Mike Michalowicz is the entrepreneur behind three multimillion-dollar companies and is the author of Profit First, Clockwork, The Pumpkin Plan, and his newest book, Fix This Next. Mike is a former small business columnist for The Wall Street Journal and regularly travels the globe as an entrepreneurial advocate. Mike shared the business formula he and over 600,000 other small businesses have used to grow faster while maintaining profitability.
Becoming an entrepreneur wasn’t part of my plan, out of college I struggled to find a good-paying job. I moved back home and started working at a little computer store. One night after having a few too many drinks I found that liquid courage and decided to start my own business the next day. My first business was a computer networking business that I later sold to private equity and my second business was in computer crime investigation. After successfully launching and exiting these two businesses I decided to venture into angel investing.
I thought I had the Midas touch because I had two successful exits before I was 35. Pretty much I found out I didn’t and lost all of my wealth when the ten businesses I invested in collapsed. I was so ashamed and embarrassed but it was a wake-up call that I didn’t understand the core principles of business. So I started researching the topic and writing books, not because I know it all but because I’m still learning these principles.
I came across a fascinating statistic from a study by US Bank and the SBA. They identified that globally 83% of small businesses exist on a check-to-check survival. However, every entrepreneur I meet says they became an entrepreneur for financial and personal freedom. This means the two primary things we want as entrepreneurs are not happening. That is when I started looking at the problem to find the underlying cause. The problem I found was in the foundational formula of business. We are taught that profit comes last and it's our human nature to assume what comes last is insignificant.
The idea of profit first is built on the foundational principle that when money comes in it is divided out into multiple responsibilities of which profit is one of them. You also have owners' compensation which is different than profit, it is a salary for the work you do in the business. If the business had to replace what you do what would you have to pay that person? We also need to allocate money towards taxes and the operations of the business. No question if you have bills piled up you need to pay them but you don’t have to perpetuate that cycle over and over again.
We believe it’s close to 600,000 businesses that have implemented our profit-first model. The interesting thing we have seen in our case studies is the businesses that implement this model grow faster than their competitors. One of the main objections we hear is I’m trying to grow my business I can’t take the profit out, but what we found is that when you limit what is available to spend you make a better decision. With a profit first mindset, you are looking for what generates the best return verse just spending money on say Facebook ads because everyone else is doing it.
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