This Simple Formula Will Make You Permanently Profitable

I'm reading a book that's relatively new, just came out, How to Know a Person. It's by David Brooks. I was reading on a flight back yesterday and I read a chapter and I'm just gonna paraphrase it. I don't have the book with me now. There's a particular section in this chapter that talked about how people are degrading in our desire to be contributors to society and increasing in our demand to be rich. And he talks about the consequences of that and other things that are causing the great disconnection of humanity. And, and in his book, he invites us using specific strategies to really connect with people again, uh, to, to get rid of this great divide. And what is probably the most, uh, encouraging news that I have to report is the demand for this book. It is selling like hotcakes. It deserves to be, and we need it to be. What caught my attention though, and what I want to talk about today is that financial freedom, that desire to just be rich. When I survey audiences, I'll ask, why'd you start your business? And probably the top reason is to be financially free, which runs in parallel to personal freedom. Financial freedom is where I don't have to worry about bills. I never have to worry about money again. Personal freedom is where I have the ability to do what I want when I want. They're very similar, but you're not beholden to the business. So you could be financially free, not worry about bills, but the business does demand your attention. So there is a slight subtle difference. And, uh, there's other reasons people start a business to serve a purpose, to experience fulfillment, but without financial freedom, that typically isn't the case. So how do most people approach achieving financial freedom? That's what I want to share with you. Why do most people fail to achieve it? Uh, in fact, to get into a more dire circumstance, we're going to explain that. And then what is the real method to becoming financially independent, to never worry about bills again, to have predictable income and to have that emotional stability as a consequence? I've lived through this, uh, myself. I remember a period of time where I was financially struggling so severely that I was getting in the mail letters from these debt consolidators. And I felt like perhaps it was— I was getting 5, 6, 7, 8 a day. I remember I had lost— I sold my second company, I made millions of dollars, I lost everything through ignorance and arrogance. I had other assets I sold and so forth that brought this wealth. Within 2 years, I lost it all. I had $300,000 of debt. I can't remember. It was overwhelming. I didn't even want to look at it. I was embarrassed to my core. I was ashamed. I was terrified I would never recover. But the part that really drove home my financial misery, my emotional misery as a result of my finances was when I started getting these letters to consolidate debt. And as I saw these letters coming in, I was like, my God, this is public. Everyone knows what a failure I am. Well, the traditional approach that we follow when we're trying to seek this financial freedom is what I call the survival trap. Often it's a sell more mentality. In fact, there's pundits out there, I won't mention names, who say sales cures everything. That is total bull. That is so wrong. Sales equates to responsibility. So the more your organization sells, the more you're responsible for delivering on those sales. So sales doesn't cure everything. It brings this stress upon your organization where you must now deliver on these responsibilities. The more you sell, the more stress your organization. Now, sales are necessary, of course they're necessary, but absent profitability, it becomes overwhelmed. In fact, we have a client— I have a firm I started that is a strategic accelerator in venture expansion. So we call it a SAVE, S-A-V-E. But particularly, we go in with these stressed firms where the owner's overworked, they're not profitable, maybe they're accumulating debt. Their output's inconsistent. These are companies usually over $1 million in revenue, under $10 million. So that's the range. And we go in to resolve them. And in most cases, what the owner or owners are trying to do is to sell their way out of the circumstances. The result is when they sell, if they do collect that cash, they get some immediate cash flow, but they have this accumulating responsibility behind the scenes. They're using cash from a sale today to pay for responsibilities in the past with this responsibility for this new sale also on upon them. So they have this accumulating responsibility. And so the cash flow game simply is, can you collect more cash today to pay for the responsibility of yesterday? But yesterday gets further and further away. So we have kind of situations where companies have backlogs, months and months, a year of responsibility to deliver a product or service, and they don't have the cash to afford it. So they're trying to sell their way out of it. It's a trap. Well, talking about traps, I want to introduce you to a concept called the survival trap. And I'll probably use this in other discussions I have with you. Um, but the survival trap plays into our finances among other behavioral tendencies we have. And I want you to draw along. So, What I just did, if you're not watching the videos, I drew the letter A on the center of a piece of paper and put a circle around it. And what A stands for is where the business stands today. It's point A. A could also stand for apparent. There's always apparent issues going on. So let's talk about the sales situation. I need to get more sales. So what do we do? What I want you to do in this next step is draw 3 arrows in any direction away from A, which these arrows indicate relief from the current circumstance. So I'm going to draw 3 arrows. I'm just doing them in random directions here. And what each arrow represents is an action we can take to alleviate, uh, the stress or the challenge that we most urgently see at point A. So let's say it's sales issues. We need more cash in the business. So therefore we're going to run a discount, 50% off sale. We're going to hire you know, a rainmaker to come in and start selling our way out of things or do collection calls, whatever it is to get more money in. Well, what's interesting now is if you're following along with me and drew through it 3 arrows going away from A, what I want you to do in this final step is draw the letter B in the bottom right corner of your paper. What B represents is a healthy organization where the business needs to move to. We want to go from point A to point B, from the apparent to the actual business needs. That's what B can stand for. So now my question for you is, how many of your arrows are pointing toward B? The ones that you drew. Now, obviously we're doing this through recording, so I can't see what you've done, but I presume none of your arrows are pointing toward B, or maybe by happenstance one, or if you're really, really lucky, two. I'd be shocked if all of them point toward B. Of course, the, the question with the obvious answer is, if the business needs these actions taken, how come all the arrows don't point toward what the business needs? And the answer, of course, is so obvious. I didn't know what the business needed, therefore I just took actions to get out of the A. So it's this constant escape mechanism that happens. And so we don't necessarily move to the business needs. And so what we do is we take a particular action. I hire that rainmaker. Well, once I hire that Rainmaker, I'm in a new apparent situation. Is the Rainmaker producing or not? If they're not, maybe we got to get them training. Maybe we got to give them some lead flow or whatever. We take a new action, whatever it may be. So I'm just again drawing 3 arrows in whatever directions. We make one choice. We end up in a new apparent situation. And you can make decisions of where to move. And what you'll see is businesses move in this kind of circuitous circle pattern. We keep on having the same recurring issues come up over and over again. So how this manifests itself as a business owner, you may be very familiar with it. You come to work and it's, it's another crazy day at the office and you're trying to put out fires and so forth. And you think you tackle things and then the next day the same issues rehash themselves. So what we need to do is know what the business needs. Now, I do want to address that one final circumstance is you may have a situation where you accidentally drew an arrow toward A because you didn't know what it was. And the manifestation in that in a business is sometimes you're working and things start clicking that one day. All the collections are in, customers are happy, no employee complaints. You're like, "Finally, we've arrived and tomorrow's going to be a great day." But you get back the next day and it's just crazy insane again and the wheels have come off the bus. Well, all that really happens without the knowledge of what the business needs from you is that we simply end up in a new A, new apparent issues. We have multiple choices we can make. I'm drawing many arrows in this case. And you make a decision, you go to a new A, and simply we're circling in the woods again blindly, just in a new part of the forest. We need to know what the business needs. And like I shared with you, we have a company that does a strategic acceleration of growth. We go into distressed businesses. Usually it's a single business owner, $1 million to $10 million in revenue. And what I have found consistently in the participation we're having with these businesses, the number one thing we need to address is profitability. So back to this chart here. This— I'm not saying it's true in your case, but the next significant need your business has, the most important thing you can do is generally have a system of profit. It needs to be consistently profitable and making profit a habit. Most businesses think, and business owners think, that profit is an event, as an eventuality, if you just stick it out long enough. And I'm here to tell you, profit is not an event. Profit is a habit. I'm a little bit famous for that quote, if you will. And when I say famous, among the one reader that recognizes that quote, but gosh, that's probably the most important thing I could share. So there's my little fame. Profit is not an event. Profit is a habit. I encourage you to write that down, to live by it, because profitability brings about stability. So the standard approach is sell more. Now, you know, the trap of it, we try to sell our ways out of things. Sales alone, while it's necessary, generates cash. Sales without profitability is unsustainable. I want to give you a scenario and tell me what doctor you would prefer. So imagine you go to the hospital, you have a life-threatening event happen. Go to hospital, two doctors come out. Let's just say it's a heart attack. Dr. One says, um, I'm doing heart surgery. I'm actually trying to do other things. I'm really struggling financially. So I'm trying to do as much as possible. But, um, let's spend some time doing this. And I got some other clients coming in, or patients, I hope. And let's go. Let's get this done. Dr. Chu comes out, um, cool as a cucumber and says, all I do is heart surgery. I'm masterful at it. In fact, I'm extremely profitable in the work I do. I have no other customers I'm gonna see today. I work with one patient until they're fully through to resolution, and I have a 99.9% success rate because I have no stress on myself. I just master my one thing. Which doctor do you want to perform the surgery on you? I hope you're choosing doctor number 2, the, the one that's highly profitable. The point I'm trying to make here is profitability translates to sustainability, stability, uh, both financially and emotionally. And don't you want, when your life is on the line, a doctor who is financially stable, emotionally stable? Of course. The best customers. Yeah, you may not be life-saving for their needs, but you are life-altering for their needs. You're providing something extraordinary to them. Your customers want you to be profitable because they know, consciously or subconsciously, it brings about better quality service, better stability, better availability. They get treated as the number one customer as a result. There was a study in the American Psychology Association by two Researchers Diner and Biswas-Diner, which is 2002. And in the article, they found that financial security is a significant predictor of subjective well-being, meaning people feel better when they're wealthy. People who feel financially secure tend to report higher levels of happiness and lower levels of stress. Now, here's something interesting I cut out of this article that, um, you— I don't think will surprise you, but I thought it's just an interesting tweak. People who, uh, people who prize material goals more than other values tend to be substantially less happy unless they are rich. Isn't that interesting? So if you prioritize material goals or other values, maybe contribution, connection, and so forth, the people who focus on material goals are less happy unless they're rich because they're not worrying about the bills. So I think what the argument here is, it doesn't matter what is your value system, what you value, that the more financial independence you have, the happier you are, the more stable you are, and the less stress you have. There was another study that came out of, uh, the Journal of Family and Economic Issues and highlighted that economic strains such as difficulty paying bills— been there— or financial unpredictability are associated with lower psychological well-being. This research underscores the importance of financial stability and maintaining mental health. I personally experienced that when I had all those bills piling up, when I had no cash, I was broke. I remember the pain so much that I didn't even want to open the bills. I just wanted to hide them away, assuming if I didn't open them that I wouldn't have to worry about them. And that's when all those collection calls and bills were coming in and we can consolidate your debt, associations, all those things were coming in. And my psychological well-being tanked. I went through 2 years of depression, self-diagnosed because I didn't even seek out the help of a professional, which was a big mistake. Today I do. So, what's the solution? The solution is radically simple. Is by taking your profit first, and it has a cascade of benefits. So there's a survival trap. Let me just draw out the profit first method. What it is is simple. As revenue comes into your organization, so as we generate sales, we're going to subtract a percentage of that money as profit first. The remainder is left for expenses. Now, the traditional accounting formula, it's called GAAP, says our sales minus expenses equals profit. Well, that makes logical sense. This formula also makes logical sense because they're the exact same formula. Just do the math. It's called a variable swap. That's all we did. So mathematically, there is no difference. If you hear anyone say, well, it's a different, you know, it's radically different, or it changes GAAP or whatever. No, it doesn't. It just is a variable swap. And, you know, the logic is the same, but there is a significant change in behavior because what we're doing now is when revenue comes in, We take a predetermined percentage of the revenue as profit first, hide it from your business, and then your business tells you what you have available to operate. You're reverse engineering your profitability. If I want to have a 10% profit, take 10% and this is what you must work with. And if you can't work with those expenses, that means there's a flaw within your business. Either we don't have proper margins— that's actually a common cause when we go into these companies we're helping. Often there's margin challenges. There's inefficiencies that need to be resolved. Pricing is off. Material costs need to be controlled. Or it could be expenses. Um, some companies are buried in subscription costs, for example, and, and aren't even paying attention to it. But no matter what, by taking your profit first, you will have that red alert saying, beep beep beep, there is an issue in this business, and now we need to find how to resolve it. One of my favorite stories is a baseball team that I suspect you may have heard of. I write about them now. It's called the Savannah Bananas and they deploy Profit First right from the start. The founders are Jesse and Emily Cole. Jesse sent me a lovely letter back in the day. And when they're starting out, before you ever heard, heard of them, and they deployed Profit First. And I remember Jesse recounting a story saying, gosh, we can't afford with taking our Profit First to power, let alone maintain the electric scoreboard, we're gonna turn it off. And they become the first baseball team not to have an electronic scoreboard in the league. So what he does is he has people from the audience, kind of like between boxing, in a boxing match between different rounds when someone walks with the number, you know, the score or the round at least number. Same thing, they were walking on the field, they had fans doing this, showing the baseball score. And they did other things, like they couldn't afford to hire a mascot or cheerleader, so what they did is they had the audience participate. They called them the Grandma Bananas. It's kind of funny, you need to be 80 years or older to participate in the Grandma Bananas. Teeth, teeth are optional. And it's a fascinating story in showing that Necessity is the mother of invention. By taking away expenses, by driving profitability, they had to become innovative. Now, Jesse and Emily are innovative. Their whole mission is to make the Savannah Bananas the new Harlem Globetrotters. It's amazing what they've done for themselves and for the city of Savannah. I personally have traveled, traveled to and stayed in Savannah for days because the Savannah Bananas baseball game was the draw. I know countless other people who've done the same. They're redefining baseball. They're making it into family entertainment, a circus, if you will, just like the Harlem Globetrotters. Well, the other thing is that profit first brings about not just that necessity for invention, it brings about psychological comfort. So what happens is as you start taking your profit first, you immediately allocate money toward profit. You start seeing cash on a cash basis at your bank. And we're not going to dig into all the elements of Profit First, but this must be done at the bank because everything in Profit First is based upon behavioral tendencies. It's called a behavioral intercept. Um, this is where most entrepreneurs manage their money. So when you allocate money at the bank, you see on a cash basis, actual cash waiting for you. There's a serotonin and dopamine release. It feels good because it is good. That, that way will likely continue the behavior. So Profit First brings about an immediate kind of sense of joy and comfort. The more accumulates, the more you get that. Interestingly, or maybe almost ironically, but this is also a psychological tendency, you reserve money for taxes. The most common thank you email I get is during tax season. And people email me around, you know, March and April saying, I just paid my taxes through the business. The business paid my taxes for me. I feel so great. And this is because of loss aversion and other behavioral tendencies, but it brings about more psychological comfort. So here's what I want you to take home from today. Most businesses are in this survival trap. Let me cut back to the overhead. Most businesses— oops, I have it upside down— are in the survival trap where we're trying to sell our way out of circumstances, and then puts us in this horrible cash flow game. I think the big driver why we think we need to sell more and more is because of misperception. We hear the stories, the lottery winners of industry, Uber or Lyft, for example, who are crushing in their space, and I want to have my next Uber or Lyft. You know, neither of those companies have been profitable. WeWork, another massive organization, not profitable. Twitter struggled with profit for the longest time, um, losing money constantly. And yet we herald these companies because of their size, but we don't look at their profitability. There was a study that came out from the SBA in 2022. They estimate there's 33 million small businesses in the US alone, but 99.9%, almost all of us are under $25 million in revenue. 99.9% of businesses will never go beyond $25 million in revenue. I don't know what your course is gonna be, but statistically, your company won't surpass $25 million in revenue. My company is smaller than $25 million in revenue, and perhaps it'll stay there. I don't even know if I necessarily aspire to have a business that's larger than that. But the point is most companies won't be the next Uber or Lyft or Amazon or Google or whatever. And yet we look at those companies and say, I just want to be like them. I'll wait to be profitable until that happens. But it's never going to happen. So what we need to do is start taking our profit first. Your business must be healthy starting today. Don't get huge and hope you can get healthy in the future. Let's get healthy starting today. The way to do it is the small step is to set up one account at your bank, call it profit, allocate 1%. If I may be so bold, the bank I recommend, it's a banking platform called Relay. It's who I use. They're excellent. And they actually automate the Profit First process. They're certified in it. I mean, they do it right. So if you want to check them out, Uh, the link that I use is BankLikeMike. That's the one I should say I set up banklikemike.com. It's literally the bank I use. If you want to go to a more advanced rollout, that's where we set up multiple accounts. Please read the book Profit First. That'll give you guidance on it. Um, there are many videos out there. Some of them, um, are not teaching the system properly. So I just invite you to read the book and, uh, you can go to your local library and get it for free. Use the guidance too of a Profit First professional. You can go to profitfirstprofessionals.com. These are people who are certified in the process. They understand the behavioral componentry around Profit First. That's the key. I hope you saw as we went through this is this is not about knowing the steps alone. It's about knowing the behavioral management, the psychology that we need to use, um, to break outta the survival trap and and move to a sustainably profitable business. My final thought before I wrap up for today is this: your clients are starving for you to be profitable, like that doctor story I shared earlier. The economy is starving for you to be profitable. Your employees need you to be profitable. Your family, the people you care for, need profitability. It frustrates me that some people perceive profit as greed. And I think it's the greediest thing not to be profitable. That means that you are harming intentionally everyone else that depends on you or depends on your business, that you're not gonna worry about your financial strength to care for all your responsibilities, unexpected or otherwise. And therefore, isn't that greedy to be selfish like that and just say, well, it's just about my business doing what my business is, but screw everyone else if, if I'm not stable and strong. No, be, be the doctor who can care for the patient properly. Take your profit first.