Master Class: How to Profit First

After selling two multi-million-dollar companies, Mike Michalowicz decided to become an angel investor.

“Quite frankly, I became the angel of death,” says Mike, author of The Pumpkin Plan and Profit First. “Every time I put money into a company, I was destroying it.”

The problem is that when the companies failed to turn a profit, he “just kept on throwing money at [them],” he says. “And it took me a mere two years to lose everything. I mean, literally every penny I had made.”

Today, Mike knows how to put profit first to turn startups into money-making machines. In his Mixergy course, he shows you how he does it. Here are three highlights from the course.

1. Rethink What You Really Need

When one of Mike’s previous companies was having cash problems, he took a hard look at his business expenses.

And they seemed fairly normal. For instance, he had already moved out of his $14,000-per-month office space and into a more affordable space.

“I only had $1,000 a month in rent,” he says. “I thought a lot of my expenses were pretty reasonable.”

The problem is that his profit margin said otherwise. “My business [was] shaking and screaming at me,” he says, “saying, ‘You can’t afford that, Mike. Your business isn’t at the size to afford this.’”

So how do you figure out what you can really afford?

Put your profit margin first

Allocate money for your profit margin and taxes first.

“Of all these businesses in all different fields, I discovered that a healthy million-dollar business will be taking a profit of about 15%,” says Mike. “Now, that’s above and beyond the owners being paid $200,000. Then, $150,000 is reserved for corporate tax responsibilities and personal tax responsibilities of the owner.”

That leaves 50%, “and that 50% is used to run the rest of your operations,” says Mike. “It’s payroll, everything.”

Those are the numbers for a million-dollar business, but Mike says the same principles apply to businesses of any size. So he developed a Profit First Instant Assessment (included in his Mixergy course) to help companies figure out what their profit margin should be and what they can spend on operations.

For instance, when he assessed his own business, he realized that to make a profit and pay taxes, he actually couldn’t afford an office space at all. “I moved into a factory that was owned by a friend,” he says. “He manufactures cookies. He gave me free office space, just as good as any other office space, plus free cookies.”

2. Take Baby Steps

Once you figure out what your profit margin should be, it’s tempting to try to hit that number as quickly as you possibly can.

But Mike says that’s a big mistake.

“If you go full bore, you may not be prepared for it,” he says. “You may have too many expenses. You may not be able to cut back fast enough, and now you’re going to start borrowing. That’s stealing from yourself…and that defeats the system.”

So what should you do to hit your target profit margin?

Build it over time

Build the profit habit slowly.

For instance, Mike says that two entrepreneurs who read Profit First thought, “‘You know what? We’re first going to start with a 2% [profit for the business], to get into the habit of taking a profit first,’” says Mike. The last time Mike talked to them, they were at 12%.

“The key is to start small, build the profit habit, and slowly build it over time to bigger and bigger margin,” he says.

3. Be Brilliant At One Thing

Entrepreneurs are told to upsell, upsell, upsell. But upselling could kill your profit margin, says Mike.

For instance, Mike’s lawn guy offered to clean his gutters for $200, which Mike agreed to. “He comes back down, knocks on my door, says, ‘You know some of your shingles are coming off. I can replace those, and I noticed your chimney’s falling apart. I can fix that. Another 500 bucks or whatever.”

The problem was that these tasks were outside the lawn guy’s skill set, so they took him longer to complete. Plus, he had to buy new tools for the job. “While he’s up on the roof…his blowers and rakes and all that stuff is sitting idle on his truck,” says Mike. “At the end of the day he made some good money for sure on the top line, but he didn’t make a profit.”

So what should you do to increase sales and profit?

Don’t diversify

Become an expert on one thing.

“You make money after you hit the same problem 100 times over and know how
to fix it every time perfectly,” says Mike.

And to get that kind of know-how, you have to specialize. “Be the master of one thing, replicated over and over,” he says. “Be able to do it faster and faster, better and better, and you’ll make a profit, and you’ll be successful.”

Written by April Dykman.