Profit First by Mike Michalowicz | with guest Sabrina Chevannes

0:01Mike Michalowicz:Welcome to Business Book Club, where top entrepreneurs break down the most powerful insights from the world's best business books. I'm your host, Sam Brown, and today we're talking about Profit First by Mike Michalowicz.

0:17Mike Michalowicz:If you're tired of looking at your bank account and wondering, where did all that top line revenue go? This episode is for you. Mike is the perfect person to write Profit First. He's built and sold multiple million-dollar companies and is a master at distilling hard-won lessons into easy-to-implement advice. No wonder that an estimated 600 ,000 businesses are using the Profit First principles to grow leaner, more profitable companies. And joining me is Sabrina Chavans. She's the founder of the award-winning No BS Agency and runs a community for ambitious entrepreneurs. She's also an international chess master and competitive poker player.

0:57Mike Michalowicz:She knows strategy, she knows risk, and she knows how to win. Today, we're going to discuss how to use human psychology to stop overspending, how to audit your business to find the hidden cash bleed, and the specific bank account structure that Sabrina uses for her agency. Sabrina, I asked you to choose the most impactful book you've ever read. Why did you pick Profit First?

1:20Sabrina Chevannes:For me, Profit First was one of a handful of books that I genuinely implemented directly into my business. And it's made a profound impact on the business. And I thought that whilst some of the concepts are really basic, it was still very eye opening. And now that I work with so many other business owners and I do a lot of entrepreneur coaching, I realized that so many of them don't actually have any sort of financial system or strategy or processes in place to handle their finances. And I feel like Profit First has got such a simple system that is so effective that you could use in your business, but also in your personal life as well.

2:00Sabrina Chevannes:So I thought it was a must read book for anyone who wants to be able to manage their money a bit better.

2:05Mike Michalowicz:I've asked you for your three most valuable lessons from this book. What's the first lesson?

2:10Sabrina Chevannes:Your profit line should be the most important accounting figure in business.

2:15Mike Michalowicz:What do you mean by your profit line?

2:17Sabrina Chevannes:Without getting nerdy about accounting and your P &L spreadsheets, essentially in business, I think there's so much focus on revenue, i.e. the money that just comes directly into your business, whether you're a product business, service business, that's just money from sales, right? And most people look at that. So when you look at quotes on social media about how much people are earning, it's all about revenue. and they're saying I've hit my six figure months or whatever brags that they do. It's all about revenue. And they're not taking into account any costs. So especially if you're in a product

2:50Mike Michalowicz:business, and you've got a lot of expenses going out, and even take some of the big tech companies

2:56Sabrina Chevannes:like Uber, for example, very, very known to have not been making profit. And I think that, well, obviously, Mike thinks he wrote the book on it. But I also agree that the profit should be the most important accounting figure, because at the end of the day, even if you're taking in a lot of money, if you're bleeding a lot of money, it doesn't mean that you're a profitable business. And what that means is that you're not a sustainable business. Eventually, your money is going to run out unless you do something, improve processes, reduce expenses, your business is going to fail. So for me, profit should be the most important line of the business.

3:30Sabrina Chevannes:And it's also what investors look at. They're going to look at what your profit margin is. And I come from agency background. And that is such a big flaw in agency world. It's all about the revenue. All they care about is what is your turnover? And they forget that profit margin is actually even important. In fact, people don't even know what their profit margin should be. I think as a business owner, you should know what a healthy profit margin is and you should know what your industry sort of standard is.

3:56Mike Michalowicz:I think Mike distills this down into a really simple formula. Revenue minus expenses equals profit is what you're talking about, like that most people have as their like normal formula to use. And he flips it to revenue minus profit equals expenses. So shifting profit into the sort of main part of the equation, once you understand what your profit is, then you're able to understand like what your expenses are that you've got left. It's a very easy way to understand it. Did you implement this with your agency first, or was it another business that you implemented this with?

4:26Sabrina Chevannes:No, it was with the agency because I felt like agency world, like I said, is very revenue focused. And there's a lot of a concentration on growing, scaling, speed, like that's what a lot of agency coaches sort of train, like that's what they try and get into you. And when you're doing that, you're looking at revenue, that's what they're doing. So if you're looking at scaling, you need a lot of revenue, then you need to hire a lot of people and you grow that way. They're less looking at profit margins. And I found that was a bit of an issue. For me, I care more about quality and actually doing a good job for the clients.

4:59Sabrina Chevannes:And then you could grow slower, but at a more sustainable way. So profit for me was a big thing to look at. And that meant going deep into processes, understanding our efficiency as a team, looking at my costs, because actually I was spending a lot of money everywhere and I didn't realize it. And it's so easy to do that when you're a business owner. There's a new software out every day and you're subscribing to it. There's like marketing things, networking events, and suddenly you're spending all your money every single month.

5:26Mike Michalowicz:What was the first thing you noticed when you started looking at this in a different way. Like, can you remember like, what did you cut?

5:31Sabrina Chevannes:Yeah, I do remember. So I actually now implement a software audit every quarter, because especially with tech, the speed that it goes, it's so easy, especially as a creative agency, there's always a new piece of software out. So we were subscribed to absolutely everything, I swear. So it was like, obviously, the usual stuff, which is like, you know, your Adobe suite, Slacks and Asana project management softwares. But it was then we had something to allow clients to be able to feedback easily on websites, for example. And then we have like type form. So it's like a pretty form that people could do.

6:02Sabrina Chevannes:And then you have like other AI tools now that are coming in and you subscribe to all of them. And it might be 50 quid here and there that goes into stuff. And then you think, okay, it's going to save time. But then when you add it up, actually, you're spending four figures a month on this sort of software. And I was like, that is too much. And then I'd speak to the team, how often do you actually use this stuff? And they're like, no, it's really useful. I was like, but how often do you actually use it? And then we looked at it and we looked at time, spent. And again, some software seems like it's expensive.

6:29Sabrina Chevannes:So it's like 200 quid a month or something. But then you look at how many hours it does save them. And then you work it out. Actually, it is efficient. So you have to do a lot of direct calculation between the hours they spend and the efficiency and also does it interrupt their flow process? And you've got to calculate that. So there's a lot of things that we took away a lot of software expenses, which just weren't using, we forgot about, we're just paying for, which was kind of ridiculous. A lot of networking marketing expenses, because I was part of lots of different memberships, which inevitably changed what I wanted to do because I realized I was part of members of all these different clubs and organizations and I was spending thousands of pounds to be part of them because they promised to like bring us clients or meet the right people I was just getting no value from them so I realized this and sort of audited that as well so I spent loads of money there and so there's little things like that that just you know I realized I was spending far too much money on even things in the office that we were spending too much money on things are coming out subscriptions like we have biscuits on subscription like you know like people were just munching through in the office and I was like this is unhealthy as well so I'm gonna reduce this so ridiculous things that you start to realize when you go really granular on your expenses and then just efficiency which is a really really good process and actually we kind of went through each of our team and I kind of got them to do exercises where they thought an optimum workflow was between us all we were able to optimize that.

7:49Sabrina Chevannes:And not only did that obviously improve our clients' experience, our team actually felt better about it. They actually changed something, which was really nice for them. We saved lots of time. We became more profitable in terms of projects as well. It just was an all-round great thing. And actually this kind of encouraged me to do that, which you always put off those sort of things in your business because you're doing client work, and they're not billable hours, but actually they make so much money. And we probably would have saved like tens of thousands of pounds by doing that exercise which is kind of ridiculous

8:18Mike Michalowicz:I love getting your team involved with process if you give someone a process to do they'll do it to 90 but if they're involved in making it then they understand the rationale they understand why yeah they can then come to you and remove bits from the process if it's not efficient

8:32Sabrina Chevannes:that's definitely the way they feel more empowered too because it's like you're part of like you know they're actually creating this which is kind of cool I think let's move on to lesson number two You can remove temptation in your business and focus on what really matters.

8:46Mike Michalowicz:All right. So temptation in this respect, what is temptation?

8:51Sabrina Chevannes:As a business owner, you naturally look at your bank balance a lot and you sort of like, oh, I've got a fair amount of money to play with. I'm going to do this. I'm going to do that. I could do with a new fancy equipment and this and that. And you think you've got so much more money to play with than you actually do. Because when you get your VAT bill, you're like, oh crap. and it becomes an issue. And it sounds very immature when I'm saying this like this, but I've been running away business for 15 years. I'm not quite that flamboyant with it, but there is that temptation to do it and you miss budget things.

9:19Mike Michalowicz:Yeah, I think a lot of people listening will resonate.

9:21Sabrina Chevannes:Yeah, I mean, unless you have a CFO and you're lucky enough to have that, lots of small business owners don't have that, right? They have either factual CFOs or an accountant or someone to advise them, but they're not there all the time. It's like all you're being invited to go to a big trip and it sounds exciting. Work trips are nice and the expenses and you think, oh, okay, I can afford this this month. But you can't because actually you just had a big cash flow come in from a client that's supposed to go for the next couple of months on the budget of that project because it's a long project, but you've had a big milestone come in or like you've got expenses coming out that you've forgotten about and your cash flow and your working capital at that moment seems a lot bigger than it actually is.

9:56Sabrina Chevannes:And what I love about The Profit First and how it actually works, the actual specifics of what he teaches is that every month and you do it twice a month is so it's regularly you make pockets for different parts of your business and he recommends different ones but I actually slightly changed it so what I did was I took out a certain percentage of my income every single month and made that profit so that

10:21Mike Michalowicz:became a profit pocket in my bank account then I had a tax one as well so I took out a certain

10:27Sabrina Chevannes:amount of percentage and I know that's going to go for tax so that pays my PAYE bills and my VAT bills and stuff like that. So I know that I'm going to be able to make tax. And then I put an owner's drawing one. So that basically goes to me, which is really nice. So it's like that is the money that I actually get to pay myself. And you could decide whatever that is. So I decided a decent salary that I should be paid that I can live on. That's not going to hurt the business because at the same time, I still want the business to grow. So I shouldn't be taking out too much money out of the business all the time unnecessarily because you want to have enough working capital to be able to do things.

11:03Sabrina Chevannes:So as long as I paid myself a healthy amount of money, the profit is a pocket where you can play with. So it's like you can reward your team, you can do nicer things, you can pay for a team trip abroad, like it's what we do. So that will go into that. And you know that that's a good, healthy profit as well. So you've got profit, you've got your owner's drawings, and you've got your tax. That's what I took the three pockets out. And then I know I'm going to make my obligations. And you take a percentage out every single month and everything that's left in the business then becomes your operating costs.

11:32Sabrina Chevannes:And you could just use that. And that's how much when you look at the bank balance, and you put them in separate different bank sheets that you don't notice. And that's what you're left with. So when you're looking at your budget, and you're thinking, how much money do I have to play with this month? That's only in that particular thing. So you know that that's actually what you've got to spend. And so when it comes to paying yourself, you can pay yourself on the owner's drawings. And when you come to do your tax bill, you've got that bank balance, and then you've got profits still left that you can play with.

11:58Sabrina Chevannes:So for me, that was a great way of doing things. And you're actually budgeting in a correct way without overestimating how much you've got to spend.

12:07Mike Michalowicz:Great. So let me just play that back to you. You look at your bank account, all of your money is in there. So what you've then done is split this up, opened a new bank account, siphoned off the money that you need in the future to pay yourself and your taxes and your profit. So because you've already mined off your profit, which is the most important thing, the top line of your business, financial reporting, you then understand what your expenses are and that's the money that you can decide whether you keep those subscriptions that we spoke about in the last section.

12:34Sabrina Chevannes:Yeah exactly that and it doesn't have to be separate bank accounts a lot of them have what they literally call pockets depending on what bank account you've got like Starling and Revolue and all those new challenger banks have allow you to just be able to create them in there so it's quite nice.

12:46Mike Michalowicz:Yeah one of the things he says in the book is that he likens it to Parkinson's law which is that work expands to fill the available time. Mike says that expenses expand to fill the available money. So if you don't have as much available money, you will only expand to fill the available money that you do have. And you'll still find a way to make the same products and to be able to deliver the service that you need to on the budget that you do have. Have you found that limiting the amount of expenses that you have available to you has made you more resourceful? Or has there been an impact in limiting the amount of expenses that you have?

13:20Mike Michalowicz:Because that would be my major worry about doing it this way around?

13:23Sabrina Chevannes:I found that actually it's made me much more disciplined with my money. I also created a contingency pocket because we had situations where we thought, oh, it's going to go to court or something like that, like a client wasn't paying. And I was like, I need fees to cover that. So I actually created a contingency pocket as well. And I put money in there to cover any sort of situations like that. So I wanted to make sure that for whatever situation I could face, I had money. I don't want to be panicking, thinking, oh, what do I do? I need to make someone redundant, or I need to like do something crazy to be able to afford that.

13:53Sabrina Chevannes:I made sure I could always do that. We never had a situation where we didn't have enough money to deal with stuff. There were times when the sales became slower and all I did was make sure I just didn't pay myself the full amount of money. And if I needed any money, I'd transfer that money from that pocket into the business. But the thing is, you don't want to do that. Your whole point is that you want to be able to pay yourself a salary. I would do that once and then make sure I go back again. But I always keep a spreadsheet and the things I had a proper spreadsheet, which had it all there directly.

14:23Sabrina Chevannes:And I would make a note of which ones I didn't pay and which ones I did and then make sure it got paid later. So you just were so focused on the numbers that you actually understood what was going in and out all the time. And you understood which were months which were slower and you understood just cyclical turns and everything like that. So I think it just made you more aware of money as well, which I loved about it for sure.

14:41Mike Michalowicz:Yeah, it comes back to the what gets the measure gets managed again, doesn't it? It's so true. So what he suggests in the book is that every quarter you distribute 50 % of what you have in your profit account to the shareholders. So if you're a 100 % shareholder, you get all of the 50 % that's in there, leaving the other 50 % in for a rainy day, which is, I think, super useful and very simple that anyone can sort of follow rule to use. Let's move to lesson number three. What is that?