GE Ep 59: Michael Michalowicz, author of Profit First, Gives One Simple Formula To Increase Your Profits With Michael Michalowicz

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qR5URQnhToday I have the pleasure of working with Michael Michalowicz, author of Profit First. Michael grew several companies while an EO member, sold one private equity and sold yet another to a Fortune 500. But he credits the most interesting part of the entrepreneurial journey with losing money and struggling with failure.

Keypoint Takeaways: The angel of death years

Michael gets right to the point about his bumps in the road to finding sustainability as a successful entrepreneur. “After I sold my second company, I can’t really use the word, but I was a “dick”. I was a total dick. I fooled myself, like “I’m Mr. successful. I know all the answers to entrepreneurship.”

Michael started investing (something he calls wasting money) and became an angel investor. He was so terrible at it, he called himself “the angel of death”. The experience prompted him to take a closer look at what he assumed was the foundation for success. He realized he was wrong.

For starters, Michael saw profit as an event driven by a sale. Instead, he realized it’s a habit that needs to be fully baked into the business. It’s really a series of small wins and continuous momentum that results in massive profits.

Flaws in GAAP accounting

Michael’s book, Profit First, challenges GAAP accounting that says sales minus expenses equals profit. While it’s true that formula technically equals profit, Michael points out that it doesn’t actually match human behavior. Expenses continue to grow, and we use the profits from sales to cover those expenses. This leads to businesses simply generating revenue to pay expenses with profit as an after thought.

Parkinson’s Law says that as supply increases, it’s human behavior to expand our demand to meet the supply. Michael illustrates this also works if we ask for a week deadline. What happens next? We take a week to complete the project.

But it also works with sales, too. The more we sell, the more we expand our expenses. We might hit some sales spikes now and again, but the profit isn’t sustainable. Instead, Michael advises to calculate your sales minus profit and use what’s left for expenses.

Take your profit first

Like the concept of paying yourself first, Michael encourages companies to assign a percentage of sales to your profit first, and hide it so the temptation to spend it is removed. You could try putting the money in an account that isn’t easily accessible or requires a co-signature. Our behavior will adjust to live on the remainder without widening the sales and expense gap cycle most businesses follow.

Profit before paying off debt

Michael says people get trapped in the idea that you need to pay off debt before profiting. Instead, it should be mandatory to be profitable in order to get out of debt. But he warns not to ramp up your profits too fast and instead start small in order to balance paying off debt with earning. Determine a target allocation percentage (or TAP) with a 10% profit off the top line. Instead of jumping from 1% to 10%, Michael suggests incrementally increasing it by a percentage or two each quarter to make realistic steps towards your goal.

Michael uses the TAP system itself and it took him about a year to master. Despite being an author in an age where books don’t earn much revenue, he actually makes more money and profit than in any of the companies he ran previously. It’s true his current business doesn’t make the $7.5 million like his last one, but he takes home more income and profitability in comparison. Today he works with dozens of companies that implement the strategy, though he warns it’s easy to fall off the wagon at the first sign of financial stress.

Finding accountability

It’s crucial to find someone who can hold you accountable when trying to profit first. Michael says that person was his accountant. When Michael told him what he had been doing to earn more and why he was slipping, his accountant offered to talk to him once a month to make sure he stuck with the program instead of falling off the wagon.

Michael realized others would need that same type of financial accountability and organized a group of accountants, bookkeepers, and business coaches. He launched his own certification organization called Profit First Professionals. There are now over 40 accountants throughout the U.S. and worldwide.

Functional depression

Michael says he went through a series of depression after selling his second company. This was also the period he says he morphed into a jackass, wasting money and making dumb decisions. During his dark days, Michael’s functional depression kept him from becoming immobilized, but did keep him isolated from social situations. He stopped going to social functions, avoided friends and dwelled on being a loser.

Eventually Michael realized money doesn’t define us, but is a necessary tool that needs to be fostered and sustained. He realized he wasn’t happy building and selling companies and wanted to be an author and speaker instead, despite the criticism from friends and colleagues.

Selling zero books

Profit First is currently Michael’s fastest growing company. But as a book with the same title, it’s not his first. He released The Pumpkin Plan and Toilet Paper Entrepreneur. The latter sold zero books the day it was released on Amazon. He quickly realized if his own mother didn’t buy a book that day, that he had to hustle and spread the word to find his raving fans.

The Pumpkin Plan fared better and had a stronger launch. But Profit First was easily Michael’s best launch with books flying off the shelves. But he says promoting it still requires tons of speaking. Michael says one of his tactics while speaking is to share everything in the book to the point people don’t’ feel they have to actually buy it. It gives his audience the confidence to know the book has valuable content and finds that people will buy it as a reminder or even as a souvenir.

Resources mentioned in this episode:

[spoiler title=’Transcript’ collapse_link=’true’]

Eric: Hi everyone, welcome to this week’s edition of Growth Everywhere where we interview entrepreneurs and bring you business and personal growth tips. Today we have Michael Michalowicz who is the author of Profit First. Michael, how are you doing today?

Mike: Good. How are you?

Eric: I’m good. Why don’t we talk a little about your background first and then we’ll continue on the conversation.

Mike: Yes. I know you mentioned off air that you have some EOers watching. I’m EO. Actually I consider myself a YEO. I’m back 15 years now. I’m still a member.

Eric: Just so everyone knows EO is Entrepreneurs’ Organization.

Mike: Right, and YEO was Young Entrepreneurs’ Organization until guys like me turned 40 and we were like, “We’ve got to drop the Y.”

I grew a couple companies as an EO member, sold one private equity, sold one to a Fortune 500, but I think the interesting part of my entrepreneurial journey was actually losing my money. After I sold my second company, I can’t really use the word, but I was a “dick”. I was a total dick. I fooled myself, like “I’m mister successful. I know all the answers to entrepreneurship.” and then started investing, aka ‘wasting money’. I became and angel investor, I called myself the angel of death because I sucked. I just lost.

It was during this collapse that I realized the principles I thought were foundational for entrepreneurial success are not the right principles. One of the, perhaps, more important; I thought profit was an event, you have to make a sale, you have to be an investor, to have the big moment to make profit, and I found that profit is not an event, profit is a habit that needs to be baked into our business. Every single day, every transaction, what we’re doing right now is inching us towards profit and resulting in profit every single time. It’s a series of small wins that results in the massive profit win.

So, that’s my background and now I’m out teaching these contrary principles.

Eric: Got it. Cool! Let’s talk about the book itself, Profit First. I’ve read the book. Obviously—you spoke last week at an event and everyone crowded around to get free books after. What’s the book all about?

Mike: I don’t know if you can see it. I’ve got a copy here. Profit First just so you can look at it. I’m not plugging myself. Oh yes I am.

Profit First, basically I challenge GAAP accounting and I have my Johnny Cochran saying that ‘GAAP is crap.’ Here’s my thought; the foundational principle or GAAP accounting, we all follow it, is sales minus expenses equals’ profit. The problem or the flaw in that formula is, it’s logically correct, the result is profit. The flaw is it doesn’t match human behavior. When we sell and then we subtract expenses next it is our behavior to use all pf our sales to cover all of our expenses and expenses continue to grow at a rate of sales. Most businesses are in business to pay expenses. A profit becomes an after thought, a left over, something we address at the year end and we’re surprised if there’s a profit or not.

That formula is flawed and it’s probably flawed because there’s a behavioral theory called Parkinson’s Law. Parkinson’s Law states this, as supply increases its human behavior to expand our demand to meet that supply. If you and I were negotiating a contract Eric, and you said, “Mike, it’ll take me a week to get the contract written for you.” it will take you a week. If you and I had the exact same conversation, the same people, the same conversation about the same thing and you said it will take you four weeks, now it’ll take you four weeks. Our demand for the supply of time expands.

This is true for time, but this is also true for money. As our sales expand, ‘GAAP’ has us increase our expenses and that’s why we never break into this extremely profitable component. Usually there’s certain times that we our sales spike and we have some profit, but not sustainable. In Profit First I explain how we actually need to change the formula. Sales minus profit, take your profit first, sales minus profit equals expenses. It’s a simple change, but this is all you do, is to pay yourself first, the mentality we’ve been told in our personal lives, apply it to business. Sale as aggressively as you always can so you have the past, but now subtract a predetermined percentage, 5, 10, 15, 20% of that money automatically gets allocated to a profit account.

Take your profit first, you hide it away so the temptation’s removed and now the remainder is used for expenses. What’s shocking by this little flip is that our behavior adjusts to live off the remainder. The expenses we justified in the past we can’t and don’t justify anymore. We become more innovative, we find ways to do things and get the same results in ways that don’t require as much money. When businesses implement this simple little flip, Eric, it’s amazing how much it can change even—I even work with public companies doing this now. It brings profitability to their business instantly and permanently if they stick with the system because it works now with human behavior.

Eric: Got it. Let’s give an example here. Let’s say I have a small business and I’m having cash flow issues, I might even be in debt, I might even be taking that line of credit, I may be super strapped right now. How do I get started using profit first? I can’t imagine going all out immediately, right?

Mike: Yes. One key is if you have debt, and a lot of people that take on the system say, “I can’t have a profit until I get out of debt.” The irony is this; the only way to get out of debt is to have a profit. You have to have more sales collecting up than expenses so you have a profit so you can pay back your debt. If you have debt, this is actually mandatory, you have to become profitable. The mistake that people do when they hear this system and they go, “Oh, I love it. I’m going all in. Screw 15% profit, I’m going 70% profit. I’ll be rich.” They go overboard and that’s like taking a frozen mug out of the freezer and throwing it into a boiling hot oven. It will shatter and explode. That adjustment’s too quick and too intense.

Instead I tell people, let’s determine a target goal, I call it TAP, target allocation percentage, maybe we want to target having a 10% profit off the top line, but let’s start off with wherever we’ve been historically plus 1%. So, maybe we’ve had no profits in the past and we’re running a 1%, 2%, 3%, or 5% profit, by the way it’s coming the 5% profitability historically, that’s still considered a break even business. So, say we’re at 5%. We’re now going to add 1% so it’s 6% and for the next quarter, the next 90 days you take 6% of the top line revenue allocated toward profit. Now, next quarter we move it up to the 7%, 8%, 9%, every single quarter and this inches you forward. What happens is; as you increase your profitability, your expenses get compressed by that same 1%. Move it to profit you reduce your expenses and it gives us time to adjust. It’s a way to step towards these goals and usually within four to eight quarters, one year to two years, companies that have implemented this are hitting their profit goal, their actual idyllic profit goal.

Eric: Nice. Can you give us an example of a profit first success story?

Mike: Sure. The obvious one for me is myself. True to all my books, when I figure something out or I discover something new I don’t just write about it. First I experiment on myself. I discovered profit first maybe six or seven years ago now and started doing it for myself. I went through the bumps and bruises like, it didn’t work at first. For example I was allocating my ‘for profit’ and then there would be a time when I couldn’t pay my bills, I would just borrow back my profit and that would defeat the whole system. So, I found that when I allocated my profit, actually just remove it and transfer it to a bank where I can’t get easy access to it, so I can’t steal from myself it forces me to be more disciplined with expenses.

I did this for myself. It took me about a year to really start mastering it, but the end result has been this: I’m an author today and authors don’t make money, can’t make money selling books. I make more income, but more importantly far more profit than I have in any of my companies and my second company it was an EO company. When I sold it, it was a $7.50 million run with we were three quarters into it and we sold it to Robert Hath [ph 00:09:08] International. For an EO company that’s a nice win. My business doesn’t do $7.50 million. Not even close, but the income I take home and the profitability, it crushes my old company. Even as an author with a lame business that can’t scale can do very well profit first.

Subsequently I know about 1000+ companies that have done it. I’ve personally have worked with maybe 20 of them. There’s a manufacturer doing this in Saint Louis. There’s a public company here in New Jersey that’s implemented it. They sell goods to the Department of Defense. All these businesses have increased their profitability. It works consistently as long as you stick with it. The big flaw, the big challenge is people start this and then they fall off the wagon very quickly and of course it doesn’t work then.

Eric: Got it. Because when you try to set a new habit and try to go all in, try to work out and all of a sudden you run five miles and you never run, it doesn’t work that way.

Mike: Yes. There was an interesting study about running specifically. If someone wants to start running and has never run before the first step is to actually stand while you watch T.V. as opposed to sitting. Move in a small step. Once you master standing, because that’s so easy to do, you’re lowering the bar, it’s so easy to be successful. The next thing is to march in place for the next month while watching T.V. Now start walking in circles in the T.V. room while you’re watching T.V., then you get outside. And if you move by raising the bar just by inches it’s just so easy to jump over each time, the chances for success increase dramatically.

Eric: Perfect. We talked a little before we started, you talked a little about Profit First Professionals. What’s that all about?

Mike: Here is one thing I anticipated, thank God, was that as people were doing this I found when I fell off the wagon and started borrowing from my profit, when I broke my own system, the person that was holding me most accountable was my accountant. He’d call me and say, “Man, you had a great profit last quarter. Now you’re slipping. What the hell’s going on Mike?” Well I told him about profit first, he’s like, “I’m going to talk with you once a month and we’re going to make sure you stick with this program because it’s working for you. You just keep falling off the wagon.”

I was like, “Ah, I’ve got to start a group of accountants and bookkeepers, and business coaches that’ll help people stay accountable.” So, I started a certification organization called Profit First Professionals. We now have 40+ accountants throughout the U.S and growing, and also that’s internationally, that we’re helping businesses implement a profit first, because there’s some nuances to it, and then stick with it. My offer is if anyone listening in wants to try Profit First I’ll gladly—reach out to me or go to ProfitFirstProfessionals.com, gladly make an introduction to an accountant or bookkeeper that knows profit first and can help guide you through this process.

Eric: Perfect. And we’ll put that in the notes as well. And so everyone knows as well, MichaelMichalowicz.com, that will also be in the notes. Tons of great resources in there that are absolutely free. That’s a must track for anyone that’s interested in this stuff.

Okay. We talked a little about the Entrepreneurs’ Organization which you and I are both members of. What are the main benefits that you’ve gotten from it?

Mike: Oh my God! EO has helped me start businesses, sold businesses, navigate law suites, hire employees, fire employees, marital issues like; how does my wife stay married to a guy that’s as weird and as crazy as this, constantly doing their things, and how do I navigate that relationship. I am probably one of the biggest, well maybe you are too. I am such a big proponent for EO because it gives you an outlet of other weirdoes just like us. My friends never get this. You start a business and they think you’re a millionaire and you’re on some beach sipping margueritas when you’re working your ass off.

It’s a great enclave of people who get you, who are part of you, and can support you, and can see the trees from the forest, or see the forest from the trees. One thing I love about EO is that in forum, that’s the master-mind crew, that the people you’re associated with aren’t your friends, you’re not in the same social circles, so there’s no competitiveness like, “I better be better than you because we’re hanging out with the same people.” You’re non-competitive. You’re very supportive, and they have no emotional attachment to your business. When it comes to discussing challenges in your business they can be brutally honest with you because they have no emotion associated with it. It’s great feedback. Great organization. Probably the best I’ve ever been in like that.

Eric: I couldn’t agree more. Once you get into something like forum it’s almost like your own board of records, but it’s also like a therapy group too. They’re telling you things that you wouldn’t have spotted on your own and that experience itself pays for the membership over many times.

Mike: Totally. It ain’t cheap, but it’s worth it.

Eric: Yes. Totally. I think you do a lot of speaking. I saw you at an EO conference in Vegas a few weeks ago and then last week you came out of nowhere at a QuickBooks Conference and I was like, “What?” Can you talk a little about how did you get involved in speaking and how’s that helping you today?

Mike: After doing my entrepreneurial things I decided I was going to write books. Actually I went through a period of depression. After I sold my second company things were great, money was flowing, but then I become this jackass, wasting money, making dumb decisions, I went through depression, but it was a good period in regard to: I got clear of that, money isn’t the only thing that defines us. It’s a necessary tool, you’re got to be profitable to sustain it and I wish well for everybody because it gives you freedom. But I also realize that compromising who I was just to make money is not a good compromise to make. I decided I’ve got to commit to what I love and what I love is the nuances of entrepreneurship, the untold stories. I thought, “I’m going to become and author.” People were like, “Are you freaking crazy dude?

Do you know how hard that is and how lame that is?” And I’m like, “Really?” So, I committed to becoming an author and I got my first speaking event. I had a blast speaking. I decided to do another; decided to do another, and then I started getting paid for it and I was like, “Oh my God! People will pay you to talk? That’s amazing.” and that kind of kicked it off. I’ve had the privilege of speaking with maybe 15, 20 EO chapters now. I love EO, but on a bigger platform it’s events like QuickBooks and even bigger events where I’m the keynote, where there’s like 2 or 3000 people are in the audience. What I love about it is the fact that within one hour you can impact all these people and give them an insight they’ve never had before. I recognize that not everyone will take action on it, but some people will. It is the ultimate form of impact. The only think greater maybe would be having a television show, but I’ve got two parts right? I’ve got books and speaking and maybe T.V. one day.

Eric: Baby steps like we talked about earlier.

Mike: Yes.

Eric: It’s really interesting when you’re talking with these different audiences, obviously you have your “your pitch”, but do you find that you have to tailor it to specific audiences sometimes, you make any specific adjustments?

Mike: Oh totally. I learned a big lesson when I was in Jamaica. I was presenting. So I use the F-bomb occasionally when I was—in front of U.S. audiences and they love it. There’s certain things where you can just f-bomb something and it just sounds really funny. I was in Jamaica and Jamaica is kind of loose, drugs are kind of all over the place and you’re “Ahh, it’s Jamaica.” I f-bombed and the whole place was silent. This was in front of a 1000 people. The whole place went silent. It was going really well and I f-bombed. And they said, “You know how offensive that is in the Jamaican culture?” and I’m like, “I had no idea.” So, I’ve come to appreciate how important it is to realize and understand cultural differences.

And this is between even demographics here, young audiences and older audiences, professions like accountants act differently than athletic workout kind of facilities, and I’ve presented to both, and it’s different in international cultures. I do modify now and am acutely aware of those nuances. If in doubt I leave something out. If I think it may not work out or it would work with one type of audience, but may not work with another, in those cases I decide to leave it all out all together because it could flop.

Eric: I notice that you, between the EO event and QuickBooks event you alternated jokes and you had different jokes. They’re really subtle things that you do.

Mike: Yes. EO will get jokes around money so an EO member if I say, “I’m doing 1.3.”, but in EO talk that’s really $800,000 in revenue. Like an EO will get the bravado of money. If I present it at QuickBooks, which is mostly accountants and stuff, and I say, “Hey, I’m doing 1.3, which is really 800.” the accountant will say, “I look at the GO, and I look at the income statement, you’re aren’t doing 800.” That joke would go [whoosh] right over their heads so you’ve got to present on something different. I’m becoming more and more aware of that and how to position things.

Eric: Cool. Great. I want to backtrack a little bit and this is something that’s hardly talked about and its depression. I’ve seen a lot of different venture capitalists and entrepreneurs talk about it, but it’s something that I haven’t really experienced a lot yet and I know it will probably come at some point. What is it like to deal with that? What did you have to go through exactly?

Mike: It was mild. My father, unfortunately has had challenges with anxiety attacks so I’ve seen much more severe symptoms than I ever experienced, but there’s different levels of depression. It’s on a spectrum. I had the very low mild stage, often called functional depression which simply means the thoughts through your mind are negative and depressive, but it doesn’t affect your functionality. I continued to work. I worked every single day and kept driving forward. More extreme depression, is it immobilizes you. It’s when you stay in a dark room and you just don’t want to interact with the world.

I didn’t experience that. Functional depression means I remove myself from any kind of social things. I wouldn’t go to any social functions. I’d avoid hanging with friends. Some people were, but how, you just disappeared. I was embarrassed about what I’d done to myself and how much of a failure I was and my thoughts were all negative so it was hard to concentrate. I’d be working, “My God! I’m such a fricking loser man. What am I even doing on this planet?” Even considering maybe harming yourself and wrapping things up. At certain points I was pretty f-ing useless.

So, there’s all different degrees of it. At the end of the day I couldn’t drive forward until I navigated that period. I wasn’t any fun to be with. It was difficult on my relationship with my wife. She called me the black cloud and I get it, and very argumentative and confrontational. It was just this ugly period, but at least I found an outlet and started getting through that. I hope I never got through that again, but at least I know what it’s like.

Eric: Got it. And what was that outlet again?

Mike: Becoming an author.

Eric: Got it.

Mike: What I did, and actually I have it here, I started journaling. The reason this is black tape; it used to say successes, or my list of successes and what I was doing in this thing was I was just writing down all these different achievements that I had in my life so I could look at it, but it was like this super uber positive thing. One of my EO forum mates, when I was going through this he said, “Are you journaling?” and I go, “What do you mean?” and he said, “Writing down the challenges you’re facing.” and I’m like, “No. Why would you do that?” He’s like, “This is your outlet.

This is your therapy. You can talk to someone.” I’m not going to read this, but it’s all my negative feelings that I was documenting here. I don’t actually reflect on it, I never really even look at it, but what would happen is I gave myself an outlet to writing, “This sucks. This is miserable.” Nasty stuff, but I felt a release just by writing it. This potentially the most important tool for me in navigating it and I encourage anyone that’s experiencing anxiety, even a difficult day, write it out, not to review it, not to ever look at it, you can burn it, but at least it’s an outlet, you’re sharing it, you’re releasing it from your mind.

Eric: Got it. So is that, correct me if I’m wrong, that’s done at an as needed basis.

Mike: Yes. As needed. It’s funny. Like I can tell the good times when I haven’t written in here in a while. My last entry’s from 2013 so I must have been a good run. But sometimes I just make notes for the fun of it and I’ll write something down that’s exciting, but usually now this is just an outlet for stuff I need to get out of my mind.

Eric: Perfect. Cool! You’ve grown multiple businesses. What’s one similar struggle you seen across these multiple businesses? What’s like a one constant?

Mike: The one constant is my lack of focus. That becomes a challenge. It’s very easy for me to jump into new things because I get excited about it and I find the most success when—I’ve got to do what I’m good at, so if I have to sit behind a computer all day and never speak again and not be on the stage, I’m going to suck. I’ve got to be doing what I’m doing, but conversely I’ve got to make sure that that’s feeding the next step and that everything is in alignment.

Over the last few months in particular I noticed there’s a trend again, I’m spreading out too wide. I’ve lopped off lots of things and I’m focusing on just speaking and exposure and make sure it’s funneling into Profit First Professionals, that organization we started. And Profit First Professionals is actually the fastest growth rate I’ve experienced in any of my businesses and part of it—I mean there’s many reasons, but part of it is I’m filtering out some of those distractions that I’ve been bringing about.

Eric: Got it. The focus mainly, right now is, more or less branding and getting the word out about Profit First right?

Mike: Exactly. There’s two components. One is encouraging entrepreneurs to realize there’s another outlet for you, it’s your accountant and bookkeeper and they can help drive profitability. Our business specifically, we’re certifying accountants and bookkeepers and we’re being very selective, kind of like EO membership, but you just can’t join, you have to qualify. So, we’re contacting accountants, bookkeepers, and some business coaches now and evaluating them and bringing them into the organization, certifying them in a process, and then giving them all the lead flow.

Eric: Got it. Okay. Changing gears a little bit. Talking a little bit about the book. What’s one big struggle you faced while getting the word out for Profit First before all the speaking stuff?

Mike: Well, Profit First is my third book. I wrote another book, The Pumpkin Plan, Toilet Paper Entrepreneur. My first book came out six years ago now and that was the biggest challenge. I’ll never forget the first day I released Toilet Paper Entrepreneurs on Amazon. I sold zero books. We should have clarity on what zero books means. It means my own mother didn’t buy a book that day. It was a miserable day. I realized the hustle that’s necessary. It’s enabling other people to spread the word and finding your raving fans. There are certain readers it just connected with and empowering them to tell other people.

When I came out with my next book, The Pumpkin Plan which took me three more years to get that book out, that one hit the market much better, came out with a much stronger launch, and that spread the word and both books kicked up. When Profit First came out it was my best launch yet and books were just moving and all the books jumped up. It still requires tons of speaking. One of the key things I found too is; sharing everything in the book to the point people feel they don’t need to buy the book, which sounds self-defeating, but what it does is, it gives people confidence that there’s good content in there and they’ll buy the book as a refresher, as a reminder. Sometimes even just as a souvenir.

You saw a speaking event. Three hundred people took a book. They were purchased, not by the people, but by the sponsor of the event, so they were all purchased books, but I recognize the vast majority of those people may not ever read the book. I told them everything at the speech. They wrote down the notes, but it may serve as a souvenir. It may sit on their desk or on their bookshelf, and they may refer to it in the future and it’s just the trigger they need to remember the book. There’s lots of things you need to, I need to do to keep the momentum growing. That’s kind of how I’ve been doing it.

Eric: Got it. Okay. One thing my friend said, I think it was yesterday actually, people will pay for convenience and people are just ultimately want to pay you back for everything you’ve given away for free, so I think that drive certainly works.

Mike: Yes. It’s called reciprocity right? If I send you a card this Christmas and you get one you’re like, “Oh gosh.” and you’ll feel obligated, to some degree, to respond, send me a note or send me a card back. If you get knowledge from me the natural form of reciprocity is to be more committed to that relationship. There’s certain authors I love, Malcolm Gladwell, anything he does I will go out of my way to support Malcolm Gladwell. I will buy books just because I want to contribute to what he’s contributed to me, all the knowledge he’s departed. And he’s never met me, he probably never will, he has no idea who I am, but I’m a huge raving supporter of his and will do anything to support him.

Eric: You never know. Malcolm Gladwell was at an EO event last year.

Mike: Was he really? Oh, I missed him.

Eric: Yes he was.

Mike I missed him.

Eric: Got to come to L.A. Great. What’s one piece of advice you’d give to you 25 year old self?

Mike: Well, it would be focus, right? Pick the category and focus. When I started my first business I was 23. It was in computer networks and we were trying to install computers for everybody and their mother. I don’t care what kind of client you were. If I simply focused on one type of customer, niche, which took me about five years to figure that one out, if I started that when I was 25 my businesses would have gotten along a lot faster.

Eric: Got it. Cool! That’s simple enough and that’s something I think even I need to take to heart. It’s really easy to lose focus especially when you’re a little younger too. Who is your idol and why?

Mike: It may be—usually I would say Michael Gerber because of E-myth [ph 00:27:15]. I’ve met him and know him well so I consider him more of a friend than and idol now. I wonder if it’s George Washington. The reason I’m looking over here, maybe you can see this one, I have these different pictures going across my wall of different sayings I’ve heard from people. George Washington just impresses the heck out of me. Here’s a guy who gives freedom to the United States of America, is then approached by the population says, “Hey, we want you to be king, George. We want to give you all the power.” and he had the humbleness and the discipline to say, “That’s the worst move for our country. I do not want the power.

We have to spread it out. We have to protect ourselves from this ever happening.” So, here’s a guy who’s given the keys to the kingdom and has the wherewithal and the courage to overcome his own ego and say, that’s not the best for our country. That’s the ultimate humbleness, that’s the ultimate in contribution. I aspire to have one one-hundredth of me to be as noble and as humble as George Washington. What an amazing human he was.

Eric: It sounds like you might have read some kind of biography around this. Is there a biography?

Mike: There’s tons of biographies. I read his literature, his letters to Martha Washington. He’s just an amazing guy. This saying up here—and he’s smart as hell. One of his sayings is, and it’s been my experience too, this is very specific but he says, ‘My observation is that whenever one person is found adequate to the discharge of his duty is worse executed by two persons and is scarcely done at all by three or more.” Now, I’ve experience this in my business too. When I tell two people to form a coalition to take care of something it doesn’t get done. There’s finger pointing. If assign a team to do something it never gets done. When I assign one person to do one thing that’s the accountable person and they make sure it gets done. There’s tons of wisdom from guys like him that’s eternal. It was true in the 1700’s and it’s true now in the 2000’s.

Eric: What biography would you recommend to the audience around George Washington? I love biographies personally.

Mike: I watch all the things on T.V. I watched the biography channel. That’s where, it’s funny. I should read more biographies. I read every business book on this planet, George Washington’s mostly been television. So, just watch T.V. Biography channel.

Eric: Great. What’s one productivity hack you can share with the audience?

Mike: Oh dude! Keep throwing it at me. Here it is. This is my productivity hack. This is my to-do list and I found that most people list sucks so I invented my own. What I do, as tasks come up I write them down, but here’s the hack. As you can see next to it I have different symbols; a smiley face, infinity sign, I think that’s a dollar sign up there. They represent different things. If it has a dollar sign next to it, it means; this activity will generate revenue for me, for my company in the next 30 days. If it’s a smiley face it means its client. If it’s an infinity sign it means it’s a system.

Sometimes, and you can see I crossed this one out here, sometimes it’s two symbols; a dollar sign and a smiley face. That means I’m going to make money in the next 30 days and it takes care of a client. I prioritize based upon that. The more symbols it has the more important it is and that’s why it’s crossed out. I did that task first. The next task up here is, there’s a sponsor relationship, it’s closest to the money, I’m going to take care of that task next and then I have different things I’m going to do. The interesting thing is most of the ideas of things I need to do have no symbols at all. Those are put off to the very end and I find that 80% of the things I need to do, there’s no benefit and I really don’t need to do them.

Eric: So, what percent, you say you have this list, what percent are you completing on an average basis?

Mike: Maybe two or three major tasks a day. This is an ongoing list. This list I’ll keep building and building. This has been the last week and I’ll keep compiling until all it’s all here. Then at the end of the week I go through and refresh everything. I remove stuff that I really don’t need to do that. I remove all the stuff that I’ve crossed out. By doing this I’m getting two or three things done a day. The second I started doing this, I started this about three or four years ago, my revenue jumped, I mean, appreciably, and the only thing that I simply reorganized things by dollar amounts and smiley faces, as opposed to due dates. It had that much of an impact. I’m actually thinking about writing a book about this. I already wrote an article for the Wall Street Journal that was very popular about this. Now I’m thinking of writing a book about it.

Eric: I think you should.

Mike: Well thanks.

Eric: I saw this in profit first task management system or something like that, is this downloadable on your blog?

Mike: It’s downloadable on MichaelMachalowicz.com. Actually I talk about it in a chapter in Profits First. I wrote about it in the Wall Street Journal, been doing it for myself. Here’s a little trick to being an author, many authors, I do it for sure, I’ll write little sections of my book that are really test platforms for future books. I’m seeing how many people respond to this and say, “Wow! That’s been a game changer.” So, profit first I mentioned six years ago in my first book, Toilet Paper Enterpreneur, so many people inquired about it, like this has to be a book. Now I’m measuring how many people are responding to this profit first task management system and if I get enough inquiries that means I should be writing a book about it. To be determined right now.

Eric: Okay. Cool. Let’s hope you get more inquiries around that. Aside from Profit First which everyone says is an incredible book, is a must read for any entrepreneur, Toilet Paper Entrepreneur, and what was the other book?

Mike: The Pumpkin Plan

Eric: The Pumpkin Plan.

Mike: I got it here so your viewers can see, but this is The Pumpkin Plan and what I did here is I studied pumpkin farmers and I found a faction of pumpkin farmers that grow colossal pumpkins. I reverse engineered their process and found that it applies to business, colossal business growth follows the same principles as pumpkin growth, ironically, and so I find that here. And Toilet Paper Enterpreneur was my first book. It’s about the ultimate bootstrapper’s guide, I guess. How to get things done when you have no resources, no money, no even toilet paper.

Eric: Can you explain the pumpkin plan really quickly so we can understand at a high level?

Mike: The pumpkin plan, there’s basically five fundamental steps that colossal pumpkin farmers follow that ordinary farmers don’t. For example, and ordinary farmer, when it comes to picking their seeds for their farm, will pick the cheapest seed they can get because they’re in the quantity game, the more seeds they spread around the better. Colossal farmers pick a seed that can spawn colossal growth and they’re very selective and it matches the soil content, the climate, and so forth. In businesses most entrepreneurs go for the cheap easy things to do, copy the competition. Look at my competitor’s website and try to design one that’s better. Look at their customer service and try to do it better.

We emulate and try to improve upon, which I found is the worst strategy. The strategy that colossal entrepreneurs use is an intersection of a few things, it’s the colossal seed and its intersection with what person, the owner themselves, distinct as a person and how the business becomes a platform for what makes them unique, the business amplification of who they are. A classic example is; here’s my 1930’s iPhone—so, this is my iPhone and you notice iPhones were button free. There’s one little button here, but that was it. Why is that significant? Steve Jobs, and you’ve got to check this out, Steve Jobs had a phobia of buttons.

That phobia, instead of trying to compress it and ignore it, he exploited the fact that he was afraid of buttons and now made products that were button-less and a result blended technology with art and distinguish himself. And there’s other components too. And then there’s four more steps and I’m not going to go through them all, but basically I go step by step from going to seed to massive two ton or one ton pumpkin and explain how a business can start up from a small seed and grow explosively, organically, by the way, without funding or anything, just natural explosive growth by following these five principles.

Eric: Got it. Okay. Cool. I think, first of all, everyone in the audience needs to buy all three books.

Mike: [Laughs] Please.

Eric: One more thing before I cover the last question. The iPhone 4 or 4S.

Mike: 4S

Eric: One thing I’ve noticed, my friend who’s a buddy who makes millions a year, he does really well, you’re doing really well right now, you both have 4S. Is there any reasoning behind that? He talks about himself being frugal and things like that. Is there a reason?

Mike: Exactly. That’s why I do it. That’s exactly why I do it. My phone before the 4S was a flip phone and it literally had duct tape on it just to hold some parts that fell off. This phone has all the productivity I need and has lots of distractions on it too. The new 6 or the Android has even more distractions on it. I want a productivity tool and I don’t want to spend money I don’t need to spend. I learned a great principle, I’m a co-owner now of a small manufacturing company and the founder of that company taught me a lesson I’ll never forget. He calls it ‘the one more day’ principle.

What happened was, I was visiting him Saint Louis where they’re located, we were driving from the airport, he picked me up, we were driving to his office, and we’re driving by Home Depot and, I actually mention this in my newest book. He said “I need to pick up some electrical supplies.” I said, “Oh great.” and he goes racing by Home Depot. I was like maybe he didn’t—I don’t know what happened there. Next day we’re going out to lunch he says, “Oh, I need to pick up some electrical supplies.” I see the Home Depot and he drives by. I go, “Paul, why do you keep driving by? Let’s pick them up.” and he’s like, “Oh, I’m doing the ‘one more day’ principle.” He goes, “I know I need something, but then I ask myself, can I get by one more day?

I find that by doing this I often delay purchases three to six months and find out some of the purchases I was considering weren’t necessary in the first place.” And by doing this he’s increased the profitability tremendously in his business. Businesses die by a 1000 cuts. If I upgrade this why not upgrade that? Why not upgrade that? And I start losing my money. I’m trying to live, hopefully I am, the ‘one more day’ principle in everything and this is one part of it.

Eric: Cool. Great. I think that’s a very valid reason. My friend is funny. He has that phone, but at the same time he is all this lavish stuff going on.

Mike: Yes, you’ve got to be consistent throughout.

Eric: Yes. Okay. Final question. Besides your book, what’s one must read book for the audience?

Mike: I just finished Contagious. I read about a book a week. Actually I read two simultaneously, Contagious and Think Like a Freak I read this past week. Contagious is amazing. I can see the book here because I just put it on my shelf, but I don’t remember the author’s name, but it talks about—basically it takes The Tipping Point by Malcolm Gladwell and gives the how to. Why do things tip and start spreading out so aggressively and how to do it yourself. It’s sort of this cool principles and kind of psychology of marketing that gets stuff moving. It’s a great add on to The Tipping Point.

Eric: Perfect. Love it. We’ll put this in the show and all the other resources we talked about, but everyone, this is Michael Michalowicz of Profit First. Make sure you get the book or else I will come to your house and knock on your door.

Mike: Beat their ass.

Eric: Yes. But definitely Mike there’s a lot of other stuff to talk about and wish to have you on the show sometime soon, but thanks for being on the show today.

Mike: I’d love that. Love to come back Eric. Thanks for having me.

Eric: All right. Take care.

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