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GAAP Mastery

Lesson 18 from: Manage Your Money for Maximum Profit

Mike Michalowicz

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Lesson Info

18. GAAP Mastery

Lesson Info

GAAP Mastery

I wanted to do something that I didn't share in the last segment I just wanted teo present because I thought was interesting when fred was talking to us fred people he was sharing how sometimes we need to put other people in positions because we're doing the work and something else to do it more efficiently. Well, I want to share something with you I learned from garrett boone if you don't recognize the garret named garrett boone your pride recognize the business the container store have you heard of the container store just by circumstances I was able to meet gareth boone he's one of the co founders the container store about five years ago we sat down uh for lunch end of the next each other I spent an hour or so with him and I asked him how can a store that sells you know containers be so successful? It's it seems it's hard to compete and he attributed to people and he wrote down this formula that wanted to share with you on a napkin he says mike one a player one person a top performe...

r that a player is the best type of employee can have is equivalent of three b players so one person is a top employees equivalent of three average employees this person will work that hard that efficiently that focus that committed to the business excuse me that they're delivering the level three b players I said additionally, one b player is the equal to three c and I think he went all the way toe d so he said, one see player equals of three d because most the hiring that we d'oh ah, when it comes to employees, is in this range down here, we seek out the bees and the seas, we run an ad on craigslist or wherever it is and say, hey, I need someone that's proficient at microsoft word is effectively it they submit a resume, he said, but container store alternatively, they find a players they has devote a lot of time to find the right people and their processes is extensive interviews understanding people's behavior because behavior of our past often repeats in the future. So how people act in the past is how the back in the future so then all this investigative work and maybe they're going to crave life session about hiring and so forth, and I'm gonna dig into this, but what I do want you to realize so I asked gary by these people said, well, they sound like they're really town people, he said, yeah, it's about ten percent of population is that are the best performers when it comes to employees he is, but because there must be expensive, but he said, yeah, yeah, they're they're expensive if the average person for this role, whatever the role is makes thirty thousand, he says, I'm paying maybe forty thousand, so I hire retail people that get that are a player's I'm paying forty thousand where the average person's making thirty thousand, but because you two realize here's an average performer who's making thirty thousand dollars but to do the level work, this person doesn't need to hire three of them, so the real cost is ninety thousand dollars and you can continue down the list. So if you hire one person whose extraordinary and you pay them, uh well extremely well for their category, they'll be delivering level of three other people would actually cost you more to hire the average folks. So he said, we should spend all our time as we start to build our business, to hire people like this, and I'm gonna say it's, full time employees, when you hire virtual assistant, take the time necessary to find someone that's extraordinary because even that person works two or three hours a week for you, they may be performing at the level that that an average person would take ten hours the results will be gang will be tremendous and yesterday at the payment premium, but the savings are huge because you want to pay that there's no saying, too, they say, higher slowly, fire quickly I don't feel I've ever heard that one, but the ideas you bring employees on board take the time necessary to find the eight players, and if you've made a mistake, it's probably mistake for both of you. If they're not. If there are truly a great employee but are not working out it's probably good for them either. Fire quickly. Let them move on and let you move on higher. Slowly, fire, quickly. It's unfortunate. Most businesses do the reverse. We hire fast. We need a position filled. We bring them on and then we say, oh, they're not working out here not working out. We stretch it out forever. It's the reverse of what we want to do. Um, okay, well, when one little last trick I wanted to share with you that I didn't get chance to cover in the prior segment is, uh, is a trick you can do with that ad. You know, I assume it just by show of hands. Who, when you hire employees who wants to hire someone? It's, very detail oriented. A zone employee. Any of you? Some of you on behalf of us. Who wants hire employees that present professionally present well, who's important, okay. So you usually there's the two main categories we want to hire employees that present our company well so they can present themselves professionally and well and we hire one of hire people that are detail oriented they don't make mistakes to get it right the first time here's a trick to qualifying this people even before you interview run you when you run an ad in craigslist or monster dot com or whatever you use right make a really long ad, so don't just say looking for a person that khun do bookkeeping or looking for a person that khun schedule for my speaking schedule put all the details of the position five or six paragraphs long then I think you know what's coming I see this smile because I told the scene for the very bottom means in the last paragraph of the second to last paragraph add this save your truly reading every word in this ad I need to know it because I'm looking for meticulous people when you respond to this ad in the subject line of your email say this and put you know I'm a meticulous reader or I am the exact employees that or that you're looking for I've read every word in your ad something that you know when they respond they've actually read your at now it's here's what's interesting most b level and sea level people are looking for a job this person is looking for a career so the c and b level people they see an ad there's respond, respond, respond, respond and get all these responses the a level person will write exactly exactly what you told him to write because they're meticulous they're in a level person and then when they e mail you back in the subject line it's right there you'll get a hundred responses for an ad in the five people they're a players were already have differentiated themselves and the rest you can delete they haven't even read your ad in the first place why would you want to hire someone like that is a great shortcut to finding great people the second trick to find great people is to run a video cover letter sort of request of video cover letter ideas for every position I have so I submit I put my ad on monster whatever and that's how people along with a resume I would love to see a video of them why explaining why they want this position and that's it uh and when they do the video what I'm looking for is their professional presentation I mean you came in for an interview my office I wanna see how you present yourself if you're wearing tourney jeans and t shirt and you're like this is you know you're smoking a cigarette when you walk in I don't want to hire you but the investment to meet with you and go with that time is a significant investments an employer I could get the same impression of your beauty video you'll be surprised people that employees there down this category they'll say do video they'll make this crazy video a player may take five or six shots before they get exactly how they want to do it the dress professionally the present themselves the way they want present it's a great way to distinguish two eight players so video cover letters I found an embedding a kind of code in your ads okay what were to cover in this segment is gap mastery gap stands forget for generally accepted accounting principles on going to cover the three key statements of gap accounting which is income, cash flow and balance sheets. One thing I want to share with you guys is that, uh private first does not replace accounting it does not replace gap private first is a system that sits on top of it. I considered like a plug in so profit first is a cash management system and gap is a almost like a map of your financials uh private first like a gps gps says you're you hop in your car and you plug in your gps you put the destination it says turn right here turn left there it doesn't put up the whole map for you gap puts out the entire map of all the alternative routes you khun go different cities you could discover and so forth so profit first is just the turn by turn mechanism something we do every day but we're going to want to rely on our gap accounting on our income statements and so forth produced by our book keepers and by our accountants to really map out our business to get true understanding of it now I'm gonna rely on you a bit jeff here two types of of ways of reporting your accounting a cruel method and cash method you mind if we have a spy here? You're not you didn't expect this coming can you explain the differences so folks get understand this basically to make it simple a cruel is when you, um um get the expense when you know you purchased materials you get the pio in right and then it's an expense all right when you get the materials and you get the invoice yes, that would be an expense cash basis when you actually put the cash out yeah. So you write a check than that's your cash basis? Yes. So cruel basis is when the event occurs you buy something. So say jeff is works ah uh a vendor of mine I buy something from him that's the event the cruel now the cash you mean send me an invoice and I'll pay for it for thirty days when the cash occurs when akash just transferred that's the cash event so cruel bases recognizes the transaction at the at the moment of the event if he if I deliver a service I invoice him ten thousand dollars in a cruel basis you'll see ten thousand dollars of income posted but the money hasn't arrived and I'm still waiting for the money so that's a cruel basis cash bases on ly recognizes when the cash is actually exchanged hands right now here's a trick question is there one is one better than the other hey not necessarily but yeah and I would agree so they both have different values for small business cash basis in what profit first is a cash business isn't cash basis is easiest to understand it's when the money transfers but for understanding the true health of your business in the perspective it of it a cruel is often better because that's when the event occurs so the answer is there really is no better option but do you have to know that two options exist because if you look at your statements from your accountant or something and so cruel basis you may look at seo it means cash came in it doesn't necessarily mean it so you may want to get both forms statements and you can get both right you khun run accrual basis in your counting but have it also presented a cash basis or vice versa I think yeah if you're using quickbooks it's a simple click of a button and okay switching back and forth easily and then when you report your taxes tio when you when you do your income statements and so forth word for tax returns what is that cash basis or cruel base? It depends on how your business was shut up I didn't even know that so what kind of businesses are cash basis and what are normally smaller businesses accrual basis problem bigger manufacturing multimillion dollar ok cos okay, so you have those businesses or cash basis so well when she now is an income statement this is what a traditional income statement looks like um who prints out income statements for their business I want to call people okay you raise your hand if you didn't know okay uh income statements represent the income the mines come into business and come out of your business it's the flow of money this is a very simplified income statement and results in the what they call the net income our loss the end result again this is we don't know if this is a cash or a cool basis the way it's presented so when you prepare this on quickbooks make sure you said to cash or cruel so you know you're looking at it this is a cruel basis this simply means that we have one hundred thousand dollars of events it doesn't mean the money came in if this is cash basis, that means we've collected a hundred thousand dollars of sales. Okay, gross sales is your top sales. The transactions that you have returns and allows is our refunds. So if you sell fifty units of your product and it generated, say, one hundred thousand dollars but then three or four units returned and you return money to the people for that, you give him a discount. That's what's called a returner allowance and that results in net sales costs. A good sold is this section, um, costly gets hold again is the cost of our business incurs to deliver the sails? The stuff we sell your materials cost a good sold rick for you. When you do a presentation, your actual time on the stage is considered a cost of goods sold, so it gets a little technical. And I dare say, jeff gets me here too is when I'm doing work. My work for the company sometimes could be acosta good sold sometimes is right. So sometimes rick, you're speaking that's the service you're delivering, you sold a speech. Hopefully you saw one speech, one hundred thousand awesome. You sell that speech, you then do the speech, the time you're on stage is your cost a good soul, direct labor conversely, when you're back in the office writing your speech oh are preparing for it might not be cost to get sold it maybe that's something you discussed your accountant and then if you're simply determining what your schedule is gonna look like for the next couple weeks that time is absolutely not cost of goods sold this stuff can get really heady stuff that's why when it comes teo profit first I talk about the thing called real revenue as opposed to gross profit gross profit is where you take your sales and subtract out all these different types of costs tio deliver the service including your own time could be in involved with that when we do profit first we're suggesting you take out of your sails you take out the subcontractors people that don't work for your business and you take out materials so just simplifies this process but it's kind of similar purchase is uh is the materials you you purchased to do it in direct labor is your labor or any employees labor that's required specifically to deliver this you subtract out and you get your gross profit it stands for sales general and administrative costs these air the cost to sell things in general administrative so anything to run the office uh rent is a classic example. This is substantial rent compared to sales, but rent of your office space would be typical dna sales and administrative labor so if you have a sales employee that selling for you if you have a receptionist uh oh our in house people that are doing some work that would be here supplies for the office to run the office operations are here supplies are different than purchases purchases or what required are required directly to deliver on the sales supplies or what's required for in your office then you subtract these numbers have your gross profit and you get your income statement I mean your foot your final balance that you have a loss or a profit when you see parentheses on income statements that means it's a negative that's us how it's indicated as opposed to seeing maya scientifically when you see a single line that represents that the number below is uh is either an additive of it forty seven thousand forty plus seven or that this next number is it's attractive so forty seven thousands been subtracted from ninety seven thousand drive this number um when you see a double line that's the final line so this actually should have two lines below it that that's a final number when you see a double line. Okay, so that's what income statement looks like then I want to show you what a cash flow statement looks like now income statement just you know, this does not mean that eleven thousand dollars came out of your bank unnecessarily because we don't know if it is the cruel or cash basis this is cash basic county's an actual transaction we should see eleven thousand dollars actually came out of your bank it is the cruel it just means that these air statements events have happened we don't necessarily this came out of the bank what a cash flow statement does is show you the actual flow of cash so cash flow from operations being from running your business the cash flow statement by the win by the way represents a period of time how money moved over a period of time when it says year end as of in this case december thirty first this means from the start of the year to the end of the years this is a one year report over this year I can see this business that have received one hundred twenty thousand dollars so we have deposits in our business receipts from cash from customers of one hundred twenty thousand cash paid to suppliers those airbender based bills I paid so I can see that ninety thousand dollars went out then it's some tolls at thirty thousand dollars of positive cash not prentice's was generated from operations then there was another general operating an administrative expenses of thirty five thousand so we had to pay employee salaries and so forth to run our office there there's that interest I think this is exactly the way you're experiencing curious and so we see that over this one year period of time that the company actually has sixty six thousand seven dollars go out of the business cash flow that came in from investing I'm sorry cash flow that went into into investing so we bought additional products. I'm sorry additional equipment ten thousand dollars went to that there's replacement equipment something broke or something that we had replaced five thousand won their way put out another fifteen thousand dollars of cash went out to purchase those things cash flow from financing um the proceeds from loans means we borrowed some money, so we borrowed twenty five thousand we made payments on this loan of twenty, five hundred. So the net is we have two twenty thousand five dollars a cash that came in from that at the end of the day we increased cash by eight hundred dollars. So that's, how casual statement works the goal, the cash flow statements is this to see the flow of money from different activities. But even though we see a positive eight hundred doesn't mean it's a profitable business, these statements tight start tying in together we go back to this income statement we can see our business actually ran eleven thousand dollar laws so we have some issues going on here we need to fix we can see from the cash flow statement that that eleven thousand dollar loss was actually in cash we already seen we've lost six thousand seven hundred dollars and that we've also put in fifteen thousand dollars here so we had to borrow money so they understand how our cash flow statement work sort of questions around it actually the last were the same so that negative eleven thousand is the gross profit minus the sdu is that what that isthe it's gross profit uh minus uh yes my siesta okay that's exactly right that's exactly right okay um so this is when kirsten came up earlier this is we didn't income statement for you this is the most common statement that entrepreneurs look at they neglect to look at the other two statements so a lot of people will look at their income statement once a month maybe once a year maybe not even once okay once a year okay so once a year but I think most answers never even look at their cash flow statement ever never look at the balance sheet and don't know how to read it and actually these three statements worked together in a little bit we're going to get my friend tim he's gonna walk us through a lot more details of these things so this what's the red flags you see here what do we need to have fixed it? Doesn't something need to be fixed? Was this raising your mind when you see his income statement rent rent he rents an issue right? Flavor labor labor seems awfully expensive forty thousand dollars I mean the first scene comes to my mind is like okay we're losing eleven thousand dollars that's a big issue um what we need to do is you have rent seems extremely high so what kind of business is this? Of course we need to know more behind it but what kind of business is that's why we're spending so much johnny fifty percent gross margin is pretty good for any company it's just the estrogen eh that's killing your profits yeah yeah so as you get intimate with other businesses and your own yeah this may represent a good gross profit margin um the thing is we may not be making a physical product if this is a labor based business if this is a law firm the gross profit actually seems a little low then maybe so I want to know what kind of businesses is of course but all these numbers invoke the most important thing questions wise rent this this height it seems I'd why is it so high white why are these numbers the way they are and so when you have an income statement it allows you go through all the elements of your business private first like a gps like I told you tells you turn by turn but it's not giving you the detail you're not seeing the entire map so when when I gave you kirsten that's the challenge of hey we got a look at your business and figure out how to get more profitable she didn't she left the process of profit firsts the percentage component and she started looking at the map she said well I got twelve items here's what they do did you do that a thing during break by the way oh would you find out so those six items account for forty eight percent of sales six items represent okay that's interesting. So that's fifty percent that's right down the middle so the other six items represent fifty two percent. Yeah, well there's um those ones that we sold off like that were extra skews so those have something to do with so there was more than twelve skews there was additional there were like this past year way have twelve okay don't probably like eighteen or something. Okay, so okay, so that actually that makes more sense messed it a little bit up but let's have a little bit so you're eighteen scuse we did six of them represents fifty percent six thirty percent so one third of the scuse represents fifty percent of your sales. Okay, that makes more sense for you actually have already started cutting back when you did six of these already you ready, ditch six those six some customers go are you doing? We need those no, because everybody hated those ones. Okay, okay. So now wonder with those twelve can you even get down more? But the question is the six you've identified our own generating half your revenue. I wonder if I would look at every single skew of those twelve left individually and see what the waiting is. Are they all equally balanced? Where are there a few? They're selling stronger than others because of these six that represent fifty percent. Is it one that represents forty nine it's? No, it's. The best one is thirteen percent than ten. Ten, seven. Five. So okay, well, that now that's revealing the five percent is very small compared to thirteen percent, which is three hundred percent bigger. Right? So a lot more sales or coming out of that. So the six you said their best, maybe aren't your six best. All right, well, how did you pick the six in the first place? Because they're according to my sales reports. Those were the ones that have the highest amount of revenue. And but by percentage wise. Okay. Hi. Chart. That's what it. So, in your case, I would just want to go through every single individual item one time, because if one five percent once a thirteen percent, I wonder if there's other it's like that I want people of thirteen percent ones you know saying right so maybe they're in the next break we're gonna work together on that and this is by the way, this is where it gets heady and complicated for auntie this is why people get stuck this is why I get a bookkeeper I like to say a profit first professional uh go on the web and check him out but this is where you get a bookkeeper or an accountant or even a business coach that that can dig into these details and these nuances and figure it out for you because for most entrepreneurs were really good at selling we're really good at making but the numbers start get a little crazy and that's why we have this cash management system not this one but they want to show you a profit first because it makes it real simple you command your books you know, a minute a day but when it gets this stuff when it starts becoming heddy don't just try to go it alone bring in a professional um I had to say when it comes like working out like when you go to the gym like you could go to gym to start working out you may injure yourself you may not know exactly what's going on, but you can dig into it, but if you bring on a trainer there's a low cost associate with that, but the train will leave exactly exercises to go through the exact process to go through they've done with hundreds of other people, so when you start moving into territory, you're not one hundred percent familiar with it's a really good idea, a really good idea to bring on, you know something that can help you navigate that I won't show you one more statement before we bring on my friend tim esos the cash flow statement so income statement just shows you where you know how much money you're making, how much you're selling, how much you're spending and then what's left over at the end of the day and it breaks it out so you can leave the individual components. The cash flow statements shows you how the money's kind of flowing around your business I can see from operations from running the business we're losing money uh from investments to improve our business. The assets were buying the equipment it's costing us money, which we'd expect, and we've brought in more money into our business by financing by loans. This could be credit card debt, so even though our business hasn't of cash to operate, we're not doing well in the operations, okay? The last statement is called a balance sheet balance sheet shows you these were assets equals liabilities plus uh uh, shareholder equity assets are what is valuable within your company cash is valuable inventory stuff you can sell accounts receivable this is where you've invoiced clients and they owe you money assets are things that are owed to you or of value liabilities air things you owed to others is the outbound stuff accounts payable means you've been in voiced by someone taxes payable stuff you're the pay expenses this is like accounts payable have accrued over time have built up over time and cheryl de commies less what's left over so here's what is you have assets here's what you owe going out and then the difference is what equity of what was left over what's retained in the company were given to you as the owner so you can science starts seeing the distribution of money and that's what a balance sheet does it's really looking at these three statements that gives you the entire sense of the health of your business what's going on with your income how you're generating money where money's flowing and how bounces out in the different major components of your business doesn't have questions about a balance because I tore through that I want to get him on any questions the moment we have a quick question for philippe see who's actually joining us in belgium I think he's an antelope is saying isn't it necessary to check the profit per item instead of revenue of one model because isn't it possible that the one which sells the best brings in the least profit per unit? Yeah, it's better to focus on the higher margin it tolly does. We're going to dig into them and detailed the next segment we're gonna do is called the parade of principle. But there's a technique are you even determines called the gross margin for product to say, well, you hear something pick on your business right now, but say item one what do you typically sound item for with the price point twenty. Fifty. So twenty two. Fifty. Okay, is what you sell it for. That's how much money comes into your pocket? But then the cost for the item may vary if you pick up material. That's not is you easily available. They may charge him or assume right, right. Okay. And some materials cost a little bit last night, so item one sells for twenty two fifty item in all your himself for twenty two fifty so each item sells that exact same price point. Okay, twenty fifty, but one item may cost ten dollars. All the materials and stuff and labour you've put in to assemble on this item because the materials are harder to get may cost twelve dollars, and this one may also cost ten dollars in the next one down here maybe the materials are available, but it's a different technique of assembly and maybe cost fifteen dollars. Then you get what's called the gross profit for the product itself. So this proctor really making twenty? I'm sorry. Twelve fifty. Twelve. Fifty where this progress making ten. Fifty and you can go down the list. And philip from belgium is totally right. As you go down this, you may find some products, make you very little money on other products, make you a lot of money, the obvious or the one way looking at say, well, I myself, things that make more money, which could be right but they also have we I look your client appeal. Some customers may say this the product we want the most of so it's, the lower margin product, but there's a higher demand for it. So you actually overtime are making more money based upon the volume. The ultimate goal is to find out which products people want most and increased the margin as much as possible. So when on the last interview we had with fred, he says, you gotta look for those constraints. If this if this makes you twelve dollars and this one makes you twelve dollars and this one's making you, uh, seven dollars and this one's making you ten dollars but this one's, the one in highest demand. The question is, how do we get this fifteen dollars, cost on this item down to ten dollars, or less? And then then you don't sell any more to your customers. Already demanding this, you'd have to find out how to make it more efficiently. Same thing is with our service. If the big service that we do, how do we make that thing? Is the most demand, the most efficient.

Class Materials

bonus material

Mike Michalowicz - Instant Assessment.pdf
Mike Michalowicz - Profit First Graphics and Charts.pdf
Mike Michalowicz - Profit First Overview.pdf
Mike Michalowicz - Profit Pod Sample Agenda.pdf
Mike Michalowicz - Top Questions about Profit First.mp3

bonus material

Mike Michalowicz - Profit First - Chapter 1.pdf
Mike Michalowicz - Profit First Article - WSJ.pdf

Ratings and 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.

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