Profit First: How Mike Michalowicz Hit Rock Bottom And Used Behavioral Psychology to Start a Financial Movement


The Bench Team


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July 23, 2019

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Bench makes life easier for entrepreneurs by doing their bookkeeping for them. In this series, influential people talk about what it’s really like building a business.

The following is Mike Michalowicz’ story as told to Jared Lindzon, exclusively for Bench.

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You know you’ve hit financial rock bottom when your nine-year-old daughter offers up her piggy bank to bail you out.

I thought I had done everything right, and on paper it appeared that I had. I successfully built and sold two businesses, was living the lavish lifestyle of a successful entrepreneur and even used my “vast” knowledge and wealth to invest in a dozen other startups. In reality, however, I was constantly struggling for survival.

My first business was based on setting up computer systems, and the second was a computer crimes investigation firm. My goal for both was to build them up as much as I could, assuming that the bigger the business, the more sales and ultimately the more money left over for me to take home. Sure there were expenses, but all I had to do was outpace those expenses by selling more.

I was also convinced that there would be a threshold moment where I would reach a certain size and then boom, my financial problems would be over. At first I thought once I hit $100,000 in revenue I’d have some serious take-home, but that didn’t happen, so I changed the benchmark to $250,000. As I approached $250,000 in revenue, however, my expenses ballooned and I was deeply in debt, so I upped the number to half a million, then a million, but my expectations for the take home pay I associated with these arbitrary numbers never came to fruition. In fact, the bigger the business got, the deeper I was in the red.

There I was, embodying what most entrepreneurs would consider success, completely wiped out and starting from scratch.

I may not have said it out loud or even realized it at the time, but I sold my first business in part to get out of this cycle. My second business grew even faster, yet there was still no money left over. I was growing at all costs, and I mean that literally; as the business grew, so did the expenses. After I sold my second business I realized the only way to make real money as an entrepreneur was to grow really fast and then sell it to someone, commonly known as the pump-and-dump strategy.

After that windfall of cash I decided it was time to realize the successful entrepreneur dream. I bought three cars and took my family on sabbatical to Hawaii. I also invested in a dozen start-ups, arrogantly assuming that my formula for success would result in a dozen more windfalls.

It didn’t take long for all but one to go belly-up, and on Valentine’s Day 2008, I got a call from my accountant, saying “I never expected to have to say this to you, but you need to declare bankruptcy.” I tried to put on a brave face for my family but I could only contain myself for so long. As I broke the news my daughter got up and ran into her room, and I couldn’t blame her; I wanted to run away myself. Much to my surprise, however, she returned with her piggy bank, and volunteered her savings to support the family.

I didn’t end up declaring bankruptcy, but we did have to make some serious lifestyle adjustments. We lost the house, sold the cars, and I had to explain to my daughter why she couldn’t continue her horse-riding lessons. There I was, embodying what most entrepreneurs would consider success, completely wiped out and starting from scratch. I had to come to terms with the fact that my concept of cash flow was inherently flawed.

Then one day I happened to see a fitness instructor on TV explaining why most diets fail. They explained how most try to control their consumption with sudden and drastic changes, but dramatically changing our core behaviors isn’t always realistic. Instead they advocated for buying smaller plates, which would lead to smaller servings and ultimately less calories. That, to me, was the ‘ah-ha’ moment.

It all comes back to behavioral psychology. It’s in our nature to spend up to the limit, and when we restrict what’s available, we spend less. When I had the money just sitting in my account, I would find a way to justify spending it.

To carry the small plates concept over to finances I set up multiple accounts, each with their own purpose, including one set aside for profit. If, for example, someone paid me $100, I would take $10 and put it into my profit account, which in itself felt good. Then I took the rest and divided it into accounts dedicated to my various expenses, such as payroll, overhead, etc. Simple as it may seem it completely changed my relationship with money, because I didn’t see that $100 as belonging to me. Incredibly, when I executed this strategy, there was actually money left over, regardless of sales. It provided an incredible sense of control, comfort and clarity.

Changing behaviors is hard, and frankly humans aren’t good at it. Instead we often have to set up a new system that enables us to maintain our behaviors while still reaching our goals.

I told some entrepreneur friends to try it out, and they too were blown away by how profound an impact it had. I eventually wrote an article about the “profit-first” methodology for the Wall Street Journal, and it’s success inspired me to write a book.

Entrepreneurs, often by necessity, have to put on an air of success. After all, their clients probably don’t want to engage with a vendor that’s surviving paycheck to paycheck, but research has found that 83% of small businesses are. I knew the strategy would resonate with many, but I’ve been overwhelmed by the response the Profit First book has gotten since it was published over two years ago.

There are some hard numbers that suggest this methodology has morphed into a movement; book sales, the number of languages it’s been translated into, the number of keynote speaking invitations I receive, or the more than 350 accountants and bookkeepers around the world who are certified in the Profit First methodology, for instance.

What’s been even more powerful to me, however, are the 30 to 40 emails I receive every single day from small business owners who adopted this strategy and found it effective. It just makes me think about all the entrepreneurs who didn’t have to have a difficult conversation with their children; one so devastating that it compelled them to offer up whatever little money they had to support the family. That, to me, is the best outcome I could imagine.

More stories in this series:

This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Bench assumes no liability for actions taken in reliance upon the information contained herein.
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