Mike Michalowicz, author, entrepreneur, and angel investor, shares his story of losing all his financial assets fifteen years ago.
“I lost all my money because I was completely ignorant of what made an entrepreneur successful.”
As a result, Mike lost his home and possessions; but still had his family.
Do Sales Cure All Business Issues?
“First we have to realize what sales are.” Sales create cash, but sales alone are not sufficient. “Sadly there’s some pundits who say sales cures everything. And that is total bullshit. The point of sales is to establish a runway for profit.”
Sales give our business a reserve of cash, where we can sustain our business changes; however, sales create stress. “And I think this is often ignored.” says Mike. The more and more you sell, the more you have an obligation to deliver on what you sold those products or your promises. “The more we sell, the more obligations we have.”
Baking Profit Into Your Business
“Profit is something we need to bake into our business.” Every transaction needs to be a profitable transaction.
Profit first – every time a deposit comes in, immediately take a predetermined percentage of that money and hide it away, allocate it to a profit account, but hide it from your business. The remainder of your money is what you use to run your business.
Second, we need to maximize our spending in our companies based upon our bank balance.
Capital Equipment Expenses
Some businesses are so overwhelmed by expenses, and then they pat themselves on the back that they have a $0 tax bill. So instead of paying tens of thousands of dollars in expenses, let’s pay thousands of dollars in taxes. And that gap between what you would’ve spent on unnecessary expenses now goes in your pocket.
When you purchase equipment that isn’t being used in your company, that is inventory capital equipment that’s not being utilized, which is a total loss of money. For a visual, imagine taking hundreds of one-hundred-dollar bills, tearing them up, and putting them on the table and thinking, ‘Hey, now I don’t have to pay taxes on this.’ “So I tell people, if you’re ready to spend money, are we tearing up cash?”
If I make this investment, what will our actual utilization be, and what historical proof do we have? What’s the return we expect? Once you can answer these questions, then, Mike advises, you’ll be able to make more prudent decisions. “That stuff is pretty hard to do when you’re running a business and putting out fires left and right.”
With his passion and interest in behavioral psychology, Mike’s book Profit First is rooted in how our minds operate. For example, reviewing what we are spending money on before taking the plunge is a behavioral intercept. This process is a way to break a pattern that forces us to recognize what we are doing before going on autopilot.
Apparently, this is totally normal behavior. As humans, our brain likes routine – whether our routine has a positive or negative outcome. This is because we perform a common habit in a certain way, and our brain has a common expectation.
Then we get uncomfortable with our habits, whether good or bad. Mike’s business partner says that our habits are grooves that often become ruts because we get so comfortable with our old habits that we start digging this hole.
It’s no surprise that when we create a new behavior, that the behavior is unfamiliar to our brain and, therefore, a bit disconcerting. However, when you stop and think in a behavioral intercept pattern, it’s then that you can discover inefficiencies in your business. Whether you’re driving towards better or new results, you can now get there with fewer resources and less effort – and that’s the definition of efficiency.
Working More with Obligation
I think part of working more is a sense of obligation as a business owner. It feels weird for me, the business owner, to work less, especially while my employees are working and making the money that I take.
It feels almost unethical. But once I changed the framing and considered myself a shareholder, I felt much better about taking money from my business.
The Goal of Having an Efficient Business
The goal of an efficient business is not to have a linchpin employee. This means that if one person were to leave, that person leaving would cause a massive issue in your company. Instead, Mike suggests having a backup person for each team member, so another person can step in and take over if that person can’t do their job for whatever reason. “We always have backup in place and the business is stronger and healthier than ever before.”
The Four D’s
Mike created the Four D’s to work at a higher thought level.
“The base level is doing. Doing is necessary. Where we actually do work. Then, there’s deciding, delegating, and designing.”
Designing is where his team works on the vision and planning, putting the puzzle pieces in place.
“When we have a break from the actual doing it avails us to design work, which is the most important.”
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