The Creative Entrepreneur's Financial Journey | Mike Michalowicz

PROFITABLE TALKS... 

In this episode of The Profitable Creative, host Christian Brim and guest Mike Michalowicz explore the intricate relationship between creativity and analytical thinking in entrepreneurship. They discuss the challenges creatives face in understanding profitability and financial management, emphasizing the importance of a balanced approach that leverages both creative instincts and logical frameworks. Mike shares his personal journey through financial struggles and the development of the Profit First system, designed to help entrepreneurs manage their finances effectively. The conversation highlights the need for a shift in mindset regarding revenue and profit, advocating for a focus on financial health over mere revenue generation.

PROFITABLE TAKEAWAYS....

• Creatives often struggle with the analytical aspects of business.
• Profitability can be communicated in simpler terms.
• Most entrepreneurs lean towards creativity, which can hinder financial management.
• Avoidance of numbers is common among creatives, but they can improve.
• A simple system can help leverage natural instincts in financial management.
• Accountants may resist new systems like Profit First due to traditional training.
• Financial struggles are a common experience for many entrepreneurs.
• Revenue should not be the sole focus; profit is essential for sustainability.
• The perception of success often masks the reality of struggle.
• Entrepreneurs need to prioritize financial health over revenue growth.

Ready to turn your PASSION into PROFIT?!? Let's get CREATIVE ➡️
https://www.coregroupus.com/profit-first-for-creatives

Transcript

Christian Brim (00:01.38)
Welcome to another episode of the Profitable Creative, the only place on the interwebs where you will learn how to turn your passion into profit. I am your host, Christian Brim, joining me, the esteemed Mike Michalowicz. Welcome, Mike. Yeah, I mean, I could think of a lot of adjectives. Esteemed seemed appropriate. Thank you, sir.

Mike Michalowicz (00:17.292)
My 16 part, I love it.

Mike Michalowicz (00:25.026)
Well, that's very kind of you, sir. And I'm honored to be with you, the esteemed Christian Brim, and on your show. So thank you for having me.

Christian Brim (00:31.172)
Well, I just got back from, you can see from my t-shirt, the Onward Summit, and it was a gathering of videographers, storytellers, and the energy was amazing. But it got me thinking, and what I wanted to talk to you about was this dynamic between the...

creative elements of business and the analytical parts of business and kind of marrying the two because I was doing a presentation on profit, right? And a lot of these people are solopreneurs and it was like I was speaking a foreign language and I had tried to dumb it down as much as possible.

But there seems to be like this fundamental disconnect in the brain between the way people think and some people who are creative struggle. to me, it feels like a communication thing at its essence. it's not that the ability is there to understand it. It's just a.

like people speaking different languages.

Mike Michalowicz (01:58.69)
Yeah, it's, it's funny. We, we have a project we're doing outside. there was some trees that have to be removed. So I looked into tree felling and which is, is cutting trees and the complexities like, you need to come along and you need this Jack and you need to do reverse cut. I was like, my God.

Christian Brim (02:09.403)
Yes.

Christian Brim (02:19.78)
I just thought you used a chainsaw.

Mike Michalowicz (02:21.258)
Yeah, I use a chainsaw. There are ways to safely remove a tree and there's really basic principles. These are dead trees. And I was overwhelmed by information. said, I can't do this. And I had to have someone else do it for me. That's not true with profitability. I mean, it is true that we get overwhelmed, but you can manage the basics yourself. There's no question.

Christian Brim (02:37.701)
Right.

Mike Michalowicz (02:46.99)
Once you get that tree down, if you need to haul it somewhere, don't try to lift out their back. You're going to throw it out. There's a certain point where you need to bring a professional in and there are certain situations that are dangerous, but there are some basic techniques. I think the problem is we're, we're over-communicating. We're giving way too much detail. What entrepreneurs need is the basic compass, the guidelines, and that will get them 80 % of way there. And then they bring in an expert like yourself who, who guides them, keeps them accountable.

Christian Brim (03:04.548)
Yes. Yes.

Christian Brim (03:12.74)
Right.

Mike Michalowicz (03:15.938)
helps the nuances, there's tax compliance and other stuff that is really heady but important, but they can do it themselves, but they need to find someone that can communicate it in a tangible, consumable way.

Christian Brim (03:28.336)
So in your experience, you've obviously been in a creative space as an author and a speaker and in your entrepreneurial journey. Am I imagining things that there is this continuum? I don't want to say it's a dichotomy. I don't want to say it's either or, but there's this continuum of creativity and analytical that shows up for entrepreneurs.

Mike Michalowicz (03:59.074)
Yeah, I think there is. And I would say most entrepreneurs lean, if it's a spectrum, to the creative side because you have to believe you can pull something off that most people believe they can't pull off and actually emphatically say, yeah, of course the world needs this widget. And of course I'm the one to do it. If you think about it that's absurd. Like what's the real chance you have a success? And yet most entrepreneurs literally pull it off.

Christian Brim (04:07.865)
Yeah.

Christian Brim (04:15.801)
Right.

Christian Brim (04:22.447)
Yes.

Mike Michalowicz (04:29.074)
They are able to do it successfully and sustainably. That's very creative mind and you have to adjust to all the dynamics that are going on. The logical side is that crunch of numbers. It's the if, or, and statements or if then else statements. And that in most cases is not inherent to an entrepreneur and that's where you need an ally. But I also think it's a big mistake to say, since I'm a creative, I can't do or serve the logical side.

Christian Brim (04:29.348)
Yes.

Mike Michalowicz (04:58.802)
I can't do numbers. So there's this avoidance mentality that kicks in with many creatives that I've known that says, you know what, I'm just not a numbers person. I never will be. And therefore I will struggle. And the reality is you do have the core competencies in that creative mind of yours to really improve your financials and get it on the right track and to use your emotion and reactivity to manage numbers really well. And that's what Profit First and Profit First for creatives does.

It allows you to work with who you naturally are and drive your business where you want it to be. And it needs to be.

Christian Brim (05:29.487)
Yes.

Yes, and I think the brilliance is when you have not necessarily in one person, but in a company or an endeavor where you have both elements, right? Because I was having this conversation with my leadership team and they're all accountants, right? And we were talking about creativity and I said, well, Chelsea, you're creative and she's like,

Well, what do you mean? And I said, well, you're a dancer. She was like, well, yeah, but I haven't danced in a long time. And I'm like, well, that doesn't mean that that's not there. I mean, like, right? And I moved along and I said, well, Jeremy, you're a creative. And he goes, no, I'm not. And Chelsea spoke up and she goes, yeah, you are. You're a drummer. And he's like, well, yeah, yeah.

Mike Michalowicz (06:11.136)
Mm-hmm.

Christian Brim (06:25.72)
And I think that's it. It's like we kind of get settled into what's comfortable and what we're comfortable with, and we kind of bury the rest of it. You're going to speak. I want to hear it.

Mike Michalowicz (06:41.006)
Yeah. Yeah, no, we do. We do. we are really good at affirming labels we've given ourselves. So if I say I suck at math, that's not necessarily the reality, but what I'll do is say, here's proof. I suck at math. I don't study math. I don't practice math. I don't do anything at math. The, so, so just, we all need to be careful about the labels or identities we give ourselves because we will comply with it.

Christian Brim (06:55.472)
Right.

Christian Brim (07:10.949)
Yes.

Mike Michalowicz (07:11.01)
So to do the reverse is very difficult too. If I've been saying for my life, I suck at math and then the next morning wake up and say, I'm good at math. My back of my mind was like BS dude, because I've had all this momentum. So what we do with Private First is our goal is not to convince ourselves we are counting maestros. What our goal is, is to recognize we have certain abilities of instinct. And that when I log into my bank account in this case, if I know

Christian Brim (07:20.559)
Right.

Christian Brim (07:29.261)
Right. Right.

Christian Brim (07:37.338)
Yes.

Mike Michalowicz (07:40.526)
what money is intended for what purpose. carved up, my instincts will kick in and I'll work within those confines. So we just need a simple system that leverages who we are without having to change who we are. The basic system that you and I are teaching is most creatives will collect money into their bank and they have one account and they see $1,000 in there and say, I have $1,000 to spend or whatever they see. But the reality is some of that needs to support their lifestyle that you gotta put food on the table.

Christian Brim (07:45.947)
Yes.

Christian Brim (07:51.27)
Correct.

Christian Brim (08:03.749)
Right, right.

Mike Michalowicz (08:10.382)
Some of it needs to pay taxes and liabilities we have to the government which you can't avoid that and some of it has to pay for the continuance the operations the business and by carving this money up first on a percentage basis now Gosh, your instincts become your biggest ally. okay. I don't have a thousand dollars to spend I got 300 for the operations of the business I got 400 to support my groceries this week or whatever it may be and now you can start working with who you naturally are very well

Christian Brim (08:15.128)
Right. Right.

Christian Brim (08:32.112)
Right.

Christian Brim (08:39.554)
Yeah. And, and, and I, you, that brings to mind a client I was having a conversation with, to, to write the book. And he said that, he was using one bank account and he did a lot of project work where he'd get a bunch of money up front. And so he had in his mind, okay, this is how much money I'm going to make on this project. and he had to pay this out to contractors, cetera. But then.

Mike Michalowicz (09:06.862)
Yep.

Christian Brim (09:09.254)
he would get another job and there was still some money left over in the one account, but then he got another big jump of money. And like, he was trying to keep this track in his head, like it, but instinctually instinctually he, he, he was on the right track, right? Like I'm, going to, I'm going to make this much money on this project. He just didn't have the structure to keep, get it out of his head.

Mike Michalowicz (09:24.864)
Yeah, exactly right.

Mike Michalowicz (09:32.962)
There's a contractor in town. He got a house, reno job. And I know him or of him, I should say. And the next day after getting this, this job, he shows up in his brand new truck. And so the gossip, like, how did he afford this truck that went around and they're like, he got the new job. And then he couldn't complete the job because he bought the new truck. So then the reputation now is like this guy was stealing. He's a bad guy. The reality is.

He leveraged his normal instincts that all of us have. We see a source of income and we can take an action. He's probably been waiting for that truck for 10 years and said, now I have the ability to get it. So he's not a bad guy. He just has a bad system supporting a good guy who's leveraging instincts. So he hasn't done this because I don't, I'm not friendly or in contact with him. But what he could do is when that job and other jobs comes in, he could have set up a truck account and say every time a job comes in,

Christian Brim (10:10.82)
Right, right.

Christian Brim (10:18.672)
Yes.

Christian Brim (10:30.661)
Yes.

Mike Michalowicz (10:31.758)
2 % is to acquire the new equipment that I need, this truck. And over time, there'll be a trigger point where there's enough money in there to get that truck he needs. And the beautiful thing is, that's how this guy's wired. He saw enough money to get the thing he needs, but by pre-categorizing it, he would have been able to balance all of the responsibilities that money had. So it's kind of normal. It's normal. We just wanna work with how you normally work.

Christian Brim (10:35.076)
Right, right.

Christian Brim (10:45.923)
Exactly.

Christian Brim (10:52.526)
I think... yeah.

And I think that's the brilliance of the system that you created is that it, it meets people where they are and it works with the way they're naturally wired, as opposed to, and I find this strangely. I find so many accountants and CPAs that have this like almost visceral response to profit first when, when, their clients come to them and say, well, we want to do profit first.

No, that's a bad idea. and, it's because they're looking at it through the lens of the way they were trained. It's kind of like going to your doctor and saying, well, I'm going to try acupuncture and their traditional Western medicine doctors. they're like, well, that's, that's not going to work. Right. Right. And, and it, it's, it's, that's what I think is the brilliance of the, of, of profit first is it's, it's designed for.

Mike Michalowicz (11:44.558)
Are you kidding me? Yeah.

Christian Brim (11:55.78)
Business owners, not accountants.

Mike Michalowicz (11:57.822)
That's exactly right. And it's designed to work with accountants. So this is kind of the front line. It's the cashflow management for business, but it doesn't negate the necessity for accounting. Yeah, supports it. So there's two forms of resistance I see. One is to your point is the programming. And most accountants, by the definition of the job they're in, are the Spock's of the world. They love the number crunching. They can see the tea leaves through the numbers. That's their job.

Christian Brim (12:07.032)
Mm-hmm. No, no, absolutely not.

Christian Brim (12:21.615)
Right, right.

Mike Michalowicz (12:26.05)
But when we see ourselves as capable of something, we assume that's the nature of everybody. Isn't everyone just like me? So I think one challenge an accountant has is thinking that everyone's an accountant. I think the other challenge is that there is inherent resistance. Well, are you saying what I'm doing is wrong? Are you saying I'm not fit for you? Well, screw that and we fight back. The perception that is wrong there is Profit First sits in front of the accounting system as a

Christian Brim (12:31.056)
Yes. Right?

Christian Brim (12:44.144)
Right.

Mike Michalowicz (12:54.914)
cashflow management system to be in the moment. So every time a deposit comes in, you know in that second how much money has been deposited today, you allocate it out to these different accounts, you know what's available, and you start working within these allocations. The accountant behind the scenes, when she reconciles or he crunches those numbers, he still does the process and can give you a historical recommendation or a reflection of what you've done and also a forecast, a recommendation of what you should do.

Christian Brim (13:08.837)
Right.

Mike Michalowicz (13:24.907)
key components still play in, but now we've given the entrepreneur a tool for managing money in the moment.

Christian Brim (13:30.564)
Yes. And it was like, my, account executive came to me with a question that she got from a prospect and, he had started a business this year, but he hadn't made any money. And so he had this piece of equipment that he wanted to buy. his question was, because we're accountants and accountants have trained, business owners to think this way.

He came and he said, his question was, I need to spend $5,000 on this piece of equipment. Do I do it now or do I do it next year? Right. And, my immediate response to her was absolutely the wrong question that you're asking the wrong question. You, you have not made any money. Do you need another piece of equipment? Right.

Mike Michalowicz (14:17.742)
Good. That's good.

Mike Michalowicz (14:30.666)
my God. Hey, Christian, anyone's listening in right now, whoever you're working with, hire Christian's accounting practice immediately. (coregroupus.com) Because that's exactly what you do not hear. The number one response, and I was like, this is what accounts will say. Well, it's a tax write off this year. if you spend the money now, you can post a loss. Good for you, you're losing money. In regards to tax law, there could be an advantage, but that is a cut your nose off despite your face. I wish accountants would say,

Christian Brim (14:37.178)
You

Christian Brim (14:44.837)
Right.

Christian Brim (14:57.359)
Exactly.

Mike Michalowicz (14:59.702)
Is this prudent for the health of your organization? Like that should be always the first question. Yeah, I love that you did that.

Christian Brim (15:04.358)
100%. Well, it's business purpose. You have a business intent, any action you take, right? And then you determine what is the most tax efficient way to do it. But the business purpose has to come first. It can't be secondary. You can't have tax wag the tail of the dog. I'm going to pivot here a second. I know your story.

And for those who haven't read Profit First, which I highly encourage because Mike's a great storyteller. And then you can read Profit First for Creative. You need to read both. Exactly. That's right. Tell us a little bit about your entrepreneurial journey and your money struggles.

Mike Michalowicz (15:37.432)
Thank you. Thank you.

Mike Michalowicz (15:42.958)
Do you buy both at the same time? Get a two for one deal.

Mike Michalowicz (15:55.502)
Yeah, I grew some businesses early on as an entrepreneur and was in hindsight lucky in regards to its financial success, but I was blind to it. I attributed it to myself. I said, well, I built and sold two companies. like, the only common factor I can think of is I'm here. You and I were both in the same organization, the community of entrepreneurs during that process. And you know the organization I'm talking about, it's a wonderful

Christian Brim (16:14.758)
Yes.

Mike Michalowicz (16:22.998)
organization, and there's a lot bravado there. So to say, yeah, sold one, sold one, I started to buy my own BS. My third company, I became an angel investor, I decided like, I'm going to help many companies grow, but I'm gonna have a piece of everything. And I was a disaster. I didn't know what I was doing. I wasn't capable. I blew money left and right. There was an interesting phenomenon I see in retrospect is as my money was declining, I logically saw losing money, losing money, but behaviorally thought

It would turn around. I was rejecting that story. was like, well, I'm a moment away from the next big client. It's just a matter of time. I'm here. I finally had to face the truth. I'll never forget the day. It was February 14th, which is Valentine's Day of 2008. And my accountant, he calls me says, Mike, you got to declare bankruptcy. And that was the first time I heard it and it landed. I knew I was in trouble, but that time I heard and landed. I didn't tell my family up to that point of the struggles. And I'm ashamed of that. I was lying to them by omission.

I said to my wife, yeah, things are fine. We're one client away. Because I wasn't being truthful to myself. And the pinnacle moment was when my daughter asked if she could still go to horseback riding lessons. To give context, was $20 for a group session for a half hour. They would do their practice. And she was nine years old and in tears sobbing because I was so ashamed. We were about to lose our house. We lost it 30 days after this. I told her, I said, you can't go. I'm so sorry. And she ran out of her room. I thought to run away from me.

Christian Brim (17:21.231)
Yeah.

Mike Michalowicz (17:50.434)
She ran to room to grab her piggy bank and came running back to me and plops on the table and says, daddy, I'll, I'll save our family. Here's my money, my savings. And it was such a humbling and shameful moment for myself. It became this awareness that I didn't understand financial discipline or financial behaviors. It wasn't like the next morning I woke up and said, I got this. I started drinking hard. I went through depression. Again, not proud of that, but

Christian Brim (18:14.511)
Right.

Mike Michalowicz (18:18.86)
feel emboldened to share it because this is a struggle for so many entrepreneurs. It did set me on a path and it was a year or two later in reflection. I looked back at that moment and said, damn it, I can make this into something. I draw the line of sand for myself and I will never allow myself to struggle financially again or anyone I'm privileged to have come in contact with. I am on your team. I'm all in on this. We are going to make sure you're financially sound, period. That's become my mission. I call it eradicate entrepreneurial poverty.

Christian Brim (18:22.106)
Yes?

Mike Michalowicz (18:48.002)
is perception of success, the reality of struggle to close that gap. And that's the reason I do what I do.

Christian Brim (18:48.198)
You

Christian Brim (18:55.416)
I love that story. Thank you for sharing it because I know that's not easy, even, even though you've probably told that story many times because I I'm envisioning myself and my own struggles as a professional that knew better. and you know, the shame, and, and the heartbreak of those that you affect, right?

Mike Michalowicz (19:10.285)
Yeah.

Mike Michalowicz (19:20.034)
Yes. And the insidious nature of entrepreneurship is you can't wear that flag. It's the scarlet letter. Could you imagine going to a client saying, I'm washed up. My business is struggling. I don't think I'm going to be able to make payroll tomorrow. And by the we're ready to serve you now. The client will walk away. We have to show our strengths. And so then there's this outward facing facade and then there's this internal struggle that you cannot share.

Christian Brim (19:44.474)
Yes. Yes.

Yes.

Mike Michalowicz (19:48.738)
And then it goes beyond that with your family and so forth. And it's very lonely. And that's why it is painful to share it. I did race through, because I would start crying again. But I want entrepreneurs to know they are not alone, not even close.

Christian Brim (20:04.646)
Yes, I, as I was talking to these participants at the onward summit, I was, cause some of them had had been greatly impacted by COVID and you know, they, they shrunk a lot. and, we, we had this comment. I made this comment that I didn't coin the phrase, but it's, know, I don't know. Maybe you, maybe you coined it. The, the, the revenue is vanity. Profit is sanity.

and cash is king, right? Did you coin that? Do you need a trade market? You need to. Okay.

Mike Michalowicz (20:34.326)
Ash is king. Yep. No, I did not. And it goes, that may be a Jim Collins thing. Vern Harnish, who we both know, talks about that often, but it goes ways back. It definitely is not mine. But it's a wonderful term or phrase.

Christian Brim (20:48.666)
Well, and it speaks to exactly what you speak. So when entrepreneurs get together, they always talk about the top line, the revenue. I sold this big deal or we got to this size revenue or I have this many employees. I have never gone into a conversation with a colleague as an entrepreneur and the topic of, how much money did you make come up? Never, never.

Mike Michalowicz (21:14.274)
Yeah, never. Yeah. Isn't that funny? So I started this this program, if you will, just for myself, whenever there was a conversation about how big is it, then that's the entrepreneurial thing. How big is your business? How many employees you have, which is a backdoor way of finding out revenue. How much revenue make? I simply say, tell me how healthy your business is. And you got to see the consternation on people's faces. Like, what do mean? How healthy is it? like, well, tell me about your financial viability. And they're like, well,

Christian Brim (21:25.988)
Yeah, yeah, yeah.

Mike Michalowicz (21:43.182)
you know, we're making 10 million revenue, but I missed payroll last month. You know, that's the reality. And the size of revenue, in fact, often amplifies the struggle. So if you don't nail the profitability at the early stage, as you get bigger, that profitability issue becomes much, much bigger itself.

Christian Brim (21:47.437)
Yeah.

Christian Brim (21:55.044)
Yes, yes.

Christian Brim (22:02.854)
I remember sitting in an event with Vern Harnish 13 years ago and there was a group of 50 entrepreneurs and he said, how many of you, and all of these entrepreneurs had businesses of at least a million dollars in revenue. He said to us, how many of you would rather have, you would shrink your business, work less and make more money? And almost every hand in the room went up, right?

Mike Michalowicz (22:29.571)
Yeah. Isn't that funny? That's the three things we've always wanted. We want to have financial freedom. We want to have personal freedom, which is work when you want, when you want. And we want impact. Like work less, impact more, and have the freedom to what we want. And yet it's the ironic thing is the reverse is happening. Most business owners are surviving check by check. So we don't have the financial freedom. We definitely don't have time. We sacrifice friends, family, holidays, anything to keep the business afloat.

Christian Brim (22:32.282)
And I.

Mike Michalowicz (22:58.988)
with our efforts and then impact forget it goes out the window. You can't be of service when you can't sustain.

Christian Brim (23:05.306)
Yes. Mike, I very much appreciate your time today. It's been my pleasure. Listeners, if you like what you hear, please rate the podcast, follow the podcast, share the podcast with somebody. If you don't like Mike and me, shoot us a message and tell us who you'd rather hear. Until then, ta ta for now.