235: Clockwork: Designing Your Business to Run Itself With Mike Michalowicz

SHOW NOTES FOR EPISODE 235: CLOCKWORK: DESIGNING YOUR BUSINESS TO RUN ITSELF WITH MIKE MICHALOWICZ

If you’re like most entrepreneurs, you started your real estate business so you could be your own boss, make an endless stream of passive cash flow, and live life on your own terms.  In reality, you’re bogged down in the daily grind, constantly putting out fires, answering an endless stream of questions, and continually hunting for cash.  In this podcast, Mike Michalowicz, the author of Profit First and other small-business bestsellers, offers a straightforward step-by-step path out of this dilemma.

What You Will Learn

• How keeping a journal can be a an effective tool to help you overcome business challenges
• What’s a Queen Bee Role and how it can impact the success of your business
• What “entrepreneurial poverty” is and why this is the state of many entrepreneurs
• Why a business is not like a parent-child relationship
• Why many entrepreneurs fail for being “doers” and not “thinkers”
• Why being a good entrepreneur is about designing a business that gives you the freedom you want.
• What the “4 Ds” are and why you need to know them to successfully grow your business
• A quick and effective way to capture effective company systems and that can be used to train employees
• The team-building power of matching traits to tasks, not people to titles
• Why a thinker is more of a choreographer and conductor than worker

About Our Guest

Michael Michalowicz

Michael Michalowicz is the author of Profit First, Surge, The Pumpkin Plan, and his newest release Clockwork. By his 35th birthday, Mike had founded and sold two companies – one to private equity and another to a Fortune 500 company.  Today he is running his third multi-million dollar venture, Profit First Professionals.

Mike is a former small business columnist for The Wall Street Journal and the former business makeover specialist on MSNBC. Over the years, Mike has traveled the globe speaking with thousands of entrepreneurs, and is here today to share the best of what he has learned.

More About Mike

• He has been an entrepreneur for over two decades, since he graduated from college.
• Sold two successful companies he started.
• With the cash he amassed from the sales of the two companies, he decided to became an angel investor.
• Wanted to start multiple successful companies but, instead, failed miserably.
• Knew nothing about what he was doing – what he calls a “combination of ignorance and arrogance.”
• In two years, he had eradicated all his wealth.
• His accountant suggested that he declare bankruptcy.
• Lost everything – his home, his car, etc.
• He decided not to declare bankruptcy but to dig himself out of the mess instead.
• Went through a period of depression (which many business owners experience).

The Journal

• One of the things he did to deal with his depression was to begin a journal, to write down and vent out everything going on in his head.
• Wrote down every thought – the good, the bad and the ugly.
• Out of this spawned a book – The Toilet Paper Entrepreneur.
• Fell in love with the idea of becoming an author and has continued on that path for the last 10 years as a full-time author.  His mission is to help other entrepreneurs to navigate the huge challenge ahead of them in the hope of being successful.

Entrepreneurial Poverty

• This is the state where many entrepreneurs live.
• Definition of “entrepreneurial poverty:”  The entrepreneur’s outside perception of wealth and success is totally the opposite of reality.
  • You decide to start a business and you have fervor and excitement.
  • Your friends think
    • “Wow, you are a millionaire!”
    • You are extremely wealthy.
    • You have a lifestyle of total freedom – you don’t even work!
    • You can do whatever you want, whenever you want.
  • The reality is:
    • Most entrepreneurs don’t make anything.
    • They sacrifice their savings to support the business and the people they’ve hired.
    • They work like animals, relentlessly.
  • The outside perception of wealth and success is totally the opposite of reality.
• The result is depression.
• “I’ll fake it until I make it” turns into “I’m faking it but I’m never going to make it.”

Maslov’s Hierarchy of Needs

• There are basic foundational needs that everyone needs:
  • Oxygen – If we can’t get it, we’ll die.  We’ll do anything we can for it.
  • Food & Water
  • Shelter
• Once those basic needs are meet, we elevate our needs to pursue.
  • Finding a sense of community
  • Feeling and expressing love
• Highest level: Self-Actualization

How these basic needs can be applied to business:

• Oxygen = Sales – the need to generate income so your business can thrive.
• Food & Water = Profitability – Without it the business will die.
• Shelter = The need to protect our time (freedom or financial independence).
  • Entrepreneurs become workaholics – some even boast about how little sleep they need.
  • The goal of a successful business is to not just yield income but to also yield time.

The Fallacy of the Business Parent-Child Relationship

• The goal of every entrepreneur should be to eventually make your business so it can run itself.  Because when that happens, you can do what you want with your life or you can insert yourself into your business wherever you want.  Either way, you will have the FREEDOM to do what you want, when you want!
• Many entrepreneurs see their business as a parent-child relationship:
  • The entrepreneur is the parent. If they feed and nurture the business (child) enough, it will eventually grow-up and one day and be able to sustain itself.  It will develop momentum and legs where it will no longer need the parent any more — and it can pay the parent back.  And we think that, one day, it will just happen.  We’ll wake up and the business can operate without us.
• But the reality is that it isn’t really a parent-child relationship.
• It’s more of a reality of conjoined twins!
  • Most entrepreneurs are joined at the hip to their businesses. We share all the critical organs, the heart, everything.  And as the business goes, so does the owner.
  • As a result, we have to “surgically disconnect” ourselves from our business.  It takes time – deliberately and systematically. We need to give the business growing independence over time.  The problem is most owners don’t really want to separate and, even when they do, they still share a soul.  So, the owner eventually can choose where they want to work within the business.
• Our job is not to be the “superhero” and swoop down and save our business yet again.

Becoming the “Thinker” and not the “Doer”

• Our job as an entrepreneur is not to be the “do everything” person.  Our job is actually not to do any of the regular activities of the business but to be the “thinker.”
  • Our job is to have a clear vision of the outcome we want for our business and then orchestrate or choreograph all of our resources (employees, contractors, software, etc.) we have around the business to reach the vision for that business.
• When we need to be in the position as “the thinker”
  • Sadly, most business owners and entrepreneurs don’t spend much time thinking and their time is spent having quick actions, followed by quick panic, day-to-day survival, reverting to the urgent!
  • Our job needs to be on focusing in on the orchestration of our resources to cast our vision.

Michael’s “Light Bulb” Moment on the Importance of Time

• His turning “light bulb” moment
• He had written  “Profit First” and was living the model
• He was researching “business efficiency” but had not figured it out yet
• One night, he was in his office late at night
• His office was in a cookie factory where he was able to work out a deal with his friend for free office space
• His windowless office was above the ovens
• One night it was very hot, in the 90s, and the ovens made it even hotter (he had no air conditioning)
• He walked out that night very proud that he was a workaholic, getting things done and had worked through such adverse conditions
• Then he had a revelation – He came to work before it was light and left late in the evening.  He had not seen the light of day.  And he thought, “This doesn’t seem like life.”  He felt like he had put his life on a shelf.  And he thought, “This is not the way to be an entrepreneur.”
• Being a good entrepreneur is about designing a business that gives us the freedom we want.  And more than just financial freedom but more “time freedom” and the freedom to experience life.

How the Concept for “Profit First” Was Conceived

• Mike read an article that said that 83% of small businesses globally are surviving check-by-check – are not sustainably profitable.  They may be playing a “shell game” of profit, saying they are plowing their profits back into their business (which really just makes it an expense), but they are not truly profitable
  • They don’t have profits above and beyond a normalized salary for the owner
  • He was amazed that most owners, who are courageous enough to start a business and do the many things to sustain the business; sales, marketing, service, product, etc., can’t figure out that one last critical part – profit!
• So, Mike looked at the foundational formula for how we calculate profit: Sales – Expenses = Profits and saw that that was real problem.  He saw that the problem is that Profit is Last!  And because it’s last, most people tend to think of it as insignificant and tend to put if off because it’s last.
• With his own businesses, he recalls going to his accountant who had just completed his annual taxes and asking if they had a profit that year and hearing the accountant say, “No, not this year.” And, discouraged, he thought he had to wait another 365 days to see if he could get it right the following year.
• Mike saw this as the wrong way to look at profits, so he re-drafted the equation to read: Sales – Profit = Expenses
• The foundational principal of Profit First is this: every time you make a sale or a make a deposit into your business, a predetermined percentage (5, 10, 20%) is allocated to profit – reserved.  Then, you run your business off of the remainder.
• You literally take the “profit” amount out first, hiding it out and putting it in a bank account where you can’t see or access it.  Now your business will be “reverse engineering” profitability.  It will know it exactly what it needs to survive off of and do.
• 75,000 companies are now doing Profit First and are growing faster than their competition.  What happens is that when companies take their profits first, they become much more concerned about their use of funds and they use their funds much more effectively.

7 Steps to Make Your Business Run Itself

It took Mike six years to write Clockwork because he wanted to not only research, investigate and try out each principal himself, with his own businesses, but he also wanted to “super-simply” the methods so that everyone could easily apply it to their personal situation.  However, effective time management is very complex.  Here is what he came up with:

1. Know your 4D mix – Categorize your work in four stages and analyze and understand where you are today.
   1. Doing – The work you are actually doing by delivering a product or service to your customer or an activity that supports that function.  If you aren’t “doing” your business will tank.
   2. Deciding – Where you hire your first one or two employees and give them specific tasks.  (HINT: Hire part-timers when you start out.  It’s amazing how a 4-hour employee can accomplish 8-hours of work in a 4-hour time span) But many owners are busier now because they are constantly answering, approving and training. It can be overwhelming, so they need to go to the next stage…
   3. Delegating – The assignment of outcomes (the true definition of delegating).  You don’t say, “go do invoices.”  You say, “We need to bill our customers on time and accurately.  Your responsibility is to insure that happens and agree on the outcome.  If you reach a roadblock, YOU need to find your way through it.”  Proper delegation is also relinquishing decision-making to the employee.
   4. Designing – This is the choreographed dance of our resources.  Where you have a clear intention or vision of where you want to take your business and then making strategic decisions based upon the parameters around us to make that a reality.
2. Declare the QBR (Queen Bee Role) – The critical role that your business success hinges on.  Every organization has what is called the “Queen Bee Role” – the most critical function in the business that the business is hinging its success on.  Not necessarily a person but could be and could be a group of people, as well.
   1. For a bee hive to survive and thrive it has a critical role to serve – the laying of eggs.
   2. If eggs are being laid then the bee hive colony will grow.  (bee hives have a short lifespan – 4-8 weeks)
   3. If the Queen Bee dies, the colony will spawn a new Queen Bee to fulfill the role.
   4. What do organizations need to thrive?
      1. For example, Fed-X – to deliver their packages on-time (their brand promise and Queen Bee Role is dependent on their logistics)
      2. What’s the one thing you tend to be known for – your brand promise?  Then, find out what the main activity is that supports it and that’s the QBR.
   5. As an entrepreneur, you want to peel yourself out of the QBR so that people are not dependent on you.
3. Protect and Serve the QBR – Elevate the QBR and your business elevates.  Make the QBR efficient and your business is efficient.
   1. Every employee needs to know and identify with the QBR and must protect and serve that function at all times.
   2. When the pressure is on (i.e. Christmas season, etc.), the employees at Fed-X will hop in the vans to deliver the packages if they have to because they understand that their livelihood is dependent on the QBR.
4. Capture Systems – All the systems a business needs is already created, they are just in people’s heads. Extract is by recording the work as it gets done.  Then transfer over to the new person who will do the work.
   1. We need systems that other people can follow.
   2. The traditional method is Standard Operating Procedures (SOPs) (they usually just sit on shelves) and Check Lists (which get outdated quickly).
   3. Mike came up with a quicker way to capture systems and train people.
      1. He simply video records people doing their job to share with others.  That way, he efficiently gets things done while he is creating a training video at the same time.
      2. Or, go to YouTube and type in “a better way to…” and borrow someone else’s system.
      3. Also, after the person has learned the best way to do something, ask them to record their own way to do the system.  When people are “teaching” how to do something you know that they know what they are doing
5. Balance the Team – Match traits to tasks, not people to titles.
   1. Once you are assigning out responsibilities and processes, you want to match up the right people with the right task – better than matching peoples talents with a job title.
   2. Instead of matching people to their titles, match them to their traits.
   3. Instead of creating a typical pyramid organizational structure, create a more inter-laced web.  That’s how you balance the team.
6. Commit To a Community – Identify the customers who most highly benefit from your efficient offering.
   1. If we are building efficiencies in our system, we identify those customers that benefit most.
   2. Some people think they need to take the customer and build your business around them.
   3. Instead, you need to look at you, the entrepreneur, identify your superhero strengths and target that at the community it serves best.
   4. This way, you’re playing into your customer’s strengths – serving customers who most need it.
7. Break Free – Declare a 4-week vacation to test your business.
   1. Go into “fully automatic” mode.
   2. This is where you are physically and digitally extracted from the business.
   3. A 4-week vacation out of the office.
   4. See how the business runs without you.
   5. This can even work with “solopreneurs” with virtual assistants, outside contractors, etc.
   6. You can even test it over a week or two, see how and goes, re-work and try again later.
   7. When it works, you will find a new level of freedom in your life
   8. Also, your business value just went up because you have demonstrated a “Plug ‘n Play” business is appealing to those looking to buy your business because you have demonstrated how your business can generate profits without you.

Advice for Old Dawgs Interested in Starting Their Own Business

• If the business cannot operate without you, that’s not an ATM machine.
• You need to set it up so you can extract yourself.
• You can set up a business that runs itself even if you are the only one in the business.
• You can continue to do the stuff you love the most and outsource the rest.  It’s your choice.
• With all the tools out there, micro-automation, software, packages, artificial intelligence out there, even micro-companies can compete because it’s all in the tools.
• Sometimes it’s just a matter of breaking the “old school” habits of the past.
• He has found that the more successful his business is, the less it needs him.

Tips on Prioritizing

• You need to determine your QBR
• The QBR helps you to determine what has the greatest priority
• You need to look at the other tasks and see how much time they are taking.  That’s time taken away from our core tasks – the QBR.  Then look to transfer that work for others to do.

What’s Ahead for Mike

• He thinks Clockwork will be bigger than Profit First.
• His books spawn new licensing deals and tend to evolve into other businesses as well.
• He also has other ideas he wants to write about.

How to Reach Mike

• Clockwork.life

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