How did you spend your 35th birthday? I’m sure that whatever you did, the celebration was incredible. Were you celebrating the founding of two multi-million dollar companies that you sold?
That’s exactly how Mike Michalowicz spent his 35th birthday. He became an angel investor, satisfied that he had found the recipe for success. But, despite believing he knew everything about building a successful company, he was wrong. And as a result, he lost everything.
Don’t choke — there is a silver lining. And that was the emergence of the Profit First system — which came from Mike’s drive to discover better ways of growing strong, healthy companies. The system is used today by hundreds of thousands of companies worldwide to drive profitability.
In fact, Mike has built two new multimillion-dollar ventures and has divided profits for 52 consecutive quarters since starting over.
Clearly, Mike has learned from his mistakes and has developed a winning formula for any business, and individual, to scale successfully. I found his journey so inspiring that I asked him all about it during our talk in August 2021. Here are some of the main takeaways I can’t wait to share with you today.
The Differences Between Scaling and Growing a Business
The first lesson here is that there is a massive difference between scaling and growing a business. I know people throw these terms around interchangeably, but it’s true.
Business growth means increasing revenue. But it also means requiring more resources. In this case, you may have to hire more staff to handle more customers or generate more leads.
The idea of scaling is to increase revenue without increasing costs significantly so that you can support further growth. Many look at it as a more sustainable method of expansion. Why? Because you’re bringing in more money with less effort.
At the time, Mike didn’t understand the difference between the two. But, after the second company experienced a fast growth rate, he believed that he had the Midas touch and built companies real fast.
“But the vast, vast majority of people or companies that buy companies care about the fiscal integrity of the business,” he said. “Like an investor doesn’t buy a business to say, ‘Oh, here, let me throw some money out there, and hopefully it’ll ruin me.'”
“No. An investor wants something that’s an investment,” Mike explains. “They want to know there’s a return. And the proof positive of a healthy company is one that shows profit quarter in and quarter out.”
Growing Isn’t the Same as Thriving
Also, there’s an unhealthy culture in the startup world. Phrases like “grow bigger” and “grow faster” are constantly thrown around. Why? Because if you do, someone will buy it. In reality, that’s like banking on winning the lottery.
Instead, you should focus on making your business viable. For example, you may decide to keep your company small to keep expenses low, provide better service to your customers, and make faster decisions. As a result, there’s less risk, higher profits, and the freedom to work on your own terms.
“A viable business from day one. It’s consistently profitable,” Mike told me. “They live a comfortable lifestyle. They’re not working like animals.”
“Those are the successful businesses,” he added. “And they’re the ones that get acquired if that’s what you so desire, or they’re the ones that you see as a legacy, and you give to your family.”
More Sales, More Problems
As a business owner, there’s a misconception that more sales will cure all of your problems.
“Here’s the problem with sales increasing,” Mike explained. “Sales, particularly in small business, it’s organizational stress. That’s the direct translation.”
Here’s how. Whenever you sell a product or service, you’re obligated to deliver on that promise. “If you sell something to someone else and you sold something to me, now have two promises out there,” Mike says. “The more you sell, the more commitments you are making; you have to deliver on it.”
If you keep selling and selling, you eventually overextend yourself. Not only are you pushing your resources to the limit, but you’re also putting unnecessary stress on you and your team. Even worse? This can prevent you from delivering top-notch service to your customers — which will harm your reputation.
“More profitable sales will cure things, but more sales alone is actually very dangerous.” — Mike Michaelowicz
Don’t Plow Back Profits into Your Business
You’ve heard the adage many times, in fact, countless times. When you start turning a profit, reinvest it back into the business. Mike adamantly disagrees.
“We’ve actually employed these soft terms: reinvest, plow backs, pushback,” Mike clarified. “All of these words say, ‘It really wasn’t profit. We gave the accounting phrase ‘profit,’ but we spent the money.'”
Cash flow is a straightforward metric to measure. If you spend the money, that is an expense, or if it goes to the business owner, that is a profit. “And that’s literally the only two terms,” he added. “If the money is spent, it’s an expense. If the money goes to the owner, it’s profit. If the money is sitting there, it is neither a profit nor expense until it’s determined where it goes.”
In short, this is bending the rules. And, that’s not just bad for business, but there could also be severe legal and tax consequences.
Instead, you have to report a profit on a cash basis. Besides staying out of trouble, there may be tax benefits available, and you can withdraw the cash you need to pay yourself.
What it Really Takes to Succeed as an Entrepreneur: Alignment
I think this is often overlooked. But, it could be the most important lesson you should take away from Mike’s journey. And that’s alignment.
“Alignment is knowing what gives you joy and who wants that joy,” Mike said. “Now, we’re selling something that they need, but it’s serving your soul. When you have that aligned, you now have a business that brings happiness and wealth. Everything comes in together.”
While you could pivot your business to generate money and scale, it may become something that you can’t stand. And, even though the money is there, that’s no way to live.
Successful entrepreneurs have left the grind behind because they want to pursue a business that doesn’t just help them live comfortably but one that also has a purpose.
I am grateful for the conversation that I had with Mike. And, I hope you did as well. If you want more information on his Profit First system and how to scale your business successfully, head over to MikeMichalowicz.com.
Image Credit: Thisisengineering; Pexels; Thank you!