"Profit first" is better for entrepreneurs than "G.A.A.P." | Mike Michalowicz | TEDxFultonStreet

there is a formula there's a formula for profit there's a formula for wealth it's actually the exact same formula and it works perfectly until the moment doesn't work I follow the formula actually grew a couple multi-million dollar companies that way and found that as I grew these companies that my profits and subsequently the income I made for myself my own wealth occurred as an event grow grow grow and I sold the company and that's where I made my wealth and do it again and for selling my second company for the first time in life I was a millionaire and let me qualify what I define as a millionaire I just breached a million dollars in cash in this at net assets and then when taxes came I stepped back below so I consider myself a one-day millionaire that's what we look like but I knew the formula now grow grow grow and the profits will come so I decided to become an angel investor today I now call myself the angel of death because I started ten companies and every single one failed so badly that in two years of making my millionaire for a day status I lost every penny and my most devastating humbling day in my life came next I came home April 4 time sorry February 14th Valentine's Day 2008 to my family to say the last penny was gone I had wasted it all on frivolous arrogant items too lots and lots of dumb investments i sat down in front of my family in front of Thanksgiving and we saw in front of my family on Valentine's Day and we celebrate it kind of like Thanksgiving we all sit around the table enjoy a wonderful meal together but I was sad too stoic and my wife looked at me and said what's wrong that's all it took for the dam to break I started to sob and cry to the point where I'd say it's kind of like you could hear a pin drop but my sobbing was so intense you couldn't hear a pin drop it was like that whenever those sudha thank you for laughing at that appreciate I'm happy we're that close to ready you can laugh at my embarrassment and my family stared at me and had nothing to say and my daughter eight years all the time ran out of the room and when she ran the room I wanted to run out so badly - and then she came back with her piggy bank she put it down on our dining room table and slid it to me and said I'm going to help us that's a humbling moment and what I realized that moment was the formula I believed for financial success is a broken formula it's called gap general generally accepted accounting principles it's an axiom and action is this it's a truth that we hold in our minds because everyone else is doing it there was a time with the world when we thought the earth was the center of the universe we all believed it because everyone else did until we realized it was wrong the world was flat until was wrong man couldn't fly until he could we would never leave the planet until we did in gaps another one of these and the funny thing about generally accepted accounting principles it says it's an axiom right they're generally accepted we just generally accepted the formula looks like this sales - expenses equals profit perhaps you use this formula yourself this is how I grew my business sale as much as you can incur expenses to support those sales and then you have profit profit is a left over it's an afterthought and for myself how I'd run my business and perhaps you do too and perhaps even your life is I look at my bank account every single day and see how much sales has accumulated and then I would see what bills had piled up that I could pay extract for my sales and pay the expenses that's what the formula says and then I'd look for the leftover profit fortunately there's rarely a leftover there never in fact only want to have this big moment of selling a business or a huge customer come in and there'll be some profit momentarily until my expenses would expand to fill it there's a principle called Parkinson's Law nothing to do with Parkinson's disease but with Parkinson's Law states is that when a resource is made available available we consume it all if we have four hours to get a project done miraculously you will do it in four hours but when you're given four days or four weeks it will take four days or four weeks that's the power of Parkinson's Law and while this portable formula is very logical it doesn't account for Parkinson's law now if you ever go through an experience like I did and I pray you don't you do I did face with what I call functional depression I could continue to work but it was very hard to work I removed myself from my social situation and hanging out with friends and just watched a lot of TV and drank a lot of beer and as I was sitting there watching my last infomercial of all things watching Susanne summer with her thighmasters and of course I had one so I'm watching TV like this going what am i doing I decided to turn the channel and a fitness expert came on and said those quick fixes the p90x is the thighmasters the abductor that electrocutes you every five seconds those things don't work now that I actually don't work but they require us to change our behavior and for us to change our behavior is very hard he said but there is a solution as simple work with our behaviors and he said what we need to do for health is get smaller plates the average plate size in America say has more than doubled from what it was in the 1700s George Washington was ripped not because he worked out so much with his wooden teeth I don't know why through that business that's kind of funny the reason is they had smaller plates and overtime plates have increased and our behavior is to see what's on the plate and consume it all and that's what this formula teaches us to see what's in our account and consume it all see what's in our account and consume it all until there's nothing left I want to propose today a new formula I called the Prophet first formula if you look at this logically it's the same mathematically it's the same but for human behavior it's radically different what if today every time you made a sale and that check came in to your bank account you first took your profit and reserve that away what would happen now is your expenses would become a smaller plate less available and we could continue our behavior of consuming it all and will force us to do is become innovative we'll go back to our entrepreneurial innovative roots and find how to get things done with the smaller expenses if we take our profit first this is the small plate principle played out with our financials I employed it from my own business five years ago and it's turned things around today I'm a business author you can't make money as a business author I'm happy to say last year was my most profitable year in my entire life regardless of all my businesses because I used smaller plates if logic works every person in this room will be rich it's simple spend less than you make but we don't do it and I'm here to say that's okay and I'm also here to say that we have to exploit our behavior we have to leverage how he naturally behaved starting today put your profit first always thank you thank you

Channel: TEDx Talks

Views: 70,860

Keywords: ted talks, United States, Economics, TEDxTalks, tedx, Career/Life Development, ted talk, tedx talk, Psychology, Business, English, tedx talks, ted, ted x

Id: -8O2Rw8moHs

Length: 8min 19sec (499 seconds)

Published: Wed Sep 24 2014