Have you ever wondered how flipping the script on profit can revolutionize your business? Mike Michalowicz joins Toby Mathis, Esq., to dissect his innovative ‘Profit First’ formula, a game-changer for entrepreneurs swimming against the tide of traditional financial management. Mike, the sage behind several seminal business books, engages in a no-holds-barred discussion about the essentials of a prospering business—prioritizing profit, pinpointing pressing needs, and strategies for organic growth. You’ll also hear the details of Toby’s own multi-million-dollar tumble and the invaluable lessons that journey taught me, all of which dovetail with Mike’s profound insights.
Highlights/Topics:
- Mike intro and background
- Books by the guest and their basic message
- Past failures, “face plants,” losing millions
- Competitive advantages in today’s market
- Camps in the sports industry – employers should take note
- Home Depot’s employment recruiting ‘camps’
- Examples of offering education for recruitment
- What is ‘collective psychological ownership’?
- Using these techniques as an employee
- Company culture- diversity builds community
Resources:
Tax and Asset Protection Events
Full Episode Transcript:
Toby: Hey, guys, Toby Mathis here. I’m joined by Mike Michalowicz, the author of Profit First and a bunch of other books. I’m just going to read through them real quick because you’ve done so many—Get Different, Fix This Next, Clockwork, The Pumpkin Plan, Surge, The Toilet Paper Entrepreneur, and most recently, the one that we really want to talk about today is All In.
First off, welcome, Mike.
Mike: Toby, thanks for having me.
Toby: It’s great to talk to a fellow author. Nobody knows how hard it is to birth these books. I say birth because that’s what it feels like.
Mike: For each book, it takes me roughly 3–5 years from concept to collating and codifying to finally producing the book. I’ve produced many books, but I’m working on Parallel right now. I have three concepts I’m working on for years, trying to push forward. It’s hard.
Toby: Let’s do this. Before we get into All In, maybe give them an easy guide to understand the library that you’ve created. Most people know Profit First. If you haven’t read Profit First, that’s the one that you’ll have every accountant going, yes, because it talks about percentages and is actually looking at different-sized businesses and how those percentages move. It’s not universal for everybody.
Give us the thumbnail sketch of the different works you put together, who they’re for, and how they would benefit somebody.
Mike: Profit First, we’ll start there. That is my most popular book. What I do is I challenge the standard accounting notion called GAAP where profit comes last—sales minus expenses equals profit. What I teach is that sales minus profit equals expenses. It’s basically the pay-yourself-first system applied to business, which can be a profound mind shift. It’s a massive behavioral shift too because when we take our profit first, we guarantee profitability. That’s Profit First.
I think the book that’s the center of the universe of books I’ve done—if that’s the right word—is Fix This Next. The biggest challenge entrepreneurs have is we try to fix everything, and then we get frustrated when nothing is fixed. Fix This Next is a strategy to identify the weakest link in your business currently. The vital need, I call it.
The example is if there was a chain between me and you, Toby, and we have to fix the chain, the mistake would be to fix every link. The right thing is to fix the weakest link, and the entire chain strength elevates to the next weakest link. You’d ping-pong around. That’s what organizations actually need to do. Fix this next to the system to do it.
I won’t go through every book but a couple of other ones. Clockwork is about business efficiency. What I identified is the biggest form of entrepreneurial poverty and struggle is actually not financial poverty, it’s time poverty.
The sacrifices we make as entrepreneurs are off the charts, sacrificing family, friends, personal life, and everything for the business. Sadly, it’s promoted by some pundits, like hustle and grind, hope you don’t burn yourself out. That’s total nonsense. The thesis of this book is that the number one job of an entrepreneur is not to do the job, it’s to be a creator of jobs. It teaches you that trajectory to designing and overseeing a business but not being inside the business. That’s what Clockwork’s about.
Then, just a couple of others. Pumpkin Plan was a book I wrote specifically on organic growth. I used a technique called biomimicry. I looked at colossal pumpkin farmers specifically. They change the growing process by a few things, and it spawns massive growth. I translated it using biomimicry techniques and said, my gosh, there are applications to business. That’s Pumpkin Plan.
All In is my most recent book. And the last book I’ll make mention of is called Get Different. Get Different is my approach to marketing. What I realized is most of us market the way our competition markets because that’s the obvious way to market, but it triggers this thing called habituation to the consumer.
When we see the same message and it wasn’t effective the first time, we already know it’s not relevant or effective the second time, so we don’t even consider it. We have to do what’s different than everybody else to get noticed. Once you get noticed, how do you capture that in a positive way that empowers a consumer to make a buying decision? That was Get Different.
Toby: All of them seem like they’re applicable to the business owners out there. For everybody that’s listening, you just went through a really good library of things that you could do to give you good ideas, track things appropriately, and make sure you don’t fall into the traps that take us out.
This is where I want to go next. It’s not everybody’s favorite thing to talk about. It’s our failures. What were the hard lessons you’ve learned? I could say my own, but I’m really interested in what are the ones where you face-planted, and now you’re writing these to make sure somebody else doesn’t follow suit.
Mike: Here’s the hidden secret. Every single book I’ve written is something I have or am struggling with, and I’m finding a solution. I own multiple businesses now. We deploy it.
I had multiple faceplants. The biggest one, I sold two companies. I thought it was God’s gift to entrepreneurship. I’d made millions in my early 30s. Then, I started spending money as a venture capitalist. I wasn’t a venture capitalist, I was barely an angel investor. I now call myself the angel of death. I had no idea what I was doing, and I lost everything. It was out of vanity and ignorance.
Toby: How much did you lose? Just put it in perspective.
Mike: A couple million.
Toby: Let that simmer for a second. You’re handed $2 million. Was it more than $2 million?
Mike: Yeah, it is more than $2 million but then taxes came. That was the first wake-up call. You sell a business, and a big chunk goes away. I was like, what? A third vanishes. I had no clue, no perception.
Another faceplant was I was spending before we sold our company. In my head, I’m like, oh, this is my new lifestyle. We’re just weeks or months away. That got stretched and stretched. It was a strategy by the acquirer as a public company that did a deal—sell high or offer high and then low ball, so high ball, low ball.
Toby: Then they ground you down. They got you hooked in, and then they ground you down. They got you to think you’re going to have the money. In your head, you’re already spending it. Oh my gosh, that’s classic.
Mike: I wish I knew that. Toby, you should’ve told me. I totally got burned, and I deserved it because it was hook, line, and sinker. That was one of the biggest faceplants, just pure ignorance.
But I’ve made leadership mistakes. Actually, in almost every book, I reveal the reason or the impetus behind something I’ve written because of a failure I’ve had personally.
In my newest book on leadership and people, I remember coming out of my office one day and calling the team together. It was on my computer forensics business. We were doing a crime investigation. I had 30 employees in a brick-and-mortar place.
I ran the numbers. I’m like, we can do $10 million this year. I wrote $10 million in bubble letters on the wall, put a big Post-it note over it, and then called everyone. With great flair, I’m like, this is the year of $10 million. Everyone’s like, whatever, and […] back to the office. I’m like, this is my dream. This is the dream of the company. This is our vision. Why isn’t everyone into it?
My assistant said, Mike, if we’d see $10 million, you’d get a bigger house. You’d get a new car. What about our dreams? What about our vision? It was a wake-up call that the dream or mission of a company is the vision of the leader, and it’s self-fulfilling. We need to care for our colleagues’ personal visions, too.
Toby: That’s actually a really good point. That is a good segue. Right now, we’re sitting at historically low unemployment rates, and that may change very quickly. The Fed is doing its best to screw things up and cause earnings to drop.
It is what it is. It’s like they target unemployment. What you do is you make it more expensive for everything. Inflation drives up when you make debt more expensive. Companies have to make their profitability—Profit First.
These companies are dumb. They’re like, hey, we have to bring the bottom line. What are we going to cut? Personnel is usually one of the easy, low-hanging fruit. Hey, let’s let go of 10,000 people all at once. Look at all the money we save. All that goes to the bottom line because it doesn’t really impact things right away. It’s going to take a while. They absolutely do it.
It’s relevant. How do you compete in this marketplace? I know these are multiple questions, but how does it give you the advantage as the business and then also as the employee? These concepts, I think, are not just for the business, but they’d also help the individual as well.
Mike: For sure. There are elements. There’s recruiting. Recruiting is going to happen. There’s going to be a clean out of employees and then comes after, you recover. To your point, it is often necessary. These companies can be villainized, but the reality is profitability translates to sustainability. If businesses are operating at a loss for a sustained period, not 10,000 people but the whole 100,000 people lose their jobs. There is this peculiar and difficult balance.
There’s a recruiting component, your retention component, and then raising the bar. How do you get people elevated? I want to start off with recruiting because I think there’s a great aha here that can be transformative for employers and employees.
What I did was I studied how most businesses recruit. What they do is they run some kind of advertisements on platform […]. They then go through an interview process, and the result is about 5–10% of the people max are an ideal fit. This is ideally suited for them. They’re very capable, and they become rockstar employees, as they say.
It’s a very bad method. I say, gosh, there’s got to be a better outcome. We all want to have a great fit as an employee. We all, as employers, want to have a great fit for us, but the results are horrible.
What’s wrong with the method? I looked at other industries, and it’s so obvious in retrospect, but I found a half-trillion-dollar industry that’s never run an interview in its life. It always has top talent, and people are highly engaged. It’s the sports industry. There’s not a single football team that says, hey, let’s talk about your resume. Maybe you’re a fit. No, let’s hit the field.
The transformation we need to make as employers is to move from an interview format to—I call them—workshops or camps. Let me give you a sports analogy, and I’ll give you practical examples of companies doing this.
I actually experienced this myself. I played sports as an average athlete in high school. I played lacrosse. During lacrosse, my parents wanted me to go to a camp called Hobart. It’s in the Northeast. They’re a lacrosse camp. They have 500 students there, and it’s considered one of the better camps.
As I’m going through this, I’m practicing. My skills are improving, and so are the other athletes, but I noticed and didn’t put thought into it. Some of those athletes were being tapped on the shoulder and invited to go to another field to advance their skills even further because they were showing potential.
Ultimately, at the end of the camp, three of those students were offered scholarships to play at Hobart. I’m not one of them, but here’s the thing. I played collegiate lacrosse after that, and a big part is attributed to the skills I learned at that camp.
Here’s the lesson. Employers that run educational, experiential events educate and enhance people for the work environment wherever they end up, and the employee can cherry-pick the best fits for themselves right there at that moment. This isn’t a recruiting camp. It’s not show me your skills. This is, let me educate you. People who want to be educated show desire, thirst, and potential, and those people can be cherry-picked.
Now, here’s a real-world example. Corporations are already doing this, just not enough. I think someone listening can do this right now. Home Depot has a recruiting camp. What you do is you go to build a birdhouse. They have these ads like, come on, learn to build a birdhouse. They don’t say hey, we’re seeing who the good candidates are for employment. They say, build a birdhouse.
We’re like, oh, this is amazing. You go down, maybe with your kid, and you build a birdhouse. A few things happen. First, you become ingratiated with the stores like this is an amazing experience, and I love Home Depot. Maybe you buy stuff.
There’s an employee sitting there who’s observing the participation of the parents, taps the right parent on the shoulder, and says, you really showed a lot of potential here. You were helping other parents and stuff. You’re the type of candidate we love having to work at Home Depot. Would you have any interest? It’s a recruiting platform.
A tip for your listeners here is to run educational workshops—they can be virtual or in-person—and observe your students to cherry-pick the best student. If you don’t want to run a workshop, if that’s too much, simply attend a workshop. I’m looking to hire a bookkeeper. I’m not going to run a bookkeeping workshop. I have to hire someone to do that. It’s too much. I’m going to a class for bookkeepers as a student, but what I’m really doing is observing the other students to identify the person with the most potential.
Toby: Can you do that virtually?
Mike: You can do it virtually for sure. You’re not restricted to the recruiting pool of people who are looking for jobs. This is educational, so you’ll now open up to anyone seeking education.
We worked with a preschool that was looking for new site directors. I won’t go into technical details. They reached out to other preschools and said, hey, we’re having a training session for site directors. If you are a preschool teacher that is interested in this and you want to support them in this trajectory, we’re teaching them. By the way, we’re charging $100 per student.
The competition sent their preschool teachers and paid for it. This event was educational, but we’d simply observed. We cherry-picked people and said, you could be a site director. We have a job opportunity.
They were integral. They would say, if you like your current employer and they have a job, go for it, but if you want to grow into this and there’s no opportunity for you, we surely have one. It became a recruiting platform.
The last thing I want to share is every single person gets better during the process. Hire them or not, everyone’s learning skills along the way.
Toby: Wow. Can you give more examples? I love the concrete, real-life example.
Mike: I can give you countless. I’ll give you two more. I’ll give you a big company and a small company. The big company was Domino’s Pizza. Domino’s Pizza during the COVID pandemic created an app called Pizza Hero.
What you could do is you could design a pizza. You could lay out the pepperoni and a smiley face, circles, or whatever. When you push submit, it will make an order for your pizza to get delivered, which sounds like it was a cool, fun experience. I can do whatever I want, and I’m buying.
They were observing to find chefs. Here’s what they did. They noticed that some people would spend more time on the app. Some people were spending a half hour designing the perfect pizza. They were surely showing a high degree of potential, intrigue, and interest, at least in the video game. So they said, hey, we noticed you spent a lot of time working on the pizza. Are you interested in coming down to one of the Domino’s stores? We’ll show you how to make your own pizza. That became the next measurement. They hired over 500 chefs or cooks out of an app by doing a class.
I’ll give you another big-world example. Audible, who makes audiobooks. They’re doing a thing not called internships but returnships. They’re approaching people who have left the workforce for a period of time due to illness or whatever may be the reason and looking to reenter the workforce but have a gap of a few years or a decade and need to get up to speed.
You can go to Audible and learn what current professional standards are and what new technology is, and they’ll teach you the process. I think it’s a 12-week program, so you really get to learn a lot. During the process, they’re observing and cherry-picking people who are fit for Audible. Again, educate to identify.
I’ll give you one last example just to give you tons of stuff. There was a bookkeeping firm in New York. The owner, her name is Tuesday Brooks. I was talking with Tuesday. She said it was really hard in this environment—this is recently—to recruit people. There’s no one available, and no one wants to be a bookkeeper.
She said, I’m going to approach a university offshore. She happens to be from Nairobi, Africa, I think it was, from Kenya. She teamed up with Nairobi University. What they did was they put on a workshop that she created around bookkeeping skills. She then was the adjunct professor who was there. She remotely gave the class through recordings and asked the adjunct professor to identify which of these students were the most engaged. The potential always comes out through engagement, desire, and thirst.
By the end of the course, she hired three bookkeepers. They’re rock stars for her, the best bookkeepers, but my favorite part of that story is the other nine students who went through it all have become employed as bookkeepers, every one of them.
Toby: It sounds like they actually taught them the skill. Did the nine come work for her, or did they go work just in the bookkeeping field?
Mike: In the bookkeeping field. She hired three. She cherry-picked the best fits for her. Everyone else has capabilities, but there are other matches besides the ability to do something. It’s your cultural fit and your natural tendencies. She cherry-picked the three best for her, and they’re rock stars. Those other nine all got hired by larger corporations, small ones, or somewhere in between.
Toby: Mike, is this all in your book, All In?
Mike: Absolutely. I challenged the standard notions of recruiting, retaining, and raising the bar. What I did is I looked at what’s the outcome we want? Rockstar employees. What’s the method we follow? Interviewing. What’s the outcome? Abysmal.
Every time I saw this pattern of desire and outcome mismatching, I fixed it. I addressed the method and researched it. This is one of them. The other one that’s a really big one is how you empower employees to feel and act like owners.
Toby: I would like to dive into that. I used to have a phrase here, ownership isn’t doership. You can own a project. You don’t have to do it. Not to relate this to my business, but it’s the way I understand things. You’re looking at folks that may not have the necessary skill set to do something, but you still want them to feel like they own the project. Is that something that’s in there? If so, or however it is, maybe just explain it for a couple of minutes.
Mike: Yeah, it’s absolutely in there. I devoted a big portion of the book to this because it’s such an important principle. What I found is there is a distinct difference in behavior between legal ownership and psychological ownership. If you want someone to act like an owner, including yourself, it’s only psychological ownership that wins.
Quick example on legal ownership. I own some stock in Ford. I drove by a Ford factory a few days ago. I looked over it, and I did not say or feel, oh, I own a few bricks in that building. That’s my Ford. Go, Ford. No, actually, I felt entitled. I looked at the factory and said, where’s my dividend check? The values better go up.
Legal ownership alone results in a form of entitlement. There’s an expectation. This is my possession, you owe me. Psychological ownership is identification alignment. My identity is part of the object.
How do you invoke psychological ownership? There are three things that always trigger it. First is the ability to personalize. I have a Ford truck. It’s the car I drive, and I am able to program the radio stations my way. I can put a bumper sticker on if I want and hang dice from the rearview mirror. I decide. That personalization makes me have a closer affinity.
The second thing is intimate knowledge, the more detail you know about something. I know what every button and thing does. I know it inside and out. I’ve read through the whole manual. The day I pulled it out to drive, I was like, I got to read the whole manual, so I have intimate knowledge.
The last part is control. I decide when I drive it, where I drive it, where I park it, and so forth. But here’s the irony. I don’t have legal ownership. I have bank notes I’m paying. The bank owns it until I make my final installment. I own it legally by psychological ownership. It is mine.
When someone says it’s mine or ours, they’re demonstrating a sense of ownership. With our employees or colleagues, what we have to do is give them the ability to personalize. If you force people to comply, they will seek to defy. It’s a subconscious response. If I tell my employees, this is what you have to do, and if you fail to do it, you’re going to be in trouble, they may do it, but they’re going to start elbowing their way out and seek to defy it.
If I say, here’s where I’m looking at, and I want you to look at it with me, how can you make this your own, and what’s your vision for this, I start giving them the authority to personalize it. More personalization has a greater sense of ownership. I invite them then to determine the outcome. What are your ideas around this project? Where could you see taking it? What path do you want to follow? There’s a sense of control and then also intimate knowledge. I give them exposure to as much components as possible. I encourage them to learn. They have more ownership.
I do want to share that there’s one big risk factor here. If you give all the authority over something, you can cause fiefdoms. This is mine, no one else gets it, and they start becoming defensive. We want to achieve the highest form of ownership which is called collective psychological ownership where we feel it’s something that’s our collective ownership. For every role and function that I have here, I always have at least two people involved in it. They say this is our job.
We don’t have a bookkeeper. We have bookkeeping that’s handled by a few people who say we do the bookkeeping. It’s our bookkeeping responsibility. That’s what we want to do with our team.
Toby: Even then, do you still get fiefdoms even if it’s two or three people? Do you ever see where they start, this is ours and stay away from it?
Mike: Less and less. The more people that are involved, the less likely you’re going to get fiefdom, so you want to have more people you can. But there’s a practicality to it. You can’t have 100 people doing things.
I’ll give you a real-world example since you like this. There was a barbecue house in Texas. The owner had an employee who was a C-player. I hate these labels, but that’s a common label. Ill performer, didn’t show up on time, and so forth.
The owner, Steven, deployed psychological ownership with Joel, who is his employee. He started off slow. This is the first tip. Joel was not performing well at all, so what he did was he said, hey, there’s a straw box on the bar there. Every time someone takes a straw, it explodes everywhere. I want someone to take ownership over this. Would you be interested? What are your thoughts? How can you make this to your standard personalization ownership?
Joel’s like, yeah, sure, I’ll take it. Here’s how I see it. The straw box now is ordered and organized perfectly. It was Joel’s straw box. Fast forward a few days later, he became the bar mat. By the end of the week, he’s also doing the cooler. It did take a few years, but Joel now has control, or he manages the restaurant. He is their number one performing employee.
To me, it’s profound that a C-player goes to an A-player, so I called him up. I said, Joel, why did you do this? How did you become so good? He said, Steven already knows my background. He goes, I had a pretty tough background. My parents told me I was worthless and that I would never own anything. Here’s the first guy that was empowering me because I feel so empowered here. He’s like, I’m in with this smokehouse for the rest of my life. I’ll do anything for this company. That’s the power of ownership.
Toby: That’s pretty extraordinary. Now, let’s flip it on its ear a little bit because we’re talking about it from the ownership standpoint, from people who own their businesses. What if you’re an employee out there? How can you use these principles to benefit yourself?
Mike: One of the things is that we need to take ownership over and we have to work collaboratively with our team. The leaders […]. But the most empowering thing is personal vision.
Here’s the lesson. I came into my office and said here’s my vision. We’re going to do $10 million in revenue. I had this great, glorious announcement. My employees are looking at me when I’m making this announcement about the vision of the company saying, well, Mike, that’s your dream. What about us?
I remember my assistant saying, if we achieve $10 million, Mike, you’d get a bigger house and a new car. Why should we care? What about our visions? That was the aha. I was like, I am an idiot. My colleague, Amy, is fighting cancer, and she’s cancer-free now going on her fifth year. She said this is the most important thing in my personal health right now.
Another person here wants to buy their first house. Another person wants to learn how to start playing guitar. Dreams and visions can be of all different sizes, but they’re all significantly important. The job of the leader and the job of the colleague is to voice what we want for ourselves.
What we do is start building groups amongst your team. If you’re employed by a company, talk to your other colleagues and say, hey, why don’t we meet once a week and talk about personal vision? Start empowering each other. When you start rooting on your colleague, they’ll start rooting you on, and it now becomes a band of brothers and sisters locked arms and walking together.
When I realized this, even for my own business, that $10 million is my personal dream. That satisfies a part of my big, fat ego, but what matters to everyone else is just as important to me. When every employee starts looking at each other’s visions, dreams, and plans for their lives and sees them as of equal importance, we all start stepping forward. As an employee, start having these conversations today with your team, friends, and colleagues.
Toby: It’s pretty profound, and 100%, I agree with you. It’s been my experience, too. Every time we see personnel issues and things like that, it’s usually a deficiency at the top. It’s fun to blame everybody else, but a lot of times, you got to go look in the mirror and say, it’s on me.
Mike: It’s tough. I’ve had to face myself in the mirror. I think I’m such a benevolent leader. I’m so nice and caring, but there are these blinders and ignorance I have. I realized I was steadfast at where I wanted and assuming that people would align.
I’ll share another thing that employees and leaders can do. It’s this concept of culture. I was a big believer that when I started my organization, I’m going to define the culture, and if people fit the culture, you’re a fit and if you don’t, you shouldn’t be part of it. Now, I’ve concluded that is the wrong move.
What happens is this siloing effect. I have certain rules, and when I get people that follow the same kind of rule-set values, then I can echo the chamber of my beliefs. I’ve now discovered that it’s actually diversity. People have different opinions and different values. Hopefully, we all agree with the mission and what we’re trying to do as an organization, but we have different approaches.
A great leader will encourage differing opinions and engage everyone. What happens is instead of culture, we build something even greater which is called community. Community happens naturally. The town you live in, the more diverse it is, the richer the community becomes. In an organization, the more diversity we have and the more we encourage differing opinions and different vantage points, naturally, it builds a stronger community. That was a big aha for me.
Toby: That’s really interesting. I’d love to sit here and chat with you on this all day long because there are so many things that apply to right now what we’re going through as a country and everything else and how we break out of our silos because echo chambers and silos sound very much like what’s going on in the US.
But this is about your book. This is about All In. This is about you. I assume you just type it in, go to Amazon, and get All In. I went to your site, and I ended up downloading a bunch of other materials that came along with it.
Mike: Thank you.
Toby: Is that what you would encourage people to do?
Mike: I would start there. By all means, you can get it on Amazon or your favorite bookstore. But if you go to—there are two sites I’ll give you—allinbymike.com, that’s the book site. If you want, specifically, strategies, I have free strategies just so you can get started this second.
But my website is mikemotorbike.com. My name is Michalowicz, no one can spell that. Mike Motorbike is a nickname back from grade school. That was the only PG nickname I’ve ever had. At mikemotorbike.com, you’ll find book downloads. I used to write for the Wall Street Journal. I have a podcast. It’s all there.
Toby: Perfect. I’m going to encourage people to go do that. I want to say thank you, Mike, for sharing with us. You know what, I just like talking to other business owners that get it and are always looking to get better. I think you just really brought it, so I just thank you from the bottom of my heart for sharing this with everybody.
Mike: That means the world to me. Thank you for saying that.
