Chantal: Mike, thank you so much for being our expert guest for this intensive series.
Mike: It’s an absolute joy to be here, Chantal.
Chantal: Now, before we even get started today, I was having a little bit of a look online, and I saw that you have now released 165 episodes of the Profit First Podcast. That is like a lifetime in podcast world. Before we even dive into the Intensive Series, tell us a little bit about your show.
Mike: Yes, so I didn’t realise it was that many, but we’ve been doing it for three years, about one a week, so that would make sense. We just passed our three-year mark. So, 163. What we do is we explore every element of profitability, how to make it, how to keep it, how to sustain it, and what we do is we bring on guests that is in one of three categories. Either an expert, they teach something about profitability, or someone that’s had a great success story, so they’ve done something to become very profitable, or someone’s going through the challenges now. Those often are our most popular guests. People that are facing a real challenge, and we talk on the phone, things they can do to improve their business to make it profitable immediately.
Chantal: What I love about your show is it is easy to listen to. It’s easy to relate to. You have great banter on this. So, I encourage everyone to jump on and check out the Prophet First Podcast after you’ve listened to the Intensive Series, right? Which we’re just about to jump into.
Mike: Yeah, agreed.
Chantal: So, Mike, I thought let’s start right at the very beginning. Can you take us through, let’s say, five resources that will improve our knowledge around financial management?
Mike: Yeah. The first thing is, well, I hope it’s okay to talk about Profit First. I definitely encourage you, you the listeners, to check out Profit First the book, simply because it tells us about the envelope system. So Profit First is not the first time this concept have been used. This system’s been around forever in personal finance. I’m just saying it applies to business. So, Profit First is good, or if you prefer, you can read The Richest Man in Babylon. There’s a lot of books out there about the envelope system. What it teaches you is how to manage cash. The second resource is your accountant or bookkeeper. I would argue there are different resources, and I used to work with both.
An accountant should be very strategic in reducing your tax liabilities, that’s important, but more, or as importantly, forward-thinking. How are you going to drive profitability in your business for the next three months? Nine months? Year and so forth? That person should be looking strategically, but your bookkeeper plays a critical role, because they’re in the weeds with you. Every day, they’re paying bills and so forth. I think a lot of businesses get out of financial control by not knowing what’s going on on a daily basis. They have those subscriptions they’re paying. They have different costs they’re incurring, and individually, they’re very small. $50 here, $12 there, $100 here. But collectively, they add up to be something significant.
Your bookkeeper often is in there. The reason the accountant and bookkeeper are so great is because they’re not emotionally attached to your business. They can look at it much more strategically or much more tactically than you can, because we’re emotionally attached to our expenses. Another financial resource, hands down, is a balance sheet, profit & loss statement, and a cash flow statement. You got to understand what these statements are and have access to them, so you can look at your business holistically and see how the money’s flowing through your business. The last resource for financial management is get someone who is a successful peer in your industry.
I can’t emphasise that enough. So many people look at just financial experts as a resource, but those people don’t necessarily have expertise in what your industry’s gone through. So, if you’re a gym owner, find someone who’s a widely successful gym owner that’s very profitable. They will know more about the financial intricacies of your business than anyone else. These folks are mentors, and I’m always surprised how many people are willing to give back and help me out. Someone’s already been there before me. So, seek those people out.
Chantal: They are fantastic recommendations, Mike. Thank you so much for that. I have to agree with you, because I read Profit First before we did our first interview, which was probably about 18 months ago now. And for me, personally, it made such a big difference, and I implemented actions from your book straight away. It’s one of the reasons that we got you back today because you just have so much fantastic information to share. So when you’re going through those resources just then, you mentioned a balance sheet and a profit & loss statement. Can we dive into that a little bit deeper?
Chantal: Can you really get into the detail and explain to us what the difference is between those two?
Mike: Yes. So I’ll start off with the profit & loss statement. I’ll tell you one thing already. In the title, there’s a big issue I have with it. Whoever said that the “lost” part should be in there, I don’t support that, because I think we see that as acceptable. “Maybe we’ll have a loss; maybe we’ll have a profit.” No, no. The intention of a business is to be sustainably profitable. So, a profit & loss statement, while its intentions are good, I think it’s titled horrible. It should be a called profit statement, but that’s just my own little bone I have to pick with that title. The profit & loss statement is a way to see how your business is achieving profitability or experiencing losses.
So, it starts at your top-line revenue. How much do you make in sales to people? Then it subtracts out all the expenses you incur. Profit & loss statements can get pretty, pretty complex, but if you boil it down into simply income, money coming to you, money due to you; minus expenses, money you send out to other people, or you have payable to other people, and then the residual difference. What’s left over? The left over indicates profit or loss. It’s a great way to analyse how your business is doing and where you can make adjustments. A detailed profit & loss statement, you’ll see all these different expenses you’re incurring. You’ll see what your margin is, meaning are you charging enough and so forth.
And you can play with the profit & loss statement and make tweaks to make sure or to find ways for your business to achieve permanent profitability. Now, conversely, a balance sheet is basically the balance of cash. Where does the cash play out in your business? You’ve what’s called assets and liabilities and owner’s equity. Assets are things that you possess that are worth something. So gym equipment are assets. Cash in the bank is worth something. It’s worth the cash in the bank. That’s an asset. Liabilities are things you owe. Maybe you have a loan you took out, that’s a liability; you have to pay for that. Maybe you have all these bills that’ve piled up. Those are liabilities.
And then owner equity is the ownership or the money due to the owner for their investment to the business. Now it doesn’t mean necessarily they put money into the business to start it. It could be. If I give my business $10,000 to get started so I could buy some equipment, there would be a $10,000 owner equity to me. But also, I sweat in, meaning the more I work in the business, the more the business generates income and grows, I may elect for it to owe me a portion of that money, and my owner equity grows. Owner equity is the money that the business owes to you as the owner minus what you’ve taken out the distributions, and a balance sheet actually balances out. So, assets equals liabilities plus equity, and that’s how balance sheet works.
Chantal: Mike, while you’re on a roll of explaining things so well, help us understand EBITDA.
Mike: Yeah, EBITDA stands for … It’s an acronym. It’s E-B-I-T-D-A. It’s Earnings Before Income Tax Depreciation and Amortisation. It’s a term basically that says after every liability you have, after everything you had to pay, here’s how much money’s left over. So it’s basically your profitability. It’s a good way to see if your business is to be profitable. Some businesses will say, “Hey we’ve made some money this year,” and then the tax bill comes, and then there’s no money left. They say, “Well we didn’t make money, but we did make money. It’s confusing. EBITDA is the true bottom line for a business.” It’s really what you’ve made left, that’s left.
Chantal: And do you recommend, Mike, with understanding the EBITDA for our business if we don’t have a background in finance, if it’s not something that comes naturally to us, all that we’ve learned previously? Is that something that we can outsource to our bookkeeper or our accountant do for us?
Mike: Heck, heck yes. Yes. The stuff we’re talking about is actually more complex for me than … I shouldn’t say that it should be, but I have difficulty understanding. So I will pull out my balance sheet, and my profit & loss statement, and my cash flow statement, and I have a real difficult time understanding it. I’m an entrepreneur just like I suspect everyone listening to this podcast. We’re all entrepreneurs. What that means is that we are very good at simply excelling, and at being an advocate for our brand, and bringing about systems, and delivering a product or service, but many of us are not numbers people, and that’s okay. That’s when you rely on these people.
A bookkeeper is more often in the weeds, meaning they more often handle the daily transactions of your business, an accountant typically is more strategic or tax oriented. Either one should be a great resource. I’ll tell you, anytime you have a question, go to them. Use them to be your guide into investigating these things. I think bookkeepers and accountants sadly are underutilised for that ability.
Chantal: Yeah, so there’s absolutely no shame in going external and getting someone to give you a hand and give you some advice when it comes to the finances. I know that I always … I always reach out when I need hands in that particular area. So, Mike, this has been really valuable just going through some definitions when it comes to financial management. When we catch up next week, you’re going to be sharing with us some tips on improving cash flow in our businesses. So, between this week and next week, when it comes to homework for our listeners, we want to leave them with a few actions to do. I’m going to grab a hold of a copy of Profit First on the top of their list, when they’re going to understand how to manage their finances better.
Are there any other actions that you would suggest that they do between now and next week’s show?
Mike: Absolutely. You take that profit & loss statement from your business and print it out. I want to know your historical profitability. So write your P&L for what’s called YTD or year to date, but I also want to know for the prior full year. So we’re recording this in 2017. What’s your YTD to today, and what did you do in 2016? Now, I want you to run that percentage of profit against your top-line income. You know, the profit you have on the bottom compared to the top-line income and come up with the percentage. That’s the number we want to improve. We want to move that percentage up, and you can’t improve your profitability until you know where you’re profitably are today. So there’s your homework assignment.
Chantal: Okay. You heard it here first. You guys need to go out and do those actions between now and next week, and Mike is going to be joining us in one week’s time when we talk about improving cash flow in our business. Mike Michalowicz, thank you so much for joining us for the first episode.
Mike: Thank you, Chantal.
Chantal: Thank you.
Mike: Thank you.
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