Howard: It is just a huge honor for me today to be podcast interviewing Mike Michalowicz. By his 35th birthday he had founded and sold two multi-million dollar companies. Confident that he had found the formula to success, he became an angel investor and proceeded to lose his entire fortune. Then he started all over again, driven to find better ways to grow healthy, strong companies.
Among other innovative strategies. Mike created the Profit First Formula, a way for businesses to ensure profitability from their very next deposit forward. Mike is now running his third million dollar venture. He is a former small business columnist for the Wall Street Journal, he is the former MSNBC business makeover expert, he is a popular keynote speaker on innovative entrepreneurial topics.
And he is the author of Profit First, Surge, The Pumpkin Plan, and the Toilet Paper Entrepreneur which Businessweek deemed the entrepreneur’s cult classic. Mike, thank you so much for coming on the show today. Unfortunately, you’re talking to dentists who studied eight years of math and chemistry and physics.
Howard: They graduate eight years later and they didn’t get one hour of business.
Mike: Unbelievable. But true. I get it. I get it.
Howard: So help them out buddy. How do they go from being a doctor of oral health and no physics and chemistry and root canals, fillings, and crowns to actually making a profit so that one day they can pay back their $350,000 of student loans?
Mike: So what you need to know is that logic does not work to our advantage here, it’s to our disadvantage. There is a formula that dentists… actually all entrepreneurs have been told that it’s totally wrong. And what we’re told is that you have to have your sales… patients coming, you have incurred expenses, get that equipment, the x-ray machine, all of that stuff. And then the money left over is your profit, and that’s a lie. It’s not true. And it logically it makes sense, Howard, but from a behavioral standpoint it’s not true.
There was a study conducted in part by the SBA tomorrow organizations, they identify that eighty-three percent of small businesses are surviving check by check. Eighty-three percent of dentists don’t have enough money to pay the rent next month unless more patients come in today. So this constant check to check survival. And that formula we’re told where profit comes last, teaches us that that’s the last consideration. Oh, maybe end of the month will be profitable, maybe the end of the year. And we keep kicking the can down the road with profitability. Profit can’t come last, it must come first.
Howard: That is truly, truly wise words. Man, you have so many books I don’t know where to start. What do you want to talk about first? You wanted to talk about.
Mike: Well, that would be Profit First because we are on the subject of profitability.
Howard: Profit First Professionals or the book Profit First Transform Your Business from a Cash-eating Monster to a Money-making Machine.
Mike: That’s the one. Let’s talk about that book because I think this can serve every dentist watching right now. And here’s what it is, the old formulas, let’s explain, sales minus x equals profit is a lie. Most businesses aren’t profitable. The only simple most powerful suggestion I make, and you should write down right now and do, is that profit must come first. And what I mean by that is no longer is it sales minus expenses is equals profit, it’s sales minus profit equals expenses.
And what I’m explaining here is basically just flipping the variables. So mathematically this is the same as we’ve been told before but behaviorally it’s different. As sales come in to our business, we immediately take a predetermined percentage and allocate it to profit. You bring in a thousand dollars of sales today, ten percent of that for example. We take a hundred dollars, we transfer it to another bank, we hide it away and then you have to run your dentist, your location off of the $900, and I’m telling you if you can run a dentistry off of $1,000 you can run off $900. But by taking that top ten percent and allocating it to profit first, you’re assuring profitability.
Howard: And I just went to Amazon.com. I pulled up your book which has an unbelievable one hundred and ninety-five star reviews. And I just retweeted that out at @howardfarran to our twenty thousand Twitter followers, because right now they’re probably all commuting to work right now so they can’t take notes.
Howard: So if they get that book they’re going to learn… what did you say they’re going to learn to go from sales minus expenses equals profit to sales minus profit equals expenses?
Mike: Yeah. That’s the basic premise. You’re going to learn that if you take your profit first, this is nothing new by the way, I didn’t invent something here. This is the pay-yourself-first system we’ve been told to do in our personal lives. I’m just a guy who’s saying it applies to more than this our personal living, it applies to our professional living, our expenses. So when money comes in, we allocate our profit but there’s more to it.
We’re gonna use what’s called the envelope system. This is something, I’m sure Howard, someone in your family tree used, and my mother did this. When money came in she divide the money up into different envelopes. One for food, one for the community, one for the mortgage and then when she went food shopping, she always take the food envelope and only use the money that’s in there.
Well businesses need to pre-allocate money to its intended purpose. The problem that most dentistry’s have is a thousand dollars come in and the dentist looks and says, ‘I have a thousand dollars to spend’. That’s not true. When a thousand dollars comes in we must pre allocate that ten percent to profit. But also, what about paying yourself as the owner? The salary you’re going to live off? Let’s allocate money to that so with a consistent salary. What about your tax liabilities? What’s allocated to my tax liabilities? What about buying that equipment that you think you need? That new x-ray machine, or whatever. We must allocate money to that. What about paying your staff? So we put money into this different envelopes. And now with the money pre-allocated. But before we spend the money we see truly what we have available to run our business and we don’t go in excess in any category.
Howard: It’s funny. My mom did that with us when I was very little, we had like four or five different piggy banks and we had goals on each one.
Howard: And we were putting nickels and pennies, and quarters, and all that stuff. These guys… you also have the Profit First Professionals, profitfirstprofessionals.com.
Mike: That’s right.
Howard: You talk about accountants, bookkeeping experts. These guys don’t even know the vocabulary.
Mike: That’s right. That’s right. So traditional accountants and bookkeepers… if you go to a traditional accountant and say, ‘I need to take my profit first’. That may actually be like putting a fork in their brain, it’s like wow. That’s… what you’re talking about? That’s not how business is run.
Accountants and bookkeepers ironically, for the centuries since the invention of GAAP accounting have been telling us don’t go to your bank accounts ever. Just read your income statements, your balance sheet, your cash statement, run the metrics, run the KPIs, blah blah blah. And what do we do as dentists and business owners? We revert to looking at your bank balance.
So, I started an organization called Profit First Professionals. We have members who specializes in different categories. Connick J. Cox is the definitive profit expert for dentists and so, now if a dentist is looking to drive profitability in their business, they have an accountant, and a bookkeeper, and even a coach who can work with them in driving profitability. And understands that traditional accounting doesn’t work. Not that it’s wrong, it’s logical. It’s just not matched to our behavior. So Profit First Professionals are people who do that work, but also understand the behavioral component and use the profit first system to drive profitability.
Howard: It’s funny. The CPAs… every dentist I know… I have been practicing thirty years, every dentist I know who’s been practicing thirty years, their CPA’s have only given them a Statement of Income, a P and L. They’ve never even given them a Statement of Cash Flow.
Mike: (inaudible 07:44)
Howard: Ninety-nine percent of dentists wouldn’t even know what a Statement of Cash Flow was.
Mike: That’s right.
Howard: And they only understand what a Balance Sheet is if they’re trying to get a loan or divorce. I mean, yeah. So…
Howard: So you talk about Key Performance Indicators and that’s even more sad because every time a dentist gets done doing a filling, if you stop them right as he was leaving say, ‘okay, you set a filling? What does it cost?’ They barely know because they signed up to ten different insurance plans, so they get ten different prices and you say, ‘Well did you make a dollar or lose a dollar?’ They have no idea.
Mike: Yeah. It’s…
Howard: They just hope they’re busy enough and work really hard at the very end there’ll be some money left over.
Mike: Yeah, that’s the hope. And accountants and bookkeepers have been yelling at dentists and business owners all the time saying, ‘please just look at these numbers, learn how to read them’. But we don’t. And that was the great lesson for me. As I grew my businesses, my accountant was yelling at me to understand his documents begging me to study this and I didn’t. But what I did do is I reverted to what I call Bank Balance Accounting.
I have my phone with me right now, I log in to my phone, I see how much money is listed in my bank accounts and I make decisions based upon my bank balance. So I came to understand that if accountants and bookkeepers can’t convince us to do this, we’ll never do it. Can we create a system that works with what we already naturally do? Log into our bank accounts. So, these different envelopes that I told you, these are actually checking accounts. And the beauty of this system is now you continue to do what you’ve always done. Log in to your phone or on the computer, see what your bank balance is. But now that there’s different accounts with different envelopes you know what intended purpose the money will serve.
And people, Howard, have said to me, ‘Well I can just use on a spreadsheet right or my accounting system’. And the answer to that is actually you cannot because we revert to looking at our bank. And if we put it on a spreadsheet and we log in to our bank account, we may not look at the spreadsheet and see what money has been allocated to or what purpose that might have been allocated to. So, we have to do this at our bank, so it’s in our natural path and every single time we look at our bank balance we see how the money’s been divided up before we spend it.
Howard: I’ve always thought it’s weird math should be purely amotional. I mean one plus one equals two, it shouldn’t make you excited, or sad, or you don’t feel sorry for three.
Howard: I mean it’s just math but when it comes to those numbers representing money it seems to be so emotional with human. Why do you think money is an emotional behavioral issue as opposed to just math?
Mike: Yeah. So because we see it as a possession and humans are prone to what's called loss aversion. Loss aversion is when I possess something I will go to extreme measures to retain it more so than if I never owned that thing in the first place. For example, say I buy a car, we'll just say it's a Toyota or something. I own this Toyota, I don't make a payment. The lendee comes to me says, ‘we're gonna repossess your car if you don't make a payment within next week’. What am I going to do? I'll take on a second job. I'll run my dentistry but at night I'll be running Uber and lift just to make some extra money to retain what I already possess.
Now here's the irony, I could have been doing that Uber and lift work in addition to the dentist work I'm doing for forever. And I could have bought the Mercedes. But I didn't. See, we are more driven to keep what we possess than we are to gain something new. So, when it comes to money when it flows in our business, we will go to extraordinary, often illogical measures to keep the money. We’ll actually spend lots of money on equipment or stuff to reduce our taxes. We’ll literally spend hundreds of dollars to save tens of dollars. So, our behavior on money is very much driven about… like it's a possession.
Howard: It seems like there's… it's really easy to look out across…. in the United States there's two hundred and eleven thousand citizens who have a license to practice dentistry, and there's two million around the world. When you look out over them it's easy to tell these are boys, these are girls, these are Irish, these are, Vietnamese but it's harder to tell that these are the Silent Generation born ‘33 to ‘45. These are the baby boomers ‘46 to ‘64. This is Generation X ‘65 to ‘79. These are the millennials 1980 to 1995. Generation Z, ‘96 to present. When you look at those millennials, versus generation X, versus baby boomers, versus silent generation, or go pre-1933 the Greatest Generation, do they deal with money differently? Do you think? Do you do think millennials are different today than say, me, I was born in ‘62.
Howard: So I'm at the end of the baby boomers. Do you do think baby boomers, versus Generation X, versus millennial dentists see money differently?
Mike: I think they see money the same in many aspects. I've worked with businesses of all different sizes on all different age groups. But their experiences play a significant influence into how they behave around money. So they see money the same. It's a vehicle or a tool to either express yourself, to procure things, to purchase things, to experience things. So people consistently see it as a tool, but their believability or their perception of how much they can retain the money varies. People from the greatest generation that I've done business with have gone through basically depressions, multiple. They see the fickleness of money that it can go away overnight. And therefore, in general from that experience I see them cling and retain much longer.
The newer generations that have been in boom periods think money just flows on trees. You snap your fingers and it appears and they're much fuller with money. So it's funny the people, their behavior around it doesn't change in regards to… it's a tool, it's a vehicle but their belief in its availability changes based upon their personal experiences. I think every generation will go through and should go through depressions or major recessions and wake you up. I mean 2008 that was a big wake-up call for people in their earning years, the twenties, thirties, forties, and fifties. But the people who were eighteen then and now are twenty-five, twenty-six didn't experience the pain of that. They don't have the experience, they may think that money still grows on trees. They'll change too once they go through their challenge.
Howard: Yeah. And I also want to tell you that, in my fifty-four years, none of these Talking Heads experts predicted the Berlin Wall falling down.
Mike: No. No.
Howard: The Arab uprising, 9-11, all these things. So when everybody tells you everything is great and rosy you never know what you're going to wake up to the next day.
Mike: Oh my God. It's so true. I mean everything seemed to be booming before the 2008 collapse. Everything seemed to be booming before the 9-11 attacks. I'll never forget that two days before that, my business was as strong as I ever was. Two days after that, the phone didn't ring at all and so there's these unexpected challenges that we’re faced with. But I will tell you this, if we build a cash reserve during the good days and the bad and continue to build the cash reserve, that is a powerful tool for carrying us through these tough challenges.
Howard: So you have so many books. So talk about the Surge. Another one of your books with a gazillion five star reviews. Surge: Time the Marketplace, Ride the Wave of Consumer Demands and Become your Industry's Big Kahuna.
Howard: What take away do you think these dentists could learn from that?
Mike: So I found is there's movements in markets and here's the big lesson. Find a niche and cater to it better than anyone else can. Irish community is something you mentioned earlier. What does the Irish community need? Are there certain things? Maybe there are certain religious sect and we need to practice our dentistry in a way that complies with their religious guidelines and the person that adheres to it will get recognition in that community.
The unquestionable thing about Surge as I was writing that book, is that I was observing surfers. Surfers look for one wave at a time and try to ride that wave, once they selected, all the way in. The equivalent in the business space is a niche community. Identify a small community and observe it. How is it moving? What's the changes going on and what can you do in front of that change? And if you're a provider that understands what that niche needs, the niche will talk about you and they start to carry you forward.
Howard: One of my favorite guys on that was a dentist in Boston named Tom Warren. He started practicing there and his whole office looked like himself. And then he realized that every time he went to the barber, everybody coming in and leaving when he was there had an accent, and he finally asked the barber, ‘What is that accent?’ And he said it's Portuguese from Brazil. He said there's a gazillion Portuguese that live around here. So he actually went back to school.
Mike: That is so smart.
Howard: And learned Portuguese, started networking with that barber, and got himself a thousand Portuguese people. And I've seen that so many… one of the smartest dentists I know in California got out. He realized most of the dentists, this is thirty years ago, most of them look like me and you and there were pockets of… in this San Francisco community, these people were all from Thailand, these people were all from Vietnam and Korea and he saw ten ethnic markets and he set up ten different dental offices.
Mike: So smart.
Howard: Where everyone would be completely staffed by people from Malaysia or…
Howard: Vietnam because I would think if I moved to Vietnam and can speak a word of Vietnamese I'd want to find a dental office where they all spoke English.
Mike: Of course.
Howard: And so he target marketed those guys and he… I think two years out of school he owned ten offices doing a million dollars a year each. Just by target marketing.
Mike: So I love behavioral influence and understanding human behavior. Actually I'm working on a book that's not my next book about the book after this. All about behavioral influence and one thing, that you talked about, is called commonality. When we see common traits in someone else, we have instant trust for them. If you and I went to the same high school, oh my God, all of a sudden we're the best of friends because we have this common thing. Well we do judge people, sadly we do judge people by their skin. If we see someone that looks like us we immediately have a stronger affection toward them. So look like your customers that we can’t morph our face well, well nowadays you can, but we can dress like our customers, we can show respect for the community that we're serving by having decor around our office that speaks that community. So the things you can do to establish that commonality which establishes trust and trust builds business.
Howard: I am one mile away from the Guadeloupe Indian Reservation that has like five thousand legal citizens, Spanish only and probably about ten thousand undocumented and I'm surprised that even on my own corner, almost every office you're going to know not even one person speak Spanish.
Mike: (inaudible 18:46).
Howard: And I've always told people to start demographing, just Google the demographics of your own zip code. And if fifteen percent of your zip code speaks Farsi, why don't you have a Persian Farsi-speaking dental assistant or receptionist somebody, you really got to match your demographics.
Mike: Yeah. Yeah and we are the ones who have to change, customers stay equal. I think it's arrogant to say, oh our customers need to change. You know, there's five thousand of them that need to change or one of me that needs to change. The numbers speak for themselves, we got to change.
Howard: Oh yeah. And they're the best patients ever. They always pay everything in cash.
Mike: Oh. That isn’t too bad.
Howard: Yeah. I mean it’s fantastic. You also wrote The Pumpkin Plan: A Simple Strategy to Grow a Remarkable Business in Any Field with the remarkable three hundred and seventy-seven five-star reviews. How do you get all these five-star reviews? What is The Pumpkin Plan: A Simple Strategy to Grow a Remarkable Business in Any Field?
Mike: Yeah. So the five-star reviews are… I'm very appreciative of the audience who reads them. I'm really lucky. The one book Profit First with a hundred and ninety reviews, that only came out three months ago. I mean that's really getting traction. And what it is you'll start to see a common parallel is it's always a study in behavior and I always also do an analogy to something else that's happening in life. So the Surge was actually analogy to surfing.
In pumpkin plan, I actually studied pumpkin farmers of all things. I study colossal pumpkin farmers and found that they change the growing process of pumpkins just by a little bit. But as a result of that minor change the pumpkin responds with the explosive organic growth. So, my question was how does a business grow explosively, organically, and healthily just with minor change? Here's the stuff that blew my mind away.
I found out that if you rid of your lowest ten percent of customers, your business will immediately become more profitable. Why is that? In any business the lowest ten percent of customers are the customers who pay you the least, are never satisfied with the services, require rework, don't pay their bills, they're a pain to do business with. Here's the irony. You get rid of those clients, you don't have to do the rework. They weren't paying you anyway, so you're not doing work for free. Profit booster, but the best part is the time that it avails, the lowest ten percent of customers take about twenty percent of our time. They take an inordinate amount of time. So, now it frees up time of my own and my staff where I can focus and target my best customers.
The second thing I learned in Profit First is, interview your top ten percent. Once you know who your true best customers are, the ones that pay in cash are wonderful. Interview them and say, ‘where do you hang out? Where do I find more people like you because I love you?’ You can clone your best customers simply by interviewing them and asking them where they congregate.
Howard: The young kids I would say their first major nightmare mistake is people come in, they get a couple thousand dollars of the dentistry they don't pay when they leave, and then they beg them for money with statements every thirty, sixty, ninety, hundred and twenty days.
Mike: Right. Right.
Howard: And the average dental office, according to the American Dental Association, is sixty-five percent overhead. So if I do $3 of work on you, you don't pay, I have to spend $2 for all my rent, mortgage, equipment, build-out, computer insurance. So I can't go anywhere… I don't know where I could go… I can't walk into the mall and grab a pair of tennis shoes and say, ‘hey, bill me’.
Mike: That’s right.
Howard: I mean every place you go… and that bottom ten percent, you're right. I mean, when you say you need a filling, and I say, ‘okay give me two hundred bucks. Ninety-five percent do.
Howard: It’s that five percent that say, ‘well, blah, blah, blah’. They never even … they never even thought they were going to pay you.
Howard: And these young dentists they really… physicians and dentists, people who go to college eight years to heal you with their hands and surgery and work all day and operate. They just have such a hard time asking for money, especially upfront.
Mike: (inaudible 22:48)
Howard: But if you go to McDonald's and order a Big Mac.
Mike: Oh yeah.
Howard: This sixteen year old kid says, ‘Give me two bucks’. And if you say, ‘I don't have two bucks’, he’s just like, ‘okay, next’.
Howard: So how do you help emotionally these young doctors listening to you, that just have a… they can't say money, they can't say customer.
Mike: Yeah. Yeah.
Howard: They can't say sales. I mean really…
Howard: I mean they can't even say the word sell. You say, ‘well, what's your treatment plan conversion rate?’
Mike: (inaudible 23:16).
Howard: I mean if you presented ten fillings, how many of them close. ‘Like close. What do you mean close?’
Howard: I mean how do you get into their… it's almost like a religion, you know what I mean?
Mike: Yeah. I truly do
Howard: How do you get dentists to say dirty words like sales.
Howard: And pay me now?
Mike: So I found there's three ways. First of all, if you're terrified to ask your… train your employee to ask so you're once removed. Often the person you yielding the service also trying to collect the money feels they are putting a value on themselves, and it's very uncomfortable. So if you have to, find someone else to do it.
Second technique is don't call the sale call it a service, that's the big one. Say I am looking to service… I'm not selling to a person, I'm servicing the person. And realize the money they're paying is what's called appreciation points. They're not here paying you money, this is how much they're going to value you literally. If I use your services and you charge me nothing I have zero appreciation for you. If you charge me $10,000, ten thousand appreciation points in business. I want a successful outcome. The people that pay you more want a greater outcome and are more vested in successful outcome. So call the service call, call depreciation points.
And one final tip is, for those clients that just can't afford you, realize it's charity work and call it your charitable hours. I mean, label it what it really is and say, ‘Once a month, I'm going to do one day of charitable work’. So you put parameters around it. And you tell that person say, ‘If you can't pay me now, I do do one month… one day a month where I give away my work for free. It has to be on such and such day and you have to be here and you may have to wait for the entire day but the work will be done free’. So now you're giving services to people who can't afford it, but you're quarantining it and not mixing it with your regular clients.
Howard: What you said that having skin in the game it's so true. In every single… all Medicaid practice, or if it's free Indian Public Health Service these welfare clinics. Their number one problem is no-shows and cancellation. I mean, here they have a chance to come in and get their tooth fixed for free…
Mike: For free.
Howard: And they have to triple book, because two out of three won't even show up for free. But I bet if that person had to pay $10 out of their own wallet to make that appointment, what do you think that no-show rate would be?
Mike: Oh my God, it would cut in half or more.
Howard: Yeah and then the big government people would say that was mean, you know what mean I mean? It should be access to free dentistry on… in this area and it's like when you make something free the value is gone.
Milk: It devalues it. Exactly. So listen if the government saw that as mean or inappropriate, what you do is you force the $10 for no-shows and when they show up and you finish the dentistry work you give them the ten dollars back, so that they're not spending the money. But if people don't have skin in the game they aren't going to show up, it’s just how it plays out. So in your practice, if you have people that get billed and then don't pay, they have no skin in the game.
Howard: What I thought when I got your book The Pumpkin Plan… I have all your books.
Mike: Thank you.
Howard: The most interesting… I lecture in Australia about every five years to dentists on there and I'm going back. I'll be in Melbourne, I think July 28th on a Saturday and the following Saturday I'll be in Sydney, is the booze. Almost every restaurant has pumpkin wine.
Howard: And their pumpkins down there they're not orange, they're green. They don't look like our pumpkins but it's obviously a pumpkin, it just stays green. But I always thought, ‘what a business that would be to import a bunch of pumpkin wine once a year for Halloween and really market…
Mike: Oh my God.
Howard: How many millennials would buy a bottle of wine if it had pumpkins on it. It was called pumpkin wine. I mean a lot of businesses do all their sales seasonal. I mean some people have eighty percent of their sales just during Christmas.
Howard: And I always thought that would be an amazing business plan and to import pumpkin wine. Plus, since I'm Irish, I'm an alcoholic and just have another reason to import alcohol. You also… this one is… by the way I mean I can't believe I got a guy on my show that’s… small business call, this is Wall Street Journal former MSNBC biz makeover, but Businessweek deemed this book a cult classic.
Mike: Oh yeah.
Howard: The Toilet Paper Entrepreneur. Now I'm sure all my homies have just heard that, which by the way has six hundred and forty-two five-star reviews. How the hell did you come up with the name The Toilet Paper Entrepreneur? What does that even mean?
Howard: And why did it become a cult classic?
Mike: So it was the first book I wrote and I realized to break into any industry trying to be better than the competition is the biggest mistake people make. Don't be better, be different. And so what I started doing is I started lecturing around the collar circuit talking on certain topics and one of the stories was about the toilet paper experience.
When they're short on toilet paper how people react to it. And when I came back to this conferences people said, ‘you're the toilet paper guy. You're the toilet paper entrepreneur’. So they assign the label to me. The lesson one is be different. The lesson two is see what resonates with your client base and what do they remember, what sticks in their mind. That's the topic or that's the title. So that's how I came up with it.
And the concept, it's a parable or is an analogy that when we're scant on resources, our behavior changes. So the pseudo bathroom humor here is when you'll have three sheets of toilet paper you still survived that situation. When your business is short on contacts, resources, finances, we find a way. And so we intentionally want to quote unquote ‘cripple our businesses’.
The fact that you don't have contacts in this industry means that you have to challenge the industry norms. The fact that you don't have experience means you’re going to have to break the rules. The fact that you don’t have money means you have to find innovative ways to get us same result. So less resources triggers innovation, and innovation is your biggest advantage to stand out.
Howard: But it is the total herd mentality. I mean everybody comes out of dental school…
Howard: And they try to just be exactly like the dentist across the street.
Howard: Everybody wants to be unique just like everyone else.
Mike: Oh, that's a good one. Never heard that before. Yeah, and that's the bane to success is trying to copycat. It's the biggest mistake. We were talking about niches are earlier, find that community and speak to them and in the way they want to be spoken to. And here's an even better way. Find out who you authentically are. Be totally true to yourself. If you had all the money in the world, how would you behave and build a practice around that, and that will attract all the money in the world because the people who resonate with the true you will be loyal customers forever.
Howard: So, what do you think people have the biggest problem with implementing profit first? What do they stumble on when they try to do this?
Mike: So back to profit first. Is when people stumble they say, ‘Mike, I’m profitable now and you're telling you take my profit. I have to be profitable before I start taking my profit’. And I say that, that's actually the total mistake because we're falling victim to Parkinson's Law. Parkinson's Law states the more a supply increases, in this case money, the more consumption increases. So I asked those owners and say, ‘well, we let’s look at your history. Was there a time that your dentistry was smaller than it is today?’ ‘Yeah, of course’. ‘You must have been losing huge amounts of money then’. They said, ‘no. No. I was just getting by’. And I said, ‘well where's your business now?’ ‘Well, the revenue increased but I'm still getting by’.
So I showed them that as revenue increases their expenses rate increase the same rate. All we need to do is stick a wedge in there and they'll stand out. They'll still start making a profit. The other thing that they will resist they say, “Mike, if I set up all these bank accounts, the fees will crush me. Those $5 fees, those $10 fees, I can't handle all those fees’. You know what find a new bank. Banks are businesses too. Negotiate with your existing bank if you like them and say, ‘I'm not going to pay fees’. If they're not willing to do that, go to a local regional bank or a Federal Credit Union. They will credit you. I mean, they won't charge you fees. So, there's always a way.
But the biggest reason people don't do it is because it's unfamiliar. People are very comfortable with the familiar even if that's not working. So business owners that are struggling check by check, that don't do profit first say, ‘But it's so new to me, I can't do it. I'm going to keep doing what I was doing’. And of course they never see results, and that's the definition of insanity.
Howard: It's funny because you're right. You don't get in life what you deserve, you get in life what you negotiate. And a lot of these young millennials, they don't like direct mail. They only like to advertise on Facebook because they're always on Facebook and they hate getting junk mail in their mailbox. But these banks, they spend a million dollars a week.
Howard: Sending all these direct mail… all these… I mean gosh, darn it. It's just non-stop. Because they if they send out a hundred and one guy gets a credit card they think that's a bonanza. And so if you go into your bank manager and instead of getting what they threw at you get what… negotiate. Just talk to him. And that's another thing I always think in my mind when someone will need… have a cavity and they’ll need a filling. I'll say, ‘it's two hundred bucks’. They say, ‘I don't get paid until Friday’. And they'll say… I'll say, ‘well great. Let's make an appointment after Friday’. And they go, ‘no, I want to have it done today’.
Howard: I say, ‘okay. Well we take credit cards’. And they say, ‘oh, I don't have a credit card’. I'm thinking I have four kids and they were all given credit card applications once a week starting at age ten.
Mike: Right. Right.
Howard: I mean… so Chase, and Citibank, and Wells Fargo, no one will give you a loan. A billion dollar a day bank won't give you a loan, but you want me to give you a loan?
Mike: Right. Right. Yeah.
Howard: And I say, ‘well, I'm a dentist. I'm not a banker. I can't give you a loan. You have get a credit card’. And as soon as they know that I will not do the filling today because they're not going to pay, all of a sudden a credit card appears out of their wallet.
Howard: ‘Oh, wait a minute. Wait a minute. Maybe…
Mike: I totally forgot.
Howard: ‘I totally forgot I have money’.
Howard: And again it's that five percent of America who plays the game. And they know doctors that don't like to strain over your collection, but if you did a facelift on me and I didn't pay you and you turn me over to collection, well I'll just run down to the medical board and say the reason I didn't pay is because you botched it. You did something wrong and all that stuff.
Howard: And I've had several malpractice attorneys tell me the biggest mistakes are, like you said, not getting rid of the bottom ten percent. You knew when that lady was sitting in the chair that she was crazy.
Howard: That her demands were over-the-top
Mike: Yeah. Yeah.
Howard: That she spent half the consult bad-mouthing all the dentists before her. And then the other half is the collection policy. I mean, I know malpractice attorney says if nobody owes you money, you really decrease your chance of getting sued or taken to the board. And then the other one is I think the nature of a dentist is to heal their patient and we're not judgmental. We don't care about your politics, race, or religion. We just want to help you, which is all true and fine until you get to crazy. And I can fix your tooth but I can't fix crazy.
Howard: And I mean… I mean that I've had ladies that came in that brought in four different pictures of movie stars, and wanted her teeth to look like that.
Howard: And she had like three pages of notes, and I'm just looking at this lady thinking, ‘you're completely out of your mind’.
Howard: And then so I find somebody who advertises cosmetic dentistry in AACD and all that stuff and it’s like… I mean… I mean I just can't wait to get them out of my office. But the young dentist thinks, ‘well I got to work on everyone and I'm here for everyone’. It's like man you can't be. If you're all things to everyone, you're nothing to no one.
Mike: That's exactly it and that crushes so many business because it's the generalist mentality. Specialists become completely… they become a lead… and extremely capable in a very narrow category and can then attract us to lead customers. So, the customer comes in with a very, very specific need. The specialist is designed to do that and that's what we going to do. And we can become a specialist in our own category, but if we try to bleed out and do all these different things, it's a recipe for disaster.
Howard: So what do you think are other common pitfalls for professionals? When you're dealing with physicians and dentists, do you think they're all the same as someone who owned a bagel shop and a dry cleaner? Or do you think dentists and physicians have different biases or problems than people who own say general retail or agriculture, whatever?
Mike: Yeah I think they do have a slightly different challenge. And what the challenge is that elite training we went through. Right. So as a dentist you went through at least eight years of advanced schooling and training. Which means you have a very specific school set. The guy at the bagel shop, yeah he's running a business and ultimately that it is sophisticated, but didn't need that training. As a dentist you guys needed that training and you got to run a business. Here's a mistake I see professionals, high-end elite professionals make. They think that they can do everything. They think that, ‘well, I can do the accounting at night. I'll file the paperwork. I'll manage the patient's books and records’. And they'll do the dentistry work. That's the mistake.
To find someone to file a papers. To find someone to do the scheduling. To find someone to do the accounting and the bookkeeping work. Those you can get higher I mean lower end people with a lower salary to do that, so that will free you up to do the elite work you do. That is the bottleneck for the business, is the dentist work itself. Every time the dentists I see filing papers it drives me nuts, because the dentist isn't doing the elite work that will drive revenue to the company. So I know it's scary to hire those people to do that lower level work. But if you, as the dentist, are doing that lower level work, you are crippling your business because you're not doing the necessary work to drive revenue.
Howard: So what year… which one are you? Are you a Generation X or what… were you born (inaudible 37:10)?
Mike: I'm forty-five. So whatever forty-five is. I think it’s X.
Howard: What year were you born?
Howard: ’71. So you're… you’re Generation X.
Mike: Generation X.
Howard: ‘65 to ’79. I want to keep coming back to this one thing I see. I'm surprised the millennials keep listening. They probably think I don’t like them. I obviously love them, all four of my kids are millennials. Millennials 1980 – ‘95. But baby boomers, when they said they work nine to five, they meant ninety-five hours a week. And they all held two or three jobs. When a millennial says they work nine to five they mean Monday through Thursday nine to five. And it also seems like… it just seems to a hundred percent of all the dentists I know, fifty-five and over, they just think millennials spend money…
Howard: Like it was just coming off a printing machine.
Howard: So they have a double curse. Their nine to five is literally Monday through Thursday nine to five, and they spend like a drunken sailor.
Howard: And then the baby boomers, our nine to five is ninety-five hours a week. And we're saving money for rainy days.
Howard: So how do you get through to that millennial that… I don't even think they think they spend a lot of money. I just saw something last week that millennials eat out nineteen times a week. I mean like I brew my coffee the morning, they go to Starbucks and get a $5 one.
Howard: I mean it's just like…
Howard: I mean the joke is if you want to hide something from a millennial you put it in the oven because they’ll never find it. So how do you… how do you… and I'm scared for my homies because we're all dentists. They're in the sacred sovereign profession we call dentistry and they're already starting behind the eight ball.
Mike: Yeah. Yeah. Yeah.
Howard: $350,00 – $500,000 in debt. And for some reason their first house is too big.
Howard: Their first car’s too nice I mean…
Howard: So if you're working less and they'll tell you. They'll say, ‘well, I don't want to be like my dad. I mean my dad was a dentist and, my God, he worked five and a half days a week for forty years and died of a heart attack. I want to be well-rounded.
Howard: So I'm gonna take off Friday, Saturday, and Sunday’.
Howard: So they work less, spend more. How do you get into their head?
Mike: Yeah. So I don't think they’re a hundred percent wrong. I do think there's a challenge there. I think the greatest generation had something wrong too. So, my parents are from the greatest generation and it's work, work, work and then die the richest man in the graveyard. So it was just wonderful but what value is that? So I think it's somewhere in between. There is work-life balance, and I think the millennials understand that, and are actually executing on it or the prior generation, we didn't just worked, talking about work-life balance but didn't achieve it. Of course the flip side for millennials like you pointed out is we're spending more than we're making so it's also a downward spiral. It's not going to be sustainable.
I think the middle ground is to reverse-engineer our lifestyle. Basically saying what is the life I want to live and commit to living? What’s the standard? And what kind of income do I need to support that? Saved a hundred thousand a year, then you reverse engineer saying well for sixty-five percent overhead my business and I need x, y, z. I need to generate say, $400,000 in revenue and then, if I want to do in four days a week how many patients do I need to see? What kind of services? Am I putting crowns on, or can I just do cleanings for that? You have to figure out your mix of services.
But when you reverse engineer it, you'll come up with a plan. I think the mistake that all generations have is no plan. One generation just save, save, save, work, work, work. Okay. For what? The other generation says live life to the fullest. But how? So we got to reverse-engineer it and then the truth will reveal itself.
Howard: You talk about profit and that is one, you said a KPI a Key Performance Index.
Howard: Are there any other key KPI’s that you think a business should look at, track or any other favorite KPI’s for you?
Mike: Yeah. I mean… well anything that drives profit. So profit itself is a great measurement because it's cash on hand. That's how I define profit, not an accounting profit but actual cash on hand reserve. But I think another thing is the products or services that provide that. So how many fillings do I do per week? We should be tracking that. If I'm averaging say forty fillings a week, I'm just picking a random number here, but that's the number that may indicate business is healthy. But I see (inaudible 41:39) that drops to ten, that's a red flag.
The idea of a KPI is a simple number that the second it changes out of the norm, meaning there's a deviance that we say oops, what's going on? Either a good thing or bad thing. So you got to look at your business but for dentists, I think it's certain products or services like fillings. A number of cancellations could be a big one, that's lost revenue and lost profitability. So pick numbers that the second it deviates from the norm that's an indicator for a problem or an opportunity in your business and it'll be a flag for you to take action on.
Howard: I think… I graduated from dental school May 11, ‘87 and October ‘87, was Black Monday and it was not pretty. The Dow dropped five hundred points when… I mean it was brutal and I thought that was the best gift our graduating class could have ever got of 1987. It's not always going to be a rosy day. And then it’s 2008 I'm here in Phoenix, Arizona and there's different numbers. But somewhere between like seventy-four and eighty-eight dental offices went bankrupt, and I thought the movie The Big Short… I got an MBA from ASU and I thought The Big Short was one of the greatest movies of all time. In the fact that at least it topped the economic lesson and it got amazing five-star reviews from people who had PhD’s in economics. And you’re like, man. You explain that really, really well.
But I think the older people have seen a lot of rainy days and these young people don't see a lot of rainy days. My specific question is on cars. Like I remember when that happened and there were dentists in my front room crying and the first thing I would say is, ‘well you drive a Mercedes, your wife drives a Land Rover, and you got this fancy sports car. Why don't we start with just selling those?’ And they couldn't. They were leasing them.
Howard: And so much of their monthly overhead. They couldn't even get out of. You know real estate collapse, so their houses were upside down the liquid. What would you say to a young millennial who just asked you like a basic question. You think she should lease that brand-new $75,000 Beemer or should she buy it or does it even matter?
Mike: Yeah. So don't get the freaking $75,000 Beemer. So because I've been there. When I sold my second company, I was a self-made millionaire in my early thirties as in computer crime investigation and just was in the right place at the right time and my ego kicked in. Here's what I learned. No one cares about that $75,000 Beemer except for you, the person driving it and if you care about it, it means you're in an ego mindset like, ‘hey, world look at me. Look how great I am’.
No one really cares because I found out when I had that stuff, no one noticed, and when I lost the stuff, no one even knew I had it in the first place. So any of those artifacts of success, any of those trophies if you will, I found have no significance except to feed our ego, and then that becomes a trap because the Beamer isn't enough. Now maybe it's the bigger house. If the bigger house isn't enough, maybe it's the second house. Live within your means. The stress of trying to support these superfluous trophies is of no value. What is a value, I found in my experience is a stress-free life where we live within our means. And if you want to acquire that BMW or that big house, that second house, you have to achieve that standard of income first and be able to pay for with cash. If you can buy it with cash, listen there is no stress. You just take possession of that thing when you want it.
Howard: The editor of Dentaltown magazine since 2000 is Tom Jacoby and it was so funny because he bought a thousand dollar beater car in dental school.
Mike: Love it.
Howard: I mean he drove that thing… I mean he drove that thing until the wheels fell. I mean he… and then that car was a brand new BM suburban or whatever in cash, but I mean it was amazing how minimalist he lived. I think it's not what you make, it's what you spend and it's just that bottom. But I also think it's a big difference you're talking to the girl dentist listening to you versus the boy. Because the girls, thirty percent of the women dentist married a male dentist in their class, the other seventy percent married someone with a nice job. Engineers, physicians, lawyers.
Howard: But when that single male dentist is driving around a BMW that he can't even afford. What does that attract? Some girl he thinks he's rich…
Mike: That’s true.
Howard: And if I marry you, I’ll never have to work a day in their life.
Howard: And it’s so sad because so many of the guys married women who don't have jobs and who spend ten thousand a month. And all the girls married a doctor, dentist, lawyer, engineer, someone who makes $10,000 a month and the difference over age twenty-five to sixty-five is several million dollars.
Howard: So they talk about being $350,000 of student loans, but that Beamer just attracted someone who’s going to spend three million dollars before they're sixty-five and that doesn’t even show up on the balance sheet.
Mike: Yeah. Well shame on the guys for putting that illusion and for them to allow that spending behavior to continue for both of them. And showing the girls and saying, ‘hey, I got a free ride here’. I mean the goal is that spending money, to me it just brings about stress. It’s debt. It’s money that will be owed at some point in some way, and that becomes overwhelming. And now you're just surviving in running a business to feed the credit card company. It spells out disaster. You got to live within your means.
Howard: So I’m going to ask you. So you're forty-five years old. What do you think makes you different? Was it your father? Do you think it was nature? Was it nurture?
Mike: Oh no.
Howard: Was it desperation?
Howard: Was it inspiration?
Mike: Maybe all of the above.
Howard: What made… what pulled your string and made you roll?
Mike: All of the above. But the big one that I'll never forget, was when I sold my second company, a Fortune 500 acquired it. I was a millionaire and then I blew the money because I got the 7 Series, I got the Land Rover, I got the Dodge Viper. I started stable of cars. I did all that stuff which is now total nonsense. Back then I was like, ‘wow, look at my success. I gotta show success to the world’. But then I lost it all.
And when I lost all my money through my own arrogance and ignorance. That was the great wake-up call I needed. That no one cares about the money. It is necessary and important to sustain life. It’s important to experience life the way I want to experience it. I believe in financial freedom. I don't believe in flourish and just wasting money. So that was kind of the wake-up call. No kind of it was the wake-up call. And so now I live within my means and I love it and I keep expanding what my means are by always living within it.
Howard: So which one of these books do you think they should buy first? I noticed on Amazon you can buy all your books for fifty bucks.
Howard: I mean that's a hell of a deal.
Howard: Do these books in audio too?
Mike: Audio, Kindle, eBook. Yeah. Every bookstore and wherever you shop for books. I don't know if a book is right for people. If a dentist watching right now and isn't profitable, read Profit First. If a dentist's watching right now and their practice isn't growing, read The Pumpkin Plan. If you're just starting out as a dentist, read the Toilet Paper Entrepreneur. If you want to capture a market and milk it for all it's worth in a positive sense, read Surge. So, ask first what the challenges you're facing and then find the book that serves it.
Howard: Nice, nice, nice. Well I've retweeted on Twitter that book.
Mike: Thank you.
Howard: So if you are there driving to work. So if you go to my Twitter, @howardfarran. My last tweet is the man himself. Profit First: Transform Your Business from a Cash-eating Monster to a Money-making Machine on Amazon.com. So all they got to do is click that link and you're on Amazon and there's all of his books.
And I'm a dentist, so I get it. I mean there's nothing more fun than pulling a wisdom tooth and doing a root canal. I mean I get it. Pulling a wisdom teeth is so damn fun that when people fail the financial arrangement don't have afforded, and that's when I can't even let it go. I just say, ‘okay, well I'll just do it anyway for free’. Like you say the charity. And I know its charity because it's just too damn much fun to let a set of wisdom teeth walk out that I need to remove.
I mean that's my golf. I mean four hours of whacking a white ball around. Compare that to five minutes of pulling out four wisdom teeth, not even close. But I'm trying to be a leader and trying to lead these kids that I know that's what you want to do but you have to focus on these numbers. They don't know their key performance indicators, they don't know the difference between a Statement of Cash Flow and a Balance Sheet, a P and L. They don't know any of this stuff and what's worse than that, they're not interested.
Howard: So my question to you is, how do you get a twenty-five year old dentist who wants to take every root canal course known to man, from here to Kathmandu. And then you're sitting here at the dental convention lecturing in the next room? You're like, ‘hey. Hey. Come over here I need to talk about this little thing called business, and profit, and money’. So how do you get someone to be good at something they're not interested in?
Howard: Imagine if I wanted you to be a master violinist and the only thing you said is, ‘I don't even want to touch a violin. I have no interest in music’, but you have to be a pianist.
Howard: How do you get people to have interests on they're not interested in?
Mike: Yeah. So I show as a means to an end. Meaning I can't make you interested in violin if you don't want to play violin, but I can ask you what do you love to do and is this a vehicle to get there. So if you don't care about the books or finances. I can't make you interested, but if you love tearing out wisdom teeth then I ask you to keep doing this for the next five or ten years. What do you need to do that? ‘Well I need to pull the students to training and I need the money to have the office?’ Okay. So let's worry about having the offices you can keep doing what you’re passionate about. So if it's not your calling, if it's not your interest, at least, it's the means to an end and I'll show you how to navigate the means.
Howard: We live in the United States where half the marriages fail. Most research shows they fail in three subjects. A third, a third, a third. Money, sex, and substance abuse. So what would you say, since you're a money expert. Right now you're probably talking to a lot of couples who’re commuting to work? One spouse, the dentist, the other spouse, he’s the office manager. Maybe it's two dentists that met in dental school. If you're talking to two people commuting to work right now and they're married and if they get divorced, it’s going to be extremely likely it’s going to be over money. What would you… what would you say… put on your marriage advice hat. What do you recommend when it comes to money and marriage?
Mike: Yes. So it's funny my wife…
Howard: That ought to be… that ought to be your next book, Money and Marriage.
Mike: And Marriage. Yeah. My wife has probably a better answer to this. We did a program together called Married to Mayhem and here's what I discovered. One is both of you need to be involved in the finances so you know what's going on and need to have equal contribution, equal input. If one person controls it all, the other person will either feel victimized, or out of control, or point blame.
But the other thing is you have to find a common language and this is totally outside the scope what we're talking about but there's a fabulous book my wife and I discovered called the Five Love Languages, and I'll tell you that has helped us navigate the biggest challenges in our marriage. Just appreciating each other's communication style, a love language. Understand the communication style. We've been able to navigate and discuss some real hard topics including money.
Howard: Yeah, that was an amazing book. The Five Love Languages.
Howard: Did you remember them off top of your head?
Mike: Acts of service, gifts, quantity time or quality time. I think that's three. I think physical touch was four and I can’t remember what the fifth was.
Howard: Yeah. I think that was an amazing… an amazing book.
Mike: Oh, and hey, Howard. I'm sorry I just got… I got to be on another live interview to happen right…
Howard: Okay, well. Hey you spent fifty-five minutes with my homies. I can't believe I got you on the… I mean someone of your credentials. His website is… what is the easiest one to remember? Profit First Professionals?
Mike: Yeah. You go to Profit First Professionals or go to mikemotorbike.com. That’s easier to spell. That will bring you to mikemichalowicz.com
Howard: Okay, thank you so much.
Mike: Howard. Thanks.
Howard: It was such an honor and a flattery that you came on my show. Seriously, dude. Unbelievable.
Mike: It’s been a joy. Thank you brother.
Howard: Thanks for coming and talking to bunch of dentists.
Mike: You’re welcome, Howard. I’ll see you later.