Bill Cates [00:00:08]:
Welcome to Top Advisor Podcast. To say I’ve been looking forward to this interview with Mike Michalowicz is an understatement. As I was listening to his book, Profit First, I kept thinking, why didn’t I read this book 50 years ago when I was building my two book publishing companies? Or how about 34 years ago when I started my writing, consulting, speaking business? Of course, the book didn’t even exist back then, but I, I believe that the message in Profit First is elegantly simple and powerful at the same time. I’ve already adopted most of the strategies over the last 6 months, and my business has already become more profitable, and my cash flow management is clearer and smoother than ever before. This interview of Mike is going to follow two parallel paths. As a financial advisor, you are a business owner and you probably serve a lot of business owners. So you’ll find this show to be doubly valuable. But first, I need to tell you about my most recent book, “The Hidden Heist: Stop Robbing Yourself of Lasting Wealth: An Irresistible Tale of Financial Redemption.” The story is a parable that’s set during a bumbled bank robbery.

Bill Cates [00:01:19]:
So it’s a great blend of tension, suspense, and fun. That delivers a powerful message. The book explores the beliefs and assumptions and emotions that form our money stories, our self-talk that we’ve lived with for so long we start to believe it to be true. Financial advisors and other business leaders are using The Hidden Heist in 3 main ways, each building on the other. Advisors are finding the book to be a bit of a wake-up call for their own thinking about money and their ability to achieve abundance. They are then using The Hidden Heist with their support team for an open and honest discussion about everyone’s money stories, starting to rewrite their stories to contribute to their own success and the success of the firm, and then bringing great empathy to the stories their clients bring with them. And advisors are also purchasing copies of The Hidden Heist to give to their clients, sometimes for them in turn to give to their adult children. We’ve had advisors order from 5 books to 25 books for themselves and their teams, over 100 books to give to their prospects and clients.

Bill Cates [00:02:28]:
One advisor recently texted me to say that the story was so engaging she couldn’t stop listening to the audio version of the book. Curious? Go to thehiddenheist.com. That’s thehiddenheist.com. It’s also in the show notes to learn more and catch our fun 1-minute video trailer. Today’s show is sponsored by Nexruto. Nexruto helps financial advisors attract and engage qualified pre-retirees in their local market by filling educational seminars with high-intent prospects and turning those audiences, of course, into new client opportunities. You can learn more at nexruto.com. That’s N-E-X-R-U-T-O.com, and more about them later in the show.

Bill Cates [00:03:12]:
Mike Michalowicz is the entrepreneur behind 4 multimillion-dollar companies and the author of several bestselling books translated into 30 languages. I think you’ve beaten me by about 23 or 24 translations. I’ve got Polish, I got Chinese, but not that many, including Profit First, which is what inspired me to do this interview in the first place. Clockwork, The Pumpkin Plan, love the title, All In. Mike’s a true entrepreneur. He launched 4 multimillion-dollar companies before his 35th birthday, sold his first company to private equity, his second firm to Fortune 500. So he’s kind of been there, done that. Just released The Money Habit, groundbreaking book into personal finance.

Bill Cates [00:04:08]:
I would say to advisors, a great gift to your clients after you give them a copy of my book, “The Hidden Heist.” There you go.

Mike Michalowicz [00:04:16]:
Exactly.

Bill Cates [00:04:17]:
You know, they actually, they pair well together, truthfully. Anyway, Mike McCallough, zooming in from Boonton, New Jersey. Welcome to “Top Advisor Podcast.” Bill, thanks for having me.

Mike Michalowicz [00:04:27]:
And I’m so flattered that we have mutual friends in Stephen and Michelle.

Bill Cates [00:04:31]:
Yep. It’s wonderful. Anyway, so as you know, most of my listeners are successful financial advisors. So we’re going to kind of come at this from two angles, two parallel paths. Advisors, how they can apply the Profit First to their own practice, because there are a lot of advisors out there, you know, they’re bringing in a lot of top line, but they’re not keeping as much as they probably could, even though they know about it. And then, of course, a lot of our clients, a lot of our listeners have small business owners as their clients. And I think this is knowledge they can bring as a value add to their small business owners.

Mike Michalowicz [00:05:09]:
Yeah.

Bill Cates [00:05:10]:
So you begin Profit First with a pretty interesting, heartwarming story, I would say, with, with your daughter’s piggy bank. I’m a single dad. I raised my daughter myself, so I could, like, I could see this in my mind’s eye. Uh, but it changed your perspective on how to become more profitable. So if you can tell that story real quick, I think our listeners will find it interesting.

Mike Michalowicz [00:05:31]:
Yeah, it kind of ties into that kind introduction you made. All true, but there’s missing elements. I never really had financial control over my businesses. I was all about the pump and dump, grow them quickly. And I never made money running them. I made money selling them. Well, I became an angel investor and I was clueless about the process. It just sounded really compelling that I should replicate this, you know, at hyper speed with many businesses.

Mike Michalowicz [00:05:59]:
And I was a disaster. I actually call myself lovingly the angel of death because I was not an angel investor. Yeah, I destroyed businesses and, uh, in the process, wipe myself out financially and my family. And, uh, I told my wife, I have 3 children, um, that we were up, up the creek now, uh, without a paddle or down the creek, wherever you are on the creek. And, uh, I brought this upon us. And my daughter, she was 9 years old at the time, asked me if she could keep going to horseback riding lessons. And I told her sobbing that she couldn’t because we had nothing. We were broke because of me.

Mike Michalowicz [00:06:31]:
And she ran to her room. I thought she was running away. She actually ran to her room, Bill, to grab her piggy bank and ran back to me. And she said, Daddy, if you can’t pay our bills, I’ll take care of the family. And it became— I get emotional still. And this is like almost 20 years ago, but it was a great reset for me.

Bill Cates [00:06:50]:
Yeah.

Mike Michalowicz [00:06:50]:
And, and, and honestly, I write these books, including the books around money, because I’m not good at money. I feel like, oh, you must be a genius at money. No, I need systems that are the genius. And it was that moment that compelled me that I really don’t know much about entrepreneurship. Or business or money, and I need to investigate this and write about it to learn it.

Bill Cates [00:07:09]:
Now, I know you’ve recovered nicely, uh, and with that said, you did lose like a million dollars in the first 2 years. Gosh, what, what was that like? I mean, you’ve kind of alluded to it, but just put it all on me.

Mike Michalowicz [00:07:21]:
That’s brutal. It’s brutal. Yeah, well, you know, what’s so interesting is there’s two components. As, as our income increases, uh, so does, for many of us, particularly me, the identity I have associated with that money. And when the money goes away and it can evaporate, I’ve proven I can blow money, I can make money, I can really blow money. That goes away very quickly. But the identity readjusting back down is near impossible for most people and was impossible for me. So I tried to maintain a lifestyle that I could not support, and that just dug the hole deeper and deeper and deeper.

Mike Michalowicz [00:07:55]:
That was brutally painful, not losing the money, shattering my ego was, was painful. Ultimately, the most humbling and important experience of my life, honestly.

Bill Cates [00:08:06]:
Well, it’s pretty common for us entrepreneurs to, you know, identify with the business and we are the business. And yeah, then we get— we make the mistake sometimes where we judge our self-worth by our net worth. You know, I used to joke that I think I measured my self-worth by the square footage of my home. Which was not a good measurement.

Mike Michalowicz [00:08:30]:
No, no.

Bill Cates [00:08:31]:
So, all right, now the book was, when I read, actually listened to “Profit First,” it was like, where was this book 40 years ago when I could have used it? I mean, I’ve done well and, gosh, I could have done so much better. And I’ve already started adopting, even though I’m a little later in my career. Oh, great. Yeah, I’ve got the account set up and the money flowing automatically. All right, so small business owners struggle to make a profit. They keep plowing their profits back into the business, right? Where’s your profit? Well, back in the business. End of the year, their CPA says, “Hey, you made $50 grand last year.” And they go, “I did?” Yeah, yeah, yeah, where? And then where is that money? So what are they doing wrong?

Mike Michalowicz [00:09:16]:
Yeah, well, first of all, the word for that is being human. Like, it is the most common experience. What we’re doing wrong is we believe that a certain growth metric, a certain revenue, maybe your first 6 figures, maybe it’s your first million, maybe it’s your first $10 million, at a certain point that the business will translate into profitability. So there’s this almost panic to grow to a healthy business. But the reality is an unhealthy business, not properly structured, amplified, actually is even unhealthier. But then there’s this perverted belief, well, if I didn’t make it at a million, maybe it’s 2 or 3, and we constantly push. The reality is we need the business to be healthy on every transaction. There is a foundational formula though that is causing the problem because, uh, there was some data, Bill, from the SBA that really was revealing.

Mike Michalowicz [00:10:07]:
They identified of the 20— I’m sorry, now 35 million small businesses in the US. They define that by a company that does $25 million in revenue or less. So that’s my business. It’s probably many of the people listening in.

Bill Cates [00:10:20]:
Yeah.

Mike Michalowicz [00:10:20]:
When it comes to your commissions, at least. And, uh, they said of us, 83% are in check-to-check survival, barely enough cash to get by. And so it’s this constant panic. And what triggered a thought in me was we’re, you know, to start a business, you gotta be smart, dedicated, devoted, driven, maybe a little bit crazy. But how come almost everyone starts their business or with the intention of financial independence? Yet 83% of us don’t pull it off. What’s wrong with this collective us? Are we all stupid? Or that’s why I noticed the formula, the foundational formula we’re taught is flawed. And what it is, the GAAP formula, generally accepted accounting principles. We’re told that sales minus expenses equals profit.

Mike Michalowicz [00:11:01]:
The flaw in that formula, it’s not logical, it’s behavioral.

Bill Cates [00:11:04]:
Say that set again. Sales minus expenses equals profit.

Mike Michalowicz [00:11:07]:
Expenses equals profit.

Bill Cates [00:11:08]:
Right.

Mike Michalowicz [00:11:08]:
That’s the foundational formula. Yeah. In, uh, GAAP accounting is used by all small business. Our vernacular. In fact, the word like bottom line or the phrase bottom line or year end, those are all indicative of profit comes last. But it’s human nature. When something comes last, it means it’s not significant. And that’s the flaw.

Mike Michalowicz [00:11:28]:
You would never say, I love my family, I put them last. I, my health matters. That’s why I put it last. It comes first. And so what we need to do is take our profit first to fix that flaw. Hmm.

Bill Cates [00:11:40]:
It’s such a simple way to think, but—

Mike Michalowicz [00:11:43]:
Yes, it’s basic. Yeah.

Bill Cates [00:11:45]:
But I know I’m guilty of that is, you know, you wait, you’re right. You wait till you get to a certain level and then I’ll say, and you know, what are you doing with your profit? Well, I’m plowing them back into the business. I go, well, all right. So in your book, Profit First, you cover, I guess, 4 fundamental lessons that you learned from health and fitness experts, right? That I think our listeners can apply to their practice and that small business owners, any small business. So, you know, what are these lessons? Apply them to profitability.

Mike Michalowicz [00:12:15]:
Yeah, we can do the first. So the first one is a concept of the container dictates the consumption. So in the American diet, for example, plates now are double the size they were 300 years ago. Our behavior hasn’t changed. We, back then, we filled up our plates and cleaned them up. And today we fill up our plates. But since the container’s bigger, the serving’s bigger, the consumption is bigger. And then societally now our waistline is bigger.

Mike Michalowicz [00:12:38]:
So in fitness, it’s crazy, but just get smaller plates at your house and watch how it controls your consumption. So with our bank account in our business, if we’re managing our money out of our bank, logging in, seeing how much is there, which most people do, right? Don’t try to fight that. That’s our natural tendency. But we do need to channel it. And what we’re going to do, instead of having one plate of money where you say, oh, look at all this money came in, I can spend it, we’re going to divide that money up onto different small plates. So at the bank level, we set multiple accounts with its pre-intended purpose. Profit would be one, maybe purchasing computers might be another, paying payroll if you have payroll, maybe another. And you may have 6, 7, a sophisticated business may even have 10 or 12 accounts.

Mike Michalowicz [00:13:22]:
But now. When you log into your bank, you see what’s available on each plate is divided up, and smaller portions mean smaller, more prudent consumption.

Bill Cates [00:13:32]:
So, I mean, I remember in reading the book there was kind of 5 main ones. So there’s the main checking account, if you will, where all the revenue comes in.

Mike Michalowicz [00:13:40]:
Yeah.

Bill Cates [00:13:40]:
And then you got your profit account, which I have set up and I have, I have an automatic drip into the profit. But I also, when I take in some money, I’ll just, just for fun, I’ve now I just, I’m using this as a reward now.

Mike Michalowicz [00:13:54]:
I love it.

Bill Cates [00:13:55]:
Just take a percentage of that, 10%, 15%, and just funnel in the profit. Then you got owner, owner compensation, you got expenses, you got taxes. Yeah. Operation expenses. Those are kind of the main ones, right? But you’re right, a more sophisticated business may be more, but those are kind of the main basic ones, right?

Mike Michalowicz [00:14:13]:
Yeah. Yeah. The income account acts like a serving tray, so all cash flows in there. You don’t pay bills from it. Like a serving tray dinner, you carve it up. Profit is what you’re doing. It’s a, it’s a reserve and a reward for taking the risk of starting a business. Owner’s comp is different.

Mike Michalowicz [00:14:28]:
That’s for the work you do in the business. If you had to replace yourself, very few people ever attempt starting and operating a business. That’s why we have profit. It’s a thank you for your contribution to our economy. Owner’s comp is a reward or pay for the work you do. Taxes for your own tax liabilities and your business can pay your taxes. Sometimes has to reimburse you for taxes if you have an S corp or C corp, but It’s for your, your tax liability. And then the OpEx is for the operations of the business.

Mike Michalowicz [00:14:54]:
And what the power is here, it’s on a percentage allocation. And, uh, we used to think $1,000 came in, we have $1,000 to operate my business. Well, that’s not true. $100 may go to profit first. Uh, $200 or $300 may go to your salary. Um, another $150 to reserve for taxes because when you’re making good money, you’re going to have a big tax bill and that may leave, say, $500 for operations. So you get a real sense of what’s available to operate your business.

Bill Cates [00:15:21]:
And if you don’t have enough money in your operational account, yeah, I know you make the point, well, maybe we work on trimming the cost to operate the business and don’t necessarily steal from the profit account, correct?

Mike Michalowicz [00:15:39]:
Yeah. Yeah. If I just returned, I know you’re a professional speaker. I just returned from a speaking engagement and I’m not a professional speaker. I started yelling at the audience. So that’s— don’t do that. No, don’t do that. But people said, oh, should I just take from my profit account when I’m not profitable? I’m like, no, no.

Mike Michalowicz [00:15:55]:
If you don’t have enough money in your operating expenses, that’s your business telling you there’s something, something flawed in your business. And it could be running too many expenses, could be inappropriate margins, not pricing properly, overstaffed, inefficient. I say Profit First doesn’t fix your business, but it points out what needs to be fixed. Because when you take your profit first, you see what’s truly available to operate your business. And if you want to have a 10 or 20% profit, then you must work with what’s left over and adjust your business accordingly.

Bill Cates [00:16:27]:
Let’s pause for a quick word from the folks that make this show possible. You and I know that the way most people find their financial advisor is through human-to-human connections. Such as referrals and events. Hosting educational events for qualified prospects is a tried-and-true strategy that is still producing great results for advisors who know how to make them work. Seminar marketing works because the in-person setting allows you to build that all-important trust with the attendees. And one of the key ingredients in making seminar marketing work is getting the right people truly qualified prospects to attend. This is where Nexrudo comes in. This is their special expertise—getting the right people in the seats.

Bill Cates [00:17:14]:
Nexrudo handles the heavy lifting so you can focus on earning their business. Nexrudo can help you design the seminar if you wish, train you to present it effectively, and create customized territories targeting your ideal market. They even handle compliance approvals if necessary. And here’s the best part: their specialty is getting pre-retirees, specifically those with about $1 million in investable assets, into the room with you. Nexruto promotes the event, getting bodies in the seats, so you just show up and bring your great value, spur attendees to action, and set appointments. And because Nexruto guarantees exclusive marketing rights, You’ll never have to worry about them reselling your leads to the advisor down the street. They even offer ongoing marketing support to help you create a true sales process that ensures your prospect lists are always fresh, responsive, and eager to meet with you. You’ll be working with the owner, Steve Abbott, who provides incredible customer support.

Bill Cates [00:18:19]:
Without any pressure, Steve makes it easier for you to see if this is a right-fit model for you. I’ve looked at NexRuto’s model and I’ve looked at other models, and NexRuto does offer some features and value the other firms just don’t. So head over to NexRuto.com, that’s N-E-X-R-U-T-O.com, and request your free local market report. You’ll see exactly how many millionaire pre-retirees live in your area, broken down by age and assets. Again, head over to NexRuto.com, N-E-X-R-U-T-O.com, for your free market report and to schedule a complimentary strategy session to see if it makes sense for you. That link is also in the show notes. Now back to the show. Tell me the distinction you make between profit and owner compensation, ’cause a lot of people mix the two together, I think.

Mike Michalowicz [00:19:12]:
Yeah, profit is a reward for taking on extraordinary risk. You’re a shareholder of your own business. Many of the folks listening maybe own 100%, Maybe you have a partner, you own 50%. I’m an investor in Ford, and this is not a stock tip, but they sent out a distribution and I own 100 shares. So investors, kind of a loose term. My last distribution was around $15. I didn’t take that money and say, oh, I don’t, I don’t deserve this. I need to plow back into the business, return it.

Mike Michalowicz [00:19:40]:
I said, no, I took a risk. This is a reward for risk. And I didn’t say I need to go to the factory to earn this money off. This is a reward for risk. By starting a business, you are one of maybe 17% of the global population that takes on that risk ever. So this is a reward for thanking you for supporting the other 85% of our population looking for jobs and supporting our economy and paying your vendors and all that stuff. Owner’s comp is the pay for you if you had to hire someone to replace you. And your company has got your person, that person’s already hired because it is you.

Mike Michalowicz [00:20:14]:
We need to pay you accordingly. So that’s the difference between the two.

Bill Cates [00:20:18]:
And so, um, what would the profit money be used for?

Mike Michalowicz [00:20:24]:
Um, great question. So, you know, I found, and, and I wrote a subsequent book around this, is it’s called The Money Habit. But the reason is a business finances are only as healthy as also the owner’s home finances. I’ve seen businesses do well and the home lifestyle leeches off the business and takes it down. And I’ve seen the reverse. Someone prepared for their future, but the business is struggling. It starts eating off the home finances. So we need to nail the two.

Mike Michalowicz [00:20:50]:
The, the owner’s comp is used to support your lifestyle. That’s your salary. Profit is a bonus, just like that quarterly distribution from Ford. It’s a quarterly bonus. You don’t live your lifestyle off it. You reward your effort off of this by making— taking on this risk. So when that bonus check comes out every quarter, It could be a big celebration or it could be preparation for your future. You choose the use of funds, but don’t make your lifestyle dependent upon it.

Bill Cates [00:21:16]:
You know, you made me think of something. I do a lot of coaching for advisors, and some of the folks I’m coaching these days have, I think, have made an aha, great connection. What I mean by this is the inextricable link between a small business owner’s finances and their business finances, right? Quite often advisors will help the individual with their personal finances and don’t even really get into the business side of things, maybe leaving that to the accountant or whatever. But the truth is, in the brains of most business owners, those two things are inextricably linked. And really, the advisors need to attend to both, do they not, to be a good advisor to small business owners? Hundred percent.

Mike Michalowicz [00:22:01]:
I, I’m, I’m proud of, so this is proud of and it’s given me great awareness. Profit First has over 1.1 million deployments globally. Wow. Um, I’ve spoken with more of the folks than I can, than I can count on a hand. And we have, uh, at our pinnacle we had 600 coaches actively teaching Profit First. And sure enough, to your point, Bill, as if the home was struggling, the business, no matter how healthy it was, kept on getting pulled down. And the reverse was true too. People got a nail on both fronts.

Mike Michalowicz [00:22:35]:
So I think a financial advisor has an obligation of caring for the holistic customer, and that’s in the business owner’s case, the finances at business, at work I should say, and at home.

Bill Cates [00:22:45]:
So I know in the book and, and I’ve just seen this in general, CPAs, not all CPAs get this. This is different from certainly what they’ve been taught traditionally. You mentioned. Yeah, yeah, yeah. So I think you’ve got like CPAs that have kind of been trained or certified in this. Is that correct? Tell me about the, the CPA angle here. Yes.

Mike Michalowicz [00:23:07]:
Alluding to those 600 coaches, those are mostly CPAs and bookkeepers. So we have an established presence now, I think, in 6 countries, but we do serve globally. What these are, are folks that have a financial competency or business competency of some sort— accounting, bookkeeping. Some folks are business growth coaches. They’ve added on the profit component because it is, it is integral to every part of a business. If a business isn’t profitable, it’s not going to be sustainable. So these are folks who got certified in the Profit First process. They’ve proven through testing and through case demonstrations, working with clients that they’re competent at it and they get certified, recertified every year on this process.

Mike Michalowicz [00:23:52]:
We— so these people are out there circulating, coaching folks are called Profit First professionals. And whenever we get an inquiry, we get them literally every hour. There’s some kind of inquiry coming in on Profit First. We’ll redirect these people, these business owners to these experts to get guidance.

Bill Cates [00:24:09]:
So what do CPAs say? What is their main objection? And is there a way to get them to think differently or just, you know?

Mike Michalowicz [00:24:18]:
Well, the main objective, I learned this early on when I wrote this book. Um, I was invited to a major CPA conference to speak, and then when they asked me to detail out about Profit First, I said the GAAP formula’s wrong and I got quickly disinvited. So my first big, like, speech in front of 1,000 people I didn’t do because I was told not to come. I, I, I think it speaks to, Um, the challenge that many CPAs face is this is not what we’ve been told. We’ve been told that profit’s the bottom line. It comes last. There’s a sequence. My response to that is yes and.

Mike Michalowicz [00:24:52]:
Profit First, while we’re flipping the formula to sales minus profit equals expenses, logically the math is actually identical. It’s a behavioral shift. Profit First works with any accounting. It doesn’t change accounting. It just changes what’s called the cash management component at the, at the bank level. So when a, when an accountant sees that, um, they can start understanding it. But my favorite thing, and it’s, it’s a little bit gutsy for me to say this, but I go to an accountant and I’ll say, why don’t you just evaluate your client base and see what percentage are profitable? Like really sustainably profitable, not an accounting profit, but real cash left over. And the number comes out to be true with what the SBA indicated.

Mike Michalowicz [00:25:31]:
Very few, 10%, 20% max. But when we have Profit First deployments, it actually flips. Most of our clients, about 80% of their clients are profitable. I mean, it ain’t, isn’t perfect. Life events happen, industries shift and change, but the majority are profitable. And we just show them that data and that’s sometimes enough to convince them to at least dip their toe in the water and start, uh, trying it out. Yeah. All right.

Bill Cates [00:25:57]:
So, um, a lot of business owners have debt. They, they’ve. They’re paying off, you know, equipment loans, whatever, and they’re thinking, all right, well, this sounds well and good, but I got all this debt. Yeah, I’ll wait, right? Yeah, yeah, yeah, sure. So speak to that a little bit. Yeah.

Mike Michalowicz [00:26:17]:
The only way to eradicate debt— so let’s determine what that is. Debt is a business expense you incurred that you could not afford or chose not to afford and leaned on a third party, borrowed from a third party to pay it. That’s what debt is. The only way to eradicate debt is if you make more money than you’re spending right now. You have to have a surplus to pay off this expense. That’s called profit. So ironically, the only way out of debt is by being profitable. So what we do with the system is we follow the same process.

Mike Michalowicz [00:26:46]:
When money comes in, we allocate as profit. It accumulates in that profit account. But when the profit distribution is due, we allocate it toward the debt responsibilities, those past sins, if you will. Now some people say, well, why do I go through this process of setting up into a profit account when I know ultimately that profit is going to go to a debt expense? It’s a behavioral reason. We want to start building that muscle. You see the profit coming. It is a genuine profit. You must be profitable to pay debt.

Mike Michalowicz [00:27:12]:
But then we go to pay this debt. The nice thing is, as you cycle through this and build a profit muscle, when the debt is eradicated, the next profit payment, it goes all to you.

Bill Cates [00:27:21]:
Yeah, I think it’s— isn’t it? It’s a psychological thing in terms of, of getting used to doing this and seeing that putting it just like, just like, say, you know, pay yourself first for personal finance. Yeah. You know, money goes into savings before the rest. You got to get used to feeling the reward of that, don’t you? Yes.

Mike Michalowicz [00:27:43]:
And you nailed the nail on the head because it is the pay yourself first principle. So this has been established forever. And this is just a business translation to it. When people set up in the beginning, I expect them to be skeptical. I was skeptical. I’ve done this for myself now for, I want to say, almost 20 years now. So we’ve had— I think we record our 78th consecutive quarter of profit distributions in my business. And in the beginning I was like, I don’t know if this is going to work, but I did out of desperation.

Mike Michalowicz [00:28:14]:
What I found— and it worked. But what I found is the key is to start slow and then let the system grow. So while in the book I have this whole deployment that you can use, like those multiple accounts and maybe grow, just start with one account. Yeah, kind of like what you’re doing is set an account that says profit and allocate a predetermined percentage. I do challenge you and anyone listening in to hide that money from yourself so it’s not tempting.

Bill Cates [00:28:35]:
You even talk about putting it in a different bank at some point, right? Just to make it a little harder to access.

Mike Michalowicz [00:28:40]:
We’re so hardcore here at my own office. Like, I live by these principles. The president of our company, her name’s Kelsey. She has the username for our bank account and I don’t know what it is, but I have the password and she doesn’t know what it is. And so it’s like turning the nuclear keys. She comes in and on a quarterly basis we do our profit distribution. We share with all of our employees too. So it’s a big moment, but we sit there and we say profits only to be distributed as a reward mechanism to shareholders and people who are investing in the company through our efforts.

Mike Michalowicz [00:29:08]:
We’re not gonna use this for any expenses. If we have expenses that we can’t afford, There’s something flawed in our business and we’ll fix it. Are we ready to distribute profit? Yes. Yes. And then we turn the keys basically. Right. I, I, I gotta protect myself for myself because I know if I try to use willpower, that moment’s gonna come that I justify I need to spend the money here when it really shouldn’t be spent there. Yeah.

Bill Cates [00:29:29]:
And I like the case you make in both Profit First and the, your new book, The Money Habit, is these are systems that are in a way to protect ourselves from our natural inclination. We got, we gotta be run by the process, the system, otherwise we’ll just never quite get there, right?

Mike Michalowicz [00:29:46]:
Um, and behavioral psychology, they call them commitment devices. Commitment devices.

Bill Cates [00:29:50]:
Commitment devices.

Mike Michalowicz [00:29:51]:
And these are things that intercept a natural path or action we take and redirects us to the outcome we desire. So, uh, I, I want to be profitable. I log into my bank account. Okay, I need to set this up there. I’ll tell you, when it came to physical fitness, I wanted to exercise regularly, and I tried to use willpower, and it just, it doesn’t work. What did work is I realized my pattern was I’d wake up in the morning, go to the bathroom, and then make a cup of coffee before I found an excuse not to work out. Well, I put my sneakers on my toilet seat cuz I knew every morning I wake up and use the bathroom.

Bill Cates [00:30:21]:
I remember that from your book. I’m, I just, I have a picture of it and it’s, yeah. Yeah.

Mike Michalowicz [00:30:25]:
You don’t wanna do it. And I get it. Picture that. I try to erase your mind quickly.

Bill Cates [00:30:28]:
There’s so much inertia getting between us and doing what we wanna do, but you kind of a system. Yeah.

Mike Michalowicz [00:30:34]:
Yeah. It’s a system. It’s a hack. So, so now I’m forced. To consciously be aware that I, I commit to exercising. I have the sneakers in my hand and it’s enough momentum that 99% of the time I’ll put my feet, I’ll walk to the gym. It does not guarantee a great workout, but it guarantees a workout and it, it’s improved things radically. Profit First does the same thing.

Bill Cates [00:30:52]:
I love it. Is there a, a minimum size or size range of a company that’s gonna maximize or best use this kind of, it sounds like it could work from very small to a pretty nice-sized business. Yeah, yeah.

Mike Michalowicz [00:31:06]:
We on the big side, we do have a public company using it. It’s a pink slip, so it’s not a massive public company due to Sarbanes-Oxley compliance. They can’t use it in its raw form, but they have a translation of it that we deployed. It’s more popular by far with smaller businesses. So if you’re $10 million or less, that’s where we typically see it deployed. But middle-sized business, Brand new startup. I mean, a dollar can be divided up on percentages. Yeah.

Mike Michalowicz [00:31:32]:
Ironically, the sooner and the smaller the business is, the more aggressive they can be in their numbers because they don’t have to unwind bad habits.

Bill Cates [00:31:39]:
I, I recommended your book to a gal that was introduced to me. I, by my niece, she says, maybe you can help this gal out. I said, sure, maybe, you know, whatever. Uh, and the first thing I did is said, you gotta get this book Profit First. Um, so let’s wind this up a little bit with The Money Habit, The Worry-Free Way to Financial Independence, and When I was listening to this, I listen a lot. Yeah, me too. Love your reading style again. Thank you.

Bill Cates [00:32:07]:
‘Cause you have a lot of fun with, you do ad-libs.

Mike Michalowicz [00:32:09]:
Yeah, yeah, yeah, yeah. Thanks for listening.

Bill Cates [00:32:10]:
I’m gonna bring that to my next audiobook. I love it. It’s a similar thing, isn’t it? It’s the same, the basic, just applied to the personal side. Correct.

Mike Michalowicz [00:32:20]:
Just give us a little bit on “The Money Habit.” Yeah, so it’s also at the bank level when I interviewed, we deployed it with over 1,000 individuals to get started. They were employees of companies, and the, the survey results indicated people log into their bank accounts to manage their money. They don’t have a budget, they don’t balance their checkbook, but sure enough, they log in. In many cases, it was once a day or more frequently, multiple times a day. So we said, okay, it’s the same system, but translate to our personal finances. There’s different levels of personal needs. Our finances, the foundational is our essentials for living. I actually call those needs.

Mike Michalowicz [00:32:56]:
We need food, water, shelter, but there’s also the many luxuries we call those wants. So while groceries may be a need, eating out may be the equivalent of a want, something that you reward yourself, but not essential for living. And then dreams, which is the more aspirational, bigger things. For some people, it could be, you know, I need groceries. I want to eat out. I dream of having a personal chef prepare my meal for me. You know, like that’s kind of scale. And there’s other accounts too for emergencies.

Mike Michalowicz [00:33:25]:
Actually, the most predictable bill is the unpredicted bill. You know, that roof is going to leak, the car is going to break down. So we prepare for that. Yeah. The other thing is we deploy seasonality. And what I discovered in my research for this is that we’re in different financial seasons. And just like seasons in nature, they rotate around. Some people are recovering from debt.

Mike Michalowicz [00:33:47]:
Some people are, are in a season where they’re trying to fund up and prepare for a future event. And some people are in what I call the activate season where they’re intentionally spending down their savings and doesn’t necessarily have to happen at retirement. It could. But there was many occasions I saw that there was once in a lifetime family events like the kids were past the 18th birthday and they’re going to be empty nest. We’re going to celebrate this last year together in a big way and intentionally spend down. So seasonality is bringing intentionality to, to how we manage our funds. Um, and a few other things like that. The last thing I want to share, that book is, it talks to more predictable income.

Mike Michalowicz [00:34:22]:
Yes. Entrepreneurs have very variable incomes. Yes. But most employees have a salary. The benefit is they don’t have the downsides that entrepreneurs experience necessarily. Uh, the risk, of course, they don’t have the upside that entrepreneurs experience. So how do you work with a more fixed or predictable income? And that’s in that book.

Bill Cates [00:34:39]:
Well, all I know is I wish I had read The Prophet First 40 years ago. Of course, it wasn’t written 40 years ago, but, um, I wish I wrote it 40 years ago. Yeah, I mean, it’s already made a difference for me, and I’m, I’m in the— one could say I’m in the twilight of my career, but I’m, I’m going to keep writing and speaking and working. I love my brain going. So, um, uh, well, all right, uh, we’re out of time. I just want to say my featured guest today has been Michael Michalowicz, author of Profit First, The Money Habit, and several other great books. He’s also a great speaker. You can just tell he’s got a natural, authentic demeanor to him, which I think is one of the hallmarks of a great speaker these days.

Bill Cates [00:35:20]:
Mike’s website is mikemichalowicz.com. It’s in the show notes and other links to some of his tools are in the show notes as well. So, Michael, thanks a billion for being on our show today. Appreciate it.

Mike Michalowicz [00:35:34]:
It’s been an absolute joy, Bill. Thanks for having me. You bet.

Bill Cates [00:35:38]:
To you, the listener of this podcast, may I ask a small favor? If you like this episode or like the podcast in general, please leave a 5-star review on the platform you’re listening to the show. Not all platforms have a place for reviews, but if yours does, I’d be grateful. Thank you. And don’t forget to check out my newest book, The Hidden Heist, at thehiddenheist.com and pay a visit to our resources page jam-packed with free resources to help you attract and retain more right-fit clients. Just go to referralcoach.com/resources. And now, while these are free to you, I know you’ll find them quite valuable. And don’t forget to check out our show sponsor, Nexruto. Nexruto helps financial advisors attract and engage qualified pre-retirees in their local market by filling educational seminars with high-intent prospects and turning those audiences into new client opportunities.

Bill Cates [00:36:31]:
To learn more about Nexruto and get your free market report to learn how many high-level pre-retirees are in your area, just go to Nexruto.com. That’s Nexruto.com. This is Bill Cates reminding you that ideas do not make you more successful. Only acting on those ideas will bring you the success you desire. Thanks for stopping by.