#52: Run It Like Clockwork with Mike Michalowicz

Hala Taha: [00:00:00] This episode of YAP is sponsored by Fiverr. I've been using Fiverr for years. In fact, I got the YAP logo made on there, and if you've seen my cool audio games with animated cartoons, I get those images from Fiverr too. They have affordable digital marketing services and over 100,000 talented freelancers to choose from.
I really highly recommend you go and check the site out. It's super affordable. So if you're interested to get Fiverr a shot, hit the link in our show notes. You're listening to YAP, young and profiting podcast, a place where you can listen, learn and profit. I'm your host, Hala Taha, and today we're talking to Mike Michalowicz.
Mike is the author of six books, all dealing with different facets of the journey of entrepreneurship. He's a serial entrepreneur, writer and podcaster, and has seen and done a lot in his life, including the launch of three multi-million dollar companies before his 35th birthday. Today on YAP, we're going to extract some valuable lessons from him about entrepreneurship and running a successful company.

[00:01:00]
We'll learn his seven step program to run your business like clockwork, including the importance of establishing a QBR or queen bee role to protect the lifeblood of your business. We'll also cover his profit first framework and gain insight on the key methods to optimize the profitability of your business. Hey Mike, welcome to young and profiting podcast.
Mike Michalowicz: Hala, thank you for having me.
Hala Taha: I'm so excited. So many of our listeners are entrepreneurs or aspiring entrepreneurs, and I'm sure everyone is going to look forward to all the valuable lessons that you have to share. So you've written so many amazing books. You are a bestselling author. You've written surge, profit first, fix this next, clockwork, the pumpkin plan and the toilet paper entrepreneur, all of them tackle the topic of entrepreneurship and building a business from different angles.
So at a high level, could you just share what your main experiences that you've had are and how did you become the entre pro neurdo that you are today?
Mike Michalowicz: Oh,

[00:02:00] that's, I've never heard that term.
Hala Taha: I made that up.
Mike Michalowicz: That's awesome. That's awesome. I love it. I've been called notch pro whore, by the way. That was the someone's gosh, you just don't stop doing things. Settled down.
My background is entrepreneurship after college I, of course getting a corporate job or something, but I couldn't. So I was thrust into entrepreneurship. Never had a desire. A few years into it, I fell in love with it. It just became a absolute passion of mine. And the journeys for me at least was very difficult.
Tons of financial struggle, tons of stress. It's funny. You see someone's resume or my resume and oh, built four multi-million dollar companies, sold two of them. And it's all true, but what's left out conveniently is the struggles in between the launch and that the exit. And, on I'll never forget this day.
It was February 14th, Valentine's day, 2008. I had started my third business and it was a calamity as doing angel investment work, helping other businesses start up putting my own money into them. I'd made

[00:03:00] some money selling my prior companies and I had no right to be that space. I had no idea what I was doing.
I actually evaporated all my wealth. And I had to come home to my family and tell them that we were going to lose our house, which we did and our possessions and all this stuff. And in the defining moment, I was looking at my daughter in her eye. She was nine years old at the time and telling her I couldn't afford to pay for her $20 horseback riding lessons, like a group session.
She'd love to go to because I was broke and she ran out of the room to go. She ran into her bedroom as fast as she could, grabbed her piggy bank. And she ran back to me. He goes daddy, I'll start supporting our family. And that moment was this wake up call that I really didn't understand entrepreneurship.
I didn't have fiscal discipline. I didn't understand what profit was really or how important it was. I didn't understand efficiency. So I started writing about it and grading is a good therapeutic processes just to write your thoughts, but it started to formulate a book. And that's when I

[00:04:00] realized I need to research and understand and learn.
Everything about entrepreneurship, selfishly for myself, so I can get better at it. And then hopefully so that other people will have an easier journey. Entrepreneurship is fricking hard and I'm just trying to make it just a little easier. Just simplify, a little bit more.
Hala Taha: Yeah. So what are the key milestones in your career? If you could just rattle them off.
Mike Michalowicz: Okay. So I'll give you the key highlights. First company was in computer systems, computer technology sold that to private equity. After I think we got to about $2 million in revenue. So a very small business, second company was in computer crime investigation.
Data forensics is what the direct term was and our company was one of the lead defense investigators for the Enron trial. That was actually our marquee case, but we just celebrity cases, sadly, some many criminal cases we did analytics on and that was acquired by

[00:05:00] Robert half international. We were on a run rate for 7 million, just two and a half years in, and this fortunate 500.
So this is the industry we want to be in. And they bought us. That was the grand exit. And then, another highlight. I told you is losing all my money, which is an important component. After selling the two businesses. I was cocky. I thought I knew it all. I didn't. I was very fortunate in the right place at the right time.
I hustled, I worked hard, but I wasn't working smartly. And then I became an author. So I have that as a business. I have six employees, so I was not just a, author guy in a corner typing away. There's a lot more to it. And then I also own a membership organization for accounts and bookkeepers.
We have roughly 450 active accounts and bookkeepers throughout the globe who are teaching our methodologies. And then I'm also on the board of a comment, on a board of a augmented reality company and work with a manufacturing company and an equity capacity. Yeah. Yeah. It's fun. But my full-time

[00:06:00] work though is authorship.
I just love to research businesses, small businesses. That's my space. Just love it.
Hala Taha: I had you rattle those off because I just want my listeners to understand that you're credible in this space. You have industry experiences. You've sold multi-million dollar companies. You're not just an author who's or an academic or something like that.
Mike Michalowicz: Right, I'm not pontificating oh, here's what you should do, but I can't though. The best thing is I, Everything I teach. I have Guinea pigs for my business. So I wrote clockwork. I know we're gonna talk about that. And I talk about this concept of a four week vacation, whatever we employed that.
And now actually all the employees we've mandated that for them, profit first of my most popular book currently, I live by that system. So everything that I teach I've tested. All myself before you ever goes to print. And I think that's different than some authors who, and I'm not discounting their work.
Their work is powerful. They don't necessarily, some of them have the practical experience of the implementation, just the study of it.
Hala Taha: Yeah. So I

[00:07:00] listened to your most recent book it's called clockwork. And in it, you say your mission in life is to eradicate entrepreneurial poverty and make sense, considering that you lost all your money and got it all back and you have so much value.
It was really hard to just narrow it down to one topic. So we're going to stick to clockwork, which is really about optimizing your time and profit first, which is about optimizing your profits. So we'll stick to those two different topics right away in clockwork, you say that productivity is shit. I say it's a trap.
It leads to more time to do more work. So tell us about that and what you suggest we do instead.
Mike Michalowicz: Yeah, so it was funny. I was in New York city. And what happens when you write a book is like you study and prepare a hypothesis. And I felt that businesses need more efficiency. And my belief was more productivity translates to more efficiency there.
They're almost synonymous. So I met with this productivity expert. His name is Chris

[00:08:00] Winfield. He had dedicated his life to the research of this stuff. And I sit down with him and that's the words he used. I said, Hey, let's get right to it. How important is productivity. And he looks me in the eyes and says, productivity it shit.
And I'm like, hold on, wait, you're the productivity guy saying this? This is what, and it was just around that time. Within the prior month or few weeks that he had realized that for teaching productivity for so long, that it's actually a trap. And here's how it works. How if you take on, eight hours of work in a day and you employ productivity techniques, To get through that work, theoretically, you'll be able to get that work done now in six hours, we'll say so the same volume of work done faster.
Here's the trap that now avails two extra hours that day to do more work. So it's the nature of entrepreneurs to take then take on more work. Now you're taking on the former eight hours that you've compressed to six plus two, getting back to eight. Now you're maxed out again. You need more

[00:09:00] productivity.
So we seek new tools, new ways, and we constantly compact ourselves with work. We allow ourselves no margin of error, no time to think it's this trap of just doing. And as we're talking, he says he was saying that a successful business. The owner is an owner and not an operator. Definitely not an employee.
I go to McDonald's admittedly, it was some kind of frequency because I traveled so much and I've started a routine and I encourage you to try the same thing. Next time we were at a fast food restaurant. If you partake in that type of stuff. I go to the cashier. And I asked them, I say, Hey, may I speak with the owner?
Not because I have a complaint. I'm just curious about the operation of your McDonald's here. I've never, and I've probably done this like 40, maybe 50 times now. I've never had the cashier say, oh yeah, we grabbed the owner there in the back. No, the owner is not, flipping burgers or cooking the fries or in that glorified
closet that they call an office. It's the store manager that's there. The business owners have

[00:10:00] employed and utilize the system that McDonald's developed and they seek out new properties to own more businesses, the funniest and this kind of epitomizes, what ownership has the funniest response ever had?
I was talking to some cashiers said, Hey, really I'm impressed by the operation here. May speak to the owner. And the cashier looks at me, says oh yeah, the owner came in two months ago to pick up money. I'm like, yes. So in clockwork, if we pursue productivity, we are actually forcing ourselves to do more work.
Now, I'm not saying you don't need to be productive as an organization, but what we need to do as business owners is transitioning from being the superhero that does the work for our business and the high end work to transitioning out. Instead of being a doer, we want to be, what's called a designer. And a designer is someone who has a clear outcome that we're looking for a business long-term, that's called a vision, of course, but also the short term, how do we choreograph our resources, the people we have, or the software we have or that one part-time contractor, if you're a small business, but how do you leverage the most out of the people and even the

[00:11:00] clients around you and the resources around you to get the outcome you envision.
It's really about thinking, not doing.
Hala Taha: Yeah. And I know in the book you say that we should be a designer and not a delegator. Could you explain what you mean by that?
Mike Michalowicz: Yeah. So there's four stages that a business goes through and it exists in all four stages, but the entrepreneurs journey is to climb the ladder, the base level, I call it the four D's the base level is doing and doing is where
we actually, as owners do the work necessary to support the business. Every business must be doing at the deliver your services or goods. You need to have the administrative work behind it and marketing. So the deciding phase is the next level up deciding is where we task rabbit individuals, but we control all the decision-making.
So if you ever hired an employee or a contractor, and I did this, I heard a girl named Jackie she's phenomenal. And she came on board and I realized one of the doing activities I

[00:12:00] was really engaged in was invoicing. So I said, Hey, Jackie, I want you to start invoicing. And she said, great I do it. And I felt great.
And then she came back a second later and said how we sorted these invoices. And I gave her an answer and she laughed and she came back at my office, had another question. It was a constant stream of questions, which in the beginning is great because it means she's a learner. But after a month of that, it's oh my gosh, can she not figure this out?
That's the deciding trap. And many small businesses are stuck here where the owner retains all decision-making because it's easy. It's just better to just tell them how to do it or do it myself at times, then really build a system around it. And it satisfies our egos. Hey, I'm the note all I'm the business owner, and for the employees, the safest thing,
cause if Jackie asked me questions, And I give her instructions and she follows instructions. She can do no wrong, even if I give her bad instructions, as long as she executes on it, she's good at following instructions. So that's a trap, but at a certain point, you do need to make certain decisions. So you need to move through a phase.
The next level is called

[00:13:00] delegation and delegation is not the assignment of tasks. So most people think it is. Delegation is the assignment of outcomes. And the difference here is delegation is where we are. Tell your employee, here's the objective we want to achieve. Do we have agreement on this. Now your job is to navigate it and give the employee the freedom to make all the decision making around it.
So with the invoicing is set assigned Jackie, Hey, go to invoicing. Now I'm saying, Hey, Jackie, it's important for us to build timely and accurately. That's the outcome we want to achieve. And we have to get agreement on that. I'm like, why do you think I feel it's important? And she said if we build timely, we collect our money faster.
It's fair to us. If we bill accurately where representing the work we do appropriately, so it's fair to our clients. So it's a fairness thing. I'm like, exactly. So go do it. And then, she starts doing it. She come back a second layer of the question. Now this is the key. When they come back with questions, your employees, you need to say what's your decison.
Push the decision back on the employee. And a lot of us have heard of this, not to make decisions for them. Most of us don't execute on

[00:14:00] it. That was what I found in my research. So you have to do that, but there's one other component. That's probably the most important component and true delegation that almost everyone fails to do yet
it's the most important. And what it is the approval of decisions that our employees make the approval of all decisions, even the bad ones, the support for employees. So if the employee comes back and makes a bad decision, At least they're making a decision. And if we say, oh no, that's totally wrong.
We're going to do it this way. You're very quickly slipping back to that deciding phase where it's control, which restricts your growth because now you're the one mind for the entire organization. So we need to prove all their decision-making, even the bad ones and give them the freedom to fix the mistakes that they make.
Now there's sometimes. They're gonna, try to make a decision that is really costly to the business. We should hire 20 more employees and they'll bankrupt us. In that scenario, you need to insert yourself as a coach and guide. The thought and logic with the employee say what's the consequences of this.
Let's discuss this before they proceed and curb that, but otherwise support the

[00:15:00] decision-making because that gives them empowerment that they're not going to be punished if they make mistakes. That they have given the freedom to find the solutions on their own, which ironically or coincidentally we do for ourselves.
Like we as entrepreneurs make mistakes all the time, but we don't fire ourselves. And then that moves us onto the highest level. So once we get through delegation, The highest levels designing and designing is what we talked about earlier. It's that envisioning of what we want. And it's the alignment of all of our resources to get to that vision.
Yesterday, this is, this was literal. This was yesterday. We finished our two day retreat for my business and we worked on the design phase and I have a clear vision of what I want for the business. But, I'll tell you coming out of a room with my six and colleagues there and saying, Hey, we're going to do, $10 million revenue.
Let's do this. Honestly, it's not exciting for them. It's exciting for me. I get the new car, the nicer house, whatever, but for them, it's here's really good designing. We sat down and each one of my colleagues, Jenna,

[00:16:00] Kelsey, Jeremy, everyone sat down and wrote down their vision for their own lives.
We're doing this work. The outcomes we want in our own lives. So some people, I didn't know this, three people actually want to become fluent in Spanish at our office. I had no idea. Another person is looking to build their first home. They're renting it out or looking to build their first home. And the person wants to travel regularly.
And we really got clear on our own personal visions. Then we said, how can we achieve all of these visions? How can we walk and march a path where we're moving the company forward to a vision that I have as the owner and we're supporting and achieving the visions you want. That's vision alignment, individual vision alignment with the corporate.
And that's what designing is. So just to summarize this, we as business owners need to move to the higher and higher levels. This is not, and it's not switched. You don't switch from one level to the other. It's more of a throttle. You slowly move through these, the higher levels and you as the owner will have to

[00:17:00] revert at times to doing work.
You will have to decide and delegate, but we want to be more and more focused on designing, build our team for them to manage those other Ds and their elements.
Hala Taha: Yeah, for me, I have a lot of interns that work for young and profiting podcasts, and that's the hardest thing for me to delegate and have them submit something.
And I just approve it as is because I want to like, control our voice and control our message and make sure that everything's quality. And that's where I find where our productivity stops because I'll get busy and I'll become like a bottleneck because decisions can get made. So like, how did, how do you suggest that when it comes to like content or I guess when you're dealing with a less experienced employee, how do you suggest we deal with that?
Mike Michalowicz: First of all, just coos you Hala for being so cognizant that you are the bottleneck. In most businesses, I studied, including my own. The bottleneck is the owner. For many of us, not

[00:18:00] in your case, but many of our case, my case, my ego didn't want to admit that, that I felt that I'm on the bottleneck.
I'm a superhero and I need to go through me. I'm the ultimate. So the first thing that I needed to go through was just an ego check and say, am I really that important? Am I really that necessary? The concept of brand continuity and content continuity is that important, but am I that important? That's different.
So when I had that realization, cause we produce a lot of condone here. I'm an author, but also a blog podcaster, all that stuff. And I have that team of six on my team. One of the people now as a full-time writer for us that's Jenna's job. Janet came on with no writing experience in this space. She enjoys to write, but she's not a writer in the traditional sense.
So she didn't come in with a skillset. Here's the key. When hiring people, we need to hire people. For their passion, their interests, their enthusiasm, cultural fit, intelligence. There's all these intangibles that we can't train. Like you can't train me Hala to be more

[00:19:00] smart. You can't teach me to be more driven.
You can't give me those things. Either I bring to the table or I don't. The one thing, the only thing that you can teach me is this skill. The technical technique. So what we did is we said we have a need for some writing and notably we had an immediate need. So we did outsource to contractors and stuff, and it was clunky and a little bumpy, but we said, we really need to develop this.
And someone needs to be extraordinary. And we just circling with the team, not saying that we need this, who wants to do it? We actually didn't really say that. I simply said, if you could do anything here, what's your dream work? What do you want to do? And it's interesting that Jenna who did not come on for that kind of work she was coming on for more order management stuff
like that. Said, I just, I really liked to write, I don't know if you have any needs for it, but I like to write and we're like, you like to write, let's get you started. And so about 12 months ago, a year ago, she started doing some writing for us and her innate raw

[00:20:00] capability presented itself quickly.
It's a wow. She can effectively, then it was like, now let's develop this into a skill. So we went into voice. I don't know if the term called voice management, but training on how to emulate a voice. There's actually classes and course material for that. We are teaching her in processes of persuasion and influence like different words and stuff like that.
And even launches because we launch books. So I have one coming out in just four months from this recording. Jenna is now actively involved in how do we communicate this, in a persuasive, but appropriate style to our community. And she's really stepped up into it. So I found that when people like or love to do something, they can gain the skills very quickly.
It's finding people that have an interest. And even a passion for something that is from my experience, far more important than having the existing skillset. I would even argue when I've hired people with an existing skillset. Sometimes I've had to try to unlearn, help them unlearn processes and habits because it was in congruence, what

[00:21:00] we wanted, but they quote unquote knew better.
And it was really very difficult and cause conflict.
Hala Taha: Yeah, for me, I've been like employing like templates and guidelines and trying my best. It will smooth out. In the book, you outline seven steps that can help our business run like clockwork. So your book is like 240 something pages long. So I know that we can't cover all of these steps in detail, but could you give us the summary or elevator pitch of this seven step framework?
Mike Michalowicz: Yes. Yes. So the first step is this concept of the four Ds we talked about and it's really the basis action we need to do is analyze our existing time. How do we actively spend our time? And if you maintain a calendar like I do, I track every activity of the day. I can just go back to my calendar over the last two or three weeks, just to see what a normal week looks like.
That's the goal. And we may be surprised as business owners of small businesses. We typically devote, a disproportionate amount of time to just doing stuff. I should, we probably won't be surprised. We spend little, very

[00:22:00] little time in designing. The irony is the day before you start your business. Most of us are in this design phase.
Oh, the business is going to look like this and we're going to have a cool, we're gonna allow a dog to walk around the office. We have all this great visionary stuff and that goes out the window on the first day. So figure out, analyze your time. So you can find out where devoting your time.
And next level is this concept of the QBR stands for queen bee role. It came out as I was doing research for spoken, it takes me about five years to research a book and as researching it out, trying to find what the most efficient businesses are in the world. And I found many individual categories. I remember going to Lewisburg, Pennsylvania and meeting with this place at manufacturer, very efficient.
And they had a system, but they had their own kind of system that didn't necessarily apply to everybody. When we can't find a common thread. The next step is often to do what's called biomimicry, go back to nature. See what nature is doing and see if that translates back to business because nature spent a billion years figuring out how to do something.
She's probably got mastered. The most efficient

[00:23:00] organization, if you will, in the world. Outside of, human organizations are bee colonies, very efficient can scale very quickly. And they follow a simple rule set that the most important function in a beehive is the production of eggs. That's the QBR.
The queen bee role. Now, and beehives queen bees lay the eggs. These bees dive pretty quickly depends on the species, but they can dive pretty quickly. Therefore, every bee is programmed to know you must produce eggs. Now the queen bee is the one who produced the eggs, but every bees are responsible for the production.
So they need to be heated or cooled. The bees will change the activity in the hive to support that they're always grooming the eggs and if eggs aren't being produced, that's not the queen bees problem. That's everybody's problem. The queen bee herself too, by the way, I don't want to be confused like she's the most important bee she's just as expendable as any other bee.
If she's not producing eggs, she'll be removed from the hive. And a new queen bee will be spawned. So it's about the egg production, that activity. It has relate to businesses. Every

[00:24:00] business does not have a singular most important person. There may be a person supporting the most important role, but it's that role that's most important.
We need to identify what is the most critical function in our business that's delivering on our promise. What's the egg production, just as real quick example, I, as an author, my promise to readers is that I will simplify the entrepreneurial journey. I make entrepreneurship more simple. That's my commitment.
That's my promise. And I deliver it through my books and so forth. As I look at all the different activities. I do podcasts like we're doing now. I do speaking interviews. I'm going to do a TV thing soon. All these different things are important, but they're going to be one thing. That's the most important the queen bee role.
And for me, it's the writing of excellent books. I need to write excellent books. Now, I'm the only, I can't be the judge and jury. The readers will tell me if I wrote an excellent book or if I wrote a bummer, but I need to devote myself to highest quality books. If I continue to deliver on that, my

[00:25:00] business will continue to grow. My staking, my reputation on that.
Conversely, if I'm like, eh, I can just sign that part out to a ghost writer. It doesn't really matter. Let's just churn through books. My reputation will sink very quickly. So the QBR is the singular most important activity that supports your reputation. What do you want your, what do you want to be known for your reputation?
Then ask yourself of all the activities, which one's the most important to support that. And then, you would go to the third level, which is protect and serve the QBR. Every employee, including ourselves as business owners must ensure that egg production, if you will, is happening. And if something needs to be compromised, if we can't get everything done, the one thing that will always be done as the egg production, the other things can be compromised.
If I stopped doing podcasts, if my speeches stink. As long as I write excellent books, I'll continue to make progress. If my books suck, I won't get any more speaking. So the priority is not speaking. The priority is writing excellent books. That, so that's the third

[00:26:00] level is the protect and serve the QBR. Four is capturing systems.
This most people write as a piece templates you're talking about how you do that. Here's the challenge with that. The challenge is the other side. The person receiving that template needs to actually follow it as human nature to divert from it, not do it. Our attention spans are very short, so we may skip on it.
The process that's better is to do captures and captures is I shouldn't say better is a great alternative mechanism is to use capture of the activity as we do it. So basically record video. If you do invoicing like I do where I did. I simply use a screen capture and I'm recording the process as a best practice.
I then go to Jackie with this capture process and say, Hey. Watch this is our best practice and follow this. Now here's the key to capture though. Then I told Jackie, after two weeks of doing this process, we're understanding it. Now you Jackie have to record a video, explaining it for the next person, teach

[00:27:00] it because ultimately the best student in the room is the teacher.
Therefore, like in your situations, you're saying you're doing these templates. That is a great first step. I would now mandate that, that person actually records a video teaching demonstrating how to do this for the next person. And I don't really care about the next person so much. I just care that this person that you've taught now can demonstrate, they know this because they have to teach it.
So that's the process of a capture and the great thing, of course now, since they create these videos, teaching what they know, if they ever leave our employment, their knowledge, doesn't walk out the door we've captured. So that's the capturing process. Five, bring balance. It's called balance the team. Balancing the team is putting the right people in our places.
And we already, as podcasts voted a little bit of time to that. This is that dream alignment asking employees, what do they want, what are they passionate about? And matching them up. Historical models are we use. Basically a pyramid process where you have the president, you up top. We usually

[00:28:00] write the word me in there and we have a long line coming down and below is we have all these other people and we have that traditional organizational chart. When we match or balance the team,
what we're doing is we're matching people's talents to their tasks, the old model, the organizational chart matches people's talents to titles. You, I need a receptionist. And I'm like, okay what's the receptionist. That means someone that's really good on the phone. They can do light data entry, et cetera, et cetera.
You may have someone come in the door and this guy is just amazing how friendly he is, but I cannot do data entry if his life depended upon it. And historically we'd say it doesn't qualify to be our receptionist cause doesn't check all the boxes. We actually had the exact scenario and so we hired that guy.
We said, you know what? You're so good on the phone and so good at greeting people. But quite frankly, the phone rings maybe once every 10, 15 minutes, but no one walks in the door. What we're going to do is we're going to station you in a way that you're also going to be our frontline salesperson so that when sales calls come in, we want you to warming up that relationship

[00:29:00] because you're so good at it.
My former salesperson who's a closer, is really good at closing. Isn't giving you the warm and fuzzy, but it happened that she is really good at data entry. So we started doing say, you're no longer a salesperson. Your talent is that you can close deals, but also you're going to do our data entry and so forth.
So we started building this web, like structure is no longer a pyramid structure. And what we found is you can get so much more accomplished with fewer people because you're matching their talents to the tasks. Similar to before I said before, is ask people what they are excited or interested in doing.
Don't put any titles to it. Don't say, this is what we need to say. What if you could do anything in this world, what do you want to do? And then our job as owners to start matching them up. That's how you balance a team. And I would argue with our six people and by way of our six people, only two are full-time. So as four part-timers. We produce at the levels of my prior companies that maybe have 20 or 30 employees, and we're able to do it because

[00:30:00] people are doing what they're really excited and interested in doing. So that's how you balance the team. Six, commit to the specific clients that you desire to serve. As we build efficiencies into our business, you'll identify
the clients that are resonates with, but you'll also identify the clients that you enjoy working with. And this is where we start honing in on that specific community want to serve. Now, here's the funny thing. The concept that's been revolving around for a long time is to do this concept of pivoting.
Meaning, when you start your business day one, identify the client you want to target, sell something to them, a MVP, a minimum viable product. And if it fails to serve them or they're not buying it, clearly they're indicating through the behavior. They want something different. So sell them something different, modify your offering.
It's called a pivot, keep modifying and then keep modifying until the client buys. Here's the prom, many businesses I studied have pivoted themselves into a business that yes, it's making money, but the owner hates the business, that is the antithesis of what we want.

[00:31:00] So that's why it's as we build this efficiency, we then as this as near final step, we evaluate what true customers we liked the most, and we're serving the best now through our systems and cater to them.
So now you're doing what you like to do. You've built efficiency around it and you're serving the community you like to serve. That's the ultimate win-win. And the final step is really releasing ourselves from the company. This is that I call it a four week vacation, but this is the going to McDonald's and the owner's not there concept. The ultimate goal of a business owner is that there is no dependency on you from the business that the business can survive.
I should say thrive. The business can thrive in your absence. And what this allows you to do is then you can have choice one, you have a cash ATM, the businesses for on its own. You can pursue other endeavors as you get consistent flow of money, B you can re insert yourself in the business in the way of your choosing
what gives you the most joy

[00:32:00] and that's I chose option B. So my business now generates consistent revenue and we'll continue to do it in my absence, allowing me to reinsert myself into the role I want. I'm not the president of the company, actually, Kelsey's president, I'm simply the spokesperson. I do interviews and I write books.
That's what makes me really joyful. And so that's what I'm doing. The four week vacations is concept of the ultimate asset test. If you can be taken out of your business for four consecutive weeks, a full physical and digital disconnect, and the business grows in your absence is likely can grow into perpetuity in your absence because most businesses experience all elements of the business in four week cycles, billing, hiring, new clients, losing a client.
If your team and your systems can support that for four consecutive weeks, without any of your active input. Now you're most likely in a full-time design capacity where you're working on the vision and objectives now comes you want for the organization.
Hala Taha: This is super helpful stuff.

[00:33:00] So I recommend anybody looking to enhance their business, to pick up a copy.
It's super interactive and practical, if you like to be hands-on. Let's move on to the topic of profit, something near and dear to our hearts at young and profiting podcasts. And we were doing some research and many of your descriptions of revenue really reminded me of the Pareto principle. Pareto principle states that for many events, roughly 80% of the effects come from 20% of the causes, would you share with us how revenue is not the same and not all revenue is created equal?
And how do identify those critical causes responsible for a majority of our profit?
Mike Michalowicz: Yeah the Pareto principle can also be called the 80 20 rule. And it's exactly what you said. But his research and subsequent many people have discovered and I've seen them play out in practical ways in so many capacities is that often 20% of our client base is yielding 80% of the profitability.
And many of us, like when we're

[00:34:00] trying to grow our business, we had that one frustrating nagging client. Like I cannot stand this person are killing me but can't afford to fire them. The irony is you actually can't afford to keep them. There, the other side of the 80 20 rule or the 2080 rule is if 20% of your clients yield 80% of your profitability, that means 80% are clients are yielding only 20% of your profitability.
And when you look at those, it's not all equal, there, there's definitely some bottom feeders. There's some clients we have that are costing us. So we can leverage this in many ways. One way is I call it the pareto overlap. And I just touch on this a little bit in profit first, but the pareto overlap is analyzing your clients, which ones are the most profitable meaning, which ones generate the most revenue matched to the price that are the most profitable.
So we've basically have two columns here. Column one is ranking our clients. Column 2 is ranking our offerings. As the clients, the best clients that do the most volume with us buying the best stuff. And we like doing business with, those are the ones we want to clone and focus on. And of course there's some clients that are great clients, but they

[00:35:00] buy unprofitable stuff.
That's an educational opportunity. Explain what else we have to offer them. See if we can transition them to something that serves them better and is more profitable. Commercial, you have horrible clients buying great stuff, so they make you money, but they are a mind suck. That is the ultimate test.
Usually those people we have to jettison, it's hard to make someone that you don't become likable, even if they're making us money. And then of course the other final intersection is clients that do very low volume. We don't like working with and, or buying stuff that's not profitable at all. That's the starting point, just removing those clients free up so many resources.
It's funny. As I was reading profit first, one of the greatest gains of getting rid of unfit clients was mental profitability. Meaning instead of going a bad bitching and moaning about, oh, that client guy, I hope tomorrow I have to deal with them again. They're such jerks. Instead, now you're going to sleep saying, oh, I love my clients.
I can't wait to do more for them because you jettisons that bad client, those bad clients take up

[00:36:00] tons of emotional space.
Hala Taha: That's incredible. And it made me think how many, how much expenses we spend on bad clients and how just reducing those unnecessary costs. You would see a jump in profitability automatically and reduction in stress and your employees and everything like that.
So I think it's a really good concept to think about.
Mike Michalowicz: Yeah, they they take a disproportionate amount of time and therefore profit. So what we really to consider is when delivering something. What is the investment to deliver it. And sadly, in traditional accounting analytics, if we sell a coffee mug, that's the product we're selling.
We'll say that coffee mug, the profit margin is 20%. So I sell it for $5. I make a dollar every time I sell it. That's not true. You don't make a dollar every time you sell it because great clients will say I want 5,000 of those and they'll buy high volume. Secondly, if there's a mistake or whatever, they'll say, Hey, whoops, there's a mistake.
We want to give you a heads up. Would you help us fix this? And they'll actually get engaged in the resolution.

[00:37:00] Conversely, you have these low clients that are never satisfied. They, the order volume is very low. They order one mug and the narc, you didn't do it right in colors is not, that's not consistent. I want it again.
I want it again. And now we're making 10 mugs to satisfy this person and it actually costs us money. So even though traditional accounting says, a mug makes a dollar, it actually is contingent upon the client that is buying that product on the real profitably or loss for that thing.
Hala Taha: Yeah. So let's talk about the profit first mentality before you go.
There's an age old formula for profit, its sales minus expenses equals profit. And you have said this formula is a myth and can lock you into a never ending cycle of selling more yet profiting less. Can you talk to us about that and how you rework this formula?
Mike Michalowicz: Yeah, so it is the most pervasive formula in the business world.
In fact it's penetrated our vernacular. So we call profit the bottom line or the year-end. That's the exact terminology we

[00:38:00] use. Listen, in mathematically, it makes logical sense. You have to have sales, you have to subtract out the expenses you incur to have a profit. I get that. The problem is this, behaviourally is radically wrong.
What we're saying is that profit is the last consideration. So most people at the end of the year, Say, did I make money this year? I didn't. Oh, damn it. Maybe next year. You know what? It is human nature when something comes last, as means it's insignificant, we don't have to be concerned about now. So profit is treated like the perpetual manana syndrome.
The resolution is to flip the formula, its sales minus profit equals expenses. That's why called profit first, is the first consideration for sales minus profit equals expenses. How we do some practices every time you have a sale coming through business, you take a predetermined percentage or you start slow and low, maybe a one or 2%.
Then you grow over time to 5, 10, 15, 20%, whatever. But now if a thousand dollars of deposits come in from revenue, we take say 10% of that. A hundred

[00:39:00] dollars, allocate to a profit, a literal physical account. Often one that we don't have easy access to. So we remove temptation to steal from ourselves. And now you see for your business, you don't have a thousand dollars to spend.
You have 900 hours is spent because you've taken your profit first and you start working within the confines of what really is available. We're reverse engineering profitability. In short, this is the pay yourself first principle, simply applied to business.
Hala Taha: Yeah. And I know over 175,000 companies have implemented the system so far, so you must be doing something right.
Very cool stuff. So Aristotle has a quote. It is, we are what we repeatedly do excellence then is not an act, but a habit in a similar vein, you have said that profitability, isn't an event, it's a habit. Could you talk about that in more detail?
Mike Michalowicz: Yeah, so many business owners, including myself for a decade plus looked at the end of the year or the end of the quarter to say, Hey, do we have a profit?
And if not, then I try to do

[00:40:00] correction. What I believe I'm convinced now is that profit is a habit that every single transaction we bake it in. Every day or every hour. So, it can be this literal that every deposit comes in, you immediately take a percentage of that money as profit, hide it away, and you run off the remainder.
Or as I teach in the book, I suggest on a periodic basis, maybe every week or either every two weeks that we're taking out profit first and then seamless, leftover, there was a theorist, his name's Parkinson, Northcote Parkinson's his name. And I think he was in the 1950s studying our utilization of resources and came up with this concept called Parkinson's theory.
And basically what he said is it's human nature to expand our demand, to meet the availability of a resource. For example if you put a cookie in front of me I will eat the cookie. If you put a plate of 15 cookies in front of me, I won't eat a cookie. I'll probably eat, well, I'll probably have fun
somehow figure out how to eat 15. So as the resource expands, its availability will consume more. So

[00:41:00] Pareto said the greatest way to control our consumption of a resource is to restrict its availability. Just serve one cookie and you only eat one cookie, but also an interesting phenomenon happens.
The less available something is the more innovative. We become in its utilization. The more we save what we have. Next time you go to a French restaurant and they serve like one pea and that's like your whole dinner. You'll notice it's our behavior to eat very slowly. We cut that one pea up into 15 pieces.
Somehow we keep very slowly to save what we have. When we remove the profit first, now we start looking at our business in a different way okay, I only have X dollars for my business. I managed to buy my computer equipment used or maybe there's a way to get labor, less expensively.
Yeah. Maybe I don't need that great office space and we start reconsidering things. It's called forced frugality, but we also become innovative. We start breaking the rules of the industry and just don't do what everyone else does because we don't have the money to do it. We have to find out how to get the same solutions at a cheaper price point.
So that's how it

[00:42:00] works. It works with our natural behavior.
Hala Taha: That's very cool advice. I love that. So the last question I ask every guest on the show is what is your secret to profiting in life?
Mike Michalowicz: So I use profit as a kind of a nebulous, or I should say all inclusive term. There's the, yeah. So profit direct definition is how do I make more money?
And I actually take the profit for our system that I have at home. I have, so profit versus a bank accounting based system or bank cashflow management system, which we didn't really go into how to do that. But I've multiple accounts, allocating money at different purposes before I spend it. And so everything's cash.
Like when I buy a car, I pay cash for it because I've saved it the money to buy it, but I won't buy a prior and that's my trigger. I know I can't buy a car until that money saved up. So that's how I do it that way. But honestly, I shouldn't say honestly, inclusively outside of just money. I found, it's really, two things, savoring present moments, really being present, which is a difficult thing for me.
But as I practiced that and more intentional about being present,

[00:43:00] I realize of the, all the clinical profitability that just exists around us. All the moments of joy and happiness that are there, that I was overlooking in the past. And the other thing is health is I really understand the importance of health and exercise and that without our health.
Good diet, good exercise, good sleep behaviors that we can't live out fully. So if you really want to be profitable, you got to nail that part, health.
Hala Taha: I love that. Great advice. And where can our listeners go to learn more about you and everything that you do?
Mike Michalowicz: Oh thank you. You can visit my website it's called Mike but here's the thing. No one can spell Michalowicz, so there's a shortcut. It's Mike motorbike. My nickname in college was, our high school was just say, was Mike motorbike. The irony is I've never driven a motorcycle. I don't want to, but that's what they called me cause it rhymed. If you go to Mikemotorbike.com, it'll bring you to my site.
And I do have a button there says get the tools, I gave all my books,

[00:44:00] chapters my books away and not just here's the fluff chapters I give like the actual X Hudl content. So you can get all that stuff for free. Plus I'm a podcaster. My podcast is called entrepreneurship elevated. I'll give you a link to that when you go to my website.
So go to Mikemotorbike.com.
Hala Taha: Awesome. I loved this conversation. I think we had so many gems throughout it. So thank you so much for joining young and profiting podcast.
Mike Michalowicz: It was such a joy, Hala. Thanks for having me.
Hala Taha: Thanks for listening to young and profiting podcast. If you enjoyed this episode, don't forget to leave us a review or comment on your favorite platform.
Follow you up on instagram @youngandprofiting and check us out at youngandprofiting.com. And now you can chat live with us every single day on YAP society on slack. Check out our show notes on youngandprofiting.com for the registration link. And if you already active on YAP, share the wealth and invite your friends. You can find me on Instagram @yapwithhala or LinkedIn, just search for my name, Hala Taha. Big thanks to YAP team as always. Stay blessed and I'll catch you next time. This is Hala signing off.

[00:45:00]