Destroying Debt

Well-dressed poverty is still poverty. Just because your business is making lots of money doesn’t mean you’re hanging onto it. Too many entrepreneurs believe that the top line is what defines success and then behave accordingly. Another big client comes on board, and the entrepreneur expands the office. A big sale rolls in, and with it a fancy dinner. It’s like putting Frankenstein’s monster in a tuxedo and having it dance and sing to “Puttin’ On the Ritz” (shout- out to Mel Brooks). The monster may look as if it has its act together, but it doesn’t. One tiny bit of faulty wiring—like, the big client decides not to pay its bills—and the monster goes on a rampage. Everything falls apart.

Two years ago, my cell phone rang with a call from my friend Pete. I was expecting the call—we had plans to have dinner in New York City that weekend and, since Pete is a resident of The Big Apple, he knows all the hot spots. I figured he was calling to confirm plans. The call was not what I expected.

“I’m sorry Mike, I can’t do dinner this weekend,” Pete said, his voice strained.

“Damn, that sucks. I was really looking forward to it. But no problem, brother. Let’s reschedule,” I said, looking at my calendar. “What’s going on? Heading out of town?”

“Yeah, kinda. Well, not really,” Pete replied. Then he sighed and said, “I, uh… I’m broke, Mike. I’m broke.”

Pete explained that his bank had called his line. I’m not sure if you’re familiar with this experience, but here’s how it works: You get a revolving line of credit from the bank. It’s a bank account that functions like a credit card, in that you can draw as much money from it as you want, up to your credit limit, and pay it back over time. As long as you pay your interest and make your minimum percentage payment every month, you’re good.

Except there’s this pesky little rule in the fine print that says the bank can call back the entire loan at any time. Even if you’ve paid your monthly percentage on time every month, even if you’re not carrying a high balance, the bank can yank your line of credit without warning. And once the bank calls to notify you that they’re calling your line, the clock starts ticking. You have thirty days to pay back every single penny. Tick. Tick. Tick.

Pete got the call. His line? A million bucks. The amount he had drawn from the line? A million bucks. The amount in his company’s cash reserves that he could tap into? Zero. Needless to say, dinner in Manhattan was off.

Struggling to get the words out, Pete said, “Mike, can you help me? I’ll follow your lead. I’ll do anything. If you told me to run naked in the streets, I’d do it.”

Of course I agreed to help him find a way to dig himself out of this massive debt. A Lady Godiva-like naked romp through the streets of New York might get him some attention and give me enough razzing fodder for years to come, but it surely wouldn’t address his debt (in fact it would probably add to it, what with the fine for lewd and lascivious behavior). So we spent two hours on the phone that night, going over Profit First in detail. At first Pete was confused—why was I talking about profit when he was so far in the hole? You may be feeling this way, too. I get it. It’s awfully hard to think about profit, let alone plan for it, when your situation is as dire as Pete’s. You may not have a million dollars in debt, but I’ll bet that whatever debt you’re carrying feels like it might as well be a million dollars, at times.

This is the ultimate survival moment. If you focus all of your energy on paying down debt, that is all you will ever achieve. You’ll still be caught in the trap of top line thinking, which will likely result in more debt.

Again, there are similarities here to weight loss. If you’re overweight, at a certain point your “credit line” will be called. Maybe you’ll see yourself in a family photo and realize you can no longer say it’s “just a bit of a muffin top,” because that muffin top is dropping down to your knees and tickling your toes. Maybe one day you’ll get tired of always being tired. Or maybe it will be something much worse—like a heart attack or diabetes—that finally moves you to say, “Enough is enough.”

We can trace almost every major change to a pivotal moment when the pain of staying a certain way is greater than the effort to make awareness of it go away. Call it a tipping point or a turning point, a revelation or a wake-up call; whatever name you give it, the choice is the same. Will you fix the crisis or the root of the problem?

When life “calls the line,” we take action. The problem is, most of the time the action we take is a reaction, a narrow, driving focus on the alleviation of immediate pain. We move heaven and earth to bail ourselves out of a jam with little thought of creating permanent change. Why do so many people who have lost weight gain it all back (and then some)? Because as soon as they reach their goal, they revert to old habits. Sure, no one wants to drink a gallon of water and eat grapefruit every morning for the rest of their lives, or spend so much time with the Thighmaster that they’re going to have to think about going steady with it. The pain of being fat is gone—what’s the point of taking another Richard Simmon’s Cruise to Lose?

Once the pain is gone, the action we decided to take in that pivotal moment falls away. No more grapefruit. No more water. No more Thighmaster. Grapefruit is replaced with grape jellybeans. Water turns to soda. And the Thighmaster is tossed into the basement where all good intentions go to die. Is it any wonder that when the weight comes back, it’s with a vengeance? After all, your mind now knows you can lose weight in a pinch. Who cares if you gain a few pounds? You can always crash diet again, right? Try out for The Biggest Loser? And of course there’s always “the surgery.”

What my friend Pete intended to do was the same deal, different crisis. He had had the equivalent of a financial heart attack. As soon as his big moment hit, he became a man on a mission—crush that debt immediately! By whatever means necessary, he would dig himself out of the crisis. His actions (or reactions) were the equivalent of a crash diet. He wasn’t giving any thought to how to make his business permanently healthy.

If Pete manages to survive this crisis in crash diet mode, what are the chances he will find himself in a similar situation—or worse—a few months or years from now? The chances are high—so high I would say it’s a sure bet.

Even when you and your business are in debt up to your eyeballs, you must establish a habit of putting your profit first. You must still (and always) pay yourself first. When you get into the habit of fiscal health based on this system, you will fix the problem permanently. Financial crises will be a thing of the past, because if someone calls your line, you’ll have the cash to cover it.

Here is what I told Pete: “If you have debt, be it one thousand, one million or somewhere in between, you need to kill that debt once and for all while still slowly and methodically building profit.”

The Profit First system I’m teaching you will keep your focus on a super-healthy business, working in your sweet spot to produce goods and provide services for ideal clients. This laser focus will automatically keep your costs down, allowing you to pay off debt faster and eventually increase your Profit Percentage. The tweak is, when you distribute profits, ninety-nine percent of the money goes to paying down debt. The remaining one percent goes toward rewarding yourself. This way, the debt gets hit just as aggressively, but you still strengthen your Profit First habit.

In short, if you wait to implement Profit First until after you pay down your debt, you are less likely to ever build the business efficiencies that will permanently eradicate your debt and create a perpetual profit stream. Start the habit now, and eventually that ninety-nine percent will go toward building up your cash reserves and your own owner distribution.


By now I hope you’re a member of the “How healthy is your business?” club. Are you wearing the t-shirt? I am. What? Don’t have one? Don’t know where to get your own? I’ll give you a hint—it’s in your closet. Sharpie, old t-shirt, “Profit First” on the front, “How healthy is your business?” on the back. Ten seconds. Done. What? Did you think I was going to give you a link to my online store? Hardly. A profitable business happens when you save your pennies at every turn, my friend. That’s how we club members roll. Frugal. Not cheap, but frugal, for sure. And that is how I ended up with the homemade masterpiece I’m currently sporting—and a healthy cash reserve that is about to send my family and me on a nice vacation, where I will wear my awesome t-shirt with pride, thank you very much!

Getting that healthy business all boils down to one really, really simple formula: You must consistently spend less money than you make.

Duh, right? I’m sure you knew that. Everyone knows that. So why do so few people follow it? Spending less than you make every day, every week, every month, every year, every decade leads to wealth and freedom from financial stress. And yet most of us can’t seem to do this one simple thing.

Here again we’re talking logic versus human behavior. If logic worked for us humans, we’d all be rich. I wouldn’t be writing this book to tell you how to do this, because you would already be doing it. Instead, I would have one of my minions swim from my big yacht over to your even bigger yacht to ask if you could spare some Grey Poupon. Then we would both chuckle at the complete absurdity of the situation. I mean, who would have the audacity to eat anything with a common man’s mustard like Grey Poupon?

This is the challenge all of humanity faces: We know what we have to do, but we still don’t do it. Why is that? Why do so many of us consistently fail to become rich and accumulate debt instead? Why? Why? (Picture me on my knees, dramatically banging my fist on the ground and shouting, “Why, why?” like Scarlett O’Hara in Gone with the Wind.)

Fortunately for us, Suze Orman has the answer.

Now, let me say something about Ms. Orman. I am a huge fan. However, I have never watched her show on CNN and, aside from one book (which I still haven’t read in its entirety), I have not purchased any of her products. I’m a fan of hers because I saw a lecture she gave on PBS one Sunday morning.

I like to write early on Sunday mornings, when all is quiet in the house. But on this particular morning I decided to brew a pot of coffee and channel surf instead. Thank God I did. As I flipped through the channels, I saw Suze Orman talking to a group of about fifty people. I had heard of her and seen her picture a million times, and I was curious to see how she presented in a public speaking format. Maybe I could glean some tips and tricks on being a better presenter. And let me tell you, she is really good. I have seen hundreds of speakers, and she truly impressed the heck out of me.

While explaining personal financial strategy to the audience she stopped, looked around the room and said, “The solution to debt is this simple: If you want to get out of debt, you must get more enjoyment out of saving your money than you do spending your money.”

This was a life-changing realization for me. I put down my coffee and stared out the window. Suze continued to speak, but I was so caught up in my a-ha moment, I heard nothing. I just kept repeating what she said about saving versus spending over and over in my head. “That’s it,” I thought. Wealth is a game of emotion. Business success is a game of emotion. Profit First is a game of emotion. It all comes down to the story we tell ourselves about what we’re doing. “Is what I’m doing making me happy, or not?”

When something makes you happy in the moment, you’ll keep doing it. If spending makes you happy, you’ll spend more. Period. And that spending can be on anything from a new tie to a new hire to new mountains of debt. If saving makes you happy, you’ll look for any opportunity to save more. Coupons, sales, bargain bins—heaven. Saving one hundred percent because you eliminated the expense entirely? Nirvana.

Listening to Suze that day, the whole “pain and pleasure” motivation that Anthony Robbins has talked about for years finally made sense to me. The pain moment is the kick in the ass, when you finally say enough is enough. Pain gives you a big shove out the door. For me, the pain moment was my daughter sliding her piggy bank toward me, trying to save our family from absolute financial ruin. For Pete, it was a call from the bank.

But pain just gets you to take enough action to get out of immediate pain. Then it stops working. Suze was teaching me the other half: pleasure. (Don’t do it. Don’t let your mind go there. And… there it went. Keep reading when you get your mind out of the gutter, pervert. I’ll wait.)

The premise is simple—we avoid pain and move toward pleasure, putting a significant emphasis on the moment (remember the Recency Effect) and very little emphasis on the long term. Immediate pain gets the ball rolling, but pleasure keeps it moving. You probably picked up this book because of pain, and you will likely see results quickly because your efforts will reduce the pain. But the only way you will be able to make this work forever is if you get immediate pleasure each time you exercise your new habits. Just as at the gym, you can only work out so many times before the pain of seeing your muffin top in the mirror isn’t worth all the effort anymore… and it is at that exact moment that you most need to derive true joy from working out, because it is what will help keep you fit and trim forever.

If you are stuck in the grow-more/spend-more mode and accumulating debt, it isn’t because you don’t understand the numbers. You are absolutely not an idiot. The problem is assuredly linked to your emotions. You are getting instant—albeit momentary—pain relief, because your mind believes that your investment will bring results (the hope of future and permanent returns). When this doesn’t happen, you slip back into panic, sell like a mad dog and spend (more often using the friendly term “invest”) to grow. You find momentary pain relief in making some type of progress. But when it fails to yield more cash in your pocket, the pain comes back. It’s a nasty cycle.

Fortunately, the fix is simple, if you allow it to be: Give yourself more joy when you choose not to spend money than you do when you choose to spend it. Give yourself more joy when your bottom line grows (not just the top line). Give yourself tons of joy when your Profit Percentage grows.

You do this by acknowledging it to yourself. I don’t care if you feel like Stuart Smalley giving yourself a pep talk in the mirror; you must train your mind to find joy in implementing the Profit First system. (One of the best ways to find joy in this is to hang out with other Profit First entrepreneurs. Everything is more fun when you share the experience with others. I’ll talk more about this in Chapter 8, when I teach you how to participate in an accountability group—a Profit Accelerator Group or Profit Pod.)

When you opt not to spend money, acknowledge it. Give yourself a pat on the back. Do a happy dance. Celebrate every time you save— whether it’s ten bucks or ten thousand. Put on your favorite music and crank it, get really happy. Embarrass your kids at the mall. Heck, embarrass yourself. Don your new Profit First Sharpie t-shirt, sans trousers, and post that one on Facebook. Over time you will train your mind to equate happiness and celebration with choosing saving money over spending it (and perhaps walking around malls in a t-shirt and tighty-whities).

It’s hard to get by without food or water, and toilet paper is a really handy thing to have. When you do have to spend money, reward yourself for getting the best deal possible. Find a good price for the essential things you need and don’t buy the nonessentials. Then start the t-shirt celebration all over again.


Remember the story about how I lost my first fortune by becoming the Angel of Death? You might remember that, in the end, all but one of the companies I invested in went belly up. The lone survivor was Hedgehog Leatherworks. The owner, Paul Scheiter, is an amazing guy. I consider him my best friend. I shared some of the success strategies we employ at Hedgehog in The Toilet Paper Entrepreneur and The Pumpkin Plan, so if you read those books then Paul probably seems like your best friend, too.

Recently I went to visit Paul at his place in St. Louis, Missouri. As we drove by a Home Depot on the way to his leather shop, he said, “Oh, I need to get some electrical stuff for the office.”

Then he smiled and kept driving. “Why don’t we pick it up?” I asked.

“I will,” he replied. “In just one more day.”

The next day we drove by the same Home Depot. Paul looked at the sign, grinned from ear to ear, then looked away and drove on.

I said, “Don’t we need the electrical supplies?” “Absolutely we do. Just one more day.”

This pattern went on for the entire week. At the end of my visit, Paul drove me to the airport. Just before we pulled up to my drop- off point, I asked him why he hadn’t yet bought the electrical supplies he needed. That’s when he shared his “Just One More Day” technique. I had some time before my flight, so we pulled over to short-term parking. During the next half hour, he laid it all out for me.

Paul understands the formula, spend less + make more = wealth. He also understands that for this formula to work, both factors in the equation must provide him with an emotional win.

It’s easy to feel happy about making more money, but to achieve real wealth you also have to train yourself to feel happy when you spend less. Paul achieves this by rewriting the formula in his mind. His version is (+spend less) + (+make more) = wealth. In Paul’s formula both spending less and making more are positives. Not surprisingly, his formula is like the Profit First Formula; it prioritizes human behavior, not logic.

When Paul needs to purchase something, he plays the “Just One More Day” game. He challenges himself to go just one more day without the item. Every time he passes up an opportunity to buy whatever he needs, he gets pumped. He gets a high from going without for one more day. Sometimes, while playing this game, Paul discovers that he no longer needs the product or service he intended to buy. Playing the game opens up other possibilities, and truly tests how badly you need something. Sometimes you can’t get around it—you have to spend money on something because you actually need it. But by waiting “just one more day,” you are not only keeping operating cash in your account for one more day; you are giving yourself another day to come up with alternatives.


If you’re like most entrepreneurs, your personal income is wildly unpredictable. It changes month by month, depending on sales and collections. We’re a hopeful bunch, entrepreneurs—we have to have the nerve to launch a business in the first place. So it’s no surprise that most entrepreneurs are bamboozled by their hopes and look at their best revenue months as the new normal, when very often it is not. Until your best month becomes your average month, it’s not the norm; it’s the exception.

When you base decisions on your best revenue month, you will run out of cash—quickly. Debt will start to pile up. And you will go back to your old standby, “sell more—grow, grow, grow!” Acting as if your best month is the norm is one surefire way to keep yourself locked in the Survival Trap.

In fact, accountants joke about this. I had a call with Andrew Hill and Gary Nunn, the founders of Solutions Tax & Bookkeeping in Frisco, Texas, about the spending habits of entrepreneurs, and they told me the inside joke. Whenever a client approaches them about a windfall of new money, the client will inevitably say, “I don’t even know how I would ever spend all this money.”

Each time, Andrew and Gary have the same response: “Oh, you’ll find a way. And you’ll probably figure it out within the next month.” Maybe that insiders’ joke isn’t ROTFLMAO (Rolling On The Floor, Laughing My Ass Off) funny to you, but it is to Andrew and Gary. They hear the same comments from entrepreneurs all the time, and in every case, by the next month, the money is gone.

Every. Time.

That’s why percentages are such a valuable tool. As an entrepreneur, your income varies. Some months are great; some months suck; and most are average. But it is typical behavior for entrepreneurs to look at their best month and tell themselves, “This is my new normal”— and then start spending and taking from the business accordingly.

Percentages are based on real results—the cash in the bank. No games, no hypotheticals, no, “We’ll make it up next month.” Projections are an opinion. Cash is a fact.

The percentages put a varying sum of money into your different accounts, such as Owner’s Pay, every 10th and 25th; and then you draw your owner’s salary from that account based on the pay you allotted. If you have more money in the account then you take in salary, the difference in money stays and accumulates. This way, when (notice I didn’t say if) a slow month happens, money has accumulated in your Owner’s Pay Account and your salary stays consistent. If the money in the Owner’s Pay Account is not enough to pay your salary, you can’t take it. You need to make a hard decision about cutting other costs, and you’d better kick ass growing the top line with great clients, too.

So how do you predict the owner’s salary your company will likely support? Look at your slowest three months and average them. That is the lowest your revenue will likely ever go. Then determine the percentage of this income that will be allocated to Owner’s Pay (35% for example, times the average monthly revenue for the three worst months). Every quarter, we will do a salary raise based on how much money is in the Owner’s Pay Account and whether it is accumulating faster than we are withdrawing it. Take the bump that you can reasonably take based upon your twelve-month, rolling average. As long as the account accumulates more cash or stays even, you are taking a healthy salary (one that your company can healthily support).


I’ve taught you how to ensure your business is profitable immediately— from your very next deposit. Now I’m going to teach you how to immediately stop accumulating debt, and to destroy the debt you currently have. I call the method you are about to learn the “Debt Freeze.” It will guide your business through a rapid pay-down of accumulated debt and a freeze of new debt, both while continuing your Profit First habit.

Now, don’t panic. I’m not asking you to sell everything and move into a van down by the river. I’m not even asking you to stop spending entirely. That can irreparably damage your business. I am simply asking you to commit to a spending freeze that will free you from debilitating debt. The goal here is to cut cost, not to compromise the business. You can fire all your people, shut down your website, refuse to pay a penny to anyone and seriously move into a van down by the river with your new roommate and struggling motivational speaker, Matt Foley. . . but you’ll be out of business. You want to cut out the fat of your business, the stuff that is not generating or supporting income for your company. But you don’t want to cut out the muscle, the stuff that you absolutely must have to deliver your product or service.

You need to know where you stand. The first step is to assess where you are today. Fear is only amplified by a lack of knowledge. If you don’t know your exact numbers, your mind goes wild and says crazy things (like. . . “Ahh. . . I am going broke. . . ahh. . . the only thing worse is Mike dressed up like Scarlett O’Hara. Ahh. . . what the hell am I thinking? Ahh!”). You can’t change what you don’t acknowledge, so you need to know exactly what you’re dealing with. And when you know what you are dealing with, your mind doesn’t drift nearly as much.

For those of us who get happy when we save (remember Suze’s speech?), the Debt Freeze is a rave party. To be clear, this is my kind of party, and I’m a freak. When you see the crazy debt-reduction fun we have planned, you might want to back out the front door as quickly as possible. But, if you want to be debt free forever, stick around. Here are the steps to getting your party started:


1. Print out your current income statement for the last twelve months, as well as your current accounts payable report, your credit card statements, loan statements and any other statements related to debt, and your last twelve months of payments made from any of your business bank accounts. If you do not have an income statement ready, just gather the other documents.

2. With a highlighter, draw a box around any labor costs— salaries, commissions and bonuses for employees. Exclude owner salaries and payments to freelancers and subcontractors.

3. Now highlight expenses that were required to generate immediate revenue. For example, if you are a private investigator, you might highlight the purchase of a USB drive you use to store evidence that you give to your clients. If you bought a USB drive that you do not give to clients and just use internally, that item would not be highlighted.

4. Next, highlight any expenses that are absolutely necessary to keep your business open. This does not include employees or contractors, or any people you boxed with your highlighter already in Step 3. If you have a spy car that is outfitted for surveillance and you need it to—well, spy—highlight it. If you have a spy car that really isn’t a spy car, it’s just your ride, don’t highlight it.

5. With a red pen, circle expenses that repeat every month, quarter or year and will continue to do so. Note: Some expense items, like labor costs, will get highlighted or boxed and circled.


6. Add up all the expenses for the year; include everything you highlighted, circled, boxed or left blank. Exclude tax payments and owner’s distributions or salaries. Divide the result by twelve to determine your monthly “nut”—the total amount you have decided you need to cover each month.

7. Determine the difference between your current monthly operating expenses and the number it must be according to your Instant Assessment. For example, if you currently have $52,000 in average monthly expenses and your Instant Assessment has your monthly expenses at $30,000, you need to cut your operating expenses by $22,000. Period. There will be no justifying past spending mistakes, no saying, “But I need everything.” You don’t. Your healthy, booming competitor has figured it out. You need to put on your big-girl panties and accept that you spent too much, and today is the day we fix it. (Kinda creepy that I know you wear big-girl panties, isn’t it?)

8. Band-Aids come off more easily when you tear them off. Chipping away a little debt here and a little debt there prolongs the agony; rarely fixes a company fast enough; never changes your behaviors to those that truly put profit first; and is really, really scary for your employees. Cutting back a few things (or people) at a time puts your employees (and you) in a constant state of uncertainty. Ripping off the Band-Aid will make you scream in pain momentarily, but the healing starts right away. The same is true with debt.

To avoid having to keep chipping away at debt, it’s best to plan to cut expenses until you are operating at 10% below the target number on your Instant Assessment. So if we know we need to cut expenses down to $30,000 to be in the Profit First range for operating expenses, we want to do what we can to cut down to $27,000 (that extra 10%). Why? Because when you cut expenses, you may realize that something has a negative effect on your business, and you can’t replace it with a timely alternative. You may need to take a few expenses back on. I call this “expense bounce-back.” It happens—we just need to prepare for it.


9. Labor cost is usually the most expensive part of operating any business. This is the first expense you put a highlighted box around on your income statement, and you almost definitely circled it in red pen, too. If your company is racking up debt, it is all too often because labor cost is too high. The problem with cutting labor cost is, our minds quickly defend and justify why people should stay: “I own the company;” “I can’t do the work;” “I need to direct my team to do the work.” Plus, they need a job (which is true), they are integral to the company (probably also true), the company will tank without them (super unlikely), and if I get rid of them I won’t have people to do the work (hardly ever true).

Overstaffed entrepreneurs have either tried to get them-selves out of doing work as quickly as possible (they like to think they are managers now, or better yet, they need to spend extraordinary amounts of time on the corporate “vision”) or believe that systems aren’t core to a business (which they are). You need to let go of people. And you have got to realize that switching from working in the business to on the business is not like flipping a light switch. It is gradual. Often, the most under-used employee in an overstaffed company is you, the owner. It’s time you get back to actually doing the work, and in the future we will slowly transition you from in to on.

Now, back to your overstaffed company. Evaluate each person and determine if her role is mandatory for operations to continue (not the person, but the role). If a person wears multiple hats (for example is your receptionist and in-house sales person), ask yourself if each role is mandatory for operations to continue.

10. Next, evaluate your staff. Are there any people who aren’t “A-players”? Do you have any people who are actually bad for the company? Those people are costing you money in more ways than one.

11. Ignoring the salaries and how you feel about the people, determine the following: a) which roles must stay in-house no matter what, b) which roles could be outsourced and c) which roles the company can continue without.

12. Next, look at your people. Look at yourself. What roles could you take on? Now look at your best employees, the A-players. Can they be shifted around to cover the roles that must stay in-house? Are there any must-have roles that can only be handled by a specific person?

13. Plan the layoffs. Now, before I get into this, I want you to know that I know how devastating it is. I know how much you will want to resist ever doing this, because I did. There was a day when I had to lay off ten people out of my twenty-five-employee company. It was the most difficult day of my professional life. I had to lay off nearly half my staff, not because they did anything wrong, but because I did—I mismanaged the numbers; I hired quickly and often and unnecessarily.

I also want you to know that no matter how devastating it is, laying people off is necessary. Trying to keep a few employees your company cannot afford will only put your company under, thereby ensuring that everyone loses their job. And, because you prioritize the layoff of poorly-performing staff and people who fill roles that are not a core need for your company, you are not just saving the cost of keeping these people on; you are also building a more efficient infrastructure.

Keep in mind that in letting these people go, you are freeing them to find a job that is a better fit. Yes, it sucks that you need to fire the people you hired on good faith. But it would be worse if you kept them in a dead-end job. I know this firsthand. Just this morning I looked up the LinkedIn profiles of the ten people I had to lay off that terrible day. All of them have better jobs. Three are managing partners at significant industry firms; another is living her lifelong dream of sailing around the world; one is a now a judge; one is a stay-at-home mom (which, my wife likes to remind me, is the ultimate job)! None of this would have happened if they had stayed at my unprofitable little company.

14. Call your employment and/or business attorney. (For a list of lawyers who are also PFPs, go to MikeMichalowicz. com and check out the Resources section.) These attorneys understand the law, will review your employment agreements and make sure you handle your layoffs properly. Never, and I mean never, proceed with terminations or layoffs without talking with your attorney first.

15. Among the highlighted, boxed expenses, you also have commissions and bonuses for employees, freelancers, etc. Look for ways to cut down on or remove these costs entirely, but always remember that in doing so, you are reducing someone’s pay. Staff or freelancers handed a notice of reduction in income are likely become disgruntled or disheartened; no matter how you deal with it, expect the news to kill morale and weaken productivity.

16. Start the layoffs. Choose a second person (perhaps your business partner, or your HR director, or, if you don’t have anyone in-house, bring in your attorney—this is one of the few costs you do want to incur) to witness the layoffs and help you explain the situation with each employee. Meet with each person. With the approval of your attorney, first explain the reason for the layoff to your employee and then provide support that you can afford, like circulating his résumé or even paying some severance.

17. Once each person is laid off, call a staff meeting with all your remaining employees. Share what you have done and why you did it. Explain how difficult it is to have to do this, and that you take responsibility for both the financial problem you got the company into and for fixing it. Assure your team that everyone remaining is here to stay, and that you have taken action to immediately stabilize the company.

Do not, I repeat do not, ask people to take a pay cut. I did this with dire consequences. Asking all your people to continue to work just as hard or harder than ever for less money is worse for the emotional welfare of your company than letting just one more person go. When I did this, it disheartened the entire team. I was simultaneously telling them to step up for the company and cover their own work as well as that of the people who had left and that, as a reward for their efforts, I would cut their salary by 10%! They felt disheartened and fearful that the cuts would continue. Of the people remaining, nearly half of them started looking for a new job with a more stable company. All of a sudden there were a lot of sick days, and one of my key remaining guys decided not to remain. He got a job elsewhere.


18. Now the hardest part is over, call your bank and tell them to stop all automatic withdrawals from all of your accounts, except for any that you have highlighted in Steps 2 and 3. Then notify your vendors that you are stopping the withdrawals and will pay by check going forward. I am not suggesting in any way that you should not pay what you owe, or break a commitment. I simply want you to be acutely aware of every payment you make.

19. Call each credit card company for which you have a card and ask them to issue you a new card with a new number. Tell the credit card company that no payments that were being processed on your old card should transfer to your new one. (Many credit card companies do this for you as a convenience, and this is a convenience that you do not want.) You need to do this because your cards have been compromised—by you. This step will stop all automatic charges. Then, just as you did in the previous step, notify each vendor that you are putting a halt to the automatic charges.

Those recurring fees can be insidious. I got trapped in a recurring gym membership fee. I would see it on my credit card, and since it was “only $29” a month, I let it go. I wasn’t going to the gym anymore, but I told myself, “I should go to the gym. I’ll keep the charge because I’ll use it at some time this month.”

Then one day my credit card was replaced because of suspicious activity. (I wondered if my credit card company was suspicious about how I could be a gym member for so long and a regular McDonald’s customer). The day the card was canceled, the gym membership payment stopped. I had forgotten about the gym membership entirely, and didn’t even notice the charge on my monthly bill. When the gym called to get a replacement card, I canceled the membership. I got curious about how long I had been auto-paying the gym. Turned out I had only gone a total of six times over nearly seventeen months, which breaks down to six hours of use for just under $500.

But the story doesn’t end here. This is when I realized I wasn’t working out nearly enough, so I called some friends and started exercising with them. One of them has a membership to the same gym and can bring a guest for free once a week. Guess who goes with him? I am averaging fifty-plus workouts per year at the same gym now, at no cost. And he is working out more, too, because he has a motivated workout partner.

The point is this: Cutting costs is something that is very easy to put off for another day. It’s the mañana syndrome—I’ll get to it tomorrow. And for me (and you too, I suspect) those days of putting things off pile up to a year or more very quickly. You will be unable to put off cutting costs anymore simply by getting your credit cards reissued.

20. Cut every single circled red expense that you can. Recurring bills are sneaky; they seem small and insignificant until you look at how much you spend cumulatively, over time. To make this even clearer, multiply a monthly recurring bill by twelve. That is what you are really spending. Put a big “X” through each circled expense you cancel. If you absolutely can’t get rid of a circled expense, highlight it on the paper.

21. Renegotiate the highlighted expenses. Everything is up for negotiation—your rent, your credit card rates and debt, your vendors’ bills, your software license, your Internet bill, your weight, your height, your age, everything. Your job now is to contact every vendor and get your costs reduced in the most significant way possible without hurting the relationship. Your vendors will not typically be happy with the suggestion of a 50% reduction, so I suggest you start by asking for a 25% reduction in the hope of getting a 10% to 15% savings. But don’t just call, do some research first. Find alternative, less expensive providers and be prepared to go to the alternatives.

Start by negotiating the small, necessary expenses. You want to build your negotiation muscle. Build your way up to the bigger expenses. Negotiation is a whole topic of its own, but for now, realize that being a hard-ass isn’t always the most effective approach. Being informed, firm and willing to concede so both sides win is the best method. The goal is to get the same results at a lower cost. It doesn’t mean that you need to stick with what you have and get it more cheaply; you can also find alternatives—a different thing, more cheaply. For example, some hotels charge for Internet access in the room and others don’t. If you can’t get a hotel to remove or reduce the in-room Internet charge, get the lobby password and work there.

22. Put a big check mark next to each highlighted expense you successfully negotiate or replace.

23. Now go through all those expenses that are left on the list. You know, those that you left blank. It’s time to wipe them out. Put a big X through each expense that you commit to not incurring again—at least not for another two years. You are going to take a sabbatical from these expenses and discover how much your business can accomplish without unnecessary expenses.

Job done. And if you made it to your target expense reduction without going on a bender, I say job well done. Breathe for a few moments. Feel the stress of overwhelming expenses leaving you. This was a hard day, but by completing it you have staged yourself for major profits. Now you’re ready to grow your business in an efficient way.

Cutting costs is embarrassing. You have a reputation. You always pay for dinner, or you drive the nice car. You are the “nice” boss who throws pizza parties and gives sweet holiday bonuses. Let me assure you, the relief you feel once you complete the Debt Freeze is way more powerful than the embarrassment you fear.

No matter how much debt you have, know that there is a way out. More than that, know that you are not the first person to be here. Many people have recovered from dire financial situations and the key to doing that is in your hands.

We are on a mission to change the perspective of successful business from “make a lot” to “save a lot.” The new definition of success is not about the most revenue, employees and office space but the most profit, generated through the fewest employees and with the least-expensive office space. Make the game one you win based upon efficiency, frugality and innovation, not on size, flair and looks.

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