Rocky is a certified profit first professional who was shocked to learn most business owners don't look at their financial reports. Most business owners are not accountants and don't want to be. When he realized how much of a problem this was, he knew his purpose was to help business owners be profitable.
Why do business owners struggle to create profitable businesses?
First of all, accountants don't even know how to create profitable businesses, right? They know how to do taxes, they know how to put all the transactions where they belong, according to a formula that says, this is how we do things, this is generally accepted accounting principles. So there's really nobody focused on teaching or helping business owners to understand profitability. That's why I think so many of them struggle, the system I use is from Mike Michalowicz, he wrote the book Profit First. He is a serial entrepreneur, he thought he did it right, sold his companies walked away with a lot of money, and then lost it all, you know, the quintessential thing and it's because he struggled with this just as much as everyone else did. Then he came up with this idea of when we look at things, we're given the wrong formula and if you use the wrong formula, you're going to have the wrong results. So the formula your accountant will tell you is sales minus expenses equals profit. Where is profit in that formula? At the end, it's a leftover, it's something you find out at tax time. You go to your account, he goes, "Congratulations, you're profitable, here's your tax bill!" And the first question is, "Where is that cash?" Then they just laugh at you and they go, "You spent it." Mike said that's broken let's fix that. Let's do sales minus profit equals expenses. So we change the whole way we think about business, because we take our profit first, upfront because your business plan said you were going to be profitable. Well, why not take the profit upfront, remove it, and then learn to spend less. I think too often business owners, are told you got to spend money to make money and that's not necessarily true.
Why is the bottom line far more important than the top line?
So you've heard this so many times where people who've made millions upon millions of dollars and gone bankrupt. The saying we have is, "The top line is vanity, the bottom line is sanity, and cash flow is reality." What that basically means is, I don't care how much money is coming in. If more money is going out than is coming in, you're never going to win the game. You can't grow your way to profit if it's costing you more than what you're selling it for and that's why the bottom line is so important. The problem is, and it's kind of where we started this, if I wanted to know your top line, you can go look at your bank account and go, "Hey, I had a bunch of sales, look at all the money that came in." But if I said to you, "What's your bottom line?" It's very hard to figure that number out, you don't really know. All you know is I have money in my bank, or I don't have money in my bank, and if you don't have money in the bank, you run out and you get more sales, or you do collections. But it's really a struggle if you don't know what that bottom line is. As we talked about before, most business owners may not know until their accountant tells them four months after the year is over. That's a problem and that's why you've got to create systems and processes, and go in and figure out how much is my bottom line really? And am I appropriately charging for my products? And where is my profit coming from? That's something that even large companies don't have the answer to, is where is profit coming from? So if a big company with a CFO and all these big systems can't figure it out easily, it's really hard for the little guy.
What exactly does a certified profit first professional do?
So basically, what I do is, I serve with one simple goal to help you be profitable. The system that might create it as a cash flow system. So you get your money in your paycheck, and you put your money where you're going to spend it for rent, for groceries, for utilities, and when that money is used up, then you stop spending, and you figure out a better way to do it. That principle works all the time, so what Mike did was use the same principle for businesses. You set up multiple bank accounts, which I know is a little scary upfront, but as soon as your revenue comes in, the first thing you do, is you put money in your profit account because you're supposed to be profitable. The second thing you do is you put money in your owner's pay account, because you deserve to be compensated for your work, and the efforts and the risk you've taken. Then we put money in the tax account, because it's not your money, it's the governments. Some businesses may have some other accounts for special purposes and then the rest ends up in your operating expense account. But what's happened is because you've covered your big nuts first, when you look at your bank account, and that operating account, you know how much you truly have to spend. So it forces you to be more resourceful. This whole thing is built on Parkinson's Law. What Parkinson's Law says is that whatever resources you're given, you'll use them up. So if you have three months to do a project, it'll take you three months. If you've got three hours to do a project, you'll find a way to get it done in three hours. If you've got a $100,000 budget to do something within your business, you'll spend 100,000. But if you've got a $10,000 budget to do something, you'll figure out a way to get it for $10,000. By separating the money and giving it a job and putting it in smaller piles, you learn to be more resourceful, you don't spend as much, and what I do is I kind of create accountability. I help by looking at the actual financial reports and then bringing to light where revenue is coming from whether it's properly priced. In other words, I have customers and you go down and you look into their accounts and you're like, "You didn't realize just put that item on sale, and you discounted it and you sold it for less than what your actual costs are, you actually lost money this weekend by doing that sale. I know you needed to get revenue in but this is a problem." So somebody's got to go in and figure that out and that's basically what I do. Sometimes it's easy to see, sometimes it's more difficult. So for example, I have one customer that I looked at who has two different service lines. His one service line is good, provides a reasonable living, a lot of work. He has another service line that's seasonal. That seasonal service line just put so much money to his profit, it's incredible because he's got so much margin in that business. I said to him, "Stop focusing on this service line that's doing okay, put your efforts where most of your money is coming from, you can work a fraction of the time and make a lot more money by redirecting your efforts."
Do you work alongside bookkeepers and accountants? Are you kind of in competition with them? How does that play out?
I'm not in competition with anybody. I work with whoever your bookkeeper is, and whoever your accountant is because your bookkeepers are putting the transactions in. One of the things I do is provide a second set of eyes on your bookkeeper to help make sure that they're doing things appropriately. The accountants are mostly doing taxes and so that's fine. What I'll do is I will help you put money aside for taxes. So I'll tell you the story of Mike because this is a phenomenal story. Mike was in the recruiting business and he had a blowout year, he had so many placements that year and his revenue went through the roof. Well, the tax accountant based his quarterlies on the previous year. So tax time comes around, and she's hesitant to call them because there's this massive tax bill. She finally calls him and says, "Hey, I've been dreading this call, you owe a lot of money." He said, "I know my sales have been up, I expected this, how bad is it?" She said it's almost six figures, and he said, "Oh, alright, I'll drop off checks tomorrow," and she's like, "I've never ever had anyone tell me that in over 20 years." He was using profit first, so he was putting his tax money aside, and it was ready for him. I've heard that story from practically every person that implements profit first. Tax time is no longer a season of angst and worry. They're like, "I hate taxes, but whatever that bill is, I know I'm ready for it, and I can strike a check."
Let's talk about networking because business is all about relationships. Can you share with our listeners one of your favorite networking experiences that you've had?
So you know how you felt about money? This is how I feel about networking. But I will tell you this because I realized the importance of it. I've probably spent the last eight, nine years working on this skill, from taking courses on social capital, to reading books about networking to learn how to do this. So I just want to encourage the people listening if this isn't something you enjoy doing, it's just a matter of practice. Now I've come to learn how to do that. I think one of the things that COVID did for me is overnight, is I was doing all this in-person networking, and overnight, all my in-person networking got canceled. Essentially, we went to the online world and I've got to tell you, I have found online networking to be much easier, much more enjoyable, and a much more diverse group of people that I get to meet than I was meeting in my local networking meetups. There are so many online groups that I have found and one gets me to the next, gets me to the next, and that's how we met, Right? We met through a networking group that you had started in the middle of COVID. I don't think in a non-COVID world that we would have ever met. Also, the quickness that the group came together and was willing to help. I think that was the other thing that I've noticed is in online networking, the speed of networking, and the building, the Trust has gotten faster and faster.
So Rocky, as you continue to build and grow your network, how do you stay in front of and nurture these individuals that you're connecting with?
So that's been another struggle for me because I have one of these CRMs and it gets overwhelming, there are all these people in there and I can't find the people that I want. So I've learned a couple of things. Number one, I've learned to take much better notes. I use Evernote and what I do is I have a whole folder that's called "Meetups" and whenever I go to a meetup, as people are talking and networking, I'm just putting my names and notes as I'm listening. That's searchable, so if somebody emails me three weeks from now, I go to my Evernote, I search, I find the note and then I go, "Now I remember everything." I'm kind of just basic, you know, I'm a spreadsheet geek, and so I have found it's just easier for me to create a spreadsheet of the people that I want to kind of nurture and keep track of. So I just put Date, Name, some really basic stuff, and maybe a follow-up date to it. The other thing I do is if I know that I need to specifically follow up, so let's just say that we met and, and you said to me, "Hey let's chat in three weeks." What I will do I will do is I'll go right into my calendar immediately and I will create a task three weeks out, that says, email Lori, and I might put one sentence there about to remind myself. So it's kind of different levels for different people, but I'm still struggling with how to do a better job of nurturing all the relationships. I think what I need to do is probably to create a bigger block of time for me to sit once a week, and just go through the list and at least pick a handful of people and send an email. Some of it I'm good, like if they're good on LinkedIn, then I tend to be more social on LinkedIn. The other thing I find is if there are people who are at events that are somewhat regular, then that creates that natural rhythm as well. If I meet somebody, maybe three events over three months, and we haven't connected for one on one, I'll just reach out and say, "Hey, let's do a one on one." I find having an automated calendar is a godsend. When I left corporate and I was able to turn on my automated calendar, it made my life 10 x easier.
What advice would you offer the business professional who's looking to grow their network?
So I have been told that the purpose of networking is to serve, and just go out and serve. If you want to grow your network, go out and see how you can help people. Of course, you've got to do it in an appropriate way so that you can manage your time. But I think that's a big part of it is to go out and serve and help others, because if you help them achieve their goals, they're going to help you achieve yours.
If you could go back to your 20-year-old self, what would you tell yourself to do more or less of or differently with regards to your professional career?
So that's a long way back. The world has changed quite dramatically since then. I think there were a lot of things that I just didn't understand back then. So one was this whole networking and relationship thing. It was not something that I understood and it wasn't something that I worked on. It was also a different world in the sense that there was no internet so it was hard to keep in touch with people, you'd actually have to pick up the phone and call them. Then if they move, they got a new phone number and if nobody sent you a letter in the mail, you lost connection, right? Yeah. So I think just going back and telling myself to understand that. The other thing is I didn't understand what my super skills were like I didn't know what my superpowers were. I've been playing with spreadsheets since I was in high school, so back then it was VisiCalc. I was going into fortune 500 companies going, "Hey, accountants, here's how you get off of a paper ledger and you use an electronic spreadsheet." I always thought I was going to create a business around spreadsheets, but I didn't know how. The power of spreadsheets now, I mean, it's a billion/trillion dollar business because nobody can figure out the numbers. If you understand spreadsheets, and you can see the stories that the numbers are telling you, that's very valuable. Now I'm finally in the place where I figured that out, and that's why I do what I do. So those are probably the two things, figure out your super skills, and then learn how to network and build social capital. It's okay, if you don't know how to do stuff, go ask people who will help you. I grew up in the area of you never ask for help, you do it all, you know, it was the lone gun kind of timeframe. So it took a lot of personal development to move out of that and get a little bit smarter.
So we've all heard of the six degrees of separation. Who would be the one person that you'd love to connect with and do you think you can do it within the sixth degree?
I would love to interview Tim Ferriss because he's an interesting guy, he's a little nuts. But I love to learn how to do things and he's also kind of a thinker like that. I've met people who are friends with Tim Ferriss. So I know, I'm not that far away. I've got multiple people that I'm probably one degree of separation away. Whether or not they listen to him, or he'd entertain my ideas, is a whole nother reality, but I do know people in the circle.
Any final words of advice to our listeners with regards to growing and supporting your network?
Just go out, and remember, you have two ears and one mouth so listen more than you speak.
Connect with Rocky:
Listen to Rocky’s podcast: http://profitcomesfirst.com/podcast/