In this episode Josh talks with Mike Michalowicz. They discuss making the vital change that will level up your business.
By his 35th birthday, MIKE MICHALOWICZ had founded and sold two multi-million dollar companies.
Confident that he had the formula to success, he became a small business angel investor… and proceeded to lose his entire fortune. Then he started all over again, driven to find better ways to grow healthy, strong companies. Mike has devoted his life to the research and delivery of innovative, impactful entrepreneurial strategies to you.
Today, Mike leads two new multi-million-dollar ventures, as he tests his latest business research for his books.
In today’s episode you will learn how to:
- Evaluate your business
- Apply the fix
- Find the next challenge
- Level up your business
Narrator: Welcome to “Cracking the Cash Flow Code”, where you’ll learn what it takes to create enough cash to fill the four buckets of profit. You’ll learn what it takes to have enough cash for a great lifestyle, have enough cash for when an emergency strikes, fully fund a growth program and fund your retirement program. When you do this, you’ll have a sale ready company that will allow you to keep or sell your business. This allows you to do what you want with your business, when you want in the way you want.
In Cracking the Cash Flow code, we focus on the four areas of business that let you take your successful business and make it economically and personally sustainable. Your host, Josh Patrick, is going to help us through finding great thought leaders as well as providing insights he’s learned through his 40 years of owning, running, planning, and thinking about what it takes to make a successful business sustainable and allow you to be free of cash flow worries.
Josh: Hey, how are you today? This is Josh Patrick. You’re at Cracking the Cash Flow Code. Today, my guest is a one and only Mike Michalowicz. Mike is one of my favorite people in the whole world. He appears when he does new book on this podcast. He has a new book. By the way, I think is far and away his best book is called Fix This Next.
We’re doing something I’ve only done once before, which is we’re going to be doing more than one episode at a time because there’s so much stuff in this book. I want to spend the first podcast episode. We’re going to talk about the book and the theory of the book. Then the second podcast episode, we are going to get into the specifics in the nitty gritty of the book and how you’re going to use that to make your life better and make your business significantly better. Let’s bring Mike on and we’ll start the conversation.
Hey, Mike, how are you today?
Mike: Good, Josh. How are you my brother?
Josh: Good. I forgot to tell everybody by the way, that you’re also the author of like 9,000 other books. Among them is Profit First, Clockwork and The Pumpkin Plan. You don’t know this, but two of your books are my 20 must read books for private business owners now.
Mike: Wow, thank you. I did not know that. You can see that I strategically market them at all times behind me.
Josh: Well, I think that’s a good way to do that. In fact, we’re going to help you with that right there.
Mike: Oh, wow.
Josh: We’ll leave that up for a while and we’ll let people go the Amazon or wherever they buy books and buy a copy. By the way, I managed to get a pre-publication copy. I read the whole thing in like two days and actually took notes on it, which is really unusual for me to do with any book I read.
Mike: I feel I’m in a special category with you.
Josh: Well, you’ve been in a special category for years. In fact, you were the reason my first book came out and now I’m working on a second book.
Mike: Normally the big anteater is a unique cover, which is super smart.
Josh: Yeah, that covers that’s a different conversation. That cover was totally by mistake. Anyway, let’s get started on Fix This Next, which I think is really an interesting book. How did you come up with the concept and talk about the hierarchy needs if you would for a while?
Mike: Yeah, for sure. The concept came intentionally, but unexpectedly, if that makes sense. It takes me about five years, Josh to write a book. It’s a lot of research. It’s testing that hypothesis until I arrive at a thesis and then testing it further. Employing it internally, I own three businesses actively and then writing it.
Five years ago, I email my list of readers and say, what’s the biggest challenge you’re facing this year? I’m not the most tech savvy guy, I must have done like a triple click or something because three emails went out in the same day at different times. What was interesting is in some cases the same person answered the exact same question the same day with different answers. One guy’s like, “In the morning, the biggest challenges is your sales and in the afternoon was hiring people and by evening it was setting a vision.” That’s when it became clear to me that the biggest challenge entrepreneurs have is knowing what their biggest challenge is. That became the conception of this book.
Josh: Interesting. By the way, I would agree with that. That’s been my experience also.
Mike: Yeah, it’s my observation. That’s the first time I had some empirical data to prove it out just in the way people responding. I think most of us go in with into business with a big vision and big plan, but immediately thrown into the fire and it’s all about firefighting for the rest of the business. It’s constant survival.
Josh: I just want to stop you right there for a second because you just said something really important is that most business owners spend their entire life firefighting, being reactive and not proactive. Why do you think that’s true?
Mike: I think I know exactly why it’s true. I’ll show that I can do a little demonstrative even an illustration to drive.
Josh: Okay. I like that.
Mike: Now we’re going crazy. This will require a piece of paper. I’ll draw it here. You can follow along in your head. You don’t need to draw, what you do is you draw a letter A in the center of a piece of paper and put a circle around it. What that represents is where we are right now in this moment. Point A as I call it. That’s the now and the second step is we draw as many errands we choose. Will choose three in this case, three arrows away from A in any direction you choose.
Each arrow represents a choice we have in the moment to escape the now to get out of now for many businesses is crisis or challenge, particularly in the environment right now with the economic shift. To escape A, I can go in this direction or up or whatever. The final step is to draw the letter B in the bottom left corner of that piece of paper and put a circle around it.
What B represents is the actual vital need of your business, what action your business needs you to take to serve it to grow it to your vision. No one draws arrows towards B are very few. The reason is very obvious. We didn’t know where B was in the first place. That’s the demonstrative of how businesses run. We know where we are now. We know we have crisis. So we take actions to get our crisis. But what it does is it moves us to the next A because we’re just moving around in circles. The next A is tomorrow’s crisis. We make a decision to escape it in any direction. We choose the new A in many businesses start moving in a circle is this constant circular pattern because they don’t know where B is.
Now, sometimes this is actually the most dangerous thing. Sometimes a business takes an action arbitrarily that’s in the direction of B. They move towards B without even knowing it. As I say, happenstance happens. So what happens is, someone comes in, they’re putting out fires all the time. One day, all of a sudden, the business starts clicking, and they’re like, “Oh, my gosh, I finally I got to figure it out. We’re crushing it. We’ve got it moving forward. This is the day I’ve been waiting for.”
The next day they return to the business and the shit storm returns. Because they didn’t move toward B intentionally. They moved to B by chance, but they ended up in a new A so not knowing where B is. It’s just another crisis. Then they start going in a circle again. So the goal of the fix this next system is how do we identify B? To your point when we’re talking off air— The Theory of Constraints. What’s the big bottleneck or the big problem in your business that actually needs to be resolved? How do you identify? What is it? Once you know what it is, then we can make decisions that are congruent with that and deliberately move our business forward and permanently move our business forward.
Josh: This fits in really nicely—Stephen Covey made this popular in the Seven Habits of Highly Effective People. What’s really called the Eisenhower Decision Matrix. I just learned that recently, which is most business owners live their life on urgent and important which means they’re always being reactive. The place where you want to be which is allows you to go to B is you want to be important but not urgent. Most owners never make it for more than like five minutes a day into the important but not urgent quadrant which is really where you want to be, which speaks to, by the way, and we’re going to talk about this a little bit more is how to become operationally irrelevant in your business.
Mike: That’s the main goal, yeah.
Josh: You really did a great job with your book where you say, “Gee, I want you to take a four week vacation every year.”
Mike: Yeah, that’s clockwork, what determined is that we humans, we need the most simple, impactful thing that gets us 80% of the way to the goal. If we can get that done, we’re on our way to the goal. I found with all these things, in regards to business efficiency and building systems, there’s millions of things to do, it was too much overwhelm so kept boiling it down and boil it down. The last piece of sugar was that fortification.
If an owner committed to removing themselves from the business for four weeks, the other stuff becomes mandatory. You have to figure out how you can leave for four weeks, and you must put that stuff in place. It’s not perfect experience. You leave for four weeks. You come back. There’s probably going to be problems. Now, those problems that were revealed themselves are the true priority problems that you need to address to become operationally irrelevant.
Josh: I would never recommend going away for a month, I would start with two weeks.
Mike: You build your way up for sure.
Josh: You build your way up, but what you’re going to find is that when you get to a month and you build it up properly, you should be coming back to no problems because you should have systematize your business allow you to do that. I mean, you talk about this so brilliantly in this book with your assistant who you also signed off on sabbatical.
Mike: Yeah. Kelsey. I talked about her next experiment. She became president of our company, in Fix This Next I talked about was I’ll actually show you the hierarchy of needs.
Josh: I want to get into that right now actually.
Mike: Oh, perfect. I got what we want. There’s five levels of needs I define the business and how this came about is, I believe that the DNA or the makeup of all business at the essence is identical. In fact, all humanity is identical when you look the essence of it. Now, if you look at two people say you and I are standing next to each other, we’re very easy distinguish: height, skin color, accent, all those elements but if you peel back the skin of humanity it’s basically identical. Like if I go to the hospital, because I’m having cardiac arrest. The doctor doesn’t say to me, “Hey, your heart Mike is yours in your foot.” It’s always in the same spot. The biological makeup is identical.
Well, in business, the biology of is identical the essence of how a pizza shop runs or a law firm, when you boil it down to the essence of it is the same. It translates into this hierarchy of needs. Then, which by the way, is very similar to Maslow’s hierarchy of needs with one great significant differentiator. Foundationally, every business needs sales. Sales is it says it here in Texas is the creation of cash. It’s the oxygen for business. If you have zero sales, you have zero source of revenue, you have no cash coming in your business is suffocating. It’s the oxygen for business.
Once that is adequately satisfied, that’s the key variable adequately satisfied then we move on to profit. The profit is the stability of an organization. I think it was Warren Buffett who said when the tide goes out, you see who’s swimming naked. When the recession goes out, you see what businesses aren’t focused on profit. That’s why so many businesses right now are getting wiped out. Once you have some adequate sales, you need to get adequate profit.
Once you’ve adequate profit, the next priority need is order. That’s what we’re talking about clockwork in business or operational efficiency where there’s no dependency on the owner. Next level above that’s called Impact. Impact is the creation transformation. This is where business owners are not in the business of transactions, but in the business of shifting people’s lives permanently to up to a positive. Then the highest levels of legacy. That’s creation permanence. What’s so fascinating at this level, as I was interviewing business owners, I found that these business owners realized they were never business owners. They’ve been business stewards, meaning that they realize they had a responsibility to bring an entity to life, but it’s about the life of that company. It’s less about their involvement in the business. It’s about the entity living on into perpetuity.
Josh: I just want to interrupt you for a second, Mike because I’m a great interrupter. There’s a couple of things which I think are really interesting, those top two levels. One is once you get to level four impact, you really want to be thinking about at least in my opinion of looking at or going through the qualification process to be a benefit corporation. It’s a really interesting— it’s not a tax structure. It’s a legal structure. What a benefit corporation does is it means that you a triple bottom line company is that no longer is profit, the only reason you exist. You also exist for people on the planet at the same time. It’s a really interesting form. If you’re at that impact level, you really should at least go to B labs, look at what they’ve got, and see of becoming a better corporation actually makes sense for you. That’s something which I highly recommend to people. I interrupted you. Go ahead. Sorry.
Mike: You said you’re a famous interrupter. I’m a famous over talker so that’s totally appropriate. So what I wanted to share in BHN is these work relationally and you must always satisfy the foundation first. This translates a Maslow’s hierarchy of needs. If you’re hearing that, he said there was five levels of human needs. The base level we’ve physiological needs to breathe air, drink water. Above that safety needs highest level self-actualization.
Anytime a base level needs not satisfied, it becomes the priority need. So some guy, like there’s a plastic bag over my head, and wraps duct tape around my neck, which you’ve been to New Jersey, it’s like a 50/50 in here. If that happens, I got to rip the bag off my face. That becomes a priority, even though I may be living a higher level at the moment. Well, in our business, we may be living right now to impact our legacy level, but then things change in the business or the global economy in this case.
We revert back to needing to breathe oxygen or to bring stability, the equivalent of Maslow— shelter to our business. Always revert to the base and say, “Do we have adequate sales to support profit?” We’ve added a profit to support order and you continue up the hierarchy that way. The other thing is interesting is some people try to skip levels. They say, “I’m going to try to change the world. I’m going to be so caring for my community. I’m going to be all about impact.” They ignore the foundational levels. Sadly, I see it happening right now in the market, in our own neighborhood with COVID virus, some businesses say we’re going to serve our community more than ever.
We’re going to care for the community. They stopped selling, they started serving. Two of them went out in business within four weeks because they exhausted any kind of runway they had for themselves. They try to skip up to serving without breathing air and that’s impossible. What we have to do is always start at the base of the business hierarchy of needs and then work our way up. Once the level is not satisfied, focus the fix there. The last thing I want to share about this is all elements are happening in our business all the time. Just like right now, while we’re talking. Maybe Maslow is considered self- actualization or something like that, but we’re both breathing. We’re not thinking about it. It’s an automatic process. All these elements are automatically happening. We simply use this chart to determine where do we need to apply the next fix.
Josh: I want to add a little bit to your profit level because I think that especially in the day of the Coronavirus, which is sort of my lead I’ve been talking about a lot recently is that I’ve taken profit first. Okay, here are the four buckets of profit you need to fill. One was lifestyle, two is a fully funded growth program. Three is a fully funded retirement program as you’re likely not doing right now. Four, which is the really important piece is a fully funded emergency fund that will have your business last for at least six months, but hopefully a year.
What I’ve been seeing in this process is, luckily, a bunch of my clients have actually taken that advice. They are now in the middle of the best buying spree they will ever see in their entire life. Because those who didn’t do it, which is most businesses because you’re right, most businesses are an A with a going off in all sorts of different directions and not focusing on anything that will actually move them they’re not going to make it. They’re not going to have enough cash to get through. As we both know, cash is the fuel that runs the business.
Mike: There’s no question about it. I agree. There’s opportunities in this market for bold moves, which ironically are not bold at all. Marketing into your competition now because the competitions weakened, and why not market into that, or acquiring companies. You can do owner finance asset acquisitions right now, which means you put nothing down, and the person that you buy from actually affords you the loan so you just pay off of the revenue that you generate. Those opportunities exist.
The danger of writing profit first is some people—my fear is being the— I told you, you should have coulda type of thing. Yeah, you should have taken profit first, but you didn’t sorry. It’s not the proper response. It would be nice to be deprived first. But the nice thing is even in a down economy, we can start putting the infrastructure in place to build profit and to build sales and interestingly, and I’ve now studied every recession back to the great depression. It seems like there’s a five to 10 year cycle of this consistently, the strongest companies come out of recessions. Google, Amazon, Microsoft, Apple, GE, all these companies, these mega companies were built during recessions.
What happens is right now there is a decreasing supply. Our competition is fading away. There’s remaining demand pent up demand, meaning it’s not activated. Some demand is stopped, but is waiting until they feel emboldened or empowered again and the economy serves them they’re going to buy. But as the supply deflates and the demand waits, there’s going to be that moment where demand is reactivated. Now you are one of the few suppliers. It’s massive opportunity for you.
Josh: If you’re able to take advantage of this, and that’s a big gift. If you’re able to take advantage of this. We’re probably in the best situation we’re ever going to have. The other thing around this is I’ve studied generations for years, generational theory. Strauss- Howe wrote a great book called Generations. In India, they talk about the 80 year cycle event. We are in the middle of an 80 year cycle event.
This is where major societal changes happen. You have to be thinking about this event versus 2008 or 1999 or 1978 because it comes along every four generations. If you go back 80 years, it was World War II. You go back 80 years before that it was a civil war. If you go 80 years before that it was the American Revolutionary War in EDB years before that was the British Glorious Revolution.
Mike: Areas is a war and we have the COVID wars, is that what you’re saying?
Josh: I mean, it happens to be wars are there. If you really go back 80 years of real society, change in event wasn’t the war. It was a great depression.
Mike: Yeah of the 1929.
Josh: Well, it’s 1931-32 is where the Great Depression really kicked it. The market crash was in 2009. Then next over the next three years, we had this ongoing drilling down of the economy which would come up and go down and come up and go down. In my opinion, we’re likely in a societal change that happened as a result of the Great Depression is going to happen because of the Coronavirus.
Mike: Yeah, you know, quite possible and I can’t prognosticate what’s going to come our way. My guess is I looked at the influenza virus and so we had the first surge, then it starts to wane. Then you have a second massive wave. I think right now we’re approaching that second massive wave as people go back out there, which means there’ll be more shutdowns of businesses. There’s also— I call it the triple tax punches coming in. As I’m investing in small businesses, that’s my sweet spot. I’m really concerned about this.
July 15 to September 15 is going to be a treacherous period because tax payments have been deferred. The April 15 tax payment in the US deferred till July 15. The June 15, installment of the estimates now July 15. So two tax payments are made due July 15. July 15 of 2020. We taxes for q4 2019 when many businesses were booming. That’s a big fat tax bill then you’re going to have the q1 tax bill due July 15. You can get double hit. Then 60 days later, you’re going to have a September 15 two installment due. It’s the first time I believe in us history that three tax installments are due within 60 days. My guess right now what I’m observing is businesses are not prepared for that. They’re spending that tax money to save the business. When these taxes come, they’re going to get walloped so I’m really fearful.
Josh: The unfortunate thing is a lot of these business will go bankrupt. That debt is not discharged.
Mike: Discharged, exactly. They’re going to get slammed because I’ve been on installing plan once before because of my inappropriate management of money 12 years ago, which welcomed me to the pain of this is the tax does not go away. The government is harsh. They’ll come after you with interest but also penalties. It will keep on punching you in the face over and over until you’re numb. I’ll keep punching you then so it’s going to be dangerous.
Josh: Yeah, I would agree with that. Hey, Mike, unfortunately for this first podcast episode, we’re out of time. Well, we’re going to come back again, but before we get out of here, how do people find you and you have a whole bunch of programs that you run? Can you take a minute just give us a real quick overview what you’re running and how they can find them?
Mike: Sure. I’ll start off with a bold ask so anyone who’s watching live or if you’re watching recording, I invite you to get Fix This Next. I’m so happy, Josh. He says my best book because I feel this is the most important work of my life. This may be my Pinnacle piece. It will serve you. It’s the most affordable effective way you can serve people.
If you’re willing to get on Amazon right now, because it is the most affordable and effective way I can serve you. It also serves me as multiple people buy on Amazon. This is my launch period right now. Its multiple people buy on Amazon, it promotes the book to other entrepreneurs so that’d be of service to me. If you do it by the way, send me an email to mike@mikemichalowicz. You’ll see the spelling when you get the book firstname.lastname@example.org say “Josh Rules” in the subject line so I know you bought the book. I’d like to send you a gift.
I have content I got edited out called The Lost Content. I like to send that to you as a gift. So email me at email@example.com. Tell me about the book, Josh Rules in the subject line. I’ll hook you up with that. That’s the best step to take right now.
Josh: Okay, cool. I have an offer for you also, is that as a result of what’s been going on right now and actually I’ve been doing this for years, is that I want you to become financially free from your business. You become financially free from your business. You have all sorts of options to play with your business, but your life and how you live. You’re likely going to have a lot more fun. Love your business, do this, but you have to become financially free from your business to do this. So I put together this program I call the Financial Freedom Project. I’ve got an e-book I wrote about it if you want to get its really easy. Just go to our website, www.sustainablebusiness.co/freedom and you’ll get a chance to get our free e-book. Hey, this is Josh Patrick. You’re with Mike Michalowicz. You’re at the Sustainable Business. Thanks a lot for stopping by.
Narrator: You’ve been listening to the “Cracking the Cash Flow Code” where we ask the question, “What would it take for your business to still be around a hundred years from now?”
If you’ve liked what you’ve heard and want more information, please contact Josh Patrick at 802-846-1264 extension 102. Or visit us on our website at www.sustainablebusiness.co. Or you can send Josh an email at firstname.lastname@example.org. Thanks for listening and we hope to see you at Cracking the Cash Flow Code in the near future.