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This week we’re joined by special guest Mike Michalowicz! Mike is the best-selling author of Profit First and Fix This Next. We talk with him about the Profit First cash management method, the behavioral science behind it, and why it works for contractors.
We also discuss how Profit First helps contractors get bonds, why checking on the balance in your bank account is not a good way to measure profitability, and why you should consider working with a Profit First Professional to get the most out of the system.
Check out the video of Wade and Rob rescuing Mike from the bears here!
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Rob Williams, Profit Strategist | IronGateESS.com
Wade Carpenter, CPA, CGMA | CarpenterCPAs.com
Stephen Brown, Bonding Expert | McWins.com
Rob Williams: [00:00:00]
It’s best-selling author of Profit First and Fix This Next and many other amazing books, including his upcoming September release, Get Different, all of which can be found among the most entertaining and useful books in your favorite bookstore. Or find him at motorbikemike.com. Today, we’ll be asking Motorbike Mike how Profit First can create permanent profitability in your contracting business and paradoxically, improve your bonding ability while still taking your appropriate profit first as the owner of your contracting company.
So here on the Contractor Success Forum, we discuss financial strategies for running a more profitable, successful construction business.
And I’m so excited, you should be too. So why don’t you go ahead and share our little show with your friends right now, so you won’t miss a thing on this amazing episode. So check out our show notes below and our show page ContractorSuccessForum.com.
In addition to Mike, our three long-term construction industry professionals are Wade Carpenter with Carpenter and Company CPAs, helping contractors nationwide become permanently profitable for over 30 years. Stephen Brown, a construction bond agent with McDaniel-Whitley bonding and insurance agency for over 30 years, experienced in underwriting and placing bonds for you as a contractor.
And I am Rob Williams, your profit strategist with IronGate Entrepreneurial Support Systems, driving profit in contractors’ businesses with decades of vertical integration as a contractor, manufacturer, aviator, and financial strategist in the construction industry.
Whew! Mike, welcome to our show. We’re so happy to have you here. I just gave blood yesterday. I might pass out. I’m not sure.
Mike Michalowicz: [00:02:07] I love that you use alliteration. You’re like it’s the Magnificent Mike Michalowicz! And I’m thinking in my head, I’m like, what, what are other alliterative words you could have used? Like the marginal – “Marginal Mike Michalowicz!” Malfeasance, Mike Michalowicz- was like,
Rob Williams: [00:02:21] Yeah, we got all that in the PPPs and all the amazing things that we learned together on our trip last week with you and I and Wade and our other mastery members to Arizona and the Grand Canyon in person.
Wade Carpenter: [00:02:32] Yeah, I did want to jump in on that Mike, got so scared of the bears there, me and Rob had to pick him up and carry him out of there. So we got video to prove it.
Mike Michalowicz: [00:02:41] The most bizarre video. I think of all time there.
Rob Williams: [00:02:44] Check out the show notes to see this craziness. To see Mike Michalowicz at high altitudes and what that does to your crazy Contractor Success Forum brains.
Mike Michalowicz: [00:02:57] Well, it’s great to be here. I
Rob Williams: [00:02:58] We’re glad to have you here. So man, we’re getting our bonding guru, Stephen Brown here. He was my bonding agent when I was a contractor. So he helped me with a lot of different things. Well, what do you want to get from Mike?
Stephen Brown: [00:03:13] I really appreciate it, Mike. Thanks for coming on and talking to us. The main thing is that my job is to get contractors bonds, and I put a package together to sell to different bonding companies so they’ll say, “Yes, we will approve those bonds.”
And so I’ll put a financial package, they want to see working capital and net worth and their company. But I was hoping you could tell me a little bit about how Profit First can help with that. And also if you could paint a picture for me of what it would look like to one of my contractors if they engage a Profit First Professional, to help them get your system going.
Mike Michalowicz: [00:03:49] Yeah. I actually I don’t know too much about contractors, but one of my closest friends owned a very sizable company, they are doing about $250 million in revenue doing building construction commercial construction and they got in a trap and I, I can share it a little later, but when it comes to the health of any organization, the number one determinant of your health is your profitability.
If you can show sustained profit it’s unarguable, you know, and I’m saying cash profit, like money in the bank. If you can show money accumulating month in, month out, year in, year out, it is unarguable. And sadly, there’s companies like Enron who show a profit that aren’t profitable. So there’s a distinct difference between an accounting profit and a cash profit.
And the Profit First system is a cash management system that shows how to achieve consistent profitability. And when it comes to borrowing money, my experience is real simple: that when you have money, you’re in a much better position to borrow money than when you don’t.
The people that provide money, want assurity- they’re in business too, you know, they’re not handing out cash. They’re looking to make a return on it. So they are running you know, analysis metrics to say, this loan won’t go bad, that I’m gonna get money back off of this. So it’s very calculated and it’s undeniable, if you’re consistently profitable, that you can pay back a loan, or you’re more likely than anyone else.
And that’s why profitable businesses that are consistently profitable, not one time pot shots, but they show a history of perpetual profit, consistently get the best loans, get the best rates and the best deals and are the most viable in the market.
Stephen Brown: [00:05:24] Glad you said that Mike, because bonding companies, they don’t want to know that you can finish a job. They assume you can do the project. They want to know you can make a profit consistently and how they determine that is everything.
Mike Michalowicz: [00:05:38] Oh, totally. Right. So, I’ll just share a story about my friend. I’m not going to disclose their name, but, but A very sizable company in the Northeast. $250 million. And within two major projects, it collapsed the company. They actually went bankrupt and it was a sad day. They are trying to Phoenix the business and do it in a new form, new flavor, but sadly they weren’t measuring profitability.
They were doing the cashflow game and I see this in so many businesses, that one project was actually feeding the next one and they needed to land more and more projects to pay off the losses that was happening. And the only way to sustain that, it becomes a little bit of a, almost like a pyramid and it wasn’t a pyramid, but basically you’re banking on bigger projects to trigger the cashflow, to cover up for the losses that you have in the past.
It makes you blind to it. You don’t even realize you’re struggling with these other projects because you see the cashflow going, but they couldn’t sustain. They couldn’t get a project that was big enough to cover the last major project. And that’s when the whole thing came crumbling down. So we gotta be very careful about that.
And this is why what Wade’s doing, what Rob’s doing, why Profit First Professionals are so needed, is you need an expert in there that can show you how to be profitable, but not just, not just profit saying, Hey, at the end of the year, is there any money left over? That’s not profit.
Profit is not an event. Meaning an eventuality. It’s gotta be baked into every transaction. Every raw material, every item that you bring on board is a profit baked into it. And that’s what Profit First Professional does. They get to the molecular level to ensure there’s consistent profitability.
And when you’re winning profit every single day, you will absolutely have profit at the end of the year and every year going forward.
Stephen Brown: [00:07:14] Great. Robbing Peter to pay Paul, that’s-
Yeah all the time, and it’s terrifying. And you know, a lot of times you don’t see it until you have the right accounting information in front of you. Wade, you know, the contractors that can’t produce some pretty accurate reports, and you’re not getting data from your project managers, live data as to costs that are being incurred.
You know, Rob, you, you were talking about a situation like that, so it just doesn’t end and you just have to be aware of it.
Mike Michalowicz: [00:07:43] Yeah. Those numbers, the accounting data is critical. And with a realize most business owners don’t have the propensity to dig into those numbers. We take shortcuts. We say, well, I’m just going to, I got money in the bank. I got money. I don’t have to worry about that. I’ll let someone else worry about that.
So I have two things you need to do. First of all, changing our habits are very hard. It’s very hard that if you don’t look at numbers to all of a sudden, overnight to be a numbers guy. It is important, step one, to bring an expert who is a numbers person. That’s why I’m such a proponent for Profit First Professionals.
Secondly, do what’s called channeling. It’s very hard to change a behavior, but we can channel a behavior to get the results we want. If you’re the type of person who lies in your bank account, see what the balance is, and you’re making decisions based upon the cash you see there, the Profit First system is designed for that. We’re going to carve up that money, pre-allocate it at your bank to different accounts with different intended use. So this way, when you get a traunch of money in that you’re gonna use to buy, say your materials, well, you’re going to have a materials account and a portion of that money percentage-wise will go in there.
So now, you know exactly what’s available to purchase your materials. If you don’t have enough money in there, that’s a call to your Profit First Professional to say, why don’t I have enough money? Am I not allocating properly? Am I not putting enough margin in for the materials? And it starts triggering this conversation.
With the contractors that I know sadly, that conversation happens when they’re, when the business is collapsing. My friend, they said, oh my gosh, what did we do wrong? And that’s not the time to have the conversation when you’re six feet under. What you should do is have that conversation today.
And what forces that conversation I believe is Profit First, because when you start allocating money to its intended use before spending it, it forces that hard conversation of saying, okay, we don’t have enough money for this purpose. What’s wrong? Not enough margin or something like that. We’re not pricing right? Those are the things that we have to discuss today.
Rob Williams: [00:09:37] Stephen well, we’re probably in a big boom right now, so we’re going to be hit, there, there’s surge, there’s so much demand for real estate right now and projects behind. So yeah, your clients, you know, we’re going to be boom, boom, boom, boom, hitting these things. So we’re going to very soon see some collapses. So trying to get these contractors and help them not make that mistake. This is the time that we’ve got to hit that and they need to make their decisions. Talk about that a little bit, if you want to.
Stephen Brown: [00:10:08] You’re right. Those decisions have to be made. And then, I wanted to ask you, can you work with the CFOs of these construction companies? And the owner? Contractors like to build, and that’s one problem, Mike, is understanding that you’re going to have overhead expenses. They just hate that. They just want to build and the only thing that concerns me is I want them to know how easy it will be to engage your services.
Mike Michalowicz: [00:10:30] Yeah. You know, what’s interesting is many owners I talk to, and this is industry agnostic in, you know, any business, I say, how’s business? They say, well, this year we did say, a million dollars in revenue. And then the next question they say is, but I don’t know where my million is. Like literally for many business owners, that’s the level of consideration.
And honestly, I’m there too. Like when I make a certain amount of money, I think inherently that’s how much I’m going to take. What I make is what I take. And of course that doesn’t translate and it’s so obvious it doesn’t, but when I’m running a business, I have to do the things that I like to do: create things.
So bringing in, you know, sophisticated talent behind you to go into the molecular level is very important. But the same point as a business owner, we’re going to make improper and rash decisions if we simply see a lump of cash and say, oh, this is how much cash I have to do whatever, because we’ll default to our next call to action. Like the next feeling we have, oh, I need to, you know, get some new equipment for my business in order to do these builds. Oh, we just had a hundred thousand dollars come in. Perfect. I got a hundred thousand dollars to buy that truck or whatever that gear is. And then we’re not considering what that money was really intended for: buy materials, paying labor, you know, all these other elements.
So Profit First again, it’ll help you pre-allocate money. A hundred thousand dollars comes in. It’s not just one bucket of a hundred thousand there’s buckets allocated out. So there’s say $20,000 going to your labor. $40,000 toward materials, $10,000 toward equipment purchases and so forth. And when you carve it up this way, we look at that equipment purchase account, and like, oh, there’s only $10,000. I can’t buy the thing I need yet. It starts triggering on this concept of how do I work? How do you still get this done? Maybe I’ve got to rent the equipment for now. Maybe I can work with another contractor and we can do a barter deal where we’ve swapped something, but it starts a better conversation.
And so that’s why we need a system to really channel our natural behavior of thinking that any money is all the money we need for any next intention. And supplement that with a expert, I think it’s very unfair to expect business owners to become excellent in accounting. And I hear it all the time. I hear, oh, you own a business. You gotta be good at the accounting. You gotta, you gotta know these numbers inside and out. I think that’s an unfair expectation. I’m not, you know, I wasn’t the best at math in high school, now, all of the sudden I have to be the best at math. It’s just not my interest, it’s not what I’m capable at. But I can hire that math teacher.
I can hire that expert and have them teach me through, or just give me their observations. So we’ve got to surround ourselves with the appropriate talent, but at least have a simple system, first to give you the triggers of when to ask questions.
Rob Williams: [00:13:09] The day-to-day decisions is what I thought was the biggest difference to me. I found Mike and Profit First because I had a client that is a contractor and he’s making so much profit. He kept purchasing all these assets and different things and building some things. Amazing profits, like he’d never seen before, and then it came time to pay his, taxes and he couldn’t do it. And so I went to my friend, a Vistage coach. I was like, man, I need budgeting. I’m looking at Dave Ramsey and I’m looking at- nothing wrong with Dave, but this is business- and I’m looking at these things, and finally he said, this Profit First guy. I’d never heard of Mike and I found it and I’m, and I’m reading that, and I’m like, gosh, if we had it, and I thought about the decades of my construction experience and I had been trying to create what he did, I was so close, you know, for years. And I was like, wow, this is exactly what I was trying to. figure out. I had all my projections and my numbers, but when you’re out there on the job site, it’s that spur of the moment decision.
Because I had the accounting and I had the CFOs and projecting that out, but I’m like, well hell, I got a hundred thousand in my account and I need this. I’ll figure it out later. I’m buying it right now. And then I’m going to go back and figure out how to unravel that.
Stephen Brown: [00:14:25] You’ve got your MBA. You’re a master of business. Why couldn’t you figure that out?
Rob Williams: [00:14:28] Because I didn’t have, I couldn’t look out the front windshield. I was looking back at everything and then I couldn’t process it. I was too busy in day-to-day, trying to get this built and worrying about this subcontractor, getting this material in. And it’s amazing now, when you see this and immediately- like Last week, Mike, when I was going to see you, I didn’t rent a car because it was $750. It’s normally like $150. There are no cars out there. My op ex I was looking at that and I know there’s money in the other ones, but my brain said, I got to figure something out.
Mike Michalowicz: [00:15:05] I love that. I love it. And Hey, I saw you, you were every activity. So
Rob Williams: [00:15:09] whether it was on foot or hitching, a ride or something-
Mike Michalowicz: [00:15:13] That’s the power of this system is that for your category of decision, there’s a category or account associated with it. And then we link those together. We start working within the confines of that. What I did and I continue to do is I study behavioral economics and human behavior. A lot of discussion around numbers is very logical. It’s great. And Spock would nail this stuff. But we gotta think about the Captain Kirks, you know, the ones shooting from the hip that are saving Star Trek. What we need to do is channel our behavior. There’s a thing called the primacy effect. And the primacy effect is when we see something first, we put more significance in it versus things that come after it.
So in the book, actually, I give a sequence of words, like if I said the word evil, villain, neutral, good angel. If I said it in that sequence, I’d say, you know, what do you think of this person? Evil, villain. The propensity we have is to say, oh, that’s a bad person. And maybe they’re the anti-angel. But if we take the exact same set of words and we flip them over and say, angel, good, it ends with villain and evil, now this is a good person fighting evil, possibly. So our mind, even though it’s the exact same words, so logically they’re indistinguishable, but behaviourally, we distinguish them because we put more significance in the immediate and the first.
Well, that’s true for money too. When we have a desire, you know, I feel we need to get new computer equipment. I feel we gotta hire some more labor, whatever that feeling is, that’s now the primacy effect. We’re putting significance in it. So we look at our cash and say, oh, I can support this. This is just what we needed. This just works out. But we don’t look at the rest of the sentence. And that’s what the problem is.
Wade Carpenter: [00:16:52] I know you started to mention this a minute ago, Rob, and I actually did a talk for a trade association yesterday. It was two hours that we did, and the executive director wanted us to talk about like the construction bubbles. Like 2008, what happened with COVID; and one thing I’d love your take on: Profit First works really well when things are good, but it also works really well when things start tanking.
Mike Michalowicz: [00:17:16] I probably have more emails in my life during the COVID pandemic, particularly from businesses that were immediately affected by it. Retail stores, restaurants. Pouring in saying, this is, this has saved me, or this is saving me.
And some of those businesses said, wow. So you must have been doing Profit First for years now. And you saved up all this money. I’m so happy served you. They said, No, no. I started Profit First, like a week ago or, or you know, a month ago. I’m like, but that means you have no reserves. Well, you see what happened is Profit First is a percentage-based system. So it dynamically adjusts to the current cashflow. If I’m making a thousand dollars a day and all of a sudden drops to a hundred dollars a day, the percentages stay the same.
On a thousand dollars a day, I may be allocating 10% toward CapEx or capital expenditures. So a thousand dollars comes in and I have a hundred bucks, but now my income drops to a hundred all of a sudden on a cashflow basis, 10% is $10 goes to that CapEx. So we immediately start to curtail our spend on CapEx because there’s less funds available.
That’s the power of a percentage-based system. We’re carving up the pie the same way, but every single day, the pie of income adjusts in size. So it works dynamically with it.
Rob Williams: [00:18:27] Does that kind of help resonate with you some-
Stephen Brown: [00:18:30] It does, you have to understand the concepts behind the system. And then the nuts and bolts of it are what you have to leave to the professional to help you do. You know, the concepts appear to me to be very simple, but getting them all implemented, you just need to have some experience, don’t you.
Mike Michalowicz: [00:18:49] Yeah, there’s definitely a different definition for simple versus easy. And to your point, Stephen, yeah, it is a simple system, but it does not mean it’s easy.
Once you get under the basic umbrella of the system, there’s going to be detail. And every industry is different. You know, when it comes to construction versus a pizza shop, there are elements that need to be different. There’s perishable inventory versus non-perishable inventory. There’s always different considerations. So it’s in the nuts and bolts, to your point, where it can get a little bit hairy.
What I challenge people to do though, is you can and should get started at the simple level immediately. Get yourself to the bank today. Don’t waste time on this. It’s the analogy of growing a tree. The best time to plant a tree was 40 years ago. The second best time is today. We’ve got to get to the bank today and get these accounts set up. Then you hire a professional to help you guide through the molecular details. But if you don’t get to the bank, if you don’t get these accounts set up, you’re just waiting to plant that seed.
Rob Williams: [00:19:47] Kind of the last thing, Wade, you know, having a good accountant is so important because Profit First is not an accounting system. It is a behaviorally-based cash management system. So, Wade, in preparing the numbers to be able to come up with what those allocations should be, being able to be an expert and then preparing and adjusting that, you’ve got to look back at those accounting numbers because that’s going to be critical. Can you give us just a little bit on that, Wade, while we’ve got Mike here and maybe one more follow up?
Wade Carpenter: [00:20:21] From my perspective, you can’t just look at your P and L; you’ve got to look at your balance sheet and your cash flow statement. And so…
Mike Michalowicz: [00:20:29] Yeah, that’s the problem and the opportunity, right? These documents, they work together, but most entrepreneurs can’t read the tea leaves. They look at a cashflow statement and I do, I’m like, I don’t know what’s going on here. Profit First is a trigger for conversation with that professional. So when you implement profit first and you say, wow, we’re not cash flowing, right. Something doesn’t feel right. I don’t have enough money in this account. Something’s wrong. You call your accountant immediately and say, listen, can you interpret the cashflow statement for me? And tell me what’s going on.
Because the course to correction are in those documents. Profit First is just a call to action. It’s the guard rails for kind of racing down the highway. But, but the, the accounting system gives you all the information you need to make the right decisions. I had a call actually, literally this morning, about a half hour prior to us connecting, with my accountant, and I do it every two weeks. And what we do is we sit down and we go over the cashflow of Profit First, and then he helps me interpret all the details in the cashflow statement, balance sheet, P and L. And also KPIs, he’s rattling off things like, oh, the operating cash ratio is off. I don’t know what the F that is, but I do know it’s important and that’s why I hired this guy.
Rob Williams: [00:21:34] Oh, yeah, well, that’s great. And, and I know Mike’s got something else coming up on the top of the hour. So, this has been an amazing show and tying all that together just in a few minutes has been really, really, really helpful for us. So.
Stephen Brown: [00:21:47] Yeah, thanks a lot. Mike, I’ve learned a lot more about system.
Mike Michalowicz: [00:21:51] It’s been a pleasure.
Rob Williams: [00:21:52] I hope everybody has gotten a lot out of this follow Mike if you can, motorbikemike.com if you can’t spell MikeMichalowicz.com. Yeah. And look at our show notes. It’s all in our show notes. So keep following us and come see us on the Contractor Success Forum dot com. So thanks for being with us today and thank you so much, Mike, Stephen, Wade, and we’ll see you on the next episode.
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