EA147: Profit First for Architects with author Mike Michalowicz [Podcast]

How to Build a Profitable Architecture Firm

Profit… Then Art. In order to be a better architect, we must first be better business people. We need to build better businesses. This week’s guest is the author of Profit First, a book outlining the simple process of transforming any business from a cash-eating monster to a money-making machine. Accounting can be overwhelming and complicated, not to mention difficult to understand. This week, you’ll learn a step-by-step process to guarantee that you’ll be profitable.

This week at EntreArchitect Podcast, How to Build a Profitable Architecture Firm with author Mike Michalowicz.

Mike’s Origin Story

Mike was a Jersey boy all his life who worked at a computer store right out of college. He had a drive to start his own business and quickly realized that managing a business wasn’t as easy as he thought. It took him a few years of trial-by-fire to fall in love with entrepreneurship. He learned that as the solo-guy, you only eat what you kill; the fear kept him going. He sold his first business to a small private equity firm and then started a computer crime investigation company in the right place at the right time.

Although a lot of people face struggles, few people talk about them. After selling his second company, Mike felt he was an expert entrepreneur, he thought he knew all there was to know about running a business. He went on a spending spree and became an angel investor… where he killed every business he invested in. After struggling to pay off his debts slowly, a fire was reignited in him to discover entrepreneurship the right way; he wanted to live a satisfying, sustainable life. He began writing books, at first to process and solve the problems he was personally facing.

After hitting rock bottom and losing all his money, he went through a two-year bout of functional depression. Someone suggested journaling to vent, and it inspired him to not only write his problems, but log his solutions.

Can you share your thoughts on small firm accounting?

It boils down to our behavioral wiring. Many business owners follow certain practices, and GAAP (Generally Accepted Accounting Principles) teaches us to use a system that counters our natural behaviors. For example, logically we should pass on desert, but behaviorally we eat it anyway. GAAP says that sales minus expenses equals profit. The problem is that when we put the profit last, it’s our behavior to disregard it. In order to prioritize profit, we have to put it first. Every time a deposit comes in, take a predetermined percentage for profit and put it somewhere safe. Then, run your business off of what’s remaining. Pay yourself first. Businesses that do this are all more profitable than they were in the past because the fundamental law says that what we have is what we use. If you have a small amount of food, you’ll eat that.

What if someone says, “I already don’t make enough, how can I set anything aside?”

If you’re making due with what you have now, you’re still scraping by. By taking the money off the table first, you’ll continue to scrape by but the difference is this time you’ve put money away for profit. Think of 401K: you get a gross payment for your job, but a percentage is taken for your 401K. You never think about the percentage that was taken away because you never see it, your life is already adjusted to live off of the remainder. When you take your profit first and don’t have the money to pay your bills, that’s a direct sign that you need to be more frugal and make some different decisions on your finances. Find the things that bring profitability, and get rid of the things that don’t.

How do you suggest putting the money away?

You can start by setting the money aside every time a deposit comes in. Get into a rhythm where all the money accumulates and then every other week you allocate the money to profit and other expenses.

What are the other accounts you allocate toward?

Owner’s pay and taxes are the two primary things. Sometimes there’s manufacturing costs or income or operating expenses too. Think of it as a serving tray: all of the money accumulates on the serving tray, then you allocate it to different accounts based on predetermined amounts.

1. Profit is a celebratory reward for the equity owners who had the courage to take the risk to start this firm. Do something that you get joy out of, do not put it back into the business. If you use it like that, it’s a deferred expense.
2. Owner’s Pay is for the owner/operator who’s sacrificed a lot to keep the company going, often for no pay. Another percentage is allocated here for lifestyle. You don’t go above that, you don’t use credit cards, your extra money is your profit.
3. Taxes need to be set aside for your corporate responsibility and your personal tax responsibilities. Instead of scrambling in April when you owe more than you expected, set your business up to pay your taxes for you. Put money into your tax account so that you’re ahead of the game.
4. Run your business off of operating expenses. From what comes in, allocate a percentage to run your business off of what you have left.

What if your accountant pushes back on this plan?

The goal is to be more profitable. If your accountant’s clients are all consistently not profitable, adhering to that system is insane. It’s time to start taking your profit first.

Can you tell us about your new book, Surge?

No one can nail the timing of the markets perfectly, but we can radically improve the odds. Surge is an acronym for the elements:

1. Separate out a community: speak the language of the community that you’re in and anticipate their needs.
2. Unify: cater to your clients’ needs, but stay true to who you are. If you don’t, you’ll resent your business.
3. Rally cry: find the greater purpose and mission you’re serving and speak to it.
4. Gather: find knowledge of what your clients want and improve your offering.
5. Expand: once you’ve mastered the above and surpassed your goals, look at your community and find others like them that you can serve.

What is the one thing that small firm architects can do today to build a better business tomorrow?

“The system can feel overwhelming, so many people hear and think it could work but they never do it. Don’t set up five accounts today, set up one account today and label it profit. Allocate 1% of your deposits to that account. You won’t feel it, you won’t become rich over night, but you’re confidence will explode because you’ll see that you can allocate money to profit. Start slowly, but definitely start. ” – Mike Michalowicz, Author of Profit First

Connect with Mike online at MikeMichalowicz.com or on Facebook, Twitter and LinkedIn.

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Referenced in this Episode

Profit First by Mike Michalowicz (book)
Surge by Mike Michalowicz (book)
EntreArchitect Profit Plan Course (free)