Mike Michalowicz: The #1 Financial Principle for Building a Profitable Business | Finance | YAPClassic

What's up Youngham Propheters?

“Today we're unlocking the archives of Youngham Propheting to revisit one of my most impactful”

conversations on building real financial freedom as an entrepreneur. My guest today is Michael McCallowicz. He's a best-selling author, serial entrepreneur, and the creator of the globally recognized profit first framework. Now, this is the first time that Mike came on the show that's replayed that we're about

to get into. Now, Mike has been on the show several times, three or four times. I recently interviewed him on Monday. We talked about his latest work.

It was an incredible conversation.

If you guys want to check out his most recent work, check out Monday's episode, or you can watch on YouTube. We actually did the interview in person. So Profit first, which is today's topic, is a globally recognized framework that helps hundreds of thousands of businesses become consistently profitable.

Now, we like that at Youngham Propheting. And what made this conversation so eye-opening for me was Mike's ability to completely flip the traditional business formula and explain why profit can't come last. A lot of the entrepreneurs we don't pair ourselves. We reinvest back into the business, and we pair ourselves last.

But he breaks down how prioritizing profit before expenses creates sustainable cash flow, reduces financial stress, and actually rewards entrepreneurs for the risks that they take. Now, I walked away from this episode with a completely new perspective on profit and cash flow. I actually changed the way that we handle our bank account set. Yeah, media and the way that I pay myself out as a business owner because of this episode.

The profit first framework is something that thousands and thousands of businesses follow. And it's a framework that even though was launched years ago, it's super relevant today and still used till this day and highly regarded.

“So I think every entrepreneur should be listening closely to this episode, and I think you guys”

are going to get great value out of it.

All right, yeah, families, dive right into the profit first method.

Here's my first conversation with Michael McCallitz. So, Michael, I'd love to dive right into the topic of today. You've got a classic business book. It's called Profit First. It was released in 2014 and since then, it has totally taken the business world by storm

with hundreds of thousands of businesses using your method to drive profits. And fast forward, nearly a decade after it's released, I still have many extremely successful entrepreneurs who come on my show. And they reference your books. So we've mentioned your name several times on the podcast.

And there's so many businesses that handle their cash management using your system. In fact, my company, App Media, uses your system for accounting. And it's actually considered a Bible at App Media in terms of our cash management. So let's start off with a basic question. Why do you believe Profit's come first in a business?

Well, because it is human nature when something comes first is prioritize. And when something comes last, it's ignored or it's the Mignana syndrome. And so, you know, as I use Hala, is imagine you love your family, which I know you do. And you imagine saying, I love my family so much. I decided that with them last.

I mean, it's absurd. I love them so much. I put them first. I put my health first. Things are important, come first.

And why notice when it's studying the standard formula, the gap, the journey accepted principle for accounting is that profit comes last.

And it's called the bottom line in the year end.

And we execution what this means. And maybe it's some conscious response. But most entrepreneurs wait until the end of the year, you know, it's April 15th now. And they're like, I don't have any profit. Maybe next year.

So profit is only considered at the end of the year. And we failed to get it. We wait till next year. Why teach them profit first is that profit comes out of every transaction. So profit is not an event, meaning eventuality.

Profit is a habit. I'm going to dig deeper on all of these things. But let's first start about the traditional formula. So it's usually sells much as you can. Take away your expenses.

And then the rest is your profit. But you say this doesn't work because like you just said, it goes against human instincts. Because if we are saying that profit comes last, we're going to think of it last. We're not going to think of it first. So talk to us about the Parkinson's law and the primacy effect.

And how that actually impacts us from being able to use the traditional method and get our profits. Did you did your research? Yeah, of course I did, Michael. I love it. Those two things are such important behavioral components.

So Parkinson, quick history lesson, he's a theorist from the 1950s studying human behavior and finds an interesting phenomena. As a resource expands in availability, the more time we have, for example, the more we consume. So if you and I are discussing in the agreement, I say I'll get to you in one week. It'll likely take me a week.

If you and I discuss the same agreement, the same people, the same parameters, by say, I'll get to you in one day, I'll likely get to you in one day. So as we constrain our resource, we become more efficient. It's true for time. It's also true for food.

The more food put in front of us, the more we consume. And it's true for money.

“And that's why so many businesses, as they see their sales increasing and revenue increasing over time,”

they get really excited. But almost uncannily expenses are increasing at the exact same rate.

It's some concentrated response, so we don't even realize we're doing it. But more cash means I've more to spend when keep on spending. So most businesses get stuck in this loop of constantly trying to sell their way to profit-related success.

And they never will get there because of Parkinson's law.

Now, the privacy effect means the next thing we see has a heightened importance. So as money comes in, those deposits come in. We look at saying, oh, I got some money. Finally, I can do, and whatever that do is is the next important thing. We need to get new technology, we need to hire that employee,

and we deplete the account immediately. So those two things in that scenario work against us. By taking our profit first, when sales comes in, we take a predetermined percentage that money has revenue and remove it away. It constrains the supply of cash.

Now Parkinson's law becomes our ally. It's like, oh, I don't have $10,000 deposits. I only have $6,000 available to operate my business. And we constrain and control our spending around that. And that 4,000 has been reserved for profitability.

So now we're making Parkinson's law our beneficiary. Our benefit, I guess, is the word. Something else that you teased out is taking out profits is not an event. It should be a habit. So can you talk to us about how we can actually make this more of a habit,

“rather than thinking about taking our profits out five years down the line?”

I think we look at profit in chunks by default. Like, oh, you know, if I get one more client or get the big sale, finally we're going to chunk a profit.

But the reality is profit is something that means

needs to be a habit or habitual. We build at it. It's kind of like saying, I'm going to go transform my body by going to the gym one time and work out like an animal and I'm going to come out with a perfect body. We know that to have transformational effects on our body,

we need to exercise regularly for a sustained and perpetual period. Well, this is true for the fiscal body, if you will, of the business. Never. It rarely really happens that you have that huge client and all that money comes in. And now you can reserve it and sit back and go on easy street.

What we need to do is every transaction, every time there's a deposit, a predetermined percentage, goes to our profit. What happens is we start reverse engineering profit. If I want my company to have a 20% bottom line profit and I get $1,000, I know, 20% to $200, $200 hidden away.

And now I'm reverse engineering that profitability. I've 800 left.

“That's why I had to work with to run my business.”

So by taking up every deposit. Now in practice, I wouldn't do every single transaction. We usually do it once or twice every two weeks. We allow the mine to accumulate. So every couple of weeks, the accumulate might then we take our profit first and then go through

these allocations, so it's much more rhythmic. But nonetheless, by taking the profit first, it becomes this habitual reverse engineering of profitability and it ensures profitability.

You will always be profitable because you took your profit first.

And this is really important, guys, because this is actually how you build financial freedom as a business owner in entrepreneurs, why you got into entrepreneurship. And the first place, you didn't get into entrepreneurship to build a job for yourself. We're just on a hamster wheel. This actually allows you to get rewarded, pull out money from your business and build financial

freedom. I was doing it two days ago. I just got back in the large audience, and I asked you to say, why did you start a business? And they all shared the same two reasons. And I hear all the time.

I started my business for financial freedom. I don't want to worry about bills. And I started for personal freedom. I want to do what I want. When I want.

I said, who's experiencing that in this room? And there was the 1500 people in the room. I would say six hands went up. No one would experience it. We all this dream of financial freedom and personal freedom.

And none of us have it. It's the reverse.

“Most businesses are so financially strapped that you have to work your ass off just to get”

through the day. To reverse this trend, we simply need to take profit first. And, by the way, this is nothing new. It's new to business, but the belief of the pay yourself first principle has been around forever.

So I simply took out an established concept in personal finance. Hey, for your retirement first, reserve for your savings first. Move off remainder, I simply applied it to business and it works. It does work. This is why hundreds of thousands of businesses use it.

So at the end of the day, profit first is really a cash management system. And one of the most innovative parts is the fact that you say you actually need to split up your bank accounts into smaller chunks. And this is something that we've actually adopted at yet media. We love it.

It's really helped improve the things that we do in terms of the transformation before we were doing this. After the things are running a lot smoother and peace of mind as a business owner for myself as well. Knowing we have money for taxes money for this is like I'm not constantly worrying about

stuff. So for people who are unfamiliar, what is the advantage of actually taking all your money and splitting it up into different accounts? And then we can get into the types of accounts in everything. Sure, sure.

So the technical definition of this process is called fund preallocation, meaning we're taking money and assigning in a responsibility before we spend the money. So the concept is that we set multiple accounts at your bank. And I got under the score this a million times. That is fundamentally the key.

We do this at your bank because it's a behavioral intercept. So most entrepreneurs manage their business by logging to a bank account.

We have a simpler system for most of us, log into the bank account and see what we have and spend accordingly. By having multiple accounts at the bank determined or designated for different responsibilities we know what that money is intended for and it will before we spend it. We know how to spend it.

And that's the key. And to your point, it causes an extra layer of friction where it's like you actually have to pull money out and put it in different things where if you did it like on a spreadsheet and you just bucketed money in this way, it's so easy to just not be disciplined. Wouldn't you say?

First, I don't even look at this spreadsheet. I know what I'm doing or I look at spreadsheets and say, well, we only just play with the numbers and we unwind the whole system.

Now, the reality is for most entrepreneurs, if they don't have profit first, is they have

a single primary checking account, they're banking me, they have another one for payroll or something, but they have one or two bank accounts. What happens is all the funds go in there, they pay all the bills from it. And what I quite this to is imagine Thanksgiving dinner and you cook a turkey or something. And then instead of carving up the turkey, you say to the guests, everyone fight for it.

Whoever wants it most wins, everyone for themselves. And that's absurd. We instead carve the turkey so everyone can get a piece of turkey on their plate. Well, the same thing is with our business. If you have one serving tray of cash and you tell your business, whatever needs it next,

we need a higher when you computer technology, fight for it, they will consume the whole turkey and the rest of the business will starve to death. So what we're doing in the system is we're setting up plates for every guest at the business table. If we have all these different accounts for it, we carve it up in that way, everyone, the entire business is fed in the healthy.

Awesome. So speaking of these plates, there's just really five plates or five accounts. That's main income, profits, owner salary, taxes and operating expenses.

“So I think my listeners are really smart.”

All of these seem decently straightforward, except for profits and owner salary. What's the exact difference between those two? Because especially for a silverware, you might think profits is the same thing as your salary.

It's always top and it's not.

Yeah. So profit is a reward for taking the risk of starting a business. Here's the scariest statistics. Only 17% of the population will ever take the risk of starting an operating business. And only 20% will do it successfully for at least five years.

So that means 20% times 17% which is roughly 3%. Only 3% of the world population will ever run a successful business. 97% of the population is looking to work for a successful business. Our job as entrepreneurs is to be a creator of jobs. And the profit account is a reward.

And as they thank you for taking on this risk, the only 3% of the people ever pull off. So just like if you invest in private stock, I have a public stock, I own some Ford stock. For instance, out of distribution check, profit distribution. I don't run to the Ford factories, I say, oh, I got to earn this now. And I definitely don't return it to me and say, oh, this is a plowback.

Let's go for it. I say, I take in risk, I want the value to increase, but it could decrease. This is a reward for doing almost no one else will do. Our business, we hope the value won't increase our time, but we've taken the risk. It may collapse.

Profit is a thank you for supporting our global economy. Now, owner salary or owner's compensation is the pay for the work you do within your business. So most small business owners work within their business. And if, if I had a replace you, I suspected the best salesperson for your organization

or the best folks person or the most knowledgeable, you work your tail off for this business.

“What would I have to pay a person to replace you to do the same thing?”

102 million dollars, it's a big freaking number.

That's all I know. Well, that's the number you deserve to make because your company found you. It has you. So your company must pay you. And if it doesn't pay you appropriately for what you're doing, some amount of time

before we resented. Most business owners say, yeah, screw my salary. I got pay everyone else. And years later, like I hate my company. I am starving here.

So owner salary is the pay for the work you do. This is what your lifestyle should be adjusted to. Profit is the bonus for taking on risk that almost no one will do or take on. So let's talk about how we actually get our taps. So you call this target allocation percentages.

So again, the five buckets are main income, profits, owners' comp, taxes, operating expenses. And we have to put percentages for each one of them. So why don't we start with profits?

“How do we determine the ideal percentage that we should allocate towards profits?”

So what I did, and I'm not trying to be pitchy here is in my book, but you can get online for free. I, in my team, analyze a thousand businesses in all different industries, media, industry, restaurants, manufacturing, professional services. We found that there is a percentage that the physically elite, the best performing companies in any industry will do.

Now, it's based on different revenue ranges. So a smaller business, say, or brand new startup, you make 250,000 or less in revenue, which in the service industry is typically a single person operation. If that is your case, you'll probably take a diminished profit of maybe 10%, you'll take an expanded percentage of owners salary, maybe 50%, you'll reserve 15% for tax.

The tax account in business is your business can reserve your tax liabilities and responsibilities.

and your business can pay your taxes and talk with the tax professional how you distribute it is unique in different each case. But the percentage will change.

“So once you hit a million dollars, you're not putting 50% toward profit or owner's compensation”

where you take a $500,000 salary, it may be reduced, maybe now it's 20%. Once you get to a 10 million dollar company, maybe the owner's compensation is 10% without a million dollars a year. So the percentages adjust. What I suggest people do is look at the resources, what we analyze, but don't necessarily

start there. If you're in a established business, a target is simply where we're headed. You have what we call caps or current allocation percentages. This is your starting point.

If your business is never paid a profit before and we're suggesting you can get to 20%

in profit, let's not start there. Let's start next month by going to 1%. And after a quarter, let's go to 2% and 3% and maybe the rollout takes us a couple of years to get that 20%. It allows your business time to digest and adjust to the taps that we're targeting.

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So I love that. And I want to kind of dive deeper on that point. So you're saying take baby steps, just start off with saying, all right, I'm going to allocate 1% to profit, 2% at the same time.

“We should be reducing our operating expenses by the same amount, right?”

So explain to us why we should do that. Yeah, that's the kind of the equation works is when you take a percentage away for or add it to something, you gotta take it away from something else. So in most cases, not all, but most cases, we will compress operating expenses. What our research has found, and we have over 700,000 companies that have deployed profit

first to give context, most businesses run far too rich in operating expenses.

They're spending upwards of 95% of inbound income was right back out of the door to operating expenses, and there's a meager amount left for the owner. We also found is that the spending is kind of aimless, it's just like, oh, I heard we should be running Facebook ads, because other people told me, I'll do this, and I'll do that, and there's no concentrated effort in a certain area.

What's interesting is we start constraining the operating expenses, so we allocate more to our profit, so for reduce that opx from 95% to 90 and then 80 and so forth, that the business owner, their behavior response is interesting. It doesn't reduce the impact that the business is having, and say what does is requires them to focus more on what is having impact, and they make bets onto the sure things.

So, instead of just randomly testing stuff, they say, you know what, we've had success here, let's do more of that, or let's bring an expert that can tell us actually how to do Facebook ads, so we just don't blow money out the window, and they start becoming more focused.

The greatest surprise for me, I never expected this, is businesses that deploy profit first

and reduce their operating expenses in the vast majority cases, grow faster than their contemporaries who aren't doing profit first, which I'm saying is most profitable companies grow faster than unprofitable or checked by check surviving companies. So it's interesting, because you think it takes money to make money, it's what we've been

“told, you need to spend as much as you can, and that's not the truth.”

You need to be innovative as much as possible, and as you control and constrain an opx, you become more innovative, more prudent, and how you spend that money. Yeah, and I definitely want to go pretty deep on that in a little bit, and it's so true. I think that everybody could look at their operating expenses right now and find one to five percent of like quick things that you can do to just streamline things, reduce your

cost, and then allocate that towards profitability. And so it could be just cutting software, so you don't use anymore, looking at user seats on all your different platforms and realizing that you're paying for 10 seats that you don't use, and just little things like that. So, so I started investing in companies again, and we just invested in a social media company,

and the first thing we did is exactly said, we said, where is that? We said 10 percent. 10 percent we can cut, and we did it within a month, and the business has gone unabated. And there was no damage on nothing. It's like, oh, we had a subscription that we thought we were using, but we realized we weren't.

There's so much of this stuff that is being spent automatically that we were cutting. We were cutting, and we all went to profit immediately. We brought cash stability to the business within a month just by cutting unexpected or unnecessary costs. So, question for you.

I've always known that when you're running a business, you really should have three months

of safety, net money, in case something goes wrong, three months to cover all of your operating expenses so you can pivot, figure, like, let's say COVID happens again, and your whole business goes under. So, where do you keep that money? So, we said, we call it the vault, and the vault is a bank account that we have with the

secondary bank. So, these bank accounts, we call them the foundational five that you're talking about. We keep it our primary bank. We then set up other bank accounts with other institutions with the intention of making it hard to access.

So, we don't have online banking, typically, we don't have starter checks ever, we don't have an ATM card. And so, in our case, we go to the extreme, we've six months of reserves for full operating expenses. And here's something that's interesting.

With three months or six months reserves, that can stretch far more than three months. Because, if COVID happens, you don't just sit here and just keep spending money after month one, you're like, oh, this is not going to come back, I need to start controlling costs. So, you start reducing your costs, but you still have that runaway.

So, three months can last six or eight months, six months can last a year to a year and a half. We set up a separate account. Now, what we did here at our office is we use an online bank in this case, but Kelsey, who's the president of our company, she has the user name for the account.

I have the password, but we don't know the other doesn't know the party, the other's code. So, it's kind of like the nuclear keys, like, you know, unlock a nuclear system. She has to enter the user name and she blocks it. I enter the password and we're in the system and we can access this vault, but no one can make a rash decision.

I can't go in. Only real quickly for the business and take it nor she can she. So, separate account, out of sight, out of mind, reserve that money for at least three months. I really, really loved that advice.

I didn't know that.

“So, I'm going to start implementing that at, yep, how about debt?”

What do we do if we have some debt that we need to pay off? How do you suggest that we handle that? The only way to handle debt is by being profitable is the first thing that I understand.

Yeah, I'm like, oh, you have to be. So, just real simple definition, debt is an expense you incurred in the past that you couldn't afford or chose not to afford, but you used other people's money. Only way to pay this is that you make more money than you're spending right now, profit, that you can pay this back.

It's the residual leftover that you can use to pay it back. So you have to be profitable.

“So, step one is if you have debt, you have to implement profit first.”

You still allocate money to profit. But the tweak is until the steps away when the profit distributions come out, we use a large portion of it. But over 95% of that distribution to eradicate debt. I'm not a fan of having debt, I'm a fan of self-funding.

That's the position I put my companies in is that we have debt. We first get rid of it and then we allow cash to accumulate in a vault account so that we have run away and we can be a bank to ourselves if we have to be. One last tip about debt and this is not my strategy. This was, at least, documented by Dave Ramsey, I don't know if he's the creator of it.

But he calls the debt snowball and it's illogical, but it's very behavioral. The logic is pay your debt for the highest interest rates because that's the most expensive. The behavior, though, is if we can get early wins, we're more likely to stick with something. In his concept, sort debt by small amount due first to your larger debts and get rid of the small debts first because it'll trigger that momentum because you can tear up those bills

and get the next one they can care. So we found deploying that debt snowball effect, sorting by amount due as opposed to interest rate, actually gets better momentum in debt eradication. That's super helpful. So let's talk about the profit account again.

So I'm a business owner and I have to say, I am pretty guilty of never taking money out

of my profit. I never do. I always reinvested back in the business. I pay myself an owner's salary and I sort of just like let this pile of cash sit there. Actually, all my three months reserves is like in my profit account, right?

So I need to pull that out and all of that. So what's your best practices in terms of taking out profits and sort of the mentality,

“you touched on it a bit in terms of the fact that you need to reward yourself.”

You're the one who's taking on the risk and everything like that. But I guess like what would you say to me, I'm guilty of it. I'm not taking my profits out. So what would you say to me? It's usually a scarcity mindset that triggers that meaning I'm afraid the business can't

do this on its own yet. So I'm going to put the money back in. It's like starting riding a bike with training wheels and every time you start getting

momentum, I'm going to put the training wheels back on and you never allow yourself to get

the training wheels off. Well, by reinvesting or applying back in those words, I can't stand. Because what they are, they're soft terms for extra money for expenses. It's basically saying, here's an expense. You're not strong enough for healthy enough yet company, not to get by without more expense

cash. When you, you as the owner, say, take, start taking profit distributions out of the business, the business now can't have the training wheels anymore. It has to sustain on its own. It has to work within this true budget and doesn't get a little extra feed from the owner

of the parent. So first thing is, it harms a company by replying back money in over and over again. The second thing is, we want to empower the entrepreneur. So when you take that reward mechanism, when you get into the hobby, like, "Wow, maybe you reward yourself by spanning your lifestyle in certain ways, or maybe you like to donate

to charities or have an impact in some other capacity." But what does it start empowering you to have a greater impact as an individual? So I really encourage you, that profit has to go to you. Your choice, how do you use it, but don't put it back in the company. I'm really great advice.

So let's talk about the two buckets or accounts that we should never touch, which is,

profits, and tax, and then also this vault that you just mentioned. I believe that's something we should never really touch. Yeah, I've never really touched this effort quarterly, so it's an account that sits aside. So what happens is, as we allocate money to a profit, if we leave it at your active business accounts, it can come, it can come very tempting.

They bills come in, like, I can't pay these bills. Oh, I have some profit money. I'll take from there. But they you do this, this becomes a shell game, and now you don't have profit, it's an expense, and you just pretend to do it a profit.

So we're going to do is when profits allocate, we're actually going to hide that away, too. Taxes that seem symptom can happen only is take from the tax money, no, no, that's for the government. Let's hide that away. So we set that up as a separate bank. Now, we do touch it once a quarter, and there's a reason behind this,

everything I'm teaching in profit first is a behavioral based, there's a behavioral based justification behind it. And the 90 day thing, what is an interesting phenomena around 90 days.

“90 days is far enough out that you have to make effort to get there.”

But it's close enough that you can anticipate it. It is pretty imminent. So it's a good rhythm. If you took profit once a year, it's so long out, people don't even think about it. But since every 90 days is just around the corner, we keep on pushing toward it.

Oh my gosh, it can be more profitable. So builds our energy around it. And this isn't just a behavioral principle that I'm suggesting, all major public corporations do 90 day profit distributions, or the majority do. Forward, every quarter sends out their profit distribution, and you'll see that with most public companies.

They know the number one official discipline is engagement the shareholders. Get shareholders excited. If you reward them every 90 days, it's the highest level of engagement. Conversely, you think, well, I want to take out profit every week. I'll get really excited.

Oh, this is my new life standards. So 90 days is far enough out that we're anticipating it, but we can't get our hands on it right away. So hide that money away. The tax, same thing every 90 days is when tax quarterlys are due. And that's when the money comes out.

You can make your quarterly payments. These are your personal taxes, your business campaign, your personal taxes. Again, awkwardly accounting professional, sometimes they can't pay it directly. It may have to reimburse you, but there's ways to do it. But that tax account is the same thing.

We want to ask out of mind. And when distribution day comes every 90 days, we do in the calendar. That's when it comes out and we reward ourselves with profit. And we pair tax bill through the business. I remember at YAP Media, before we implemented profit first,

our first year in business, we were hit with such a big tax bill that we weren't expecting. And it really hurt us, you know, like just cash flow wise. The gut punch, yeah. Now, you know, taxes are on the corner. I'm like, I don't work candle that, you know.

Oh, this is the craziest thing. I'm really blessed. I got an email every 15, 20 minutes now from readers of profit first. And my other books, but profit first predominantly. The number one busiest day of emails.

And I'll get one every minute or so is on tax day. So in the US April 15th, it's unbelievable. How many people say, I just paid my taxes. My business pay my taxes for me. I'm so excited.

I thought people will be so excited about profitability.

And they are, but never having to worry about taxes again.

And that bill that can just shock you, having your business already counter for it, seems to be like the biggest relief for people. It really is. That's one of the biggest things that I noticed with that. Okay, so we talked about how to change into this management system,

taking baby steps. Why should we run our business based on what we can afford today,

“rather than what we could potentially afford someday?”

Yeah, the biggest benefit of constrained spending, working within your means is it brings about natural innovation. We talked about Parkinson's law. There's this hidden, well, he revealed it, but this hidden secret of Parkinson's law. As a resourcing crisis, he says, the more supply of something, the more we consume.

So if you put more food in front of me, more cookies, anymore cookies. But what's interesting is that you can strain a supply. We start changing our behavior around it. So if you only put one cooking in front of me,

not break off a corner, I'll stretch it out a little bit. When we have less of something, we become very innovative. We think of new ways of utilizing it. So by constraining the spend in our business, we become more innovative.

One of my favorite stories, and we lots of them, but this was my favorite. There's a baseball team called the Savannah Bananas. I have Savannah Georgia, and they are explosively successful. They are a all-star college team. In other words, they're in an industry that makes no money.

Except for this one, they've become the Harlem Globe Trotters, and they are selling out their stadium of 5,000 people every day. They're more profitable on percentage basis than any team, including major league teams in the world.

But what they've done was they able to improv first from the get-go,

and the founder Jesse Cole and his wife Emily, reached out and said, "When we ran private first, we didn't have enough money in our expenses to maintain the scoreboard, which is an electronics scoreboard." So instead of saying, "We need a borrow money," or "we got spend more than we have,"

they said, "The system tells us we can't afford it. No scoreboard." And what they did is they brought people from the stands, like a boxing ring match, they walked by with the score between, before each inning, and people loved it.

They've engaged the audience in participating in the game, and that's one of their secrets for how successful they become. The moral of the story is, "Constrain of Cash" brings around an explosion of innovation, new thoughts, and you'll break the industry rules.

You are more, much more likely to define the industry, or redefine the industry. Yeah, fam, starting a business is of course exciting. As entrepreneurs, we love to build, create, invent, but entrepreneurship can be overwhelming,

especially in the beginning when you're first launching your company.

“It's really hard to figure out all the steps you need to do.”

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“It is very important you do so as a business owner.”

Yap Gang, I have become obsessed with the working genius assessment. It was created by Patrick Lencioni. He came on my podcast about two years ago and taught me about working genius. I took the assessment then, and it was a game changer

for me individually. But this year, I'm taking it to the next level, and I've basically implemented a working genius across my entire company. This is not a personality test.

It's an actual test that helps you understand the way that you work best. There are six types of working geniuses. Everybody has two geniuses. It's a type of work that gives them energy. Two competencies.

It's a type of work that you may be good at, but over time, it actually drains you. And then you have two working frustrations. It's the work you don't like to do, and it drains your energy.

“I uncovered that my two geniuses are invention and galvanizing.”

My two competencies are discernment and tenacity. And then my working frustrations are enablement and wonder. So once I found this out, everything just clicked for me. Number one, I realized why I was butting hands with my executive team,

because wonder is the frustration for me, whereas my business partner has wonder as a strength. I wanted to get things done, rally the group, keep things moving, he wanted to think about the big picture, and if this was the right direction at all.

And so once we figured out, these are our geniuses. We realized we can't build this company without each other and our strengths, and it helped us work better together. And it also helped me uncover gaps within my organization.

Turns out that I'm the only person who has galvanizing

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and sometimes that can come off as pushy or aggressive, but now that my team knows that this is a gap. We need to hire people who have more of this galvanizing strength. So it really helped us align on gaps.

“It'll totally change the way that you do your work.”

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That's Framer.com/propheting for 30% off. Framer.com/propheting rules and restrictions apply. I love that. Another way to make sure that you're not depleting resources is to make sure that your product offerings are really focused

in terms of how you're servicing your clients.

So can you talk to us about that? Yeah, hashtag truth. I mean, it does at truth bomb and a half. That's fact, Hala, is that the more variability, the more we do loot our ability to be good at anyone thing.

So when we can strain cash again when we reduce our operating expenses, we become super efficient. The analogy I use here is a doctor. Imagine you had a heart scare and you get rushed to the hospital and the doctor comes to you and says,

"I'm a heart surgeon. I'm also a neurologist. I started studying geriatric care. I'm thinking about doing pediatric.

You know what, it's different things.

It's really enjoyed. I'm thinking about becoming a chiropractor next. What's your confidence in him versus say you go into the hospital? The doctor approaches you and she says, "I only do heart surgery."

“In fact, that's the only thing I practice.”

The exact case you have, I've done, you know, 600 operations in the last two years. I have a 99.99% success rate. Who do you choose? The one who's doing everything or the one person that can save your life.

Of course, the one person that's proven they can save your life. Now, this analogy translates to a business. No, we're not necessarily saving lives,

but you're transforming lives.

You're having a major impact on business. Consumers want most consumers. Want the person who is most effective at ensuring their biggest need. And the only way to do that is to do the same thing over and over again. That doctor, that heart surgery has done the 600 heart surgeries learned

600 times over how to do it even better. The one heart surgeon, neurosurgeon, Gerry Serson, it's in about three heart surgeries and it hasn't mastered it yet. The best customers want the best masters.

“Do it as different? That's how you really get efficiency. Yes, it's totally streamlined. And customers will”

circumnavigate the world to find you. They'll go out of their way to find you. If you're the world's best heart surgeon, I don't care if you're halfway around the globe. I'll find a way to get there and I'll find a way to pay it. I won't say, hey, is anyone know a heart surgeon in my town? I'm just looking for someone. Listen, there's some customers like that.

There's some customers say, I need someone to design a crappy website for me. I'll find someone local. But the elite customers, that 20% of the best customers say, I need the best website, in my case, for an author. Who does author websites? And knows how to do a better than anyone else.

I don't care where the plant they are. I don't care so much how much should it charge. If I can't afford it, there's a certain point. I've tolerance, but I will pay an absolute premium because I get me. So you can dictate more. People will seek you out. Streamline and efficiency comes about all by being narrow in what you deliver.

Yeah, and by the way, this means turning people away sometimes and telling people, no, I can't help you. I have so many people. I have a agency of a podcast network. I've a lot of people who come to me and they're like, you know what? You're social media services. Really expensive. Can I just do three days, not five days? Can you just do this for me and not that?

And I just say, no, I can't. This is my product offering. This is how I've established, you know, what profits I make. This is how much I charge for it. And there's no other offer. Like, this is the offer. Because if I just, I made the mistake early as an entrepreneur, just trying to be a people-pleaser. Yeah, I could do that. Sure, I could do that.

And then it's everything's just messy because you're trying to keep track of things. And it's just not all the same. Like, you were saying. So you have a great quote in your book. All Revenue is not the same. Talk to us about that. All Revenue is not the same. Congratulations on this point. It's one of the hardest disciplines for entrepreneurs is to decline.

What we see as an opportunity when it's actually an albatross round our neck. There's small customers, usually are the most needy customers. So when someone wants you to charge them less, they see you as value less.

“So you have to be very careful about that. What we need to do is differentiate between good”

customers and bad customers. And the nice thing is you can look at your existing customer's suite right now. And you can identify who will surely are the best customers. Not just on the financial basis alone, but also have a good rapport with us and so forth. There's a saying, birds of a feather flock together. And they say that because there's a truth to it. Those customers want to learn more about them. Where do they congregate?

Where do they hang out? You're much more likely to find more customers like them. But if you're willing to take on any customer because everything's an opportunity, you're going to start diluting yourself. You're going to have a very, very type of customer need. You're going to have some people that are very needy at the bottom. And it's going to continually anchor your business down. So you have to have that discipline. I encourage people that

haven't done this before. Start with one customer. Start with one decline. Go to of all your customers you have to say, I'm sorry, we have to discontinue services for you. We're find a way that will lightly do it. But get rid of one. Notice the drop and revenue will be unnoticeable. But the improvement in your emotional state will be radical. You'll go to sleep without thinking or worrying about this person. Transformation internally is

radical. And that starts bringing the strength to do more of this. And as you free up from worry, as you get rid of the low hanging customers, now you concentrate more in your better customers. And they often start to flourish. You're more available for them. They may even demand more. So most cases by eradicating the unfit customers. I'm not saying they're bad people. I'm

within a few months of that, just because the emotional state for the owner and the team has

“changed. Now they're focusing forward with their best customers. Yeah, I definitely want to”

talk about an example that I did at my company with this because we had an initiative in 2022.

We called it Nice Clients 2022. And that's because we had an influx. When I first started

to get media, the agency, we had lots of interest and lots of celebrities and big CEOs, billionaires. And these were very ego-tistical clients. And we ended up with some really big accounts. The profit was great. 20, 30K monthly retainers. It was really hard to just walk away from that money. But I noticed that we were losing employees. The morale was down compared to when we first started. It was getting inefficient. These clients wanted more and more and more. And although they were

paying us so much, they wanted us to do everything. And we kind of just felt like we had to answer to every back in call and they were calling me on my cell phone. And it just was crazy. And so we're like, all right, we're going to have to say goodbye to these big monthly retainers and do what's best for our company and company culture. And so we actually let go of like two huge accounts. And it hurt in the short term. But long term, I was freed up to come up with new innovative

scalable ideas. I started my podcast network. I started my masterclass. These are all things that have already made up for that revenue plus some and are more scalable than a talent. Have a agency. So it just goes to show that sometimes you've got to eat it in the short term. But it's good in the long term. I have a very vivid memory of myself of getting rid of a customer when my business was in the point where we needed money. And it was a substantial revenue opportunity.

But this person was so rude to their own employee. We were doing a conference call. So I was shocked. In that moment, I said, I'm not doing business with person by the end of the call. I said, I'm sorry. We just can't serve you. I have the phone. I felt this relief. I felt panic still. Like I

need this money. I was like, I find stood up for not allowing that kind of behavior. And I would never

“allow it again. And it became such an empowering feeling. I think when you had that empowering feeling,”

it was to become more confident, which makes you a more effective salesperson. So it starts that upward spiral for sure. I love it. This is such an impactful method. I recommend that everybody go get profit first. Like I said, it's like a Bible at EAP media. A couple more questions before we close. I know that you mentioned that are we mentioned that this is the past for financial freedom for owners and entrepreneurs. So how can we take this system? And then once we get our

profits, how do you suggest that we manage those finances and break those apart? I know that you mentioned that there's like personal accounts that we should have as business owners as well. Yeah, there's personal accounts. Yes, I have a chapter in the profit first called profit first life. And there is a parallel between our finances at home and finances at work. Or I should say, link as opposed to parallel, meaning if I am doing poorly home with the business

is doing well, I will lead you off my business and cripple it. Or if I'm doing well, financially, home, my business is struggling. I'll start funding it. So both will go down. So we need to have this financial security and comfort. Not just the business, but also at home. We do the same thing. My wife and I implement this when we implement the profit first for our business, we implement our house right away. And it brought such clarity in our communication.

We used to be saying, can we go on this vacation? And I like, I don't know, and there would be disagreements and stuff. But now we have an account that says vacation. And so my wife will say, hey, I want to go on vacation. She actually just called a week ago and said, I want to go to Cabo and I'm like, okay, I said, can we go? She's like, the account has the funds. Like, we're on. So we set multiple accounts for multiple purposes. It could be education for yourself or for

your children or grandchildren. It could be vacation or it could be emergency six to circumstances. It could be repairs or maintenance of your property or homes. So we have, I went a little bit in excess, 17 accounts now. What happens is money flows in my income. And then gets pre-alcade based

time percentage at home to always different accounts. And it's brought with me and my partner,

my wife, absolute financial understanding and acuity. We both understand where our financials are at home without having to have discussions or sometimes arguments over it. No more. We know exactly where we stand. So it's the same deployment in our personal finances. And just a hot tip for everybody, I use Brexit and it's free to create as many accounts as we want. Are there other bank accounts where it's free to just have as many accounts as you want? Yeah, my fair bank hands down. It's

called Relay. And what's so interesting about Relay is they've become certified in profit first.

“So you can go to RelayBang or it's Relay fi.com. I think financial institution. And you go in there”

and it will say, do you want to set a private first account and you click Yes, and it's bought. It rolls them out. It's a no charge, no fee bank. And it'll even do now automatic allocations. So you can say 10% of profit, 15% here. And you say, boom, and it starts doing the allocations for you. So they're a great bag. Awesome. Well, they're not a sponsor of yet, but maybe we'll reach out to them. Well, yeah, we're going to have a little talk with them. All right. So my give a new

What can we expect in that book? Because if it's anything like your past book, I'm sure it's brilliant. Well, thank you. I'm streaming proud of this book. And why did

I deconstructed what is the most effective marketing for small business? Business is under 25 million

dollars in revenue. But my sweet spot is companies under a million dollars in revenue. Really small enterprises. We don't have a budget for marketing. How do we do it? And I boil it down to three key elements. It makes an acronym DAD, DAD, and subsequently I heard I've read DAD joke on a planet now.

“But the first D stands for differentiate the only way to get noticed and it's all again behavioral”

mechanisms is if something is unexpected. If you ever walked down a street and you do that double take, like, what was that? Because your mind registered something unexpected. So do something unexpected. Now, not saying outrageous. I'm not saying weird. It's something is inconsistent with the common

noise. The second thing is it also must be a attractive. Meaning when someone takes a double look,

you have them for about a millisecond. Now you have to win them over and say, oh, that's for me. So what does your audience need to hear first? Usually it's that you acknowledge their pain. Are you feeling this? Or you talk about the benefits? Do you want that? You don't talk about features. Then the last part is direct. And direct is now they have this, what action they need to take.

“And the key is what micro action? What's the first small step that they will safely take?”

So if I draw into my car locks, I got that flipping balloon thing and you come in and say, I want a new car and I say, well, give me $100,000. We'll find it. You're done. Like, you can meet so outrageous. But if I say, hey, would you give me your cell number? I can send you pictures of our inventory. That's the small first ask. Like, it's the momentum going. So get different talks about how to use the data model, differentiate, attract, direct for small businesses to start winning over business opportunity,

extra business opportunity. I love that. And we have so many small business owners who listen to the show. So I'd love to have you come back on, give us your marketing advice. And then I can do some sort of like best of Michael McCallow. It's episode. Oh my god. I would love to definitely gonna do that. All right. So the last two questions that we ask on the show is what is one actionable thing our young and profiter can do today to become more profitable tomorrow. Real simple.

Only said one account. So we talked about the foundation of five. You can do some personal finances or your business. You choose, but call your bank instead of one additional account and call it profit. Then any money that comes into your personal account or any money comes into your business account like 1% of it and move into his profit account. The reason we do 1% is so small is it's not going to negatively impact your lifestyle or your business lifestyle. But it's going to have a very positive

impact in your mindset because you'll start seeing cash accumulating. When you see that this can work as a small level, it's just a matter of time before you get momentum and expand it out. That's great. And what is your secret to profiting in life? And this could be relationships, financial, however you want to think of profiting. It's funny. One of the secrets I guess is this is something I discovered in the last year or so. And I've really been practicing this.

I meditate every morning and I have a ritualized morning and one thing I asked myself, I've stopped asking will I be successful in life? I've been asking will I matter in this life? I want to take my final breath in this planet. I don't know if people say, "Oh, he was successful

“as much as Mike mattered." I think that's the more important thing that that footballer”

remember. So I asked myself every morning, "Am I going to do something today that matters?" And that has changed my trajectory and it actually brought more energy to being of support to my fellow humankind. I love that that's so beautiful. Michael, it was such a pleasure to have you on your show. You are so smart and this was one of the most actionable, no-fluff podcast that I've had in a while. So I really enjoyed it. That's my goal at Young Improveding to be actionable. I think

people are going to be taking a book worth of notes. So thank you so much for your time.

This has been a joy, Hala. It's always. Thank you. Thank you.

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