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. My guest today is a repeat offender. His name is Mike Michalowicz. M-I-C-H-A-L-O-W-I-C-Z. He has a website that has that name on it. I don’t know why, but he does.
Mike: The worst name. I set up a new website Mike Motorbike. It was my nickname in high school and it rhymes and people don’t remember it. So mikemotorbike.com gets to the same thing.
Josh: I guess we don’t have to bring Mike on. He jumped on. Here he is.
Mike: Yeah, [inaudible 00:01:41] name, Josh. That’s how I do it as insert myself. Like you said, you’re an interrupter. I’m an over talker so there we go.
Josh: In the first session, we talked about the basic of the pyramid and why we need to start the bottom go to the top. Let’s dig in a little bit on some of the levels and some of the things I’ve got questions on. You have a coordinate for sales. Then there you say, we have a link, personal objective. What is that?
Mike: Yeah, so I call it Lifestyle Congruence. Well, here’s what’s fascinating about sales. Many business owners, actually the majority business owners that I investigated, set arbitrary sales goals. They start a business and they say, “We need to hit $100,000.” Then when they hit it, like, “Well, that didn’t work.” Then they say, “Well, maybe it’s a million.” It says arbitrary.
What I realized is that the number one determining factor if the business is working or not, is supporting the lifestyle they desire. We actually have to look at the lifestyle first, what is the foundational lifestyle requirements? The big dream picture, what’s the foundational? Then we reverse calculate what sales at what profit percentage needs to be achieved to support that? That’s why I call it Lifestyle Congruence.
When we did that, a lot of business owners realized that maybe sales didn’t need to be nearly as big as I thought. Maybe they have a smaller set of sales with better profit margins. That number, the sales number is no longer arbitrary. That’s what it is.
Josh: We have a fair amount of service providers who listen to this podcast. For you folks that just heard that, if you do what Mike just talked about you go through the exercise properly, you’re going to find out you need to double your prices.
Mike: Right, yeah, double your prices. It’s usually a margin game. The thing is, you want to double your sales. I just want to differentiate that. It’s unlikely that you need to sell twice as much. You need to sell what you’re selling at twice the price point.
Josh: Again, this is for people who trade dollars for hours, for time of some sort. Even if you’re charging them a retainer fee, you’re still doing that is that people in that world and believe it or not, the majority of the businesses in the country right now they think they have more time to sell than they do.
Mike: I went to the manufacturer that made leather products. We actually quadruple the prices. They were so afraid that customer would buy less. They actually saw an uptick in purchase because people also translate price into quality. They saw better quality just by paying a higher price.
Josh: I’ve gone through this exercise. I’ve done this for my [inaudible 00:04:03] group who you’re very aware of. We’ve gone through this exercise where I say, “Okay, how much do you need an hour?” People say $100 an hour. Okay, great. How many hours do you have a year to sell? They say, 2000. I said, “Well, no, you don’t.”
Because unless you’re going to work for 4000 hours a year, you don’t have $2,000 to sell. You have about 800 hours to sell. So if you remember, what do you need on an hourly rate, but your utilization rate at 800 hours a year? How much do you need to sell or charge to make a living at that? It’s typically $250, $300 an hour, if you think $100 is what you need to start on 2000 hours.
Mike: Yeah, that’s really simple. This is a simple way of saying it. That’s exactly the case. There’s another experiment I run with people. This speaks more about the order level of the business hierarchy of needs. I do these live events, I’ll say, “Who would rather make $10 an hour versus $100 an hour?” Every hand except for a few goes up when I say $100 an hour and the $10 an hour people might, why wouldn’t you want to make $100 an hour?
There’s some people that just trying to challenge the system or whatever, or just weird. Then I said, “Now we’re new parameters, who’d rather make $10 an hour an automatic meaning every hour the day the money is handed to you. And the hundred dollars an hour is on your work time? You have to work to dilute to make that, which would you prefer? This starts becoming a little bit 50/50. An hour sitting on the beach sounds great, but it’s only $10 an hour.
Hundred hours an hour is better by workforce of 50/50. Then the last variable I say is, who would rather make $10 an hour, but there’s no limited ceiling that over time it can become two times $10 an hour so 20 or 40 or 100 or 1000 has no cap, but the hundred dollars an hour can never be improved or increased, who wants what? Then almost everyone says I want $10 an hour. That represents the three stages of a business.
Then the first stage particularly service business, it says the owner and they are working for $100 an hour and they got to work your tail off. Then the second stage is there are net consideration. Should I hire someone, but if I do, I’m only making $10. Now I’m going to take a hit on my income, but it’s automatic and they often start waffling there and revert back to the first stage.
We get past that consideration and achieve the realization that $10 an hour can be amplified, then our focus becomes on amplifying this $10 an hour. That’s the intention to fix this next, to start moving up this hierarchy is to realize the value of having other people, other resources do the work and you’re choreographing the resources to get those outcomes you want.
Josh: To do that, you have to become a delegating ninja.
Mike: Don’t wear a ninja costume. You look like a weirdo.
Josh: No, I’m weird already.
Mike: Would you do that? Can you imagine you come in with your dojo, one Toshio, you’re kind of kicking around. You take this work. You take that work.
Josh: It would be fun to do, but the truth is the hardest skill in my opinion for a business owner to learn. That’s probably in level three believe it or not because level one and two you’re really have a bunch of helpers. You haven’t started delegating yet, but you get to level three, you need to be delegated.
At level three, when you’re starting to delegate, it’s not going to work. It’s not going to work the first three, or four or five or 10 times try to delegate. You’re either going to become a micromanager or you’re going to be an applicator. You’ll go back and forth between the two as a rule. When you finally learn it, which is lots of small experiments, then you can get into level three and finally move on to level four or five. What I find is most businesses never make it to four or five because they’re stuck at three.
Mike: Well, yeah. I mean the statistics support that. So the vast majority of businesses globally have two employees and the owners are three people or less. The vast, vast majority, I think, upwards of 90% of businesses have three people or less. The reason is because the owner is controlling all the decisions to your first point, micromanagement or is abdicating and therefore there’s no control. Just take care of that and then it’s unsatisfactory and they have to go back and redo the work.
Josh: You have to follow through. Mike, just for fun I’ll tell you what the statistics are in the US because I happen to know that is that there’s 28 million businesses in the United States. 22 million have no employees. Only 6 million have any employees. 300,000 businesses do more than $5 million in sales and 150,000 businesses do more than $10 million in sales. It gets really small, really fast. The truth is probably 50% of the businesses we have in the United States are stuck in level one. They just don’t create enough sales. Forget about profits.
Mike: I would say they’re stuck between the level one and level two. Level one sales, level two is profit. I agree. They’re generating sales, but also they haven’t considered the correlation between sales and profit. They want to know the margins. They don’t value the margins. They think that a lower price will sell better. They’re stuck in those two levels. We have to evaluate both. What we doing work on the BHN, the business hierarchy of needs is we do ask ourselves what kind of sales issues do we have.
Is it prospect attraction? Was it conversion? We ask ourselves questions about that. Sometimes you find that you’re actually doing the satisfactory level. We look at profit as a margin issue or that we’re accumulating debt to sell, which is the worst way to sell. Yeah, I agree. It can be sales sometimes isn’t the profit level two for small business.
Josh: It’s always going to go back and forth. So I want to take a look at problem prioritization. Talk a little bit about that.
Mike: That plays out at all levels, but often at the order level. In the business hierarchy of needs, the type of books Fix This Next is identify what your next big problem is, if you will, your vital need. At the order level, there’s what’s called problem prioritization. What this is goes back to our mutual hero now, Eliyahu Goldratt, is the Theory of Constraints. Where the biggest problem when resolved is will open the biggest pathway to improvement of our business? Most people, when they look at their business are looking at the apparent issues.
The obvious things, the things immediately in front of them because we can see them. We can therefore act upon them and see results because its front of us, but we don’t contemplate the big picture. We need to do is simply look at the empirical data. We say, of all the issues that we’re identifying, so the organization, which one is causing the biggest slowdown and the overall performance? The analogy I use in the book, Eliyahu Goldratt uses a very similar analogy is a chain. If there’s a chain between me and you, you’re in Vermont and I’m in New Jersey, we’re both pulling the chain as hard as possible.
The chain will break, but it will always bring the same point even with that ridiculous distance. The weakest link is what breaks. Therefore, when most businesses are trying to fix and strengthen all the links, the chain will still break just as easily at the same spot until the weakest link is resolved. Therefore, to improve the strength of the entirety of the chain, it’s not fixing all the links. It’s identifying the weakest one improving that and then the next weakest link will reveal itself and that one needs to be improved.
Josh: So after you read profit first, and we Fix This Next, I want you to go out and get a copy of the goal by Eliyahu Goldratt and read that. Then I want you to get a copy of Scrum by Jeff Sutherland and read that because you don’t talk about Scrum in the book, Mike, but it’s really the next thing. If you have projects, you’re doing project work like I’m building a house, or we use Scrum to build software.
You may have noticed that every once in a while you’re stuck on Google Chrome doesn’t work, you have to restart Chrome. The reason you do that is that Google just pushed out an update for Chrome. They never tell anybody do it because they push out an update every two or three weeks. They use a process called Scrum to do that.
With Goldratt stuff, the Theory of Constraints is really good for us whack a mole. Here’s an issue, I want to whack it and make it go away. At the same time, I have processes which is level three. I get to level three. I’m in the process part of my world. Then I need to have a process improvement process. In other words, a project improvement process, where in the theory constraints can be used, but it’s a little bit more efficient in my opinion to use Scrum for that.
You’re stacking stuff on top of this. You have such a good base to build on that it’s crazy for people not to use it. Because what happens is a lot of times, and this is something which I think is I promise you over and over is, business owners go for the wrong tool. They’re using the wrong tool to fix the right problem, whether using the right tool to fix the wrong problem because they shouldn’t be working on that problem in the first place.
There are things that are more important where fixes first really makes sense. Now we’re in the Theory of Constraints. Here we need to do let’s talk about minimize wasted effort, which is I think, in my opinion is a really big deal because we all go on businesses chase our tails around way too much.
Mike: Yeah. You’re honing in on the order level. At this minimize wasted effort is with every bottleneck there is an effort to resolve that bottleneck and that needs to be considered too. There’s a cost associated with opening bottlenecks. What are you going to gain? What are you going to invest? It’s just like anything else. If I’m going to tell you, “Hey, Josh, I’m going to give you $1,000.
Now, if you give me some money, now you know the return you’re going to make, but the question is how much money you’re going to give me? If you give me $10, I’ll give me $1,000. I think you’ll do that all day long. If I say you got to give me $10,000. I’ll give you $1,000 No way.
So many business owners just look at the one relation what they’re going to gain the bottleneck opening. They don’t also look at the effort required to do the opening. That’s the minimized wasted effort. Are we being as efficient as possible as opening bottlenecks and maintain the progress or the work that we’re doing?
Josh: Interesting, very interesting, what about role alignment?
Mike: Fascinating. It is something we’re experimenting. We did experiment with and now we’re in full throttle because this may become its own book. In the ease of realizations come about is usually my own stupidity. So I send too many emails out like oh my gosh, then something reveals itself. A few years ago came into the office with the big number. It was $10 million. I knew we could achieve this.
I gathered my employees. They all came around, had the music playing and all set up and I said, “This is going to be our year. I know the number. Get wait for it. It’s $10 million. We’re going to do it.” A Hush came over the crowd, my employees and I’m like, “Hold on. Why aren’t we all cheering? This is a big deal. I’m pumped for this. We have to do, we have a real shot at this. We just hustle.” There’s one just single clap just trying to supplant my enthusiasm. I then asked what’s going on.
Kelsey, who’s most trusted confidant is now president of our company. She came to me and said, “Mike, we achieved $10 million. You get the brand new car and the bigger house, but what do we get? I was like, “Oh?” The number that is set for the business achievement is for the benefit of the shareholder. The person that owns the organization in any corporation even the large corporations. When they said the number this is what we’re going to achieve, there’s the few benefactors and the many supporters but non benefactors.
I realized we need to do role alignment. Role alignment has two things. First of all, people are most satisfied doing work that satisfies them most. That’s obvious. Sadly, we take people and we put in roles where they shouldn’t be working and then we get frustrated. They’re not performing well. First of all, it’s aligning people with where their natural talents are. Secondly, and I talked about this in what I called intention alignment is what are people’s individual intentions for themselves and get very clear on it.
Going into this Copa situation, because I asked actively now, we knew one of our team members here was looking to get a new house. She was in the process of doing it. Another person wanted to learn Spanish. We look at what you really need to achieve now midterm and long term your lives. Then the job of the business owner, the leader of the business, is to organize the path of the business to satisfy or serve the individuals supporting the business to achieve their intentions while additionally moving in the direction of the intention set by the owner or the leader of the business.
Its intention alignment. Now Jenna and Amy and Jeremy and Liz, they are highly motivated to serve the company because it’s serving their individual objectives. That’s this blend of role alignment. They’re doing what they like to do. They’re seeing the outcome and benefits to them. Last thing is, I know the company’s not buying a house for Jenna. It’s simply helping Jenna make that dream a reality. We’re reminding her that where we offer flexibility in her work schedule so she can look and shop for houses. We’re asking her how it’s going on and reminding her that she made that dream a reality. That’s how we’re doing intentional. I’m mean matched up with their roles.
Josh: You just brought to mind two of my favorite things in the world. One is how to compensate people correctly. The other is how to use values in your business.
Mike: I thought you said the [inaudible 00:16:42] because I know that’s one of your favorite stuff.
Josh: Well, that’s a different thing. I did go out and buy Monster Speakers this year. I have this like this wonderful concert experience my house.
Mike: Good for you.
Josh: The thing about what you just said is that if you don’t have clear values that articulating with clarifying statements around those values, people have no idea what they’re joining. They’re just getting a job, but if you have those things, people can sign up for what you’re about. People who don’t like it, don’t bother sign up and they don’t join your company.
The second thing is, and this goes to shared values and role alignment is that when you compensate somebody it’s great, you come out the sales goal is $10 million. Let’s say that $10 million plus $3 million in your pocket, you need to be having a total profit sharing program within your company. That’s not just a retirement plan, but actually is cash bonuses people get based on the financial performance of your company.
I mean, when I found when I did this, my food service company we used to do this. I used to be called Mr. Boss. We have all these crazy bonus programs. I finally said, the heck with all that. If we hit a hurdle rate, 15% of profits are shared among everybody. It could go up to 25 if we really hit it off a ballpark. A couple things happen is that I didn’t have to police support performers anymore.
Mike: Oh, interesting, yeah.
Josh: The good performers in my company did it for me, because they would go to those people. They would say you’re taking money in my pocket so get it straight, or get the heck out of here. It made life a lot easier so people don’t work for finances, but they don’t ignore it either.
Mike: 100% agree, we do a quarterly profit distribution here. People are anticipating it. They’re looking to the numbers. We report the numbers regularly, every Wednesday. Actually, this morning, as of this recording, we recorded the numbers. We had a quiet week. It means something more, because it impacts you personally. I agree, that’s not the ultimate motivator, but it puts food on the table. We want to know that we can put food on the table and a little extra green. Now that doesn’t hurt. They noticed.
Josh: When you combine an open book management system where you’re sharing all your numbers, and you have a profit sharing system which is open and transparent so people know how they earn, what they earned is not pennies from heaven. You have clearly articulated values with clarifying statements. You’re hitting both sides of that equation.
Mike: There’s nothing to hide that. So these businesses, it’s funny, I worked with a guy a while back and the business was doing pretty well. He bought a brand new sports car. I want to work on and he never tried to work. I said, “Why aren’t you driving to work?” The way people would interpret the wrong way. You’re probably right. The reason interpret wrong way, it’s because he cloaked what the numbers were really like. He now had to live this duplicitous life almost, it was bizarre.
Josh: It makes life really, really difficult. We have time for one more little topic here. Let’s talk about motivation and dream alignment.
Mike: Yeah, okay. We talked about intentional. There’s a great book on this by guy named Matthew Kelly called The Dream Manager. I had the opportunity to interview a company called Gen Cola, which is a janitorial company, which was the inception for that book dream manager so definitely check that out.
The intention alignment that no one cares about the business nearly as much as they care about themselves. But when the business cares about their own intentions and dreams becoming a reality, they start to fall in love with the business. On my own company you can’t see on the wall, maybe you cannot see if we can turn the thing. Right there, it says, eradicate entrepreneur poverty.
Josh: By the way, that is my favorite mission statement of all times.
Mike: Oh, wow. That means the world to me. That is the mission, my personal mission, but it’s because a business is an amplification of the owner. I said this is our mission is to eradicate entrepreneur poverty. I’ve a visceral reason behind that. When we bring people on, we don’t say, “What do you think about eradicate entrepreneur poverty?”
We simply say, “What’s been your experience around entrepreneurship? Has anyone in your family done it?” We want to hear the true raw stories of struggle, and pain, and everyone that we meet with seems to have a story of an entrepreneurial journey that has gone awry. When they visually connect with it, we say, “You get it, you feel that pain. You’re on board.” Some people say, “I don’t know any entrepreneurs.” They say, “Entrepreneurs are rich people. That’s how you make tons of money.” I’m like, “Okay, you won’t get it.” There’s people here, when we start every huddle, we have a daily huddle by saying, “Why are we here? We’re here to eradicate entrepreneur poverty.”
We’ll go to stories of how one families living off of welfare because the entrepreneurial passion spirit failed for that family. Another one, they started their own business and they came out as losing money. It was the worst experience financially for them. It codifies the group. Here’s this sense, I used to say if you can get visceral. Now, I’m going to say it’s the word angry. Like, when I see that, when I see additional poverty existing, it actually makes me angry. It gives me the energy to fight back.
That’s what my colleagues, I want to see the same fight in them. That becomes unstoppable. We have a tiny business. There are 12 of us here. We are outpacing and mostly part timers too. We’re outpacing competition, three or four times our size on revenue because of that visceral angry requirement to resolve this. It’s the ultimate drive factor.
Josh: That’s cool. Hey Mike, we are unfortunately out of time. The first thing I want to say is go buy Mike’s book, Fix This Next and get it all pushing you buy books. Mike, you didn’t tell me last time around this, but tell me about some of your programs and where people can find them.
Mike: Sure. We have an organization called Prop First Professionals. We’ve certified accountants and bookkeepers in Profit First. We have advisors, they are called Fix This Next advisors, people who diagnose businesses to identify exactly what they need to do next and then help outsource to the resources that can find that for you and solve that for you.
Sometimes they can solve it themselves. That’s Fix This Next advisors. Also, the Pumpkin Plan another one of my books. We have Pumpkin Plan Strategist. I guess the starting point because we’ve been talking about Fix This Next is go to fixthisnext.com. I think there’s something really cool there. We have a free evaluation. You can click on the free evaluation and evaluate your business through 25 questions. It takes five minutes or less and it will pinpoint for you exactly the one thing you must work on. If you need help with it, we’ll get you to Fix This Next advisor.
Josh: Sounds great. I also have an offer for you too, which is I’ve been working in this area called the Financial Freedom Project, which actually fits into my new passion. I’m calling 100 year business. A 100 year business basically, is what you would be doing differently today, if you knew your business was going to be here 100 years from now.
The truth is, this is becoming a big deal. Here’s why it’s a big deal, if you’re 30 or 40 years old, you need to be thinking about living to 100 years old because you’re going to. You’re likely going to be healthy right up to your 99. You’re not going to be retiring at 65 and having 35 years of retirement for two reasons. One, if you’re bored and two, you’re not be able to afford it.
But you do want to become financially free from your business, which means you’re going to be changing your relationship to your business. So I wrote this ebook, which kind of explains what the Financial Freedom Project is all about. It’s easy to get. You just go to our website www.sustainablebusiness.co/freedom. You’ll get a copy of the book. Hey, this is Josh Patrick. We’re with Mike Michalowicz. You’re at The Sustainable Business. Thanks a lot for stopping by. I hope to see you back here really soon.
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.