsters come out and there's just this smell. It's like, oh, someone asked me once, is there something worse than the smell of a rotting corpse? And the answer is teenage boys. And they come up and they come to our kitchen and they come to the table and we'd have our Cheerios box out. Now, at our house, a box of Cheerios with teenage boys lasts about every hour. You're going through a box, you know, and they come and they fill it up and there's this heaping mass and they add milk and there's this explosion and stickiness. And then they grab their bowls. They can't speak English. They just go, "Bleh, bleh, bleh." And they go back to the lair. And you're kind of grateful that they're back in the stink central. I tried an experiment based upon what this fitness instructor shared. What I did was all of a sudden, Dan here got super clumsy around the house, and I broke all the bowls in our house. I know, yeah. Thanks for participating. I then— I then— Got slightly smaller bowls. I went to the local whatever store and got one. I didn't get these little ramekin dessert bowls, just so we know. I got slightly smaller ones and the goons never noticed. They would come up, ask, crack a two, they would fill up the thing and go away. A month later, I broke all the bowls again, got slightly smaller ones. This took me 4 or 5 iterations over 6 months, but I got the bowls to half the size. And they never noticed. But here's what happened. That box of Cheerios started lasting us like 3 days, which with teenage boys, like, is the definition of a miracle, right? The lesson one, when it comes to our finances, is the container is dictating our consumption. If we simply control the container, we are set for success. Let me ask you a question. I asked for full participation. So you got to raise your hand for this or not. It's a good way for us to survey each other. How many business owners in here have what's called a primary checking account? What I mean by this is you deposit most of your deposits in there and you pay most your bills from that. If you have that, raise your hand nice and high. Excellent. Excellent. Okay. I would say it's hard to survey, but I'd say 80% of the room. I actually thought it'd be more. One more question just to measure participation. By a show of hands in this room, who has hands? Not everybody, apparently. Are you kidding me? Oh, I work for Dynarama. I'm handless. Okay. Good to meet you. Here's the deal. I would say, since some people are choosing not to participate, I would say 90% of this room has a primary checking account. If you raise your hand or if you have a primary checking account, you are primed to be very profitable. And that's my commitment now in the next 45 minutes. My second question is, who here, even though your accountant may say never do this— my accountant says look at the income statement, the balance sheet, the cash flow statement, the KPIs— who here follows a simpler system like I do and at least once a month at least once a month, logs into her bank account to see how much money you have. And if you see money, you know you can spend it. And if you don't, you panic. Who checks their bank account at least once a month? Raise your hand. Once-a-monthers? OK, good. About 90%. Any once-a-weekers? Once-a-dayers? Your hand— you're checking right now, aren't you? As Bill Clinton famously said, I feel your pain. I feel it. I'm with you. I do the same thing. I check my bank balance coming up in here. Oh my God. Most humans manage their finances by logging to the bank account. Therefore, if you do that, you will be wildly profitable because here's the core lesson. Changing who we are is very difficult, but channeling who we are is very simple. Don't change who you are, channel who you are. So the fact you log into your bank account, we're gonna make that your biggest asset. Here's what we're gonna do. The first thing I want you to do is whatever bank you work with, we're going to set up multiple small bowls or plates. See, right now you have one big Cheerios bowl and your stinky, smelly teenage business walks into the bank account and just says, I'm going to gobble it all up. So what we're going to do is we're going to set up 5 I call them the 5 foundational accounts. This is on your worksheet too. First account, it's called income. I'll explain each one in a second. Second account, it's called profit. Third, it's called owner comp. Fourth, it's called tax. The fifth and final, it's called OpEx, stands for operating expenses. This is, let's see on your worksheet, this is number 3. So what are these accounts? Let me get a different color pen. The first account there, the income account, is going to become what's called a depository-only account at your bank. Here's what I'm suggesting. Every time a deposit comes into your business, we're going to deposit into the income account and let it sit there. The reason we're going to do this is your business has many teenagers that need to be fed, many components that need to be fed. So we're going to allow money to come into the income account and carve it up. It's kind of like Thanksgiving. Last Thanksgiving, my wife and I hosted at our house. We had about 20 guests over. And so the turkey comes out of the oven, half the family has to post this on Instagram. Like, oh my God, a golden turkey. No one's ever seen this. Fine. My family's, you know, listen, they're like me. It's a disaster. So what— here's what I didn't do. I didn't say, hey, everyone, just grab a knife and fork. Whoever wants the most gets it. Fight for it. No, I carved the turkey. And if you celebrate Thanksgiving, I suspect you carve up the turkey. And why do you do this? So every guest at the table can get a piece. Income is our cash turkey. Money flows in and sits there. Then on a recurring or periodic basis, we're going to allocate portions of the money to different accounts. The first account we allocate toward is profit. Let me give context what profit is. Profit is a reward for starting and running a business. Another study that came out from the SBA, 17% of the population will ever start a business from scratch, as a franchise, as a freelancer. 17%. If you look back at kindergarten, I had 30 kids in my class. 17% is 5 kids. There's 5 kids from your class who started a business. There's another statistic that the SBA revealed, that only 20% of those business owners sustainably keep the business in a healthy state and can employ people. 20%. 20% of the 17%. Well, 20% times 17% is 3%. 3% of your kindergarten class is running a healthy business. That's you. You're the weirdo. You're the weirdo from your kindergarten class. You're the one kid that did it. And gosh, if you knew you were getting into, you would have never done it. But you did it. The other kids from the kindergarten class are looking for good jobs with good companies doing good things. That's what you're doing. The number— and this is not in your notes, but this is one thing to remember— the number one job of an entrepreneur, of a business owner, is not to do the job It's to be a creator of jobs. Maybe you want to write that one down. The number one job of an entrepreneur is not to do the job, it's to create jobs. That's your job. Well, you know what you get as a reward for running a business? You get profit. Profit is a thank you for taking on massive risk, for doing what only 3% of the population pulls off. Thank you for providing for our economy. It's massive. I got a check, I own some public stock. I own some shares in Ford. I don't know why I'm like rolling my eyes here, but I do. I own 100 shares. This is not a stock tip apparently. I own 100 shares and last quarter I got a check for $13.23 from Ford. I open— thanks for laughing at me again. I open up my distribution check and I look at it and I didn't say, ah shucks, I don't I don't deserve this, Ford. I'm going to plow it back and reinvest it in Ford. Actually, if all the shareholders would just return all the money, we could go and grow. No, I said I took risk. This is a payment to me for taking risk. And I didn't say I had to head down to the factory and see how many hours I got to work to earn this. I took risk. Profit is not to be plowed back or reinvest in your business. Profit is not used as your salary. Profit is a thank you for investing as a shareholder in your own business, which is different than owner's comp. Owner's comp is the pay for the work you do within your business. I had a chance to meet a few folks early this morning. They were hungover. Between me and you, one guy was still at the bar. You know who you are. Oh, that was me. That was me. Um, owner's comp. Owner's comp is compensation for the work you do. And I talked with some owners here, and it's unbelievable what I heard you do. You're the best technical expert in your business. You're the best sales representative. You're the best at customer service. You sacrifice time with your family. You, you miss holidays and vacations. You do anything to keep the business going. It— if I could get you to do all those things for me at my business, you'd be the golden child. Like, you'd be the ultimate employee. And if you allowed me to pay you what you pay yourself when you came to me, which is zero— think about it. You have an opportunity to move to New Jersey and work for me. Your business has landed the number one employee in the world. The number one employee in the world, it's you. No one will have the drive or dedication or devotion for you. And imagine having to replace yourself. What would you have to pay that person to replace you? $100,000? $500,000? Millions? I bet you it's a big number. And here's the deal. If you're not paying yourself that, your business is not treating the number one employee properly. Properly. You have to pay yourself that salary. If you ever want to sell your franchise, you better have the proper valuation. You better be demonstrating that the business can afford what a key employee does deserve. If you don't want to resent your business like I have resented so many of my businesses because I'm paying employees checks but not paying myself, you must pay yourself. I suspect if we did an interview in this room, how many people started their business for financial freedom? I bet you even the handless people would throw up a nub. Hi. Everyone here. If someone here does not have a hand, like, listen, I get you. Let's— we can talk. I'm sorry. I'm sorry. I hope you see the humor too. But taxes, taxes. We started our business in part for financial freedom, hopefully personal freedom, do what you want when you want. But financial freedom is to never worry about a bill. but the biggest bill we worry about rolls around April 15th. I owe how much to who? My God. And then your giggle-snort accountant's like, "It's tax time." Your business can pay your taxes. Now I realize you may have a different formation for business, LLC, hybrid, S-Corp, C-Corp, doesn't matter. Your business can always reserve tax liability. Talk with an accountant. They may have to reimburse it to you as the owner or may pay it directly to the government. Your business can pay taxes. And this last account here, OpEx, is the operating expenses of a business. It's what your business runs on. Now we won't spend time on it because we're tight on time, but if you look at the back of your worksheet, there's a thing called the TAPS chart. Stands for Target Allocation Percentages. My company studied 1,000 different businesses, industry agnostic, and identified what the top fiscally elite businesses do. So just for pretend sake, I'm going to say your business is doing $2 million in revenue. You can find the column you're in. Ignore real revenue. That's an advanced topic. Let's just go on to profit. You'd be in column D if you did $2 million in revenue and the allocation percentage would be 10%. The carved up turkey would get 10% there. The owner's pay would be 10%. The, um, uh, taxes would be 15%. And then the remainder, the difference would be 65%. So if I add these up, 6, 7, 8, 9, yeah, it's 100%. So just to play this out with financially, if I make $2 million of revenue at the end of every year running these percentages, you should have a $200,000 bonus check waiting for you. You should be taking home a compensation on top of that of $200,000 as your salary. And if you're making this kind of money, You're gonna have a big tax bill. So we're gonna reserve $300,000 for taxes, and that means the difference, which I think is $1.3 million, is left to operate your business. Now, I'm not a mind reader, except for this moment. I think you're saying this, and you're like, this guy is crazy. Like, literally, he— does he know anything about our industry? In our industry, industry, you spend $2.5 million to make $2 million. If you get that joke— yeah, someone said, right. Yeah, you feel my pain. I feel it again. Yeah. I know you can nail this stuff. And the reason I know you can nail this is it's human nature to nail this. When you understand the most important concept I can share with you today, which is called Parkinson's Law. And admittedly, if there's nothing else you take from my presentation— besides the wallet cutout, I get it— if there's nothing else you take from my presentation, this is the take-home, because this shows how you deal with every asset that you have, every resource you have: money, time, anything. Food? Parkinson was a theorist in the 1950s— nothing to do with Parkinson's disease— And he discovers that we are told about the supply and demand curve axiom, that as demand increases, that supply will increase to meet demand. You know, this is taught in thousands of books. And he's the first person in the '50s to say, oh, this is wrong. He said in most circumstances, it's actually the reverse. That supply is dictating demand. What he said is the more— the old model said, you know, the more customers want something, the more demand there is, the more we're going to go out and supply that, or competition will come up. And he said, no, no, it's the reverse. The more a supply is available, the more we will consume it. The more available internet bandwidth there is, the more we consume. The internet will forever be slow. You remember it used to run at like 24k? Kshh, dee, koo, kshh, kshh. Remember that? You're like, "God, this takes forever." Now it runs at like 10 trillion gigabits. We're like, "Why is it so slow?" You can never have enough supply. The more supply, the more we demand. And therefore with money, the more money you make, the more you will inherently subconsciously demand it. Have you noticed your income goes like this over time? Maybe. Have you noticed your expenses go exactly like this over time? It's like there's some divine intervention. Every time you make some money, you're like, finally, we nailed it this month. Next month, where did it all go? It's Parkinson's Law. But Parkinson then pointed out a cool concept that we can constrain the supply Now supply is down here, and demand will be reduced. The less money you have, as an example, less supply of money, the less you'll spend. Obviously, the less time supply you have to do something, the faster you get it done. He says when we constrain supply intentionally, it's called forced frugality. But he also pointed out something else interesting, that we become very innovative in how we behave. I'm staying here at the Gaylord, and I rolled in last night, pulled out my toilet gear bag. I don't know, someone probably experienced this too. You open your bag and sometimes it's an empty tube of toothpaste. Ever been there? Yeah. Well, last night it was a full one. I was excited. I took my tube of toothpaste, I— put it on there. It's a full supply of toothpaste. Now, not that familiar with Tennessee, but I do know this: the water pressure here is redonkulous. I turned on the faucet in my room last night quietly. It's like midnight, and goes— my toothpaste went flying across the room. It splatters, but it didn't matter. I had a new tube of toothpaste. I put it on there. Lesson 1: large supply, new tube of toothpaste we use a lot. One part— it's going to happen to someone tonight. Someone in this room tonight is going to have an empty tablecloth. You know what I'm talking about? That shriveled up prune-like one. You open that toilet gear bag and you're like, oh gosh, I forgot to get my toothpaste. So what happens? Constrain supply, we constrain our demand. Our behavior changes radically. All of a sudden you look in the mirror and say, "Oh, good thing I've been working out. This is why I started working out again, because I have an empty tube of toothpaste. Let's get the game going on." You grab that toothpaste, you grit your teeth, and you're like, "Game on. Come on out." You start twisting and turning like that. "Come on, you filthy, good-for-nothing, dirtbag. You wanted this, you know." You wanted this. Yeah, which— I don't know if there's any professional travelers here. Don't yell, "You wanted this," in a hotel room. I learned that one. You want it, you son of a bitch. So then what do you do? You become innovative. Some people cut the back end off. Some people— oh, I heard this one recently. You start rolling the end. Any rollers here? Do you learn that in college? And good night. Right. We find ways to extract it. But now here's the most interesting thing. One droplet's enough. Sometimes the only way to extract the toothpaste is by getting the turtle head of toothpaste moment. And you know exactly what I'm talking about. You're like, nothing's coming out and I got stink going on. And so what do you do? You're like, all right, double thumb grip. Okay. Oh, come on, you filthy good-for-nothing, right? And you push both thumbs. Your toothbrush has to be put down for this. It's a double grip. You're pushing, you're pushing, and you're like— and all of a sudden, all of a sudden It starts coming up and saying, "You looking for me?" And you're like, "Yeah, oh, ha!" The only thing you can do, the only way to get the turtle is, you can be lightning fast, is just to grab it and then swoop in. Listen, turtles are slow, but they ain't stupid. You know, that turtle's up there saying, "Hey, you looking for me?" The second you reach, it's like, "You called me a dirtbag. Now you're the dirtbag." That's funny. That's funny. I'm going to applaud myself. That was great, Mike. Thank you. Wow. Wow. Note to self, speaker applauded self. Narcissist? So here's the deal. Somehow you get one drop on one bristle hair, you brush up, you're like, that's all I needed, right? We change. If you're laughing, so I know you've lived it. And since you've lived it, you are the walking definition of Parkinson's Law, and that's why I can promise to you you're about to be wildly profitable. When we constrain supply, we behave radically different. If we serve up an empty tube of toothpaste, your business will change. Here's a lesson to remember: if you can't— when you do this allocation and there's not enough money to pay your bills— empty tube of toothpaste— if you can't pay your bills, that's your business saying you can't afford afford those bills. There's something fundamentally flawed in the business. Inevitably, it's margin, incorrect pricing sometimes, inefficiencies more often, cost savings often. If you can't pay your bills, you can't afford it. If you want to be profitable, if you want to pay yourself what you deserve, if you want financial freedom, this is what you must do. It forces the hand. Okay. We answered number— let's see, number 4. The income account acts as a serving tray. You only deposit income into it and then allocate money into the other accounts. We also answered number 5. The concept of Parkinson's Law leverages the behavior of make do with what you got. So 4 was serving tray, allocate, 5 is Parkinson's Law. So that was the first principle I learned from the fitness instructor. Is the size of the plates we use dictate the consumption. The second lesson I learned is this concept of sequence. She was talking about, you know, most American diets, we don't have enough vegetables. She goes, if you want to fix that, serve vegetables first before you serve anything else and people will eat more vegetables. Do you know this sequence of things is very important? I realize logically I just allocated percentages of the income account. So technically, logically, you could just put some money here first, the 65%, and then there. But behaviorally, when you do this at your bank— this has to be your bank, we're going to intercept your path— you log into the bank account you told me, keep logging in, these accounts are set up. The first one thing we're going to do is allocate money toward profit. That is— that's the letter R in a circle— that's a reward mechanism. The most addictive drug in the world is dopamine, and and serotonin and all those brain drugs. And when you allocate money, perhaps for some of us for the first time ever, when you allocate 10% of a deposit that comes in, your next deposit, you will have cash profit waiting for you. And the serotonin dopamine releases, and you're like, oh, this feels good. Next thing we're going to do is we're going to allocate money to pay you, the most important employee. More serotonin dopamine. R stands for reward. These are reward mechanisms reward mechanisms. It instigates a good profit behavior. The next thing we're going to do is allocate money toward taxes, which is, is not a reward. It does P, protect your business, you know, from going to jail, apparently, according to my accountant. So reward, reward, protect. And the last thing we do is we fund the operating expense account. That's the letter S. It builds the behavioral pattern of of reward, reward, protect, and serve. Reward, reward, protect, and serve every time you use a system. So the second lesson is the sequence, that's the answer to number 6, is the sequence matters. Now here's the deal, I set this account, this system up for myself about 15 years ago, I started doing this. I've been permanently profitable ever since. I've had over 62, so a little bit longer than 15 years, 62 consecutive quarters profit distributions in all my companies because of the system. But here was the deal. The first time I set this up and I allocated money toward profit and owner's pay, I couldn't pay bills one day. And I said, you know what, I'll just, I'll just borrow from the profit account just, just for today. And I never paid it back. The day you borrow from your profit, we should rename profit to Peter and we'll name this one Paul because you're stealing from Peter to pay Paul. You unwind the system. Now this is a shell game if we do that. So we have to remove temptation. Quick story. My former teenage boy, he's now 23, so he smells even more. He calls me up. He's in college. He calls me up and he says, hey, Dad, do you want to join me for the Spartan race? Um, I don't know if anyone's ever heard of this. I never heard of it. I'm like, what, you run a couple miles? We wear some like dress or something. Fine, I'm in. This— if you had never heard of the Spartan Race, oh, you run a couple miles while being electrocuted, drowned to death in mud, and kicked before you even start running. I joined this and I didn't realize, oh my God, what'd I sign up for? But I'm true to my word, so I, I call my my friend, and I said, I need a coach. And this coach comes and he says, we gotta start like tuning you up for this. And he said, one of the most important components, in addition to exercise, is your diet. He said, do you have any like bad carbs you eat? I'm like, yeah, you know, cookie. I love cookies. I love cookies. So he's like, no more cookies. I said, okay, no problem. He goes, no, no, it's still a problem. He goes, you'll try to use willpower not to eat the cookies. He says you have to remove them from any accessibility. So we got out of the house. There's no cookies in the house. And so I don't eat them. Removing temptation is key. We have to do this with your bank. But by the way, I was, uh, doing a keynote about 5 years ago, and I mentioned I love chocolate chip cookies at this event. It was a similar size, about a couple thousand people. And it was, it was interesting. One person starts taking a phone call while I'm presenting, like, you know, pretty loud. I'm like, listen, we're business owners here. If opportunity strikes, you've got to go for it. But it was peculiar she didn't step out. And she says, oh, can you get here in 10 minutes? That's perfect, thanks. 10 minutes later, the side door opens up and this dude walks in with 3 box— 3 pizza boxes, steam coming out. He's kind of Frankenstein his way in. And he goes, who ordered this? That entrepreneur, she goes, it was me. And he goes, where do you want it? This is in the middle of a keynote. And she goes, on the stage for the speaker guy thingy. That's me. He puts on stage the pizza boxes and opens it up, and it ain't pizza, it's fresh-baked chocolate chip cookies. True story. And I'm like, I just told you my addiction and y'all put it in front of me. And I ate them. And I ate them. I asked her after the fact, I said, what if I told you my addiction was cocaine? Yeah, but by the way, I did that joke in Miami. It did not go— it did not go well. All right, back to what we have to cover. The profit that you accumulate here, we need to hide away, just like those chocolate chip cookies. Find an alternative bank. I'll call it Bank 2. By the way, if you're looking for another bank, I have found a great one. This is not— it is a plug because I love them. It's called Relay Bank. I even set up a link, banklikemike.com. So if you're, if you're struggling to find a bank, they're fantastic. banklikemike.com. So I set up an account called Profit Hold at Bank 2, and I set up one called Tax Hold. Because those are the two accounts that were like the cookie jar. I couldn't stop taking from them. And we transferred money over there and hid them away. No online banking, if you can do that anymore. You can't. I'll give you a hack for that. It was a remote community bank that we found. We transferred the money over there. Today, I actually was just talking to the president of our company just this morning, and the next quarter is not— —here yet, but it's approaching pretty fast. It'll be in October when we're talking about profit distributions. What will happen on October 1st, we'll do our profit distribution from the Q3. Kelsey's our president. What she will do is she has the username for this bank that we have, but doesn't have the password. I don't have the username. I have the password. So it sounds comical, but she goes in her office, She'll type in the username, she'll put a sticky note over it. Then I'm allowed in under her watch because it's all stars. I type in the password. It's like turning the nuclear keys, like, right, 3, 2, 1, release. This way I can't steal from myself. And then Parkinson's law, the toothpaste works in my favor. When you hide money from yourself and you don't have access to it, it's not accessible. You make do with what what you got. And I don't need to explain this to you. I know every person in this room's lived that way. You had days of frugality, the college days, or maybe before or after. But when you had no money, did you get by? Yeah, you're here in the room. You were pretty— I'm sure just as happy and content then as you are now. You find a way if you remove the access from it. So we're going to hide your profit from you. That's the answer, number 7. If something is not accessible, We don't use it. Oh, so we answered number 8. Some banks— this is the envelope system. If you're not familiar with the envelope system of yesteryear, this is the envelope system. And so some banks don't support it, so I do have a bank I recommend there if you want to check them out. The last component is I'm watching this fitness instructor. She talks about our diets, that most people eat 3 meals a day, maybe we skip You skip breakfast, you're late for today's session. By lunchtime, you're starving. We go into these peaks and valleys, peak hunger and gluttonous state and then peak hunger. It's very volatile. What's interesting is with our income in our business, you probably notice the same thing over time. Income goes up and down. So what she explained, and we respond accordingly. A lot of deposits come in, business is great. Next day, all those expenses go out, business sucks. It's, it's just like that. She said there's a simple way of bringing balance. Smaller meals more frequently. Get into a rhythm. 5 small meals a day. Well, in business we call this the 10-25 rule, and we don't have time to go into why those days specifically, but there is a reason. And if we look at the income account, right, that's the cash turkey. We're depositing money. Today is the 22nd, so the next trigger day will be the 25th and then the 10th and 25th. And this runs on for perpetuity. Now what's going to happen is today some money will come into your income account. Remember, it's a cash turkey. So money gets deposited into that income account and just sits there. We're going to carve up the turkey. We're going to let it bake a little bit. The next day, some more money comes in. It sits there. And when we get to the 25th, all the money in the income account Here gets carved up. So this is now the 25th. All the money gets allocated out. Profit gets transferred over here to the profit hold. Tax gets transferred over there for the tax hold. And we start this process again starting on the 10th. So all the money income account goes to zero. Then you do this process again. So all your income comes in, you allocate it out. Now what's interesting is income can be volatile. It can look spiky like this. That's how our income is. You told me when I asked you, how often do you check your bank account? I think most of us check our bank account every day or once a week. That's awesome. That's the best thing you can do. What I want you to do on these particular magical days— and I guess they're not that magical— but on the 10th and 25th, I want you to see what the average balance is. I own one company. I know exactly. We expect every 10th or 25th $47,500 of deposits for this one business. I just know it. But sometimes the money is woefully less. When I see that it's less than I expect, I call my bookkeeper or my accountant, say, what's going on? What's wrong? What do we need to fix? Our collections a problem or something like that? It's a call to action. Sometimes it's way more than I expect. That's a delta, a change from what I anticipated. I'll call my bookkeeper, accountant, say, this is amazing, how do we keep this going? This is the most simplified version of a cash flow statement. Now, I don't know if you know how to read a cash flow statement. I don't, I don't know if Keith, my accountant, knows how to read a cash flow statement, to be honest. But I do know how to log into my bank account, and every time I log in on these days, I'm like, did we hit $47,500? Oh, we're off, why? Why? Cash flow statements are supposed to show you a delta, a change in your cash flow and a call to action, and that's when you call in the professionals. So the rhythm matters. There's one other part to this rhythm. It's the 90-day component. Every 90 days is the end of the quarter. We're gonna take a profit distribution. That money that's accumulated in your profit account It's going to come out to reward the shareholder, that crazy kid from your kindergarten class that took this risk. And it doesn't get plowed back into the business. It doesn't get reinvested in the business. It's available for you to use in the way you wish, the way you desire, for your purposes, as a thank you for contributing to our economy. Every 90 days. There's a reason we do this every 90 days, by the way. I admire and respect these mega companies like Google and Amazon. I don't aspire to have them necessarily, but I do admire them. They have hundreds of thousands of employees, and the only way you can achieve that kind of size is with absolute fiscal discipline. And the number one rule with public companies: reward the shareholder. You know why they do that? Because it triggers engagement. People become fans and root for it, and they know that every 90 days, if you reward the shareholder, it It's a re-engagement with distributions. Alright, we got this, Ford. That's why they do it. And every 90 days when that money comes out to you from your business saying, here's a little bonus check, it's like, yes, we've got this. Let's do it again. 90 days is magical and that's far enough out that we have to work toward it and anticipate it, but it's close enough it's gonna happen. Some businesses wait till the end of the year. You know, once a year we'll take profit. It's like so far away. Other businesses say, yeah, we'll take it every week. Then it becomes a salary. So we want to anticipate it. The 90-day rule. Okay. We answered number 9. Number 9 is peaks and valleys in supply, right? We talked about the, the gluttonous and starvation states. In business, we have these peaks and valleys in our cash flow. So enter that. We also answered number 10. Profit is used to celebrate. If you plow back or reinvest the money into your business, you're training yourself to completely disregard profit, avoiding the call for innovation, efficiency, and frugality. Now, here's the deal. I am from New Jersey and I speak fast. And so you may have missed some answers. I want you to know at the very bottom of the sheet, upside down, are the answers. Oh, I thought that was a disclaimer, Mike. Hold on, I didn't have to be here? No, no, you could skip the keynote. I tricked you. So if you missed the— half the people like, I'm out of here, margaritas. So the answers are on there. Now here's the deal. I promised you that in 50 or 60 minutes that I would make you permanently profitable. The problem up to this point, and we only have about 7, 8 minutes left, is this: I covered a lot of ground very quickly. There's a lot of elements that we have to remember. I'm afraid of overwhelm. I think I just put you in the Spartan race. I learned a grand lesson. I was in Copenhagen, Denmark, and learned a lesson there that forever changed how I teach Profit First. And I realized then I left something out, and I left it out here up to this point. 2, and I'll share with you in just a second. I was in Copenhagen, similar size audience, it was a big event, all small business owners from Europe. I get invited to speak on Profit First, what we just covered, and they enjoyed it so much they said, "Hey, we'd love to have you back next year to do the advanced principles." This is like the basics of the basics. I talked with so many of the business owners, they said, "We're struggling living check by check," like so many businesses businesses are. It's a global phenomenon, just not the US. Most businesses struggle. I came back a year later. I said to them before leaving, I said, you don't have to change anything about yourself. Keep using your bank accounts. You just have a system that works with it now. I came back a year later and I started off the event by saying, hey, who saw me speak last year? All the hands went up. And then I said, who's doing Profit First? And all of a sudden everyone started looking down. You start taking notes like, oh, the speaker's gonna fall for that one. Too engaged in my note-taking squiggle squiggle, one person looked between her fingers and dry heaved at me. She's like, blah blah blah blah. And I'm like, Copenhagen, you just told me you're struggling with profit last year. I gave you the fix and don't even have to change yourself. You're not doing it. What's wrong with you, Copenhagen? Which professional speaking tip number 1: don't yell at the audience. And after I did my diatribe yell and my face is red and I'm screaming, I'm like, oh, I made a mistake. I taught the system wrong. I left something out, which I've left out up to this point. This is destined to fail you because I just put you in the Spartan race. And if you've never run it before, you're going to get dunked in mud, drowned, and kicked. You're probably gonna give up. We need to start slow and let it grow. There's a great book out there— I mean, there's an amazing book called Profit First. There's another great book called Decisive. It's written by Dan Heath and Chip Heath. It's about the entrepreneurial mind. If you haven't read any of their work, I highly recommend Decisive along with other books. In this book, they're studying how we make decisions and stick with something, and they looked at this concept of of raising the bar, of setting a BHAG, a big hairy audacious goal. And they said, what if more people fail by going to the extreme and more people are successful by lowering the bar? They ran a fascinating study in physical fitness. It's always interesting to me how physical fitness translates to fiscal fitness. And they took 200 participants. Group 1 was what's called the control. You give them the standard regimen. These were people looking to get cardiovascularly fit. And they said to these people— the standard regimen, by the way, regardless of your age, is if you can run 5 miles at a 10-minute clip or faster 3 times a week, you'll achieve the highest level of cardiovascular fitness. This group, they were going to try out a new concept of lowering the bar. So these researchers go to these 200 participants, they go to the control group of 100 and say, hey, "Are you looking to get cardiovascularly fit?" The group's like, "Yes!" And the researchers said, "How badly do you want to get fit?" And they're like, "So badly! I need this!" They said, "Great, here's your regimen. Go run 5 miles 3 times a week at a 10-minute clip." They run out and the group goes, "OK, we got this!" Then the researchers went to the test group, the lower the bar group. They go to them, they say, "Do you want to get cardiovascularly fit?" And the group's like, "Yes!" "How badly do you want it?" So badly we need this. 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, Ted Lasso changed my life. Yeah. They're like, great. When you watch TV, do you sit on the couch? And the group's like, I do sit on the couch when I watch television. And the researchers said, great. "Okay, you're perfect. We have the exercise regimen for you. The next time you watch TV, instead of sitting on the couch, would you be willing to stand up and just stand when you watch TV?" Talk about lowering the bar. That's below the Earth's crust. Like, I— it's down there, below the Earth's crust. Heh heh. 2 weeks into this, they come back. The control group, the 5 miles, 3 days a week, come back. 4% of the group failed to do it. One dude had a heart attack. Yeah. Thanks for laughing, creeps. Appreciate that one. The other 6, the researchers go, "You're the last 6 standing. You have to represent the group. Watch your bhag. Push it. Go, go, go." And the group's like, "We got this. We got this." They go, "We're representing." This group had 100% 100% success rate after 2 weeks. Stand in front of the couch. So the researcher goes to them and says, "Hey, now you're standing in front of the couch. For the next 2 weeks when you watch television, since you're standing anyway, would you be willing to march in place while you watch TV?" The group's like, "Yeah!" Lower the bar. 1 month into the experiment, this group was done. No one could sustain it. I do have a fitness tip. If you're not cardiovascularly fit, Don't run 5 miles 3 times a week at a 10-minute clip. You may have a heart attack. Right now. This group had a 98% success rate after 1 month. Which begs the question, those 2 dudes, he's like, did they say march in front of the television or sit back on my ass and eat Cheetos? I don't— but whatever. The marching from the couch for the next 2 weeks became calisthenics when commercials broke out. Then it became running sprints out to your mailbox and touch them during commercials, which went on and on and on. And after 6 months, they were running 5 miles 3 times a week at a 10-minute clip or faster, and they achieved over 50% success. The majority succeeded by lowering the bar, and everyone failed by raising it. And that's the mistake I made. I'm telling you how to raise the bar. We're gonna get here. We ain't gonna start here. I started off with a bold promise that you will be permanently profitable after 50 minutes, 56 minutes now. Here's what we're gonna do. 2 steps, so low, so easy that if you, you have no excuse not to do it. And you can do this within 24 hours, by tomorrow. Step 1, call your bank. Whatever bank you like. If you love them, work with them. If there's an alternative there, if you prefer someone else, but call your bank and set up one account. It's a 15-minute phone call. You can do it online. It probably takes no time. You can have a colleague help you with it. Set up one account and call it profit. That's it. Step 2: Anytime you have a deposit into your organization at the end of the day or in the week, you choose the time, allocate 1% of those deposits to the profit account. I'm saying if $1,000 comes in today 1% is $10. I'm saying take $10 and transfer it into your profit account. Because if you can run your business off $1,000, you can run your business off of $990. That's not consequential. But what's highly consequential is you now have $10, perhaps for the first time ever, in profit in your bank. And maybe that becomes another $10, another $10, maybe move 1% to 2% a few months from now. And maybe you join, we have over 800,000 companies that are doing profit first. I hope we have 802,000 after today. But most of those businesses, almost all of them to a T, started slow and they let it grow. It took them about 2 years to get here, but they started the next morning. We have been told that profit comes last. I hope I've convinced you Well, that makes logical sense. It is horrible for our behavior because what comes last gets ignored. This is the answer to number 11, by the way. What comes last gets ignored or delayed. What comes first gets done. And so starting today or tomorrow morning, the latest. Now you know how to do it. Take your profit first. Thank you.