Mike Michalowicz is an author, entrepreneur, and lecturer who strives to make entrepreneurship the simplest it can be. Mike is the author of “Clockwork,” “Surge,” “The Pumpkin Plan,” “The Toilet Paper Entrepreneur” and “Profit First.” Mike speaks about his personal failure to manage his finances in the face of early wealth, the true role of profit, and how treating your business in a biological way can help entrepreneurs focus on the right things at the right time.
Mike has been an entrepreneur his entire life. By his early 30s, he was a self-made millionaire, and he says he was full of arrogance and ignorance. Within two years he evaporated all his wealth from frivolous spending and was on the brink of bankruptcy. So, he decided to make a comeback through writing.
Mike says the goal of his writing is to increase his own awareness and share it for the benefit of others. He used to be embarrassed to speak about losing all his wealth, but he says he’s since learned when you’re authentic, it builds connection.
Make Profit Mandatory
Mike’s book “Profit First” shows how to divide your business’s money into a Target Allocation Percentages (TAPs) chart. Mike says goal is to teach you to pre-allocate money to its intended purpose before you spend a penny. He attests this helps you spend prudently.
15:01 “What we found in study is when business set profit goals among the fiscally elite they actually become part of that. . . . When you set these targets, even if they’re arbitrary, it’s actually surprising how many businesses actually achieve numbers like that.”
Mike says many entrepreneurs misunderstand the roles of owner’s pay and profit. A business owner’s pay should be a normalized salary so they don’t underpay themselves for the sake of the business and later come to resent it. Profit is a reward for taking the risk of being a company’s shareholder and should be used as “fun” money. If you are a business owner or entrepreneur, you own stock in your company and take on a large amount of risk.
16:50 “Our company has an obligation to reward us for being a shareholder. . . . so that money is a reward to you.”
Mike says that when business owners reinvest profit into the company, it sets them up for unsustainable expenses. The more money available for expenses, the more people tend to expand their expenses which can lead to frivolous spending.
Sales Do Not Mean Success
Mike says most entrepreneurs believe sales equate success. However, he has learned it’s usually the reverse. Mike says to equate sales to stress and profit to relief. The more cash you have in the bank, the more relief it affords you if unique circumstances arise.
Mike’s Next Book
“Fix This Next” is Mike’s next book, forthcoming in April 2020. He aims for it to be a compass for entrepreneurs, encouraging them to act based on data rather than instinct.
23:37 “I believe the biggest challenge facing entrepreneurs is that they don’t know what their biggest challenge is. Entrepreneurs are in a rush to put out all of the fires going on. . . . Instead of doing the apparent issue or issues, we need to nail the impactful issue.”
In the book Mike outlines the Entrepreneur’s hierarchy of needs, inspired by Maslow’s hierarchy of needs, with five levels (listed from fundamental to aspirational):
- Order — the effectiveness of the business.
- Impact — how the business transforms the community, country or world.
- Legacy — the business is designed to continue without its leader.
The idea is the fundamental need (sales) must be served first before you can move up to the next level (profit), and so forth. Mike admits most businesses will not achieve legacy — and they are not expected to. Most businesses will stay within what he calls the “getting stage”: sales, profit and order.
Nonetheless, all business owners and entrepreneurs should strive to achieve legacy. Mike compares the traditional concept of business to a spider. If its head is cut off, it dies. If its leg is cut off, you hamper the entire spider. But with a starfish, if you cut off its leg, it will grow back.
37:54 “I’m suggesting in legacy moving toward a starfish model where it’s not defined by a leader — it’s defined by a movement.”
I am grateful Mike and I were able to connect. It’s striking how he bounced back from loss, and he has a lot of information to offer because of it. Mike exemplifies how to manage your profits well — what can happen if you don’t — and provides an applicable roadmap for how to make your business one that lasts.
More About Mike:
Also Mentioned in this Episode: