How to Build a Profitable Business

Rocky Lalvani: So we’re going to go way back. I’m also from India. My parents left when I was two. They came to America a long time ago to create the American dream, to have those opportunities. And clearly as immigrants, you start off at a lower level and as you rebuild life. And so that’s basically the experience I had. During that time the one thing I noticed is my parents would get together with their Indian friends and they would talk about life and money. So I would hear conversations about money, how people were negotiating spending, how much they were spending, how they were doing different types of things. And to me, that was just then natural. I didn’t realize, especially in American culture, and I think in many cultures, people don’t talk about money. It’s a taboo subject. People don’t ask questions about money, right? So if you don’t talk about money, yet you go to school to learn to get a job to make money, there’s this massive disconnect. Also, during that period, you know, my parents’ friends were at all different levels of, you know, some of them had started businesses, highly successful. And so as a kid, I just knew I wanted to be wealthy. And so I would read and learn and figure stuff out. I had a paper route. I used to, we lived close to New York City. I would go to New York City. I would buy stuff. I would come home. I’d mark it up a hundred percent and sell it to all my friends. So I always had cash in my pocket as a young kid. And I took that money and I went and bought an Apple computer back in the day. Apple has always been expensive. That Apple IIe with 4k of whopping memory was $2,000. And I had the cash as a kid to be able to do that. And one of the early programs I learned on there was VisiCalc. VisiCalc was the first electronic spreadsheet. And so for me, I just naturally learned to work with spreadsheets and then, you know, adults started seeing me. They’re like, can you teach the accountants how to go from paper ledger to spreadsheet? And then I got a job in a bank. They’re like, can you maintain our spreadsheets? So I had this idea that, you know, when I got out of college, I would start a business doing something with spreadsheets, but I had no idea how to start a business. I had no idea how to market, what I was doing. I had no idea of the value of what I was doing. And so I ended up doing what we all do, get a job. And, you know, I always say good is the enemy of great. So I did really good, not phenomenal, but it was it was a good life. And I made a crap ton of money. And because I knew how to build wealth, I always automated and saved my money. So I built my wealth. Then I came to this realization that money wasn’t going to make me happy. And so that really began that second journey of what do I really want to do? What do I love doing? Where do I bring value? How does that all happen? Today, it’s much easier to figure out how to start and run a business. And so I came to realize, A, that people were bad with money. I was shocked to learn that business owners were really bad with money. Like they were not looking at their financial statements. They were making decisions on gut. They were making decisions on bank balances. They weren’t actually looking at the financials. And to me, it just didn’t make any sense. And I found that business owners were willing to invest in getting the right information so they could make better business decisions. And so, you know, after a lot of exploration, you know, I figured out. How to start and begin a business. And now I exclusively work with seven and eight figure business owners. And we help them to look at their entire business from beginning to end as a math equation and look at the levers and say, how do I work less and make more? I don’t believe in grinding it out.

Rohit Agarwal: Awesome. That’s a phenomenal explanation. I’m curious, what did you study in undergrad?

Rocky Lalvani: So my bachelor of science was economics and I have an MBA. Neither of them taught me how to build wealth. Neither of them really taught me how to advise companies and how to truly do that. I mean, they talk about P&Ls and balance sheets, but it’s not talked about in the way of reality. Rodney Dangerfield made a movie, I think it was way back, it was called like Back to School or something. And he goes back to school as a like a 50 year old guy with his kid, because he never went to college and they’re sitting in an econ class. And the professors up there, you know, talking like professors do. And he’s like, you have no idea what it takes to create, run and do a business. He’s like, you don’t know this, this, this. And it was just hilarious. Like. It just encapsulates how worthless I mean, think about it. How many professors actually started and ran a business? And yet you’re going to them to learn how to start and run a business or how to maintain it. People are all book smart, but they don’t actually know how to. They know how to tell you what happened. They don’t know how to tell you or direct what will happen. And that’s why you see, like, I think the guy who started FedEx turned in his business plan to college and they gave him like a bad grade that that’ll never work. Of course not, because they have no concept. And here you have this multi -billion dollar corporation today. And I can’t tell you like Michael Dell did that. Bill Gates did that. Steve Jobs did that. I mean, those are the big guys, but there’s a lot of small guys who did the same thing. They realized these guys have no idea what they’re talking about.

Rohit Agarwal: So what was the early influence before, other than your parents, that really molded that mentality of profit and profit first, and how can you really build wealth without really grinding it out?

Rocky Lalvani: I think because when we started off, we weren’t in the nicest part of towns, but yet we saw, so I saw what was possible and I was never told, you were always expected to succeed. So the underlying thing is, hey, this is possible. Hey, you can have this. And I think just my early success as a kid walking around with stacks of dollars, like to be able to say, I want to do this. And everyone else is like, we can’t afford that. And I’m like, whatever here, like, whatever I wanted, I could go get because I had the money.

What Profit First actually is#

Rohit Agarwal: Makes sense. Why don’t we talk about profit first now? So can you explain us the Profit First method for our listeners who may not be familiar with it? And what makes it different from traditional finance practices?

Rocky Lalvani: So Profit First is a book written by Mike Michalowicz. Mike Michalowicz is a serial entrepreneur. He had a company that actually did data forensics and they actually investigated Enron. And yes, Enron was guilty, right? He also did a bunch of other high profile stuff. He got lucky at the right time in the right place. And… His company paid him, but it really wasn’t super profitable. Not as much as it could have been. He eventually sold that company, walked away with a lot of money, thought he was a smart business guy, not realizing he was a lucky business guy. And over the next couple of years, he lost all his money to the point that, you know, it was bankruptcy. Yeah. They were coming for the keys to the house and the car because he just spent like crazy. He didn’t understand that. And a lot of business owners are like that. So during this period of like deep inner reflection, he started to think about what went wrong and he started to write books and do this. And what he realized is, hey, my accountant gave me the wrong equation for profit. We are all told sales minus expenses equals profit. Right? Where is profit on the sheet? It’s at the bottom of the sheet. It’s an afterthought. It’s a leftover, right? It’s not a driver. It’s a result. Mike said, no wonder this is wrong. He said, why we went into business to be profitable. Why don’t we do sales minus profit equals expenses. Now, profit is the driver and we constrain our expenses. So it’s the same concept as personal finance and everything else. If you look at the personal finance side, you know, back in the day before we all had plastic and we swiped everything and don’t think about it, people used to get their money and they would set their money aside for a specific purpose. So, you know, here’s my rent money, here’s my grocery money, here’s the kids’ lunch money. Maybe they’re saving for something in the future. Christmas, vacation club. Like when I was a kid, the bank would have a Christmas club, a vacation club, and every week they would just take a couple dollars aside. So when the time came, you were ready for it. He took that basic concept that’s been around for ages and he said, let’s apply this to business. And so instead of using envelopes or jars or cans, he used bank accounts. And so… Basically, what they do is all the money comes into one account. That’s our income account. So we always know how much money came in. Right? Most bookkeeping is not up to date. It’s always behind. I don’t care how big your company is, right? Fortune 500, your bookkeeping isn’t right to the second. So this bank account shows you how much cash came in. And at the end of the day, that’s what matters. And then you take the cash and you allocated for specific purposes. So of course, the first purpose is profit. And so we put our profit aside. Then the next purpose is making sure the owner gets paid because the dirty secret is most business owners aren’t paying themselves appropriately. They’re not paying themselves for the value of what they provide. And so we put the money aside for the business owner. Next, we put money aside to pay taxes for the business and the business owner. And now you know, okay, this is how much I need to run my business on. This is my expenses. This is the leftover. I have to figure out how to efficiently operate my business on this. Now, this is governed by something called Parkinson’s Law. Parkinson’s Law says I will use up all the time and money allocated. So if I come to you and say, we’re going to do a project, you’re going to say, well, OK, what’s the budget and what’s the timeline? You tell me six months and $100,000, it’s six months and $100,000. You tell me I need four weeks and 20 grand, right? And now you figure out how to get it done. Business owners are resourceful. The problem is they’re also lazy. We’re humans, right? I am the same way. So when I have to be resourceful and I have to think about it instead of throwing money at it, we figure out how to do it wiser. And so if you think about this, what this really is, is the 80-20 rule. 20 % of what you do produces 80 % of the results, which means 80 % of what you do is essentially wasted, right? And if you take that a step further, if I say 20% produces 80, 40% produces 96. Okay? So 40% of what I do produces 96 % of the results, which means I am wasting 60% of my time for essentially nothing. If you take the time to figure that out, okay, you can start to say, why don’t I stop doing that? Now, while this says really commonsensical, very simple, it’s not easy. So there’s a book by Jonathan Byrnes. He is a professor at MIT, back to professors, right? He’s at MIT, so this is a top institution. The book is called Islands of Profit in a Sea of Red Ink. What he did was he investigated Fortune five large corporations like fortune 500 companies, okay. He found 20 to 30 percent of what that company did Produces 80 to 100 percent of the profit, 80 20 rule, 30 to 40 percent of what the company did broke even and 30 to 40 percent of the company was unprofitable. All right. The problem is the CEO of that company can’t go to Wall Street and say, I’m cutting sales by 70 % next year and I’m doubling profits. He’ll be fired by his board, by the Wall Street. And this is the stupidity of it. No person in that company is gonna raise their hand and go, my division is the money loser, right? This employee is not making money because all those division heads, I am a division head over 500 people, right? No one wants to say I’m a division head over 100 people, even if the 100 people could produce twice the result. It’s ego, it’s silliness, but we’re human. And so when you start to understand human nature here and how we behave and what the numbers show, we can dial this stuff in. The problem is none of this was taught in my MBA class, right? They don’t talk about this kind of stuff. They don’t talk about these efficiencies. Most of the books that I find that work well for entrepreneurs are written by successful entrepreneurs who created the systems. And there’s two kinds. There’s the systems where you have to mold your business to the system. I don’t like those. There’s systems that are so universal that you can mold the system to your business. So that’s the biggest problem with Profit First. In the book, they have a basic, simple system. People struggle. They don’t know how to make it work for them. But when you take that system and you mold it and you figure out how you do things and you customize it to you, it works. But you’ve got to get that part of the hump over with and figure out how to do it. And so we’ve seen success with tremendous amounts of business doing this.

A business as a math equation#

Rohit Agarwal: To a particular application across the board, when I think about the retail business or the services business, manufacturing business, technology business, where does it fit the most?

Rocky Lalvani: All of them. But each of them has to do it differently because each of them has their own equation of how that business works. So for me, profit first is one tool in a tool belt. Right. So if I’ve got a hammer and this is the problem in business, you know, everyone’s got a hammer and all they do is they look at everything like it’s a nail. What we do is we go, no, no, no, we have an entire tool belt and we’re going to bring the appropriate tool to the appropriate situation. So when I look at a business, we start with the beginning of the business. What has to happen in order for a sale to be made? OK, so in order for me to sell something, well, A, I have to have some sort of prospect. I don’t care what the label is. Maybe that prospect turns up as a lead, maybe they fill out a web form, maybe it’s a phone call. If I’m a business, maybe they walk in my front door as a retail shop owner, whatever it is, somewhere you’ve got to have somebody finds you and is interested in what you have to offer. And that could be because you’re marketing to them. Right. So the first thing we need to look at is how does how does that first contact take place? What are the processes involved? What is the math behind that? So do I need to spend a ton on marketing? Do I need to hire a sales rep? Do I need to have a store on a busy street? Right. McDonald’s figures out what the best location is for McDonald’s. OK, so it’s figuring out that first step. Now, once we have people interested, the second step is. What percent of them buy? So not everybody walks into your business and buys. That’s a function again. So let’s just say I get 100 leads and 20 % of them close. Well, that means I now have 20 clients. So simple math. Now, I look at my 20 clients and say, what is the average sale? So the average sale might be $1 ,000. That means I now have $20 ,000 in revenue. Right. You go to McDonald’s and McDonald’s said, hmm, the average sale is $6. I want the average sale to go up. You want fries with that? You want to supersize that? You want to like it works in any business. Do you want this add on? Do you want this additional service? Do you want this tier? Whatever it is. So, you know, if I can change my average transaction and bring it up, then my 20,000 goes to 30,000. If I look at my sales process and I say, wait, only one out of five people buys, maybe we need to be better at selling. So maybe I invest in a sales program and now three out of 10 buy. So I just went to $30,000, 50 % more sales just by getting better at sales. And I said, you want fries with that. And now I’m at 40,000. How much work did that take? Very little. Right. But, what we do instead is we say, I want twice as many leads. I want more and more and more. And so we’re spending a crap ton more for leads and you’re not looking at the whole process. And then the question is, is your customer happy? Did they come back and buy again? Because those customers are easier to sell to. So what’s our retention rate look like? All of those numbers come together and they can tell us what our revenue is. So if someone says to me, I want to build a $10 million company, I go, okay, what’s your average transaction? Okay, if you tell me that, I can tell you how many transactions we need. What’s your close rate? Let’s work backwards and let’s come up with standards. Now I’ve got targets. Now let’s go test and see if we can actually do that. Is that viable? Are we doing what we said we’re doing? Are we drifting away from what we said we’re doing or are we getting better at what we’re doing? All of those are different decision points. And all of that is just driven to how we generate revenue. We haven’t even gotten the profit first yet, technically. Now, once we generate the revenue and each of those little steps that I made so simple, each of them could have 50 or 100 things behind them. So we could be talking about thousand things, or we could be talking about 10. It depends on the business, the model, the simplicity. The next we look at is what does it cost us to deliver our service? So a software company is going to have a very low cost of delivery, but they’re going to have a very maybe high R&D cost. Somebody who’s in construction may have a very high cost of goods, and that’s fine. You know, every business is different. And then the next question is, what does it cost us to actually operate our business? So operating the business is all the admin, the phones, all the stuff that doesn’t actually serve your clients. What does all of that look like? Is it efficient? Right? And part of that is also your sales and marketing costs. So what is my sales and marketing cost, and how does that apply to the beginning of the equation? Because all of these are interconnected. And now we can tell you what your profit is. Now, if I know this is my profit percentage, well, you should be able to take that off the top. You should be able to put that aside because if you can’t, then you’ve got a problem somewhere. And here’s where the big problem occurs. So this is now showing you what your P&L shows you. The problem is the P&L doesn’t equal cash. OK. And people are very confused about this, right? They go talk to their accountant. Accountant says, congratulations, you’re profitable. You owe taxes. And they’re like, wait a minute, where’s the cash? And how am I supposed to pay the tax bill? And that’s the problem we solve. We have the money for the taxes and we know where the cash is because it’s in the profit account. Invariably, the accountant laughs and says, well, you spent it, right? Because there’s a whole lot of stuff going on on the balance sheet that nobody looks at. And even accountants do not look at a balance sheet from month to month to see the change, to see where it grew or declined. Wealth is built on the balance sheet and it’s an area nobody talks about. So where does money disappear on the balance sheet? Accounts receivable. You sold something and you didn’t get paid and maybe they never paid you or maybe you forgot to bill them. I can’t, I can’t tell you how often I’m having conversations with business owners that they’re not getting billed for things. It’s amazing. It happens more often than you think. The next place it disappears is inventory, right? Maybe it’s sitting on your shelf. The question is, is it actually sitting on your shelf or did it walk out your back door due to theft? Did somebody waste it? You know, if you’re in a production company, did it get wasted because someone made a mistake and half your inventory is getting thrown in the garbage? So what does that look like? Then there’s owner’s draws, like you took money, you know, you’re using your company as a piggy bank, not realizing how much you’re taking from it, because it’s a tax deduction. And then the other place it goes is to borrowing costs. The principal repayments don’t show up on the P&L. And if you borrow money and you use it for day-to-day expenses, you get yourself in trouble. And that’s a big part of the problem as well. And so those are all the different parts of the equations that we are constantly looking at every little part of this. And then depending on the business is where we focus and where we find, hey, where’s the lever that requires the least amount of effort to produce the biggest return for that specific business? And then, of course, profit first, make sure that the taxes are there, the profits there, your pay is there, and that you’re appropriately taking the right amount of money out of the company and that you’re building up reserves. Because let’s face it, business goes up and down.

Investing in your business and where cash hides#

Rohit Agarwal: So an interesting kind of explanation and it seems like all of the operational levers are basically being optimized to be able to serve the business, right? The profit has already been taken care of, now, more we optimize the operational levers, whether you think about the lead gen machine, whether you think about the pilferage or the tech or stuff like that, it’s all enabling us to have more money to be able to invest in the business or to be able to then make more profit, right? Because every single little tweak actually does kind of flow down and create more profit.

Rocky Lalvani: Technically, yes. People talk about investing in their business, okay? Honestly, I think they’re full of it. And I’ll tell you why. If I were going to invest in your business and I came to you, Do you think I’d want to know how quickly my money is coming back to me?

Rohit Agarwal: Yeah, I guess.

Rocky Lalvani: Yeah. Do you think I’d want to know what the return on my investment’s going to be?

Rohit Agarwal: Ideally, yes. The more the predictability, the better it is.

Rocky Lalvani: The better it is. And being that you’re a business owner and there is unpredictability, I’m going to probably want a risk premium, right? Unless there’s something backing it that reduces my risk, like real estate or a large piece of equipment where I’m the first lean holder, correct? So if you’re going to invest in your business, have you met that same criteria? Or did you just throw money out with no plan on when it was coming back, what the return was and the risk premium for this choice. And do you measure and track it? And my answer to most people is they don’t. They just go, I’m going to reinvest in my business. I’m going to do this. You know, it’s ego-driven. And where’s the return on that? Well, I can’t see it in my numbers. Of course you can’t, because you didn’t define it. You didn’t measure it. You didn’t treat it as an investment. You just spent money thinking, hoping. Hoping and dreaming are not profit levers. In that whole equation, hoping and dreaming didn’t show up. Right. And that’s the key. And I think that’s where a lot of business owners get it wrong. And their accountants tell them to do this. Right. It’s November. you have a lot of profit and hint, hint. They forgot to tell you to make your quarterly payments. So they don’t want to look bad. They don’t want to get yelled at for this large tax bill. You should go invest in your company, buy some useless stuff. And then March comes around and, hey, your taxes are low, but by the way, your cash flow sucks. Because you spent money you shouldn’t have on things that aren’t returning. And you wonder why you’re stuck in this. And that is the reality of what happens when you start to really look at human behavior, what is driving the thought patterns and the decisions, and you start to get that understanding, you realize how money is just disappearing everywhere.

The scaling trap: growth as the #1 reason for bankruptcy#

Rohit Agarwal: I think it’s a great point. I was about to ask you, how does this philosophy really gets applied to scaling businesses or not? But I guess your explanation in terms of being able to understand what the return profile could be of the investments that you’re making in your business does help in scaling and beyond.

Rocky Lalvani: It does. So here’s the thing. And this is where the problems occur. One of the top reasons for bankruptcy is scaling and it’s growth. Okay. And the reason why is growth requires cash. And if you don’t know how much cash you need to grow your business, you can grow your business and quadruple it and run out of cash. And when you run out of cash and you don’t pay your people, they stop showing up at work. You don’t pay your suppliers, they stop sending you stuff. And it’s because the cash is being stuck in places where it’s not accessible and can’t be used to pay bills. And you blow yourself up. And that is the biggest problem. And so if you don’t understand, what the return is and when the cash is coming back and understanding what that looks like, you get yourself in big trouble. So we can go through a story if that’s helpful. So let’s say I’m a business owner. I’ve finally gotten myself to a decent level. And now I’ve got a large order from a big retailer. Maybe it’s a Walmart, a Costco, somebody cool. I’m excited. So they order $100,000 worth of stuff from me. Okay. Let’s assume it’s January 1. So in order to get them $100,000 of stuff, I have to make it. So now I have to go out and spend money on inventory, right? To get the cost of goods, to bring it in. Then I have to pay people to make it, right? And then I have to ship it to Costco and pay shipping. So if it’s $100,000, it could very well be that I just put $75,000 out. March 1st, it shows up in Costco. Costco’s not paying me. Their terms are… Walmart, 120 days, if you’re lucky, and you bill correctly, okay? Now you’re excited, you’re out 75 grand. It’s now April comes along, things are going well. May 1st comes along. We’re still 60 days out from delivery. So they haven’t paid you. They call you and go, things are wonderful. We need another order. Now you’re $150,000 in the hole. Now it comes July 1, and they’re like, we want another order. Now you’re two and a quarter in the hole, and hopefully sometime in July, they send you $100,000. You’re still a hundred and a quarter in the hole, six months into the deal and doing this. And if you don’t have that hundred and a quarter, you’re done. You can’t deliver to Costco. They throw you out as a vendor. Maybe they pay you slowly now and it’s over. And that’s just a simplified example of what goes on. It can be far more complex than that. In order to make those orders, you’ve got to hire more people. And if you don’t have good systems and processes, maybe they’re not as efficient. Maybe they screw up. There’s so many other holes that occur in there and problems that occur. And unless you sit down and you map it out and you look at it and say, what’s going to happen? You get yourself in trouble. I work with a lot of builders. So builders are on this kind of thing. They sell a house. It’s a long process and their money comes in chunks. We actually forward cashflow everything. So like I can sit with my builder on March 1st and say, your year is made, right? Your cash looks great for the rest of the year. Let’s focus on the delivery of a December product, right? So he can sleep at night. She can sleep at night knowing, we’ve already achieved these goals. I need to keep the business operating. I need to focus on sales that are going to happen in December. What’s my lead flow look like? Are my conversions still going? Again, so we’re going back to the beginning to the end. And when you see it all and you know that it’s working and you know the money’s coming, right, there could be hiccups in there. There’s going to be hiccups. Are we perfect? No, this is a guess. But at least we’ve got an idea of what’s going to happen, how it’s going to happen, and when it’s going to happen. And then we constantly say, are we on track or off track and what do we need to do to fix it? But throughout this whole process, we’re confident and we know we can take care of things. Or we might look out six months and go, there’s a problem. Because of the way the schedule’s working, you’re going to be short $100,000 in September. So then they’re like, OK, do we change the schedule? Do I need to save up some money? Do I need to put a line of credit in? What do we need to do differently? What was the cause of the shortfall? How do we prevent that in the future? Instead of going, I need to sell, so let me discount 20% my entire profit margin just to get cash in the… And then you get yourself stuck on a treadmill that’s running to nowhere.

Why tech market capture usually fails#

Rohit Agarwal: Makes a lot of sense. I will just counter it, with some businesses, especially if you see in the technology, sort of early stage businesses, there’s a whole market capture, psychology, philosophy, whatever you want to call it, right? That drives these businesses to say, hey, we have created something that is truly unique, truly kind of first in market. And… we should be able to capture as much market share as possible. And so thereby invest in the product, invest in go to market and really run these companies at massive losses, right? And all of these giant companies that we see today are profitable today, but then they have run for multiple decades into the red. How do you balance that kind of market capture approach with this kind of profit first approach?

Rocky Lalvani: I call BS on their unique great thing. Okay. So is it really truly unique and, and more important than your uniqueness, are people willing to pay you? Because if they’re not willing to pay you, then you’re living a pipe dream. And I think most of these tech companies live pipe dreams. They’re actually not that. So they’re not selling clients. They’re selling PE funds. They’re they’re selling suckers. We’re going to be the next Amazon. And so everyone wants to get in early because they got FOMO, right? Fear of missing out and they’re handing them money. Look, unless you’ve got something provable, deliverable and there’s a handful of unicorns, most of them don’t make it. If you can’t generate cash flow, if you can’t get people to start paying you today, you don’t have a viable product. And I think this is where all this market testing stuff is BS. And I think the smartest way to do market testing is invite 10 businesses in, say, here’s my software. I’m going to pay you $500 to evaluate it. Okay. And at the end of the thing, these 10 businesses are going to tell you how wonderful your software is. I guarantee you they will. They’ll show you a couple little things that are wrong. Here’s the question to ask. Here’s what we’re gonna do. Our software normally sells, right, when we launch it for $200 a month. So $2,400 a year. I will cut you a check right now for your $500, or I will give you a year of software for free. What would you prefer? If everyone takes the $500, they’re lying to you. Okay? This is the truth. If they all say, I’ll take the year of software for free. You know you have a viable product because they open their wallet and they gave you money. And if that’s not happening, you’re all fooling yourselves. Right. Minimum viable product, fail fast. And I mean, Netflix didn’t start as Netflix. Right. Microsoft actually had a massive backing from IBM. So you really have to understand how they do it, how they truly do it. If you watch the Amazon movie, he spent a tremendous amount of time thinking about how he was going to begin, right? He managed cash flow. They started to do things intentionally. Now, somebody like him, you know, he knew how to raise capital. So he knew how to figure out what his cash flow run rate was going to be. And he had people willing to fund that failure until you get to be profitable. Not all of us are that smart. I know I’m not. And so it’s a difficult thing to do. And I think more often, if you look at the failure rates, they show you that. And so, yeah, bottom line, you went into business to be profitable. Why can’t you be profitable early on? And maybe you put some sweat equity in it and maybe you get your developers to put sweat equity in it. And that’s okay. But at what point are we going to stop sweating and start earning?

Rohit Agarwal: Makes a ton of sense. Is there a point in the evolution of a business where applying this principle is just too late? There is a point of no recovery in some ways.

Rocky Lalvani: Usually the point of no recovery occurs for one or two reasons. The product’s becoming obsolete and so that market is going away. Or I would say the second one is you have so much debt and so much of that and so much legacy cost that it’s almost impossible to dig your way out of it. That’s usually the case. And at that point, you know, maybe it is better to go bankrupt, but yeah, those are the types of things where you’ve had margin compression or you’re just carrying too much baggage that there’s no way to dig out of that kind of baggage.

Crisis resilience and universal application#

Rohit Agarwal: makes sense. So barring those two, if you think about, let’s say, market dislocations, any kind of uncertain events happening in the market, or let’s say a business downturn, these principles are still applicable in those kind of crisis situations. And can they manage those crises?

Rocky Lalvani: Absolutely. So when we hit COVID, the businesses that were using Profit first and were doing it efficiently had large, what we call cash reserves and vault accounts. And so they had built up enough cash to get them through six, nine, 12, 18 months of business operations. If you’ve got that kind of runway, you can figure it out. And that’s the bottom line. When you don’t have cash is when business ceases to operate. So what we try to do over time is, and each business is different, each business needs a different amount of reserves. But we want to build your reserve to have six months, I would say almost six months at minimum up to 12, you know, for a business that’s got a long cycle, you want to have 12, 18 months of cash so that you can go through a down cycle and you can go through these blips and survive. At the end of the day, as long as cash is flowing, you can keep going. So while Amazon and Uber and all of them weren’t profitable, they had cash and they were able to keep going. But you don’t have cash. It all blows up. And so having cash reserves allows you to get through that part of it.

Rohit Agarwal: applicable across the globe or other cultures where you find very, you know, it’s very hard or the culture is kind of peculiar for, you know, a particular reason where these principles do not apply.

Rocky Lalvani: Does gravity work everywhere on earth? Does it work on the moon? Yeah, these principles apply everywhere. Sure, do we need to adopt them slightly for an area? Yes. If you’re in a high tax country, we might have to put more in the tax account. If you’ve got certain constraints to your business, we have to deal with those constraints. Right. I had a client that’s down in South America and they have to deal with political turmoil. So sometimes things get shut down for a month. Well, if things are going to get shut down for a month, we need the reserves to get through the month. Right. So you’re going to look at it slightly differently. You’re going to plan for it. But the principles are universal. And it will help you better understand your business and make wiser decisions. But it doesn’t matter what kind of business. It doesn’t matter. This works in your personal finances too, right? If every time you get paid, you say, I’m going to take my savings first, I’m going to pay myself first, it’s the same principle. It doesn’t matter if it’s business, personal, it doesn’t matter what it is. The principles work. The math works. And you just got to do it and implement it. And that’s the hard part, showing up and doing it time after time. Everyone wants complicated solutions. It’s like you show them a simple solution. They’re like, no, that’s too simple. I need a complicated solution for my problem. And they waste time and money and efforts on that. And that I think is the biggest thing. Just do simple. And it works.

Hard choices and the football-field metaphor#

Rohit Agarwal: Makes sense. Beyond the complexity or rather the simplicity of the approach, are there any other challenges that you face when you go and talk to clients and really try to help them, but there is an inertia or resistance to get to be helped?

Rocky Lalvani: And all the time, the number one problem is the reflection in the mirror of the business owner. And are they willing to do what needs to be done? Letting go of employees is difficult. But if the numbers say you have to let go of employees, you’ve got to be quick and swift. And it’s not even because the sales are bad. More often than not, they got to let go of employees because they made a bad hire. Right. The person’s not actually driving profit. They’re sucking profit. let, you know, in coming back to your thing of, these tech companies and we’ve got this great product. If nobody buying it, you don’t have a great product. So it’s emotion. All of this stuff is the emotional side of these decisions. And when you can sit down and look at the, the hard facts of the math, then. That’s the case. I have taken business owners out of business in the sense that we’ve gone back and forth over the numbers and they’re like, yeah, this is never gonna work. And it took them a while to get comfortable with that and to say, I gotta figure something else out. And they’re smart, they will, but you gotta let go of your ego and you have to make those choices. and make the changes. So yeah, I think the emotional side we don’t talk about, but the emotional side is the big part of it. How do you make the hard choices and the hard changes that need to be made to make the numbers work?

Rohit Agarwal: makes sense. I’m curious, are there any set of habits or traits that you would recommend entrepreneurs to follow every day as kind of just very basic principles that can help them get on this journey of profit first?

Rocky Lalvani: Yeah, this is bigger picture though. You familiar with American football at all? Right. OK. So every year there’s this big game. It’s called the Super Bowl. Right. Millions of people tune in to watch it. When you look at the game and you look at the field, the whole thing is lined. Okay. You know where you have to go to score a touchdown. You know where you have to kick to, to score a field goal. You know what you’ll get for doing those things. Right. There’s a clock up in the sky that says, this is the first quarter, second quarter, third quarter, fourth quarter, kind of like your business. Okay. And there’s a scoreboard up there that tells you what the score is. Now, imagine we’re gonna play the football game and we’re gonna take away all the field markers. So there’s no lines on the grass. Those little 10 yard sticks, we don’t need those, okay? Technically, we don’t even need a referee, because there’s nothing there to look at, right? So let’s get rid of them. Now you’re sitting here looking at a football field and everyone’s, guessing where they are guessing what the score is. They’re guessing how much time is on the clock and I can assure you they’re all wrong Okay, even with markers and everything everyone fights about the call, right, whether it was or wasn’t whether they were in bounds or out of bounds And so is anyone gonna watch the Super Bowl if there’s no scoreboard no clock? no refs, no lines on the field, nobody’s gonna watch the game. And yet most business owners are playing that game. They don’t have a scoreboard, they don’t have a time clock, they don’t constantly measure, hey, how far did we get on that move? Was it thumbs up or thumbs down? Now, if the quarterback screws up on a move or they don’t gain, you know, they go back five yards, nobody quits. They figure out the next play and they execute it and they measure it. OK, now we’re doing the next play. How far did we get? Are we moving the right direction or do we need to give up and try something different? And so the same thing has to happen in business. You have to have those boundaries for your business. I am not going to play baseball on a football field. Okay. You’ve got to figure out what is your field? What is your scoreboard? What are your metrics? Are you achieving them? Is your marketing campaign working? Is your throughput of your factory what you said it was going to be? Are all of these things occurring in the time that they were? You said that this project was gonna be done and delivered to the client in 60 days. Did it or didn’t it, okay? And so all of these things have to be metriced. Now you keep saying entrepreneur. Entrepreneurs aren’t working in the business, they’re working on the business. Yet most entrepreneurs are working in the business. So I heard this great other football analogy. So imagine we go back to the football field, this time we have the lines and everything else, it’s the end of the game. We are close to the end zone. You, the business owner, have sent in the place. Quarterback goes back, he’s getting ready to throw the ball. You look down the field, you figure out the receiver didn’t go where he was supposed to. There’s nobody there to catch the ball. So what does the business owner do? They run down the field and they catch the ball. And now they’re waving their arms and they’re looking for all this gratitude. The referees are throwing yellow flags. The crowd’s booing, right? How often do you interfere with your people? How often do you not do your job, which is to send in the plays, and if they fail, they fail, and you pick it up and you do another play. But yet we interfere with our business. And yes, I know you’re the best player on the field. Yes, I know no one can do it as good as you, but you cannot be the entire football team. Okay? And you’ve got to learn that. And I think those are the two biggest mistakes we make is A, we don’t have good dashboards, we don’t have good metrics and systems, we haven’t defined our field, and we’re interfering too much instead of trust and measure. And you know, if the receiver is constantly in the wrong place, it’s time for a new receiver. That’s fine. But you can’t do it all.

Two podcasts, spirituality, and alignment#

Rohit Agarwal: Makes a ton of sense. It’s quite deep. Yeah. Why don’t we move on? You do a podcast yourself as well and a couple of them, right? Can we talk about each one of them? Let’s talk about Profit Answer Man first. Seems like a moniker that you are admonishing.

Rocky Lalvani: So yeah, Profit Answer Man. Like that’s where that football story with the guy running down the field came from. Cause one of my guests told it to me. I’m like, I’m stealing this one, right? Phenomenal story. What we do is we basically, we go week by week into these kinds of conversations, show you from different angles from successful business owners who’ve used Profit first, from, we bring other systems on. So, you know, maybe somebody does it differently. Let’s explore their system. I don’t have the perfect answer. So I bring all my competitors on, I bring business owners on who’ve been successful, I bring people on who’ve got something that can help a part of the equation. So we do a lot with marketing because it is the number one wasted area of money. So how do we do that? And we talk about operations. Like each of these pieces will bring in experts and we share their wisdom so that the business owner can implement it on their own. Right? You don’t need to hire me. I’ll make it easier and faster. If you want to just listen and learn and do it, have at it. I’ve already built my wealth. I do this because I love it. Not because I need to. So that is kind of what we do on Profit Answer, man.

Rohit Agarwal: Got it. And the second one, which is a Richer Soul, that seems to cover a wider variety than business itself. Tell us about that.

Rocky Lalvani: It does. It is really about how do you live the ultimate life? Like money is not going to solve your problems. It’s not going to make you happy. Sure, it will take away misery. It will help you with things, but it’s not going to fix everything. So there we talk about health, right? Most business owners aren’t paying enough attention to their health. We talk about principles of time management, habit building, all of that. We talk about leadership. So your self-development, how do you do that? We talk about mindsets and purpose and defining goals and so forth. So we’ll do that as well. We talk about spirituality. People think like, I can’t be spiritual and make money. Yeah, you can. We show you how to be spiritual and make money. Like they go together. And so we figure out how do all of these things kind of come together and how do you build great relationships? At the end of the day, relationships are what drive your business. So how do we do all these different parts of the business? How do I bring them together and how do I integrate and weave it for me? See, we’re not giving you a plan and saying, follow this, because it’s not going to work. Don’t follow my path. Forge your own path. Here are some clues on how to build your path. And you can go, I don’t like those and I like these and I’m gonna do it this way, but slightly differently. And that’s cool. And so all we’re trying to do is show you how to get out of your head, how to look at the reflection in the mirror, how to live that ultimate life to be able to do that. I’m in my late 50s, I want to be doing this when I’m in my 80s. So I’m doing things today for health so that when I’m 80, I’m still strong, powerful, and can do all of that kind of stuff. So everything we do is not what you’re normally going to hear anything at everywhere else. It’s much more cutting-edge. And everything is not like, buy this. Everything is like, do this. Here’s a way for you to implement on your own. But if you need help, hey, one of these people might be able to help you.

Rohit Agarwal: I’m just curious, the spirituality thing is quite interesting and certainly there are more misconceptions around that than something that is much more understood. So just curious if you can spend a couple of minutes demystifying how spirituality on one hand and then basically profit-making business, that’s going to work hand in hand and how maybe one feeds on to the other.

Rocky Lalvani: So I think the first part of spirituality is people claim they believe something. I’m Christian, I’m Hindu, I’m Muslim, I’m this. Have you ever actually read the documents? Have you read whatever that book is that it belongs to? Do you understand what that book is saying? Okay, because I think more often than not, we don’t understand what those books are saying. We’ve never read them. And are we living in alignment with them? Are we doing what we said we were going to do? As you look at those books, though, I think the interesting thing is they all say the same thing in a different way. And so that is a big part of it. And you know, part of that also is the energetic part of you. How is it some people show up and have grit and have the ability to get through hard things? What is that grounding of you? And I think that’s part of spirituality is how you show up, how you’re grounded, how your energetic flow is. You see that, people go, you walk into a room and somebody lights up the room, right? They’ve got something inside of them that you can’t touch. And so I think that’s part of it. And then people can tell if you’re real or not, which I think comes back to spirituality. Do you really care? Do you not care? And I think it’s also, hey, look, business is hard. And if you don’t have a grounding, and by grounding, I just mean yourself. I’m not going to go into, you have to do this or that or whatever but how do you deal with the stress? How do you let go of the trauma? How do you show up every morning ready to go? And I think a big part of that is a spiritual component. I don’t have the answers. I’ll just show you doors and you need to figure out for you, but more important, you need to live in alignment with you because I think the biggest thing we all see from people. They say they’re spiritual, but their behavior does not match their words. And so I don’t care what people say. I want, show me your behaviors. I think there’s a quote, it’s St. Francis of Assisi, preach the Bible often and when necessary use words. Okay. You want to preach your stuff. Don’t talk, do. Show me your actions. Are you living in alignment or aren’t you? And we’ve had episodes where we’ve had business owners talk about when they change their energetic flow, money started flowing to them. Like they stopped blocking it. And I think that’s part of spirituality is your underlying programming and how does your programming work. And most people are running on the programming that was instilled when they were four, five, six, seven, 13. And if you’re running on kid programming, good luck. You need to reprogram yourself. And I think that’s a part of spirituality too.