Introducing The Profit First Movement With Founder Mike Michalowicz

Episode 3

When we get coherent with our life’s purposes and see our business as a platform for that— we can really shift things, we can really have a great impact.


Today, we have an INCREDIBLE guest!

Mike Michalowicz is the founder of the Profit First Movement, a multimillionaire, and a best selling author.

More importantly, he has made it his mission to eradicate entrepreneurial poverty, helping business owners worldwide to stop slaving away at their business and gain true financial freedom.

In today’s episode, he goes deep on how real estate investors can use the Profit First System to revolutionize their business.

The topics covered include:

• When to leverage debt
• Common mistakes new real estate investors make financially
• The nuances of profit first for real estate compare to other types of businesses
• The principles for successful financial management
• And more!

This is one of those rare podcast episodes where… if you pay attention, it could radically change your life – enjoy!

Connect With Our Guest

Mike Michalowicz: Website | Facebook | Instagram | YouTube | Twitter

Mike Michalowicz Books: Amazon Author Page

Mike Michalowicz Podcast: The Entrepreneurship Elevated Podcast 


Notable Links


David: Hey everyone!
This is David Richter with the Profit First REI podcast with the really special interviewee today. We have the author of Profit First and really why we have this podcast too. There wouldn’t be this podcast without it – without him.
I really appreciate him being on. We have Mike Michalowitz, the author of Profit First.
You wanna say hey to everyone, Mike?

Mike: I sure do, David. Thanks for having me and hey, everyone!

David: And we’re really appreciative because you’ve definitely changed a lot of lives in the entrepreneurial world. And for those of you who don’t know Mike or this might be your first introduction to him. He’s written a bunch of business books. He’s written the Pumpkin Plan, Profit First, Fix This Next, and he’s got several others that you should really check out. His website, and you should check out Mike and all the books he’s written. I have read every single one of them. They are all great, and all have their purposes. But this is about Profit First, and he is literally- I think the last time you said there were several hundred thousand businesses that implemented the Profit First System. Is that about right, Mike?

Mike: Yeah, we are now. – It’s hard to estimate it. It’s not like each one contacted us. But our estimates are it’s over three hundred and fifty thousand businesses now.

David: Wow.

Mike: And we think..- it’s about… It’s increasing, maybe twenty-five thousand new companies each month are doing it. That’s really hard to estimate. We base upon the number of book sales that we have out there. Then we also tie it back to implementations that we have through our Profit First Professional membership to get a gauge. And we think it’s pretty realistic and it’s definitely has an international appeal, so there is more than just – It’s being done more than just in the US.

David: Yes, that is truly – you truly started a movement, and I love that you are tagging along eradicating entrepreneurial poverty. And you are really doing it. You are really going out there.
That’s a- that’s a huge number of businesses that have implemented it. So first of all, we just wanna thank you for writing that book and for getting it into the people’s hands. Now there’s- in our specific niche Real Estate Investing, it’s already made a huge ripple in there too. And we wanted to say thank you first.First out of the gate.

Mike: Yes, so thank you; it’s my joy. And I will tell you when – at least for me when I found that purpose to write to eradicate an entrepreneurial poverty. When it really landed with me now about twelve years ago. It became clear that regards of my success or progress perhaps better word slow-downs, I just feel compelled to stick with it. I plan to be on this journey till my final breath on earth planet.

David: Awesome. So would you say that is your big why then? That is really why so intensional about it?

Mike: No question about it. Yeah, that’s my life’s why. And you know what’s interesting about business. Business really becomes amplification I feel of our why so when we get coherent with what our life’s purpose is and see our business as a platform for that you can really shift things, you can really have a great impact. And a great impact does not actually mean touching thousands or hundreds of thousands of lives. That’s definitely a one way, but it could be the depth of our impact too. You know, just doing something so remarkable just even for one of the person is serving a purpose in my opinion.

David: Yeah, that is such a… That’s so true. And with Profit First, I love it too, because you have to be profitable in order to reach your why unless you are gonna be stressed out, you are not gonna be able to reach that big why if you don’t have true profitability and I think that’s what really struck a chord with a lot of people is that they were beating themself over the head with their business and dreading going to work.Because they weren’t- It wasn`t fulfilling the purpose they originally intended for. And then when they go deeper and say this is really what I wanted to do. They realize they have to be profitable; they have to serve people; they have to make sure that they know their numbers so. I think Profit First shined a light, even a deeper light and going deeper into their businesses too.

Mike: You know- thank you. I really do believe that profit is a responsibility we have. Like you- it is not something we just simply want; it is something that is required. Cause the only way to be sustainable is to be profitable, no matter what we do. If we weren’t impacted, we got to be around to do it. Sadly, there are these non for profits that start with the great vision we’re gonna cure disease, we’re gonna save lives, and they don’t consider profitability.Cause they are a charity after all. And they just worry about you know if we build it they will come and they don`t. And sadly, I think many for-profit businesses should be relabeled as non-profit businesses. With great vision without great execution, because there is no money. So, you have to be profitable. It’s necessary, it’s critical. It’s a lifeblood of a business, honestly.

David: Yeah, it really is. I love that, that the whole framework around that is to be profitable because you have to be profitable. Not just a stay in business but to accomplish what you truly want to accomplish.
So, it is definitely the lifeblood and pumps it in to make sure that you can reach your purpose. But speaking of money and having money in the accounts and all that. The Real Estate investors I feel like are the- especially being one myself and then going into helping the businesses now, where a lot of people have- they have the money in their accounts, they wanna count, and they feel like they are okay but then Profit First really shines the light once they actually dive into that. And they see okay what are these skeletons in the closet? Am I living a deal to a deal? Check to check? So they really- the Profit First really shines a light on that.So- I would like to ask you just some questions about Profit First in real estate if you don`t mind?

Mike: Yeah, let’s do it.

David: So, real estate investors use debt all the time. You know, they are buying houses, so I just wonder what your thoughts are on using debt that way or using debt as a real estate investor.

Mike: Well, I’m not anti-debt. But I’m not pro-debt either. I’m kind of in the middle. I am ambivalent. But I do believe debt has certain applications. So there is a thing called debt leveraging.And then – everyone I know is familiar with the term, very few people are familiar with the definition. So, people just use it as a carte blanche explanation of borrowing money and I am gonna do a debt leverage. The intention of debt leveraging and the definition is that there is a predictable and expected return on borrowed money within a period of time. For example, If you David, you gave me one dollar, and I know with a high-high degree of probability that one month of two dollars as a result of using that one dollar. That`s debt leveraging. I am using my- I don’t have to make even more money, and therefore, I am able to pay you back. Plus, the interest I owe you and have a positive profit. That`s debt leveraging. There is also this thing called debt- and so sadly, in every industry I have investigated, very few people do debt leveraging. It’s more like potshots like, “oh, I borrow money with the hope of making money; there`s no really predictability, but I will say there is.” Then there is also was called debt bridging. Debt bridging done by businesses or even our personal lives is to bridge a period of time where money is constrained or less available, but there is a predictable recovery period. So when the COVID pandemic struck, people behind the PPP loans thought they were doing debt bridging. They really weren’t, though, cause debt bridging is now you get money that can afford you more time. But there was no predictable end game like when this is going to be over? Well, no one knew that, and we still don’t know.. as this recording. So, people got a bridge to nowhere. We went halfway out as chasm, and now businesses falling off the chasm cus they cash ran out. So, they moved in to, and sadly a lot of you move into the third category that I call it debt anchoring. Debt anchoring is where we take money without a predicted end game with an already predicted return, and therefore we exhaust that debt and now put us in a position where we were in further trouble. We actually do not leverage; we deleverage. So, now the businesses are under more and more constraint. And that’s why I’m ambivalent about debt.I think it can be powerful when used appropriately. I think most of the time, maybe upwards of like 95% of the time, it’s really a debt anchor. And businesses are in a worse position as a result.

David: I totally agree with that. Because most investors have one bank account that they put-where they get a lot of private money, and it goes into their bank account, and they think they are okay. But they are not actively tracking the money versus what they are into that specific project. So, it’s like they just have this one account, and everything goes in there, and they are just using the lenders funds for operations. And it’s like okay you are getting yourself into a bigger hole. And you don’t have a plan for that money, that’s why I love Profit First because one of the first accounts we have set up with investors is like an OPM account or Rehab account or project accounts that we call it. And all the lender funds go there so that they can see their own funds versus the lenders’ funds. And so that way they don`t have these just big mixed pots, and that’s helped a lot of investors, and that really helps them see is it debt leverage or am I just – is it that debt anchoring? You know, like, is it just gonna drag me down? And you know eventually, I will be out of the business. But I love the way that you just put that. Because a lot of people go into it, especially in an investing world. They know that they usually, gonna have to use borrowed money, so going into it, it’s thinking I need to be able to leverage every dollar and not use this just to eat. Then I think that’s a big mindset shift in a whole investing world.

Mike: Yeah, there is this concept called Parkinson’s law. That speaks to human nature and why we behave like we behave. And what Parkinson’s law is he was a behavioral theorist, I think in the 1950s. And he realized that in many applications is human nature that as a suppliable resource increases that our demand or consumption for that supply increases. Now his studies were mostly around time, so if you and I were negotiating some kind of project, and I said hey, I will get you that- the deal parameters in the next week or so. It will take me a week or so to get these deal parameters. Now if you and I are the same guys and having the same conversation around the same parameters where I say I will get you tomorrow, I likely get to you tomorrow, so as we constrain the amount of time that is available to get something done, we work more efficiently with the time that`s remaining. Well, this is true for time, but it’s also true for money. So there is more money is made available in our lives and our business we spend that way, and I bet you that Real Estate investors can relate to this; it’s almost uncanny – the bigger the deals you have, the more cash flow running – through your business. You are not more profitable. You spend more almost the same exact rate every time a dime comes in, and a dime goes out. And it seems like some kind of supernatural force is doing this. Well, that supernatural force is us! It’s Parkinson’s law. As we see more, we spend more. So if Profit First by dividing up those accounts, if you have a singular account, you have pre Profit First. Well, see it, and subconsciously, your mind will say, that’s what we have to spend, let’s spend it all, and we will justify it by saying we are using that to grow, we’re plowing back into the business. But instead, if we allocate money to its intended use before we spend money, mainly to set these multiple accounts with different intended use, then we work within a constrained Parkinson`s law. You know a thousand dollar deposit comes in, we don’t have a thousand dollars to spend necessarily. We may carve it up and see – there is four hundred dollars to spend or three hundred dollars to spend because other money is being allocated to things like profit or tax reserve. Maybe even to- you know, buy future properties we have additional accounts, those capital expanders we have the inventory we need to turn, so we allocate money to its intended use first. You have clarity on what’s available. You start working within the confines of what you can use in a business. And not use of anything that is intended for other purposes too.

David: Yeah, the whole of it. Cause that’s definitely a trap that real estate investors can get into. I have a couple of other questions too. A lot of investors have multiple entities that they set up because they’re- some of them do like fixing and flipping and buying holds and so they have different entities. Do you recommend that they set up all the accounts for the each entities that they are treating them like different businesses?

Mike: Yeah, I know somebody here be like, “oh my god, so frustrating, I track all these accounts. I can’t do this”. It’s really the set up that can be the nuisance. And honestly, it’s maybe a couple of hours of your time invested once, and it returns for the rest of your life. So in the picture of things, a couple of hours is well worth investments to set these accounts for each distinct business. But the reason we do it is important if you- blend all these businesses into the five foundational accounts that we call or whatever, however how many accounts you set up. It is impossible to distinguish that from a cash flow, what are those businesses really driving profit and what’s not. So instead, for each business, we set up to five accounts, and then what you see is oh, that one business I had I thought was making money actually is a drain—and having to pull money from another company to pay for that business. So we have absolute clarity. So yes, you do need multiple accounts to know what money is coming from what business. And what businesses are consuming what cash.

David: I love it,yeah. We have one client right now that has about five different entities, and they are setting him up for all. You know, like the foundational accounts for all the entities plus a couple of extra ones that they are starting off with too. And that- they already- because they already implemented the two entities, and they said:” we’re being proactive instead of reactive. We are not just looking up the numbers at the end of the month. We now know do we have the money for this month, or do we have reserves, and so they’re being proactive about it. And they were like yeah, it takes some time to set it up, but now we spend 15 minutes, you know, going through doing the allocations knowing like which companies are profitable and which ones aren’t. So I think…I love it. I love the whole system, and it’s working with people that have multiple entities, so thank you so much for clarifying on that too. So a couple- just a couple last questions here. Is there anything you can think of that real estate investors should avoid when implementing Profit First?

Mike: Yeah, so we should avoid kind of arbitrary world of dice type of investments. Now I’m not saying don’t be speculative but what happens with Profit First is you will start constraining how much money is available for your business; you have less to spend, and some people get nervous about that they say b-b-but I have everything to spend because I have to find the deals that around there. And we start becoming hyper speculative which puts us in major risks.
Here’s the great irony David. I told you we have two hundred fifty-thousand plus businesses doing it. We have a thousands of different case studies and reports and what we have discovered consistently is that the businesses that take Profit First and constrain the money available to operate the business actually grow faster than their contemporaries. What happens is you stop taking unnecessary risks. If I had a thousand dollars to spend, I would spend a thousand dollars whenever I had a hundred dollars to spend. I`m not gonna only spend a hundred. So, where is the most prudent place to put it? Thousand dollars, let’s see if we kind of spread the money out a hundred makes me be very specific about determining the ROI before I spend a dime. So it’s interesting that businesses that reduce how much money they’re spending, enhancing their profit actually become selective with what they are doing and they start growing faster. They make better deals than their contemporaries. So that’s how you leverage it.

David: Awesome. How about when it comes to Profit First in real estate investing any other tips to give our listeners?

Mike: Yeah, so I would suggest get the foundational five going but first, start really slow and just get one account. If you are brand new for Profit First as a real estate investor, I wouldn’t set up the five accounts, the main bank, and then two accounts in the second bank because it may overwhelm you. It may be too much of a shift from how you’ve been running your business to this new standard. I promise it will still be better.But maybe it’s better to dip your toe in the water. So I tell everyone to do it, and there is no excuse not to do this. Do spend the 10 minutes to set one account and cop profit. Allocate one percent of your money- cause money comes in, the thousand dollars come in. Now I’m saying put ten dollars in your profit account. It’s such a small amount that is inconsequential on the impact of how you operate your business. It’s highly consequential in the fact that you will start having profit allocated. When you see that cash accumulating profit just for you to take out and do what you want with it. Then we start becoming excited about the system and start rolling out the full system. So start slow and let it grow. And the last component is your industry is unique. You do have big capital expenditures when you are buying new properties and so for. So, the five foundational accounts simply that they are foundational over time when you really get into it, you may add six or seven accounts or maybe you are an odd ball like myself, who has 13 accounts for my business. But it’s given me absolute clarity on what money is available for what purpose. And I’ve run my business extremely profitably as a result.

David: That’s awesome. Thank you so much, Mike. We really appreciate all the – the tips you’ve given for the Real Estate investors .And the last question we always ask is how people can provide value to you, our listeners. I know that you just came out with a book Fix This Next. I am a huge fan of it. Even in my own business, I knew which level I needed to start off at, and now we are implementing that—and going hard after the levels. Cause you talk about almost like Maslow’s hierarchy of needs there but for businesses, so I love the Fix This Next book, and I highly recommend you getting that book. But Mike, do you wanna direct people on how they can either get the book or what they could provide value for to you?

Mike: Yeah, yeah – so thank you for asking that. That’s a great way of asking that question. This would be a great service to me… So it’s a selfish request, but it would be helpful, but there is two- there are other reasons too beyond selfish, I think we have a service.So if people decide to pick up a copy of Fix This Next, I encourage you to go on Amazon specifically to get it. And if you’re anti-Amazon, you can get elsewhere for sure, but here is the two reasons. One is I’ve spent five years writing that book; I devoured a lot of research and study to it. I am extremely proud of that book. I think it’s actually the most imperative and important work I’ve done up this point. So, it’s the greatest way, I can be a service to readers. It’s twenty-five dollars, and it’s actually probably less than that. It’s five years of work in there, that will be a service to you. I am convinced of it. My selfish reason, perhaps the greater reason for my perspective, is if you get the book on Amazon, it triggers the Amazon algorithm to market it to other entrepreneurs of all types. So honestly, if you get it, it also serves me in spreading the word, and that would be a huge service.

David: Awesome. Well, you heard it right here. You need to go out and buy Fix This Next from Amazon. That would help Mike, and he has been such a huge help to us. I know that we can go out there in mass and in the real estate investing world and do that for him. So, Mike, we really appreciate you for being on this podcast and coming on and sharing your wisdom today. And we really appreciate you.

Mike: David, this has been a joy. Thank you so much for having me.

David: Yes, thank you.

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