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Manage Your Money for Maximum Profit

Lesson 3 of 23

How Parkinson's Law Can Work For You

 

Manage Your Money for Maximum Profit

Lesson 3 of 23

How Parkinson's Law Can Work For You

 

Lesson Info

How Parkinson's Law Can Work For You

21 million businesses are living checked by check happen. 21 million people be smart enough to spill businesses to start businesses. But so could the Prophet part, right that that question was sitting in my head for the longest time. And I looked at all these businesses not all 21 million but looking business after business saying, What's your formula? What, your method for profit? And this is what they all told me. This is how you make profit sales mice. Expenses equals profit. You're familiar with that, right? This'd is called the Gap Formula Gap stand for generally accepted accounting principles. It's mandated in the U. S. By law that public companies have to follow this method, this formula, income statements and so forth. They need to report their financials and manage their finances in a certain way and boiled down. This is the formula small business, every business. And here the folks watching in 99% of businesses use gap accounting this formula. And I'm sure you all recognize t...

his right. His problem with this formula and the problem is was called Parkinson's Law that first their sales you sell as much as you can you occur expenses to cover those sales to maintain your business, and then the left over is profit, the remainder. It's a remainder. It's a leftover is an afterthought, and how it manifests itself is just like this. Kate was working so hard this morning on doing the slide for us. So I appreciate this. This is probably how your income statement looks. This formula, I just changes. So it's vertical. You're all familiar with income statements, sales of the top and whittles down to profit the bottom. It doesn't seem that if you have, if you look your income statement, the revenue community business, their sales, you're making money. And then there's COGSA, which has cost a good soul that cost you incur to cover sales. It enters what they called gross profit, which is gross because it's not a prophet. Uh, there's accounting joke so they can. You can barely hold himself together. That is hysterical. Is it? Are you going to use that now? Yeah, yeah, No one else gets that joke. That's how awesome of this so never use. That joke is pathetic. So gross profit it is Accounting term is profit after certain expenses or take. Then we take out was called SGN A, which stands for sales general administrative costs. It's more cost you're left with is called EBITDA earnings before taxes and depreciation. Then you take out taxes and depreciation. You take a amateur ization of these fancy terms and you see the text are takes more. Then you have owner distribution. This is your pay down here, and I don't know if you could see way down here. This little thing. I don't know if you guys see it. It's profit. There's nothing there. It's so tiny because this is how the formula tells us to operate south as much. You can incur all the expenses and there'll be a little something left. There never is mean. Sometimes maybe your accountant cause any horses. Congratulations, Kirsten. You you had $100 profit or $1000 profit and you're like I did. I'll see the cash. Where is it? Where to go? Because that's an accounting profit. That's probably cruel based profits, definitely not cash. So profit is a leftover, and therefore it's NAFTA thought, and therefore it really have. That's actually the most popular question coming online. M with Webster asked it before people have voted on this. How do you factor in particular profit in the service business where you don't know how much you're going to make from month to month? Yeah, beautiful question. They hold classes about. That's okay. I can reveal the answer now, but then we have to wait for the second time. Exactly. Yeah, but that is what you know. The majority of the audience are looking for, you know, it's great. And that's what we're gonna learn. We're gonna discover how do you know your profit in advance? And I'm here to tell you you dio and you can and I'll teach you how to do that. But I want to do a little test here for our live audience. May folks can bring in to of these businesses. I give you three examples. These are not your business. Someone else's business is what business A has a checking bank balance of 2 Business be has won 25 business See has won 2500. Do you know which one is the healthier company now? Now, now, under terminal, Right? Right, Right. Would you agree? Okay, now take this exit numbers Let's talk about your business view of a bank bounce of $250,000 or you have one of $2500. Which one is better? Your business? My business. Today we put 200 summation A would be great right situation. A right Travis. Oh, yeah, True for all of us. The count's like Don't answer the question traffic, because it's a trap. It's interesting when we look other people's businesses, we say you can't determine how healthy businesses the exact same numbers in our business was. I know why. Business inside. Now 250,000 bucks. I'm rich. What are the other variables? What if you got this, Um, and you have to buy $250,000 of materials. What? That's just the flow of money through, But you also the delivery service. It could actually ruin you. And your business is so small that could be devastating. That could put you out of business. The response is typical in the same response I have and most entrepreneurs have is we look at our bank balance and we can make a determination. We believe, about the health of our business instantly. How manifest itself in our businesses like this. Perhaps your bank account looks like this may be their balance. I hopefully is bigger. Maybe it's smaller by betcha. This is what your bank account looks like. Do all you have online banking? Everyone does. Right? Who here has two or three bank accounts to order? Two or three? Two or three? Okay, good. Anyone have just one? Good luck to most people. To two or three. Okay. My bank account was set with this. With my businesses, I had two or three. A small business got a little bigger. I got an employee account and a wire. We're doing some international business, a wire count. But most businesses that I know have two accounts. A checking bounds checking account, the balance in a savings account with a balance. But it's funny. And here we assume just by looking at our own business, we looked at these numbers and we made a determination of how healthier business was. If our checking bounce at 2 50 or business was great for 2500 bucks, we were struggling well in here. This is how it plays out in the real world. How many of us. Be honest. Check it. Log into our bank count every single day and see your pounds. Jeff, trick. All right, Jason. Good. Okay, Couple try not to you. How often do you do it? I don't know. What's a week or so? Liar. Come. You know more in that depressing. Okay. What about you, Travis? How often you check in, Uh, when it starts to get low every day. Okay. When it's when I got a little bit, like, really check. Okay. Okay. I'm Marcy. Okay, that's kind of typical. How about half an inch? Mentors Check it constantly. Other entrepreneurs don't check it often because of what's called fear avoidance or avoidance tactics. When we're fearful of something, it's you don't check. Like I don't know if you were a kid when you thought there's a boogeyman in your closet. You don't go to closets, ese in there. Do you hide under the covers, you remove yourself from it. So the fear response We're gonna talk about behavior responses when we're fearful of our bank account. We don't look at when we're fearful of our bills. We don't open them. And the other response is constantly checking like. Is there a boogeyman? There now is either. Now, how about now? Right now? That's the alternative. We check all the time. You know, I'm saying so we if we look at our bank balances like this, we will. We will make a determination of how healthy our business is in the moment based on the balance. We see that in the set up is a problem. And because of what's called Parkinson's law, Parkinson's Law There was a theorist named North Coat Parkinson. That's his real name. I know it's awesome. Like half you want to change to North coat. I know the artists and use like Holy cow. I want South Coat Parkinson East coat. There's a guy named North Ko Parkinson. RNC Parkinson. He study human behavior in a camp on this principle that the availability of a resource determined our demand for that resource. The Mawr. Something's made available for us, the more we demanded. So supply, actually, in our human behavior dictates demand. Classic example is with a person stuff of here at a time. Rex A. You and I were talking about doing a speaking engagement. I'm the invent coordinator. I wanna have you speak of the event and you tell me, Michael, put together proposal based upon your needs and your audience will take me one week to get the proposal done. I'll say Okay, and I'll take you one week in a week. Later, you'll get proposed to me if you and I, the same people, have the same discussion about the same audience the same event. And you said it will take me six weeks to do this. I'll get the proposal from u six weeks later. All right, right. And that's how almost all this behave what we have available to us the time we consume it all. And that's why most of us say, Oh, I get my work best done you when I'm in panic mode because we put ourselves in panic mode. We give ourselves the time and we chew it all up and delivered in the last day. And this isn't true. Just for time. It's true for food. You get a big place, you go to pick the isolation being although my God beans, I shouldn't be eating all this stuff. We eat it all because it's on a plate toilet paper. Do I even have to go there. Um, do I should go there now. I should not. And money and money. Look at this prior slide again. When we see $12,000 What's the conversation goes on in your head? Yes. I have $10,000 on my credit card. You pay your credit card down? Yes. The final in the next week. Then you have something you're like. Oh, yeah. I need to buy more material to make my stuff. Oh, I'll put that on the credit card cause I don't have enough money in my account anymore. Exactly. General, what's been your experience when you see your bank pounds, whatever the number is, what's your response? It's always half of the quarterly tax payment that's due my co pay my taxes. Now, finally. Okay. Okay. Jason. About you. Pretty much same thing. It's Oh, I come Money. Hey, it's not a zero yet. It is Monique, right? Money? Yeah. What's your experience? Exactly? The same, it's either. Oh, that's nice. But it's not enough. I have that reaction or, you know Oh, that's great. Now I can do this in that. The other thing. I love you guys. The common response Now I can write, We see the balances. I hope now I can. So, in our head we have all these things queuing up that we need to dio We got bills piling up way See the physical bills We have things we want to do to grow our business and a certain point, the number becomes a Now I can number. That's beautiful And we say finally and what happens by tomorrow morning? This goes to gets to plead it down toe Maybe that number, the mic goes out and then we go right back to the survival trap. There's no money, any money. I got more bills coming. I started pile up already and we start paying again. Parkinson's law dictates that would ever is made available to us. We consume in its entirety now. We don't feel that way. And that's the scary thing about behavior. It just feels right, like it just This is the way we behave. I got the money. I'll spend it. We don't have clarity about what was really happening with. The money is truly allocated for so Parkinson's law becomes, in this case, our enemy. No, this is the exact same account effectively. I'm showing you before, but what difference have $12,000 I'm was $4000. What changes now? I can still triggers off you say, Well, now I can as opposed. So now I can. It's now I can, and then we do the things we can. But what if the difference $8000 or whatever, It isn't safe. 12. We took 8000 and we first allocated it to profit into paying ourselves in our taxes, and we couldn't see it. It was just taken off the plate. In this case, Parkinson's law starts to become our leverage. Our advantage. I'm gonna go to the toilet paper example cause I have to go there darn book with that title when, um when we have a whole roll to a paper in the house, watch how quickly it depletes. But when there's a little bit left like that, toilet paper roll can sit there for weeks like what's happening in this house? The garbage can in our house, our kitchen garbage. Can we have this big garbage can? And I noticed within like, a day or two it'll be filled right to the rim. But then for the next week, it would always say the rent food was being really packed in there. So I ran experiment in my house, and now my wife's gonna know about it. I got a carbs. Canada's 1/3 the size, and sure enough, we filled up exact same rate and it stays leveled off for two weeks. We still takes two weeks to Philip the Can. Even though it's smaller, it's Parkinson's law. So it's to our disadvantage when we have all this money coming toe one account. How are accounts? You just told me you're set up. All this money is available. We spend it because Parkinson's law dictates our behavior. Available resource use its entirety. This is the simple core principle. The question people are asking online that we're gonna talk about for the rest of these segments that we're gonna dio in Day one and Day two if we take the money away first. If we talk away for different responsibilities, pay yourself. Pay your profit to pay your quarterly taxes. What's gonna happen is now this is the money that's gonna be available, and Parkinson's Law is going to say Okay, This is what you have to do. You have one week proposal done. Get it done. You only have a little bit Roll toilet paper. Make it work. You only have this much of a garbage can. You would have this much money to make it work. And what's beautiful about this is the entrepreneur. Amazing thing you've done, Monique. And starting a business targeting the city of San Francisco, figuring out you had the courage and innovative skills to make this happen. When you have less money, those to you in your account, the skills are forced to come back with a vengeance and you become mawr innovative to find alternative ways of doing. You break the paradigm of how business is done. You have changed the game. So we're gonna go in tow, whole process during these next segments of how to actually implement this. But that's the core principle. Parkinson's law is your biggest asset, and when you make less money available to you, you'll do better. Here's the new formula. It's real simple. It used to be sales minus expenses equals profit. Okay, sales so much you can extract expenses and the remains of the leftovers profit. There's nothing ever there starting today, literally. The second we're done with this segment, when we go on break, you could go to your bank and seven another account where you can do it. Tonight we're going to set up a prophet account. And what we're gonna do is we're gonna allocate percentage. We're going into the details and other segments, but we're gonna get into, um, percentage is that you can take of your from your sales and put into a profit account first. So imagine this that $12,000 comes in that big sale you've been waiting for. A nice deposit comes in. What if you predetermined take 10% of everything comes in and I'm gonna have 10% profit. So instead of $12,000 when that comes in, I'm gonna take 1200 of that, put that into a separate account tucked away, and now I only have whatever the differences 10,800 whatever the number plays out to be. Then Parkinson's law kicks in, and you have to find out ways to do the same thing with with less money. And as I tell people, this is like could it really be that simple? Just take your profit first. No. And then the challenges start coming up. No, this can't work. No, if you take your profit first was not good enough. Minor. My my business. I've already proven. Aiken, just get by. I am barely surviving on my business today is just getting by. If I take profit first, I'm gonna go out of business. My response is do any of you ever experience that you're just getting by? You feel that you have just enough money. You experience that just enough. And for most businesses, most on fighters I meet with. It's been like that for years. I've been just gained by for years. Really? And when we go on break, I want you to think about your head. How can you just be getting by for years? How can your business has been teetering just perfectly for that long? Perhaps it's our behavior of consuming everything we have available in putting ourselves on that teetering point. I'm just saying, by taking a profit first there's less expenses available, and sure enough, you're just going to get by with less money and within implementing this within weeks, months you like, huh? I'm just getting by. But behind the scenes you're gonna start seems profit can go toe. Oh, my God. There's a lot of money piling up. Okay? Any questions or thoughts or feelings? Money comes in just looking right at you. What's your thought? When you see this, it's a little scary because I am in the in the place where I am just getting by and where I'm constantly feeling the pressure to bring in a new client or, you know, make more sales or doom. Or so having that profit account is going to be kind of setting up the profit account was going to kind of scary. Yeah. Yeah, because they're just What I'm hearing is there's not enough money to put it there right now. You're barely getting by, right? But you've been gained by For how long? With this new business, it's still very new. Um, probably, uh, yes. Probably. What? Six months? Six months of just making you That's amazing. Yeah, that's amazing that you found a way for six consecutive months to just get by. And so my challenge to you is Can you fight? Find a way to get by if we take profit first. And I'll tell you this. You want the answer already. Proven you can. You already proven you can get by. You've done it. What's your thoughts, Chef? When you see this form Well, initially, I look at it. Go. Well, your day I went to school and I know for meal. I'm going, like, what school did you go to toe? Cal State Northridge. How state Which cameras on there is this The carrots on Cal State? Listen to make your teaching the wrong thing, for God's sake. Okay. So cow state do not teach you this? No. So, what do you think? But it makes sense because, you know, every business, not every but a lot of businesses They just spend all they can and they have the left over this profit. And that's Yeah, it doesn't work for people. Yeah. I mean, is 21 million people it doesn't work for her businesses doesn't work for Yeah. Yeah, totally makes complete sense now. Yeah, that. The funny thing is gap accounting as much like the tear it apart and yellow, Cal State and all this stuff. Um they are right. The formula is logically correct. The big mistake is we're not logical. Human beings are not logical where emotional beings were driven by emotion. If we were logical, we will have to do this course. It's real simple. Um, spend less money and you make We'll all be rich. That's it. We're done. If that really worked, we're done. But we're not logical. And so what we had taught in school in these programs is work with the logic worth of logic. And they're right. Technically, they're right. But behavior, they're wrong. So sorry, Cal State In Virginia, I went Virginia Tech guys a finance degree. Same that I have the vaccine education. Ironically, though, it was Cal State professors that came to my school. So it really is Cal State's issue. Okay, I'll tell you kidding. No tax. Like, who is this guy? He's a It's a great school. Okay, Yeah. Okay, So then how do you calculate profit? You predetermined profit, and we're going to dig into that in the next segment, but I will give you the biggest hint. The most important. It's a percentage. It's a percentage. What is? I studied public companies down to small companies about 1000 companies over four years and looked at what companies ran and how profitably were and how healthy, the healthiest of companies and found what percentage is healthy. Cummings run. And we're gonna show you a chart in a upcoming segment that we're gonna go over that will show you the percentages that you can start with and how to get there. But it is gonna be a percentage. That's great question. I like you. Oh, good. Well, as you were talking, what came to mind for me and I was raised in a fundamental Christian background, but it was always you pay your tie first, and then everything else right? It's the same concept, right? It's exact. Sorry you didn't invent that, Mike. So it's been around for years. Yeah. Thanks for Thanks. All right. So I need to come out and sell everything. I zoning this now you're and you're right. I did not invent this. This concept been around forever. Pay yourself first. My grandmother had a system where she would get it, pay and say $100 from working at the local grocery store. She got $100 in when the $100 came in, $5 would go into the grocery account. $10 pay back to community tithing, right? $10 into rent be divided up. And what happened is she always had enough money. Now here's the interesting thing. There were certain times that she was sick and she didn't get the pay. There's other times she worked overtime, got a little bit more. When she opened the grocery envelope, she would say, Whatever's in here is enough money. And so sometimes it was rice and beans. Other times it was a nice roast chicken, but it all depended on what was in there. But this was all that was allowed to be used, and so rent was always paid. There was always time. There's always money to go on vacation. There was always enough money because it was pre allocated. I think that's actually how the government works, isn't it? This is why income taxes taken out of your paycheck before you get it, because the government wants it before you even get a chance. Yes, because there usedto wait till April 15th to get your check, and no one ever sent it so they just take it. It's gone before you even see it. You're totally right. The greatest site savings mechanism in the U. S. Has been the 401 k So everyone here from north of 41 K It's a retirement savings plan for employees. And what happens is you have gross pay. This is how much money you're getting paid for your work. But out of it, Marcie comes your your savings into a K and your taxes is Jay Ko is pointing out. Then you get your net pay and what happens? Every employee in the world adjust to live of off their net pay and behind the scenes for a one K start plowing up and some people have achieves significant wealth through their 401 k We're going to the same things in our businesses in all these other club coming segments on doing a 41 K effectively for ourselves as business owners. And we're gonna be profit by the next deposit

Class Description

Ready to take full control of your business’s financial health? Join Mike Michalowicz, author of The Pumpkin Plan, The Toilet Paper Entrepreneur and his newest book Profit First, for an immersion into understanding the shockingly simple principles behind financial management and leveraging it to grow your business.

In this course, you’ll learn the core four principles of financial health and how to use them to create a profitable "rhythm" for your company. You’ll also learn about the psychology of managing your debt, whether you’re struggling with credit card debt, loans, or personal guarantees. Mike will also cover ways to bring new money into your business through cost-cutting, renegotiating, finding lost revenue opportunities, and much more.

By the end of this course, you will have escaped the panic-driven cycle of operating check-to-check and you’ll have a foolproof way of ensuring that your business becomes permanently profitable... from the very first day that you watch this course.

Reviews

Viktor N.
 

It was a great course, packed with a ton of valuable and actionable information and resources. I enjoyed participating in the live chat during the course and getting my questions answered live by Mike. I purchased the on-demand course so I can always go back and watch parts that I need help with the most. Keep in mind, in addition to this course, I would also recommend getting Mike's Profit First book/ebook. That's what the course is based on, and if you're like me, having it in a text version helps find and highlight important points. Highly recommend for all business owners at any stage of their business!

Ella Heath Photography
 

Wonderful class!! Not only is the content very impactful and life-changing but Mike's funny character made the class very entertaining - the marker on the forehead story made my husband and me laugh to tears!! We are implementing Profit First right away. Thank you CL for hosting such an amazing class.

a Creativelive Student
 

Exceptional. Never thought that a money management course would be engaging, thought-provoking and would change my business. In one segment of this class, I completely reworked the finances of my business. Great stuff. Highly recommended. If you run your own business, you NEED this course. It will pay itself off so quickly, it'll amaze you.