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

Mike Simpson argues that 83% of small businesses fail because they treat profit as what's left after expenses. He introduces a profit-first system that splits every dollar into five accounts: Income, Profit, Owner's Compensation, Tax, and Operating Expenses. The method promises permanent profitability within 24 hours.
Chapters
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, barkeeper. Can I have a Bloody Mary? So this is a bartender's outfit. We're talking 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 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 want to start off with a question, though. Has anyone ever here been lied to? And I want to 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 bit surprised. I thought it'd be everyone. I want 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. That's what we're going to explore. 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. 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 would come home from work My father come home from work, they say, how was the day? Did you follow the rules, stranger? Our danger? Yes, mom, yes. What happens when you're around, I don't know, five or six 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 and 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 or vernacular changes. We call profit the bottom line, the year end. But of course, if something is the bottom line or year end, or the last consideration, it 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 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 has $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 as it you saw a little intro video, whatever. I too am an entrepreneur and I've had multiple businesses and I actually lived by this formula. I thought the only way to make this successful was to 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 FU money, but it was F me money. I don't even know what that means, but you know what I'm saying? You know what I'm saying. Somewhere between FU 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 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 you feel that too, that the only way to become profitable to, 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 I was doing. If you had an idea, say hey, I got some money. And plus this genius is here. I can build businesses. Or 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 the day I sold to Robert half, that's the company that bought my second company. The day I sold my second company, I bought a BMW, a Land Rover and a Dodge Viper all within four hours. Yeah, I know, I know, I know. And you can, you can actually do that. Shockingly, I got a play I'm in from New Jersey. I don't know if everyone here is familiar from 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 and 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 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 webs, it's in the Webster 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 in 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 I got to show off my success, I become an angel investor, I start all these businesses and within two years all these companies. I had become a self made billionaire. 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 the story because perhaps you've been there too. My financials, I saw the money dwindling logically. I could see the accounts draining fast. But he wasn't ready to emotionally accept 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 14, 2008. My phone rings. It's Keith, my accountant. He said, mike, we've been going through your finances. He goes, I've been with you through your. 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. I couldn't believe it. I. 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, they. 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 want to 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 three children, and we celebrate Valentine's Day a little bit like Thanksgiving. And I pulled up. I was afraid to walk in because I tell my wife and children, we're going to lose our house. We lost it 30 days later because I was not going to 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 have the best investment yet. I sat down. I came in super late because 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 think. I think I died inside. I think we're done. Food was cold. My three 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're losing the house. We did. We're. The car stuff is gone. See you, Viper. I was grateful to get rid of that. And my daughter, she was nine 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 said, I'm so sorry. Now, horseback riding lessons were $20 a session for five kids, you know, 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 on the table, and she looked me in these big blue eyes, my eyes, and 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, because I'm starting to feel right. I'm a co crier, right? So you cry, then I cry, we start vomiting. Let's not go there. Let's get through this quickly. That was the darkest moment of my life. And I'll never forget. I think the final breath I'm going to 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 going to 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. 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 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. 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 going to 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 going to have it mastered. Now, I do have a worksheet. I think I put 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 one 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, 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 two, profit is not an event, an eventuality. Profit is a habit. We're going to bake it into every single transaction of your business. Now, here's how we're going to 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, and 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 we. I don't know if you know this. They still broadcast in high definition over antenna, but around midnight, the TV show 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 principals to transform our fitness. And she gave these four physical fitness principles that translates to fiscal fitness principles. It was the most profound show I've ever seen in my life. And I'm taking notes like, oh, my gosh, this is. 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 entree plate, what we'd consider a dessert plate back in George Washington's today, that's what they ate their entrees 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 mom's 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 waistline's bigger. The Fitness instructor says, real simple, reduce the size of the plates of your house. I'll give you an example. Does anyone here, just by show of hands, anyone here have teenage sons, teenage boys, 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 outgrown it. But here, tell me if you can relate to this. My two boys get up somewhere around the ass crack of two 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 and they're like. And they cannot speak any language. It's some kind of creature language. 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. 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'm 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 would notice that I got some, some bowls that were slightly smaller. And those goons never noticed. Ass cracker two in the afternoon. They come in, do their routine, Cheerios everywhere, and back in a month later, got the bowl smaller. It took me four iterations over six 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 three 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 your accountant may say, never log into your bank account. Read the profit and loss statement, the balance sheet, and all 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. I get it. Fail you. I fail you. He's like this. He's like, ooh. When you see that face, 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 going to channel who you are. We're simply going to 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 check. 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 physical fitness. I realized about 10 years ago I need to start working out regularly, and it's not a natural habit of mine. And I noticed the routine I'd fall as. 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 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 them on my feet. And that was enough to continue that momentum. You're already logged into your bank account. All the hands went up, or most did. If you log into your bank account, that's us walking into the bathroom. We need a behavioral intercept there. And this is what it looks like. We want to set up five accounts at your bank, and I'll explain what each one does. These can all be checking accounts. They can be savings accounts, if you think that's appropriate. But checking accounts is what I suggest. First one's called income. The second one is called profit. Third is owner's comp. Fourth is tax. And the last one is operating expenses, or OPEX. This is the answer to number three. 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 serving tray of cash for your business. Thanksgiving was only a few months ago. How quickly time goes on. We hosted 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. Priority. 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 the 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 cover taxes and other components. So we're going to talk about those four 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 for. 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 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 going to return it to you. I'm going to 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 for it. 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. Owners 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 out of your industry better than anyone else in your organization does. And if that's true, why aren't you paying yourself that.










