44: Profit First with Mike Michalowicz

september 12, 2018

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Yigal Adato: 00:02 Hey everyone, my name is Yigal Adato and this is the Pawn Leaders Podcast, a podcast that help you make more money, stress less, and live an epic life all while working at the pawn shop. Hey pawn family, welcome back to another episode of the Pawn Leaders Podcast. Thank you so much for joining me. If you haven’t joined us already, please join us on Facebook at Pawn Leaders Podcast Community on where we talk about the podcast episodes and any questions within the pawn industry. I’m excited to have my guest on. I heard him speak, I’ve read his book. With me, I have Mike Michalowicz who is the author of profit first, surge the pumpkin plan and his newest release clockwork. By his 35th birthday, Mike has founded and sold two companies to private equity and other two fortune 500 company. Today he’s running his third multimillion dollar ventures, so I believe he knows what he’s talking about. Profit first professionals. Mike is a former small business columnist for the Wall Street Journal and the former business makeover specialists on MSNBC. Over the years. Mike has traveled the globe speaking with thousands of entrepreneurs and he’s here today to share the best of what he has learned. Mike, Welcome to the show.


Mike: 01:18 Yigal thank you so much for having me.


Yigal Adato: 01:20 No, I’m super excited. You know the pawn industry doesn’t get a lot of resources like yourself. You’ve written many books about being an entrepreneur and one thing that stood out to me in reading your book was this one phrase that your mission is to eradicate entrepreneurial poverty. Let’s start there real quick. What does that mean? What does entrepreneurial poverty,


Mike: 01:42 Yeah, so is this misperception about us. The day you start your pawnshop, they start any business, all of your friends think, oh my God, you’re a millionaire. Like that day I go, oh my God, you’re an entrepreneurial millionaire, and I think you don’t actually work that hard for it. You have the luxury of doing whatever you want, when you want. The reality is you are usually tied hook line sinker into your business. All your time is devoted to it and you are far from a millionaire, even when your business makes $1 million in revenue, which they think means you are taking a million, you were still taking home zero. Entrepreneurial poverty is this facade of success. But the reality of the day to day struggle, and I don’t just say this from a theoretical standpoint, I’ve lived through it. After I sold my companies, I tried another business that was abject failure and I ran out of cash. It was devastating. Nearly declared bankruptcy, yet kept up this air of success. That’s what entrepreneurial poverty is. And I ever since living through this realize it is a systemic problem for so many entrepreneurs and business owners that I’ve devoted my life to eradicate entrepreneurial poverty. Hopefully my books are doing that and hopefully they live beyond my lifetime and continue to serve people in getting back time, getting back money, being profitable and living the business that they dreamed of.


Yigal Adato: 03:01 Love it man. And I know that when I speak, the conventions, you know, the one thing I teach is clarity, is being honest with where you are. And I believe that we all go to these conventions were all sitting around the bar and we’re all talking about, oh, business is doing well, business is going great, everything is good. But we’re back there as pawnbrokers melting as much gold just to make payroll, trying to figure out how we’re going to pay the bills. And that’s why I brought you on because I think that this idea of profit first kind of 180 turn on the way that we think.


Mike: 03:32 Yeah, I think so. You know, it’s your point. The bar conversations a lot of chest pounding, you know, I was like, oh, I got $5 million of transactions. I have 6 million, you know, and I’m better, I have more employees, I have more inventory. It’s all about size. But profit first I propose a new argument and it’s about the health of our business. The next time someone says, how big is your pawnshop? Say, let’s talk about how healthy our pawnshop is and it’s kind of this adjustment in our mindset because then we focus on what matters. The problem I discovered and I talk about in profit first is that we have been told all entrepreneurs, all business owners, that profit actually comes last. We’re told profit’s the bottom line or it’s the year end. We actually use vernacular that says it comes last. Even in the formula, sales minus expenses equals profit, but when profit comes last, it means that consideration can wait. It’s kind of like your health. If you say, you know what, my health doesn’t matter, I’m going to put it last. It’s not you’re going to go out and start exercising, eating better, but the day you say, oh my gosh, I’m putting my health first. Some of that comes first, gets prioritized and focused on, something that comes last is a Manyana Syndrome, so profit first I say, no longer are we putting profits the last consideration. We’re going to focus on the health of your company. Profits going to come first. The new formulas, sales minus profit, take your profit first equals expenses.


Yigal Adato: 04:52 When I heard that in the book, I was surprised, it took me back to when I owned the pawnshops and I was remembering when we had millions of dollars in pawn, millions of dollars in revenue, 50 employees, three locations. But there were years where we would like struggle to pay the payroll, we’d have to melt everything close out in merchandise. And it was tough. So, when I started listening to the book, first I told myself, man, I wish I had this 10 years ago. Right? I wish I had this way of thinking. And the second thing was, you know, Mike, you crazy. This is the pawnshop, you know, this is a different type of business and all that money goes back into the lending. So, in the pre-interview I said, we’re going to piss some people off. We’re also going to wake up some minds. And in the group that I lead the Pawn Leaders Mastermind, one of the guys said, I read his book, I loved it and I couldn’t, I didn’t implement all thing, but the biggest thing I implemented was the tax account. And so now I’ve never had to worry about paying taxes.


Mike: 05:55 Yeah. Huge right? So, when I ask people, because what we are about to hear, there will be skepticism and I get it. In fact, I was skeptical of the system and I’m the guy who created it. The reason I did it was out of desperation, when I lost all my money and I’m starting a new business, I had to be profitable to pay off my past debts. I had to be profitable, never lived out again. So, I started this system and it took me the implementation of it to convince myself this works for myself. Also, just to give you as a sense, we’ve over 75,000 businesses that are now using all types of industry, pawnshops [Incomprehensible], one using it. Pawnshops are using this. So, it’s out there and established, this isn’t just theory. What the core concept is every time revenue comes into your business, money comes in we take a predetermined percentage of that money and allocate it toward profit and other purposes, maybe allocate a percentage toward tax and so forth, but here’s the point. When we start our business and we say, you know what? I intend to have a 10% bottom line, 10% profit for example. Well, if we take it first, we take a 10% out and now there’s money leftover. We’re basically reverse engineering the profitability. That is all the money you have on your business. If you can’t sustain your business up the remainder, that is your business telling you there’s something fundamentally wrong with the business. I mean, you said you’re going to make a 10% profit or whatever that number is and now you can’t do it. We’ve got to fix the business. Sadly, most people do the reverse, a 100% of money comes in is 100% of money that goes out and they hope that one day it’s a hope, one day I’ll be profitable, but they keep doing the same pattern. 100% of that comes in, a 100% goes out. And we always use soft terms. We don’t say we blow the money, we say we’re growing, we’re reinvesting, we’re plowing back, we use terms that make us feel good. But I’ve seen businesses in every industry go, you know their revenue goes from start up to 500,000 to a million to three and just keeps on climbing. But their expenses go from zero to 500,000 to a million. And it’s almost uncanny. We have to force in this gap of removing the profit, extracting it, hiding it away from ourselves and enforcing our business to survive, to thrive off the remainder.


Yigal Adato: 08:10 In your experience, cause I heard you say this right now, I don’t think I started my business and I said I want to make x amount of profit, I didn’t even think that way. So, I’m guessing that a very small percentage of people say, okay, I’m going to start a business and my goal is to have a 10% profit, a 50% profit.


Mike: 08:28 Yeah. Most people say, I want to be rich. I’m starting a business to be rich. Right? Okay, great. You know what’s rich? Because for some people it’s just a few more dollars in their pocket, may already have wealth. It’s just a little more wealth accumulation. So, I could just give you like $3 and say, congratulations, you’re a richer, you are richer. But we have to define it. So, if you start a business and you already exist or you are just starting out, it’s regardless. Today we have to define what success is. I also realize often once we achieved that success, there’ll be a new plateaus. And well now that I’m rich, now I want to give back or do something else, but define what is the next plateau of success. And if we define around money, and I think it’s absolutely critical that we do to define what kind of bonus am I giving myself at the end of the year, what kind of salary am I giving myself throughout the year? How are my taxes [Incomprehensible] are they paid for me by the business or my worrying about the taxes? Write it down. Then we can reverse engineer it. And once you know, say I want to take home $100,000 salary, I want to take home a $50,000 check on Christmas more or whatever morning you celebrate, you know, Christmas morning or new year’s where I want to have a $50,000 bonus check that was a $50,000 profit a $100,000 owner’s compensation. We then have to reverse engineer our business to achieve that. And what you do is you do it on a percentage based system. If I achieve $1 million in revenue, my target and I take 5% of that, that’s $50,000 there’s my profit. So, now I’m going to send myself at 5% profit. Achieve a $1 million in revenue, I’ll take 10% of that to pay my compensation. And that leaves remainder, in this case, 85% to take care of everything else.


Yigal Adato: 10:07 In your equation sales minus profit equals expenses. It made me, when I was listening, it made me realize that expenses are now looked at with like a magnifying glass, right? Because if I’m selling, if I’m making money, can I take out the profit I need to be able to pay my bills with the remainder and if I can’t, I’m in trouble.


Mike: 10:30 Right. It is that clear, and all of a sudden now the attention goes what’s wrong with first my bills, right? First. Like, why do I have these bills I can’t afford to pay? Is my business taking on the unnecessary cost? And I’ll tell you Yigal I would say 10 to 20% of our costs and almost any business I’ve ever consulted has always had and they could cut 10 to 20% costs. There’s an inflation of cost. It’s like a software subscription we signed up for or you know, I thought it’d be cool to have the cable television running in the background and now I’m paying the cable bill of $100 a month. All these costs can add up and we forget about them. What if we just delete them? [Incomprehensible] no one gives a crap about TV. They’re grateful actually not to be watching TV, you know, so we can delete costs. The second component though is this, because cost you can cut 10 20% I think easily there’s a certain point you start cutting the muscle, the business and that will cripple the business. But the other side is margin, right? So, there’s cost and margin. Margin can grow infinitely. So, we had to look at, how are we running our business where we’ve increased margin? Do we have the light, I don’t know if the term is loan rates, but you know, for the items that were pawning are we getting the right dollar amount for it. Can we be selling for them for a higher premium? What can we do to dictate higher margins and almost any business when we really started applying our mind to it can find innovative ways to increase margin and easy ways to cut costs.


Yigal Adato: 11:56 Love it. So, I want to talk about the elephant in the room. The pawnbrokers listening. The mentality of a pawnbroker is this, I want to grow my loan balance just like a bank does. Right. Have as much money out on the street. So, all the profit that comes in, I want to reinvest it, like you said and back into the pawn loans. What ends up happening, Mike, is that you have entrepreneurial poverty for years from pawnbrokers. Because they are consistently thinking that they’re just growing their loan balance, which they could be either they’re taking loans for the money, paying high premium dollar loans or they’re just holding onto inventory, they’re hiring more people than they should expense are going out the roof. What is like the first step? Let’s talk about the first step.


Mike: 12:43 Yeah. So the first step is you got to really understand why do you want to grow? What’s the end game of that? And I believe in growth, but for the right purpose, inevitably when I asked people why they want to grow, it gets back actually to profit. I want to be bigger to have more sales. If I have more sales, more money comes in and meets them more profitable. So, the goal is profit. But we’re starting off with this a mechanism. Think about weight. If someone wants to become bigger, you know, some guys like to get bigger. There’s two ways of doing it. You can just eat a lot of junk food and become a tub of lard or you can hit the weight room and get muscle mass, which actually is heavier and denser and is obviously far healthier. So, when we look at growth first, we’re just pulling up, putting on size without the consideration of healthy size. So, that brings us back to profit. If we’re looking to grow to facilitate profit we must consider profit first. Then we focus on what drives that profit. When we started taking a percentage of money toward profit, it starts changing our perspective, our business. It uses that magnifying glass and we say, well, what’s actually the profit things we do? Maybe gold is not the answer actually. I mean it’s the worst thing to be involved. And maybe there’s other items that actually could be more successful. Maybe you become a niche specialist that you only pawn for the music community or something. I don’t know what it is, but you can become really specialized where often specialty means premium and you start focusing there. But here’s what I found most fascinating is people who focus on profit first, inevitably actually go faster than their competition. Why? Because they focus on the things that drive profitability, they focus on the customers that are actually the most profitable. So, what’s the demographic that’s responds to most? They concentrate effort and they ditch the superfluous stuff. They have to because they’re focused on profit. They have to ditch stuff that’s not working. And when you focus on what’s working and you start building a reputation, now you’re not the pawn dealer who’s just working with people in your local community. Now you start becoming known for a specialty and start attracting people from a much more global community. So, it’s almost ironic that when you focus on profit of our 75,000 companies that do this consistently, we see them outgrowing their competition faster and far healthier. They’re not putting on weight, just put on weight, they’re putting on muscle.


Yigal Adato: 14:57 I love that. One thing you said in your book, you said that, two things you said, one that your business can become out of control cash shooting monster, which I think the pawnshop can become because we’re dealing in cash consistently. And the other thing that you said was that the right size will find you. I think that because of this out of boy and go get them attitude, sometimes we grow faster than we should. Creating more expenses than we should.


Mike: 15:23 Yeah. And it’s ego. It’s ego. It’s like who’s got the biggest house on the block? Who’s got the biggest car on the block, I care who can afford their house and car, right. There’s huge houses that you go in, you’ll open the door and it’s lawn furniture because they can’t afford that house and then they’re getting booted out a year or two later. That doesn’t impress me. Actually, I feel that’s sad. So, in our business, I encourage everyone listening. Don’t worry about how big you are, that doesn’t impress, it doesn’t impress me and it doesn’t impress a lot of people. What impresses me is how healthy your business is, what impresses me is your focus on profitability and as you do this, your business will naturally grow, but you’ll also find the right size. For me, I had a company with 30 employees and I found actually I didn’t like it, I just didn’t know them intimately. My new company has about 10 employees. I know everyone, I know their life story, I know their family. I love it in this size. We’ll grow bigger. It is naturally, but I know when we hit about 30 employees, I didn’t like that last go around and that’s cool. So, I’m kind of putting, I’m just letting the right size business find me and not forcing to grow for growth’s sake.


Yigal Adato: 16:28 There’s also going to be like a kind of a mental state when you are bringing home profit, you sleep better at night. When you’re consistently consuming the profit. It’s, sleepless nights, fights with your spouse, angry at your kids, just eating you become a tub of Lard because of the anxiety. Like there’s gotta be some like a good mental state because you’re thinking profit first. Right?


Mike: 16:57 Yeah. I call it the stress O’ mess. Right. I mean, we just, we come home with is knotted up stress when there’s a lack of profitability. We go into survival thing. It’s similar to Maslow’s hierarchy of needs. Maslow said, we have these physiological needs. We need oxygen and water and food to survive. Without it, we will do anything, anything to bring that about. Once we have that, then we, you know, belonging and love matters and can go all the way up to what’s called self actualization. While in the entrepreneurial kind of mass lobbying hierarchy, the base level is profitability. If we don’t have profitability, we panic, we starve. If there’s no money coming in, it’s like I’ll do anything next customer in the door. I don’t care how bad of a deal I’m getting. At least it’s money in the moment and we do these irrational things. We bring this stress home like you don’t know how hard on having working to support this family and [Incomprehensible] I have no money, I don’t know what to do and there’s this fear and panic. Once you start bringing sustain profitability and here’s the miracle. Even in starts off very small, like 1% of your income is going to a profit and we’re talking that there’s maybe every month there’s maybe a hundred or $500 of new profit being added on, which isn’t life changing, but our mindset changes like, Oh my God, I’ve got a few hundred bucks saved up for the first time in my life and it’s profit. That’s all for me. And the next month it grows and grows and that stress starts to melt away so quickly. And it allows us then to focus on the business, bring balance back to our relationships. It’s really a wonderful thing. It is the necessity of business life. Profit.


Yigal Adato: 18:30 I remember when you’re talking about this, back when we first started the pawn shop, we make a sale and there was sales tax 8%. So, we’d collect the sales tax and then our account would be like, hey guys, we need $15,000 to pay the sales tax. And we’d be like, wait, where did it go? It goes with it. So, I understand this. I want to talk, I want to get into like how to do this. You mentioned somebody who I met, Jesse [Incomprehensible] from Savannah Bananas.
Mike: 18:57 Oh, you met Jessie?


Yigal Adato: 18:58 Yeah. Incredible guy. He’s awesome. Incredible business. Incredible guy. What he does, the way he markets, I mean, just awesome. And I had no idea he was a profit first guy. But let’s talk about like what a pawnbroker can do to start thinking profit first. Like what’s the first step?


Mike: 19:15 First thing to do is to determine how you run or how you manage your finances. Most business owners do what’s called bank balance accounting. Instead of looking at our accounting system every day and figuring out where our cash situation is many business owners, I suspect a lot people watching login to their phone or their computer into their bank accounts and see how much money they have. And then we follow a simple rule. If we have money, we can spend it, we can make loans, right? It goes back out. If we don’t have money, panic and [Incomprehensible] was like, just get money in the door. If that’s your natural behavior, I want you to realize it’s actually a good thing that you do that, the consequence right now is bad. But it’s good that you do that because we need to build a system that captures and channels that behavior to the outcome profitability of what you want. So, if you do bank balance accounting, here’s the system. Instead of having one primary checking account where all your deposits come in and you’re paying bills and making loans from, instead set up different accounts with different purposes. There are a wide called the foundational five I think for a pawnshop you can even add more, but here’s the foundational five first have an income account. This is like a serving tray of cash. Money comes in there. You never spend a dime from it. You just display how much money’s available for the entirety of your business and your life. Then we’re going to allocate or divide this money up based on percentages. Next account called profit and literally at the bank just re nicknamed profit and we allocate a percentage of your money. I suggest starting very slowly 1 or 2% over time was our building the profit muscle and make that more money. Owner’s compensation which is distinct from profit. Profit is the reward for being an equity owner in a business. This is your year end or quarter end bonus. Owner’s compensation is compensation for being the most important employee. The owner operator, you work inside of the business. This is your salary. Your lifestyle is that you have has to fall within your owner’s compensation. The profit account is a bonus to celebrate however you define that above and beyond your lifestyle. Next accounts called taxes. This is for your personal income taxes and the final account is called operating expenses and this is what you run your business off of. Start off by [Incomprehensible] these five accounts and I even have a way to get started even slower, but those are the foundational five and I believe for pawnshops we can add some more. That’ll give us even more clarity of how our business is operating.


Yigal Adato: 21:24 Yeah, I mean what I can think of is for example, for a pawnshop is having just an account, which is loan money.


Mike: 21:30 Yeah, exactly! That’s exactly!


Yigal Adato: 21:32 And if you don’t have the money then you’ve got to figure it out. But if you don’t have the money to lend, you know, you either figure out a way would you don’t use your expense money, you don’t use your compensation money. Right?


Mike: 21:42 Right. That’s exactly it. And now with the clarity. See the problem is the next time someone comes in the door and you’re about to make a loan, where are we looking, we’re looking at that one account and we see all the money is sitting there like, wow, we’ve got enough money, no brainer, and we spend it, but we ignore profit, we ignore paying ourselves, we ignore the operating expenses of the business and then panic ensues. But if we have a loan account, we’re putting a percentage in there. That’s what we operate in within those confines and it’s like Thanksgiving dinner, a thanksgiving when that turkey gets, you know, picking out of the oven, no one says, hey everyone grab a knife and fork everyone for themselves, fight for it. Go, go, go. No, you carve the turkey and every guest gets an apportionment so everyone has something to eat. Well, one of the plates is the loan plate. We’re going to put some turkey there and that’s for the loans, but other portions are being served to take care of the other guests that make up the entirety of the business.


Yigal Adato: 22:32 Now, the question in the pawn industry would be, what if my loan balances, if that account is growing faster than the other accounts, what if I need a lot more money than I have in there and I can’t say no in a pawnshop. Like the minute you say no, the client goes somewhere else. You lost a client, you’re finished. So, everyone always thinks, sorry, everyone always thinks like, I can’t say no.


Mike: 22:53 Yeah, well, I don’t know about not saying no. Like if every customer that walks in the door is a good customer, I questioned that business. There’s gotta be some qualifications because not all customers are the same. I suspect some loans get repaid, some don’t. Some are trying to hock some pawn, some item that’s a fake or whatever,


Yigal Adato: 23:10 Or crappy.


Mike: 23:10 Crappy. Yeah. So, I think we need to distinguish customers. We need to vet them. But that’s just my own little thing. I vet my customers. But the thing is if your business is making more loans than you can afford while addressing the rest of the business. That always puts the business in question, what’s not working somewhere else? If there’s more loans coming in, but I can’t then put money in the profit and I can’t pay my expenses, that means I’m not profiting on the loans that I am making because it’s not fueling it. So, there’s a problem in some other part of my business and that’s the idea of the profit first system. When we implement the profit first system, it is we’re making the allocations of money before we actually use the money. Then when we go to use it, if it’s incongruent, the allocations we’ve made, there’s something fundamentally inconsistent with the plan we’ve set for ourselves. So, anytime you can’t do something your business based on his allocations, don’t borrow from another account. Look at yourself and say something’s finally wrong here. What do I need to fix my business? Is it on the loan side, is it on the operation expenses side, is it somewhere else? And then we got to fix there to get things back in alignment.


Yigal Adato: 24:21 As I was listening to the book, I kept on thinking, you know, self accountability, like this system is set up for self accountability. So, you can’t just say like, Oh, I’ve got money in the bank, I’m going to do it. You have to be like, no, wait a second. Every decision, you know, I have to make with with precision, I have to know exactly how much money I have, which is essentially how successful business owners run their businesses.


Mike: 24:45 Oh yeah. Oh yeah. And you know, I think the thing that entrepreneurs miss on is we have a vision of where we want to go. Like we know what feels like and then we look at the immediate circumstances. We’re always rushing to the urgent, the next thing that’s needed. We don’t have this kind of interim plan. What’s the plan they’ll get us from where we are to where we want to be. If we pre-define our percentages that’s the pathway, right? And now when an immediate decision is in-congruent with it, I have enough money to make a loan or I don’t know if I’ll pay my expenses. Then the system forces you to sit back for a second and make some hard decisions. The funny thing is those hard decisions are going to happen. I can guarantee it to you. For most businesses it happens the day they closed the doors. [Incomprehensible] same where we gotta wrap things up or declare bankruptcy or fire half the staff or melt gold out of a panic. Those moments, those hard decisions are forced upon you. The profit first system presents them before it’s an issue. So, you can make smart, intelligent decisions to re-correct your business prior to a reactionary or calamity situation.


Yigal Adato: 25:59 And I think that especially with you, you know, I listened to your story in the book, you know, you hit rock bottom, you gave away, lost a lot of your money and something triggered that thought like I’m never doing this again. I’m never going to be unprofitable and blow through my money again. Is that right?


Mike: 26:14 Yeah. I call that financial heart attack. Like I don’t even smokes made [Incomprehensible] trust me. I get it. You know, smoking’s bad for you. Like I don’t need to educate you on that. The thing is it’s unlikely you’ll stop smoking. It’s going to be very hard for me to tell you to stop smoking and convince you as it’s impossible and for you to stop smoking is nearly impossible too because it’s an established habit, sadly, to make change, the most effective surefire way to stop permanently is to have a heart attack. The day you have a heart attack, you’re like, oh my God. Because it becomes this visceral painful thing. Sadly, that’s what I needed. I had the financial heart attack. I thought I knew finances. I studied finance in college so clearly I knew it. No, I was an idiot. I had no effing clue by needed to lose all my money. Almost lost my family. I destroyed us financially. They stuck by me. They’re crazy. But they did. God bless them. I love them for that because it gave me the time than to figure this out, but also the mandate was in place. I had to fix this. I put this upon myself. I had to fix this because it was such a heart attack. I I don’t want people watching right now having to have that heart attack. Sadly, I seen it. Some businesses are so skeptical that they feel they have to have the heart attack or they don’t think it’s going to happen, but when they had the heart attack, they change. I have found there is one other way though, so I wanted to share this to making the change and what it is is simply testing or small steps. You know, it’s like a smoker. Just don’t smoke for a day. Yes, I know you’ll have some nicotine fits and stuff, but you’ll notice maybe your mouth isn’t as dry. You’ll see a little bit of a gain in a short period. If you can just try it one time. Well with profit first, here’s the small step just to see if this could potentially work for you. Call Your Bank today instead of one account. I mean, it takes a few minutes. So, you can probably do internet or over online or something. Set up one bank account and savings account and nickname it profit. That’s step one and step two-

Yigal Adato: 28:18 I did today.


Mike: 28:20 What?



Yigal Adato: 28:20 I did it today.


Mike: 28:21 Oh you did?


Yigal Adato: 28:22 Yeah.


Mike: 28:22 Yeah. So easy, right? So, you set that one account called profit and now allocate 1% of your income to your profit. You know 1% your income. It’s so inconsequential. If $10,000 comes in, I’m saying put a hundred bucks in the profit account. If you can live off 10,000 we’ll find a way to live off 9,900 you won’t feel it. But what will happen is you’ll have that healthy breath of profit. You’re like, Whoa, I had $100 of profit. Huh? Over time. I’m not saying right away, but over time as say, well, what if I do 2% or 3% of every deposit? And you start building that muscle so you can wait until you have your version of the financial heart attack or you can try a small, small bite size piece that starts proving the system to yourself and listen, maybe you’re one of the unique companies that it doesn’t work for. I believe it will work for you, but maybe one of the unique ones. Don’t make me try to prove it to you, prove it or disprove it to yourself by actually testing it out in a small bite.


Yigal Adato: 29:20 Love it. I think that in the pawn industry, especially now before it was an easy business, you’d open the doors and money would walk in. That’s it. It was just no problem. Now, I always say that you have to be a better leader, a better [Incomprehensible], a better strategists and I believe profit first goes under strategy of exactly how to run your business. You know, lean well such you’re profitable. So, you can have the mindset to say, I want to keep doing this. I’m not getting, you know, I’m not going to get that heart attack, the financial heart attack like you mentioned. So, I think it’s super important. And I’m happy that you came on the show to kind of wake people up a little bit, you know, to stop the suffering.


Mike: 29:59 Yeah, totally. You don’t need to suffer as a sure sign that there’s something fundamentally wrong with your business. If you’re in your business for months, years, decades, and you’re suffering, there’s something wrong with the business and it’s usually profitable.


Yigal Adato: 30:12 I talked with people all the time who I connect with from the show, and we have conversations. I’ve been in the business for eight years, but I couldn’t pay myself last month, or I’ve been in the business for seven years and I’m still not, you know, I’m like, man what’s happening? So, what happens is this, we talk, I give him an idea or two, they go back and they just go back to their same habit.


Mike: 30:34 Oh yeah. The plate of the familiar. Here’s the greatest irony. It is easier to do things that aren’t working, that you’re familiar with than to do something new that you haven’t done before even if it will bring better results. It’s the call of the familiar. It’s like someone in a relationship. I’m in a bad relationship. I hate my significant other, I’m going to dump them. Finally, I dumped them in the next day. I’m dating almost identical person again, it’s cause I’m familiar with that rapport and relationship yet I expect maybe this is the relationship that will work out. No, it won’t. So, if something’s not working, it’s inevitable that we’re doing the same thing over and over again. But now we’re expecting different results. Never going to happen. You must change a behavior. It’s hard because the familiar is just so easy, even though it sucks.


Yigal Adato: 31:22 Got you. And pawn family, if you’re listening to the show, try something new. Go by Mike’s book right away. Profit first. You can download it on audible. You know, it’s on kindle. There’s no excuse not to get the book and try something new and you’ll never know, if it works like it works for 75,000 other businesses, it might just do you good. And it might open your mind to saying, you know what, this business works. I can make this work. You don’t have to go home without much stress. So Mike, thank you so much for being on the show man.


Mike: 31:51 Yigal thank you so much. I appreciate you.


Yigal Adato: 31:52 So how can people find you? I don’t want to spell your last name.


Mike: 31:55 Yeah, I don’t want to spell my last name. If you want to find out more you can get the free downloads of my books. I used to write for the Wall Street Journal articles. Is that mikemichalowicz.com two ways to find it cause Michalowicz is impossible. Spell in Google, type in Mike and then mic, M-I-C. So Mike M-I-C the big polish name that drops down. It’s my name. You can go there. Or my nickname in high school was Mike Motorbike. The irony is I never drove a motorcycle, but I was Mike Motorbike. None the less. So, if you go to mikemotorbike.com that’s easy to spell. That will forward you onto my website and you get all that stuff for free.


Yigal Adato: 32:29 I think the first time I typed in Mike motorboat and I was like, wait,


Mike: 32:33 Motorboat. Yeah, that is a porn site actually.


Yigal Adato: 32:36 You have to be careful. Awesome. So, pawn family, thank you so much for listening to this episode. Remember to check us out on Facebook Pawn Leaders Podcast Community, and if you want to have a conversation with me just to connect go to pawnleaders.com for complimentary strategy session. Mike, I appreciate you being here and I hope that people pick up the book and just try something new.


Mike: 33:10 I agree.



Today on Pawn Leaders, I have Mike Michalowicz, author of the books Profit FirstSurgeThe Pumpkin Plan and his newest release, Clockwork. By his 35th birthday Mike had founded and sold two companies, a bunch of private equity and another two Fortune 500 companies. Today he’s running his 3rd multi-million dollar venture; Profit First Professionals. Mike is a former small business columnist for the Wall Street Journal and a former business makeover specialist on MSNCB. He has travelled far and wide, speaking with thousands of entrepreneurs.


[02:14] What is Entrepreneurial Poverty? “The misperception about how successful and the amount of money entrepreneurs have or earn.”


[03:51] “The next time someone asks ‘how big is your pawn shop?’ Say, ‘Let’s talk

about how healthy it is!’”


[04:06] We have been told that profit is the bottom-line, but if that’s the case, it means that consideration can wait.


[04:48] Sales – Profit = Expenses


[06:39] The core concept is that when revenue comes into your business, we take a pre-determined percentage of that money and allocate it towards profit.


[07:59] We have to force in this gap of removing the profit, hiding it away from ourselves and forcing our business to thrive off the remainder.


[08:29] Most people say they’re starting a business to be rich, but how do you define what success is and when is the next plateau?


[11:44] What can we do to dictate a higher margin?


[12:52] Thinking about your reason for growth is looking at being more profitable. You must focus on what drives that profit.


[14:08] People who focus on profit first grow faster than their competition, because they focus on the things that drive profitability.


[17:02] When there is a lack of profitability, we go into survival mode


[19:15] How can a pawn broker think profit first? “Determine how you manage your finances.”


[20:08] Setup different accounts for different purposes (The Foundational 5):


  1. An Income Account
  2. Profit Account
  3. Owner’s Compensation
  4. Taxes Account
  5. Operating Expenses Account


[22:14] We need to vet our customers.


[25:45] The Profit First system presents problems before they become issues.


[26:41] Having a financial heart attack opens your eyes to what you need to change in your business and managing your finances. However, it never has to get that far.


[28:25] Allocate 1% of your income to your profit account and over time you will build your financial muscle.


[30:00] Suffering is a sign that there is something wrong with your business.


[30:39] It is easier to do things that aren’t working, that you’re familiar with,

than to do something new that will bring better results.


[31:22] Try something new; buy the book Profit First and see how it changes your life.


Visit MikeMichalowicz.com or search for “Mike Motorbike” and the first result will lead you to the website.


Remember to visit our Facebook page and website.


Yigal Adato

Yigal is a 3rd generation pawn broker, and is now a mentor, coach and educator with the pawnbroking industry.

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