Today on Investing for Freedom, Mike Ayala is joined by Michael King, an entrepreneur whose mission is to crack the code of finance and accounting.
Michael made his start in the Navy working with nuclear power into his eventual transition of business consulting. Michael King shares advice on how to get started without over-planning and tips for starting your business finances. In this episode, Mike and Michael dive deep into the government assistance available to businesses during this time. They also share the four metrics that you just can’t outsource and how Michael is able to make business money simple.
“If you’re the smartest guy in the room then you need to find a bigger room.”
- [0:01] Introducing Our Guest
- [0:29] Show Introduction
- [1:01] Start of the Podcast
- [1:18] Who Has Had the Greatest Impact on Your Life?
- [3:09] What Has Had the Greatest Impact on Your Success?
- [4:41] Greatest Setback and What You Learned from It
- [6:37] Why Adjust?
- [7:03] Did You Have to Reinvent Yourself?
- [8:42] Advice You Share the Most
- [11:33] Over-planning: Personality Driven or Environmental?
- [14:52] Do You Help Companies Define Their Playbook?
- [16:36] Playbook for Nonprofits
- [18:36] 5 Minutes with Mike
- [23:27] Toilet Paper Shortages
- [24:21] What Do You Do Now?
- [26:35] If You’re the Smartest Guy in the Room, Find a Bigger Room
- [28:18] When Should You Reach Out for Finance Help?
- [29:27] Tips for Starting Business Finances
- [32:52] Four Metrics You Can’t Outsource
- [40:24] Debt Service
- [43:43] Hire Somebody That Has the Heart of a Teacher
- [45:01] Investing in Passive Real Estate vs Business
- [48:20] Stock Market Take
- [50:17] PPP: Applying for Government Assistance
- [54:34] Offering Consulting
- [55:42] In the Trenches
- [56:55] Outro
FIND | MICHAEL KING
Mike Ayala: Today on the investing for freedom podcast. I’ve got Mike King with us. Mike King and I met through a mastermind group with a great mentor of ours, Chris Harder. Mike is amazing. I’ve been able to pick his brain on business and I’ve had quite a bit of business experience, but this guy has it locked down when it comes to operations and the accounting side and the processes. So I’m really excited to, you know, bring some tactical information along with just some wise experience about where we’re at and where we’re headed.[Intro] Are you looking for freedom? Freedom from the daily grind and hustle or just finding a way to live the life you always wanted? Then join us on the investing for freedom podcast. Our hosts, Mike Ayala will help you discover new ways to find freedom with tips, insights, and interviews. You’ll learn the exact systems he’s used to travel the world and live his best life. True success and happiness are all about freedom. And here’s your roadmap on how to find freedom on your own terms. Welcome to the investing for freedom podcast. Here’s your host, Mike Ayala.
Mike Ayala: Mike, I appreciate you being on the show today.
Mike King: Mike. It is absolutely my pleasure. Thanks for having me.
Mike Ayala: Yeah, man, I’m really excited to get into some of this. A lot of times we keep this high level, but I’m going to dig into the weeds on some of this stuff with you.
Mike King: You take it as deep as you want it to brother, I’m here for the ride. Speaker 11: Cool. So four questions before we get started that’ll probably open up
some other things for us to discuss. So who’s had the greatest impact on your life?
Mike King: Wow, you didn’t tell me we were going to go right into that kind of question. That’s an interesting one. So I think when I think back actually interesting story. I had an existential crisis about 15 years ago. And I was really struggling to figure out how I define success for me as a human being. And part of my journey through that to get to that answer is, I sat down and wrote out the three people that I knew in my world, in real life that I thought were the most successful. And I would say that those are the three people that I would say were the most
influential, the first ones, my father. I think that’s kind of, maybe a common answer for a lot of men, but my dad really molded and shaped my paradigm of the world and of myself. The second one was my grandfather on my mom’s side. And the
third one was my high school English and journalism teacher Molly Cob and she was absolutely amazing. She’s still a role model in my life. We still stay in touch. But it was interesting. Those three people are the basis for how I ultimately ended up defining success for myself. But I would say they all equally, but in different ways were the most influential in my life.
Mike Ayala: That’s interesting. It’s interesting that you’ve stayed in touch with Ms. Molly.
Mike King: Well, why wouldn’t you? I mean there’s only so many people, I think that you come across in life that really change your direction or set the course for where you’re going to go and how you’re going to get there and how you look at the world and help set the lens through which you things. And it was so impactful. I feel like I would have been cheating myself not to stay in touch with her. She’s awesome.
Mike Ayala: That’s cool.
Mike King: Hey, Molly Cob.
Mike Ayala: Yeah, I look forward to meeting Molly. If you could narrow it down to one thing that has had the greatest impact on your success, what would that be?
Mike King: Well, interesting. All right. So I’ll go back to that. So I mean this is a money podcast, so we’ll talk money. Sure. I grew up dirt poor. Like legit in a trailer park. And you know, both my parents, one of my parents at the time had a GED. The other didn’t even have a GED. So, we grew up without a lot of money. And so I always had this paradigm of success is making a hundred thousand dollars. I had since a kid, if I ever make a hundred thousand dollars, I’ll have arrived. And so, fast forward however many decades later I finally got that first paycheck that, annualized was a hundred thousand dollars and much to my dismay, it felt a whole lot like that previous check where I was making like $92,000. And I realized that, I’m like sitting there thinking about it and I remember because I’m like watching game of Thrones, like season one. That’s about how long ago it was. But I’m sitting there thinking like, oh boy, what would it be like to make $120,000? This is amazing. And after just a couple of rounds of that, I realized I’ll never arrive. It’s always going to be this terror that I’m going after. And so that was actually what sparked that, that existential crisis with like no kidding tears and stuff like that in my eyes over the course of this weekend. And so I went on this journey to like redefine success for me, but I would say that was the most influential event in my
life that changed, that put me on the course for where I am today.
Mike Ayala: Wow. That’s pretty powerful man. What was the greatest setback and what’d you learn from it?
Mike King: The greatest setback and what did I learn from it? I destroyed my back in a cycling accident like 10 years ago, a little over 10 years ago now. Like bicycle, right, not motorcycle or anything. It’s interesting, I’m technically a disabled veteran and people are like, Oh, what happened? Iraq, Afghanistan. I was like, no bicycle. Cause it happened while I was on active duty, so it still counts as a service- connected disability. But I was super competitive in triathlons and distance running and that kind of stuff. And, in the course of like five seconds, all of that was kind of gone. Still to this day, 12, 13 years later it’s sometimes hurts to just lay down, and it’s uncomfortable. And I think what that taught me and what it still teaches me is that a lot of times we have to embrace the discomfort. We’ve got to be comfortable being uncomfortable, and we can’t let that be an excuse to stop. It can be a reason to pivot or to change directions, but we can’t let that be an excuse to stop. And I catch myself every now and again, kind of digressing back and I’m not working again and I’m eating poorly. And it’s like, cause my back hurts. And it’s like, no, you can’t let that be the excuse. You’ve got to find a way to adapt, improvise, and overcome and still do the right things. Still do the healthy thing. And move forward and boy you can apply that to 52 different areas of life. I’d say it’s just all about embracing the discomfort, being okay with that and then still moving on despite it.
Mike Ayala: It’s such an interesting point and anybody that’s listened to the show for a while or has followed me real simple formula. But this is kind of what I’ve built my financial life and life in general off of my wife and me. But what do you really want? Why do you want it? What are you going to do to get it, measure results and adjust? And the question that I get so many times, I was literally having this conversation last week is why adjust? Like when you set your goals, doesn’t that mean you should stick to it until it’s done? And we constantly, I find myself all the time having this conversation about adjust, but you just brought up something that was extremely powerful because sometimes adjusting is because you’ve changed what you really want. But sometimes it’s because outside forces like a bicycle wreck, can totally throw you off track. And so I love the way that you bring that back in. So did you have to reinvent yourself through that or was it literally just…
Mike King: I was still kind of in a phase of my life where I was kind of in the middle of inventing myself. But I wanted to go back to something you just said. It doesn’t even have to be something like a back injury that can force you to readjust. I mean take the Corona virus for example too, right. That’s an external force. And you can either let that happen to you and be a victim of it. I’m talking about in business, not like if you’re an actual victim of it. Where you’re hospitalized. But you can either sit back and be, whoa it is me. I can’t believe this is going on. It’s BS. Or the government’s not getting my EIDL loan or my PPP, or I can’t get my unemployment. Or you can happen to it and say, okay, let me just take a quick pause. Let me survey the landscape. Let me see what are the opportunities that are out there. How can I move forward and happen to these opportunities rather than being a victim of the things that are happening to me? And so I think like it really has helped me have that mindset when the shit hits the fan of like, let’s just take a time out, let’s look around. How do we adapt, how do we improvise and how do we overcome rather than just feeling sorry for myself, back to the metaphor? Like how I do, I don’t want to just feel sorry for myself and be a victim of this thing, but how do I still go out and live a full life.
Mike Ayala: That’s so good. And as you guys can see, Mike doesn’t just talk it, he lives it and I’m excited to get more into this and stay tuned cause we’re going to get a little further into the PPP stuff and what’s going on with coronavirus and all that. Because Mike’s going to have some real tactical things that we can do. So what is the piece of advice you find yourself sharing the most?
Mike King: Get started. We’ve worked with hundreds of now. We’ve worked with pre-revenue startups; we’ve worked with a fortune thing company and literally everybody in between. Businesses that have been around two days, businesses has been around, 100 years, maybe not a hundred. I’m trying to think of what the oldest business is, definitely 50 years. I’ve got one that’s somewhere between 50 and 60 years. But the thing that I see, people kind of, regardless of where they’re at is like over-planning. We’re going to hire a consultant, and nothing gets consultants, I am one. But we’re going to do forecast and projections and models and we’re going to map out all the social media stuff. And it’s like, just get started. There is such so much time and money and energy goes into the planning stage and I think it’s all about that, like that minimum viable product. You get it, get it out there, test it, see what works. Plan a little bit but adjust again and go. But we see that’s probably the biggest issue, the biggest common issue businesses have is over-planning and not just executing. And I think there’s a reason for that. I’ve really recently kind of had this like epiphany. Why is it that business do that? Cause I see really, really smart people doing it and just between us and all of our closest friends listening, I do it
myself sometimes. I catch myself doing it, but I think at least for some of the time, I know why. And it’s because we don’t want to fail. That fear of failure really holds us back from doing it. And so we try to be as prepared as possible but, and we find like every excuse possible to not execute because we don’t want to look like a failure to ourselves. We don’t want to look like a failure to other people. And so we just find these reasons, these ways. We don’t want to put our job at risk. What would the boss think at this thing kind of fails and it goes back, I read this amazing book by call by Carol Dweck called mindset. And it’s like, the fixed mindset versus the growth mindset and people with a fixed mindset are really, really scared of failure. I am too. As I read that book, I’m like, Oh, this feels icky cause it’s me. But when you embrace a growth mindset where it’s about the journey and what you’ll learn along the way, you find that you’re holding back less, you find that you’re executing more and embracing the fact that it’s like, Hey, Beethoven wasn’t
perfect. He sucks when he started. He got to be so good through executing, not through reading music but through playing music. So that’s like the long-winded answer of just freaking execute. Get it out there, do it. Nobody cares if you fail more than you just get out there and do it.
Mike Ayala: So I have a quick question on that. How much of that do you think is personality driven? And how much of that do you think is environmental?
Mike King: The growth versus fixed mindset?
Mike Ayala: Yeah, well or even a step further in? Let me just elaborate on that a little bit because I, so here’s the thing I’m constantly talking about with my team. Does the strategy determine the actions or do actions determine the strategy? And I don’t think it’s either or. I think it’s a combination of both, but I’m more prone to just get moving. That’s like who I am at my core. And I don’t know if that’s an environmental thing or if that’s just a personality type or a combination of both. But I’ve been accused of being I guess moving too quickly, like let’s just get moving and we’ll figure it out as we go. And so the question I’m constantly asking is, does the strategy determine the actions or does the actions determine the strategy? So bringing it back to the question, do you think that some of this is personality driven versus environmentally driven versus how we’re trained?
Mike King: All right. Well, there is quite a bit to unpack there. So let me lead by saying for me, and I agree with you, it’s not right or wrong, but for me the why for being a person or a business or whatever, that the why drives the strategy. The strategy drives the tactics. For me, okay that’s how I kind of think through it. Hey,
what should we be doing next if I don’t know, it’s a timeout? Let’s go back to the why. And we have a, for my company, we have a playbook that clearly defines our why in our longer-term objectives. And I constantly just bring that back to what do we do next and get it down onto the tactical level. No, I’ll tell you this though, to answer your actual question. I am a degreed engineer. I spent the first 11 years of my career as an engineer and so I tend to be very planning oriented and overly cautious and let’s think through the 52 scenarios and like, really kind of figure it out. What I’ve learned as an entrepreneur over the last however many years it’s been now is that shit will kill you. Just sitting around and waiting and over- planning, one of my favorite quotes is you know, don’t let perfect be the enemy of good enough. The 80% is good enough to go out there and get it done. So I think that the strategy should inform the tactics. I think that was your question. But did I get all the points there?
Mike Ayala: Yeah, I love it. Because I don’t think, even I love that we’re talking to an engineer who by the way has worked on nuclear subs, right?
Mike King: Yes.
Mike Ayala: So I love that word. This is what I really appreciate about you. So as I got to know you not really understanding your background, we had some great conversations and you’re very practical. You’re approachable. That’s why I really love having business conversations with you. But then when we start getting into your background and seeing both sides of, I mean obviously that was very process driven, right? Nothing happens on a submarine without the playbook. You just, you don’t do anything without the playbook. And so I think both sides, you said this, there’s not a right or wrong. And I wasn’t looking necessarily for a right or wrong. I think it was just more thinking through the process. So let me ask you a quick question. Do you and your business help other companies define their playbook? Is that part of your offering?
Mike King: So interesting. I’ve never done it for another business. I did it for one. I did it for one early in early days. I did it for one, but I’ve done it with a number of nonprofits. So there’s pro bono work. And so it’s really interesting how many nonprofits need a playbook. And you would think, at least for me, when I went into it, I was surprised. I was like, wow, you’d think, there’s this passionate cause and everybody knows exactly why we’re doing this and how they are going to go do it. And I’ve learned that in many cases that’s just not true. It’s a bunch of passionate people, but they lack a lot of times, the sandbox within which to play, they lack the direction and the clarity, and a nonprofit is a business. It’s just taxed different way.
And so it’s just as important for nonprofits to have those two. So quite a few times. But for both of my businesses, I’ve gone through a deliberate process and for a few nonprofits and then one other company, but I can’t stress the value enough in having a playbook and I don’t pretend to be the expert on it. Patrick Lencioni has a book called the advantage and that I use his process, from start to finish each time to go through the playbook and figuring out your things like your vision and mission statement and your core values and aspirational values all the way through. So if you don’t have one, I highly encourage you to do it. If you don’t know how to do it, read the advantage by Patrick Lencioni.
Mike Ayala: That’s great. Interesting thought process on the nonprofit. Do you think that’s because, so a lot of times as an entrepreneur, we start a business and we know exactly why we’re doing what? I mean, we might have to go through a process to really refine that and get it into words. But a lot of the nonprofits that I’ve been a part of, I’ve been a part of, because I was on the board and there’s 10,15,20 of us that are making decisions for this and one particular nonprofit during the time I was there, we hired two different CEOs, which is supposed to be the person that’s leading that organization. So do you think that that’s why nonprofits typically don’t have a playbook versus a startup or even a seasoned company that as an entrepreneur at the head?
Mike King: Well, let me clarify. I would certainly, I have too limited of a dataset to say that most nonprofits don’t have a playbook. I don’t know. That’s just been my kind of anecdotal experience. And I think the kind of thinking back, the ones that I’ve been on a board are smaller. It sounds like [17:33 inaudible], so like the board is like 10 people or 12 people or something like that. Now the one that I’m currently sitting on that I’ve most recently done this process with; it has been around like 65 years here in Texas. But they’ve shifted so much what their direction is, and what their why is over the years. And there’s new blood in there now. And so before it was kind of a rich man’s excuse to get dressed up once a year and, put on this magnificent ball and then, Oh, by the way, whatever money happens to be left over, we’re going to donate to these veterans causes. But now it’s much more of a how do we really get down in the trenches and serve veterans in the Texas community? And so now they need that kind of direction because it’s not just this, I’ll call it an ego driven, a reason to get dressed up in a tux once a year. It’s like we’re actually serving people and how do we do that?
Mike Ayala: I love it. Thank you for Clarifying that.
Mike King: Of course.
Mike Ayala: Okay, so we’re going to shift a little bit here. We got into some good stuff there. So usually I hit this a little earlier, but let’s talk a little bit about Mike. Let’s spend five minutes talking about, you told us that you grew up poor, raised in a mobile home park, which by the way is my background too. So interesting crossroads there.
Mike King: I thought you looked familiar.
Mike Ayala: Your neighbor. So, yeah, just tell us a little bit about your background and then tell us what you’re working on today, just so we have some context.
Mike King: Sure. So I was born a military brat, so lived all over the East coast from Georgia to Virginia, Guantanamo Bay, Cuba for a stent, another smaller stent in Jamaica, back to Georgia, and then went to high school in Florida. Eventually went off to Auburn university, joined the Navy, and I spent 11 years in the Navy sitting on submarines and supervising the operation of nuclear power plants. And it’s interesting. Well, it’s actually not interesting. Most people, when they hear that, they’re like, Michael, that sounds amazing. Nuclear power plants, submarines. Oh my gosh, did you make tons of port calls? Did you see all kinds of cool stuff? And I’m like, no, I didn’t. The type of sub that I was on, four stories tall, two football fields long. And they have the ability to carry up to 24 nuclear missiles with like eight to 10 nuclear warheads each. And so because of that, other countries aren’t real keen on us parking those in their backyard. And we don’t like to let those get too far away from home, so there’s no port calls. So literally you go under water for like 90 days, then you come home. So there’s not like, we’re going to Greece and we’re going to, China or whatever. Like probably not the best example, but you get my point. There’s no like, sexy know port calls. The other thing is in the world of nuclear power, an exciting day is by definition a very bad day. So, it’s not like you literally sit there and you watch a panel of gauges and temperatures and pressures and that kind of stuff and it doesn’t do anything and that’s good. And so you’re paid a lot of money so that if it does do something, you can respond to it and keep the reactor and the submarine safe. So it’s actually a very, very boring a world, which is why I ultimately transitioned out is I wasn’t getting a lot of fulfillment out of that. That’s very important work, but it wasn’t for me. So I left there and then I made the normal transition from nuclear power into plywood manufacturing. And so I went to work for Georgia Pacific at a plywood mill in Emporia, Virginia. Which is big as it sounds like. I mean it’s like population 300 or something like
But I started off there as a staff engineer, promoted to director of engineering and then ultimately as the director of operations for the whole facility that 500 something people reporting to me. And it was amazing. The leadership part didn’t scare me probably because of my military background. But one day my boss calls me into his office, and he says, Michael, you have P & L accountability for the facility now as part of your new role. And I was like, great. There was only one problem. I didn’t know what P & L stood for. Much less how to be accountable for it. And so I would ask the controller and the staff accountants to come in my office and help explain, these reports and they would do their best to explain it, but they would ultimately kind of leave like, Oh, bless your little heart. Like maybe one day you’ll get this. And so I thought it was obvious to me, that my career was going to be in business. I like business a lot more than engineering. So I called a quick timeout. I went to business school, figured out what a P & L was over the next couple of years. But one of the big things that I learned along the way is that, 60% of small businesses fail in the first five years. And when you dig in, they’re not failing because of bad products or bad services. They’re failing because of bad financial decisions. And so when you couple the fact with like the accountant types, they struggled to explain this stuff to even an engineer, much less a small business owner that’s running a plumbing company, there’s a problem. The fact that so many fail due to financial decisions, but the people that understand it, have a hard time explaining it. And so I said, Hey, I’m going to make it my mission in life to just explain financials like this really simplified business money so that we can eradicate that 60% failure rate of small businesses. And so that’s what I’vebeen doing for the last, going on five years now, is helping small businesses understand their numbers. So they can make better decisions. So that’s how I went from a trailer park in Virginia to nuclear power to plywood to entrepreneurship. Classic story. Classic story. We’ve heard it a thousand times.
Mike Ayala: Yeah, totally. What I love about Mike too is his background is so diverse. I actually called him a while back asking for advice and he went into why toilet paper is in shortage right now. Do you remember that?
Mike King: Oh, cool. Yeah.
Mike Ayala: Because you’re that kind of a Georgia Pacific.
Mike King: No, I’m sure we had the conversation. I just don’t remember it.
Mike Ayala: Yeah, I mean, you never know. I’ll edit that out.
Mike King: No, it’s fine. I’ve actually been to toilet paper manufacturing plants. It was a little-known fact as I was a consultant, a thermodynamics consultant in business school to work. And I would go into paper mills including toilet paper mills and help them determine their thermodynamic inefficiencies in their steam plants and stuff like that. So I’ve been into many, many, many toilet paper factories. They call them fluff mills, but paper towels and toilet paper and the diaper stuffing’s and feminine paper products. I’ve actually been into many, many, many paper mills and so in cardboard mills and cigarette mills. So anyway, I digress.
Mike Ayala: Yeah, I love it. Mike King: I’ve seen a lot.
Mike Ayala: Okay. So today, I love the background. So what’s your business now? I mean, obviously as you’ve alluded to you, you consult with small businesses, larger businesses. What’s the name of your company?
Mike King: I have two. So the oldest one is KFE solutions and I started KFE solutions over four years ago. Primarily what we do there, Mike, is we’re working with businesses, or we’ll say like 2 million to 50 million in revenue. They’ve gotten to a point that they hit a glass ceiling, they’ve been doing the books themselves, or maybe mom was helping them with the books and they’re realizing now that the financial part is kind of outgrown their abilities. And so to get to the next level, they need somebody to come in and kind of help them figure that out and see where opportunities are and how do we take this thing from 5 million to 10 million to 30 million. We just don’t know how to do that. There’s a lot of tax implications. There’s audit implications, there’s inefficiencies, there’s way for money to kind of sneak out of the business when you’ve got 30 or 40 employees at this point, how do you watch for that kind of stuff. So we really help those businesses kind of wrap their arms around it and help them grow and scale to the next level. But yeah like I said earlier, so many businesses fail in the first, four or five years. And my heart has been for years to help earlier stage entrepreneurs figure it out. And so, yeah in December we said, there’s got to be a way that we can work with early stage entrepreneurs as well. So I started another company that’s under my personal brand and put together a program called business money made simple. And it’s all about helping early stage entrepreneurs. And we’ll say like 500,000 in revenue or less, understand those core fundamentals of how to manage money, how to put the right
processes in place so that you’ve got a strong foundation to scale from your amazing idea up to half a million dollars plus and you don’t have to worry about, Being one of those businesses, you worry less about being one of those 60% of businesses that ultimately fail. So those are the two companies that I have, the KFE solutions and then the Michael King with business [26:29 inaudible].
Mike Ayala: I love it. We’ll get back into that here in a minute. Get into the specific brands. But I get asked this a lot like, Don Burns edit this out.
Mike King: I do that too. Johnny cut this.
Mike Ayala: Yeah. I don’t know what I’m talking about. I get asked this a lot. What’s the one thing if you just look back and see what you did. And one of my mentors always says that if you’re the smartest guy in the room, you need to find a bigger room. And I think that that’s been one of the things that has really set me apart each time that I needed to go to a different level. I always knew what I didn’t know. And I’ve always reached out to people like you and companies like yours. Literally within six weeks of opening our first business in 2004, I was 24 years old. I had just come out of the field. I was a plumber by trade. I knew nothing about P & L. I knew nothing about business in general. I just knew that I wanted to do things different. And so from the get-go, I’ve always hired consultants. And so I think it’s extremely valuable. And I love that you’ve created that second brand because the 2 to 50 million, seems to be, one of the consultants that I worked with called it a wall’s in business. As entrepreneurs, we are excited. We get started, we’re scrappy, we’re moving along and then we start hitting these walls and you called it a glass ceiling. And I love the way you call it a glass ceiling because you don’t really, you don’t actually, no, it’s there sometimes. But you know, you’re up against something and you can’t figure out how to break through it. I think when we’re at the 2 to $50 million business, it maybe is a little bit more apparent to most of us than at startup phase and even at startup phase, I think a lot of times people don’t want to ask for help. I think that’s a very, very important area of business and I appreciate you for going into it. So what would you tell our listeners that are at startup mode? When’s the right time to reach out to somebody about their P & L finances to get in touch with Mike King?
Mike King: I think one of the, there’s a couple of psychological things that come up with early stage entrepreneurs, I think hold them back. Particularly in the world of money. So many founders are creatives, they’re not numbers people. And so maybe you’re not a creative in the artsy woo kind of way. Maybe you are, but maybe you’re a creative in the construction way or a creative in the trade’s way. Or
you’re a creative lawyer. And you’re like, I’m good at this. I’m a platform expert, but I’m not a numbers person. I’m just going to outsource that. I’m just going to pretend like it’s not there, but I’m going to always go back. 60% of small businesses fail, and it’s normally due to bad financial decisions. There’s certain things that you can’t outsource in the financial world. And then we’ll talk about this later, I think. But there’s four metrics that you just can’t outsource. You have to know them. And again, worked with thousands of entrepreneurs and hundreds and hundreds of businesses, all the ones that are successful know these four metrics inside and out. So the first thing that I would say to answer your question is, you’ve got to be paying attention to these four critical metrics from the get-go. You can’t wait until later; you can’t outsource it. You can’t trust that your bookkeeper’s looking at it. You’ve got to know it yourself. And so if you don’t know what those things are, if you don’t know how to read a P & L, if you don’t know what gross profit is, learn now. A lot of people, the second kind of thing that I see people doing wrong is they say, I’ll wait till I get bigger when it matters a little bit more and then I’m going to start paying attention to that stuff. For right now I’m just trying to create, I’m trying to build, I’m trying to launch. And while those things are important, you’ve got to tend the house. You’ve got to mind your house, and at the end of the day, if you don’t have any cash, you can’t take your creative genius to the world because you can’t like pay your rent and stuff.
And so I really encourage people like from the get-go, learn the fundamentals, learn the basics. You don’t need an MBA. As a guy that has an MBA, I’m like, don’t waste your money on it. Unless you want to go and be a big hedge fund manager one day. I don’t think it’s really worth it. There’s so much knowledge out there that you can get. But first, like be okay with the fact you don’t know. And so that’s sometimes hard for guys to raise our hands and be like, I just don’t know this stuff. So be okay with the fact that you don’t know. Nobody’s judging you for it. Go get the help. But also, I wouldn’t go hire a CFO. I would just go somewhere and learn the fundamental knowledge until you get to that half a million-dollar point or a million-dollar revenue point, a bookkeeper is the first one. The first thing you should outsource in that in the financial, get a bookkeeper and people like, how do I pick a good bookkeeper? It’s simple. If you’re someone’s subscription, then find a different bookkeeper. I don’t think that that’s a thing that I ever want to be a subscription for. I want the person to know me and have an actual relationship with me. There’s tons of things you can outsource that, it can be the $2 an hour gal in the Philippines and that’s great. But not your numbers. To me it’s just too critically important. So get a good bookkeeper. Don’t try to do it yourself because you don’t know how to do it. You’re going to do it wrong. And then, poo in poo out kind of saying. So you don’t skimp on the bookkeeper. You can find somebody for
like 250 a month. Go get a good bookkeeper and then pay attention to revenue, gross profit, net profit and cash, those four critical metrics. And then, when you start getting somewhere around, we’ll call it a half a million in revenue, your mileage may vary. Then it’s kind of start looking for somebody to help you think a little bit more strategically about your funding.
Mike Ayala: That’s good. I want to get into the four metrics now, so we don’t miss it. But really quick, you said something that I think is awesome. A mentor of mine, her name’s Beth, actually very successful developer businesswoman. She actually said one of the things that separates her success from most, and she attributes this partially to being a woman, is her ability to ask for help. And she said that it’s actually easier for women. You said this, that especially as men, we don’t want to ask for help. It’s an ego driven thing. But she said a lot of times as women in business, anytime a woman asks a group of men to help her, they’re all, again, she’s in development. So she said it’s like actually easier for a woman, number one, to ask for help, but number two men line up to help women. It’s like in our nature, but it’s the opposite for men. Like we don’t want to ask for help, number one. But then also, even when we do ask for help, it’s harder for us to get help because we don’t want to receive it. It’s just an interesting concept. So let’s get into the four metrics. I don’t want to wax over that. Let’s make sure we hit it.
Mike King: Yeah, sure. So the kind of the message there is, in the world of finance and accounting, there’s thousands of numbers. Thousands of numbers and it’s super overwhelming. And as somebody that’s even dedicated my career to it, I’m still like, shit, there’s a lot of numbers to know here. But when we sat back and we said, what are the numbers that all the successful entrepreneurs that we’ve worked with, what are they all tracking? What do they all know? Even if they’re creatives, maybe they’re musicians or they’re, I like calling them my woo woo people. They’re like the spirit coaches and stuff like that. Or maybe their lawyers or they are accountants, what are the successful ones always tracking and there’s four, there’s only four and there’s no calculus or even algebra required to know them. It’s super basic, but it’s so easy to lose sight of them and its revenue, gross profit, net profit and cash. Those are the only four you absolutely have to know. Revenue, gross profit, net profit and cash. All the other numbers, there’s some important ones out there but none of those are going to cause your business to really thrive or go bankrupt. So it’s like if you track those four, all for all you non numbers people,
I’m not a numbers person. Just track these four and you’re good to go. So what are those numbers mean? Cause I mean let’s be honest, sometimes we don’t remember what those are. So revenue’s the easy one. Everybody knows revenue. That’s how much money you made, that’s the money that came into the business. Gross profit
is, let’s say that I like to use the example, I sell markers for a living, okay. Like Sharpie markers and I sold those markers for a dollar, but I got to buy them from China. So I paid 20 cents from Alibaba to buy these markers from China. So I sell it for a dollar, it costs me 20 cent to, buy it. I have 80 cents left. That’s gross profit. So you take your revenue, subtract your cost of goods, and you’re left with gross profit. So you and I and all of the listeners, we all know that there’s more expenses that go into business than just to the actual marker. I’ve got to have a website and I pay for Facebook ads and I have a content creator to do all my fancy Instagram posts about Sharpie markers, all these other expenses that inevitably come up. We call that overhead.
And so when you take your gross profit and you subtract out the overhead, you’re left with net profit. And that’s the happy number. That’s what you’re taxed on and all those kinds of things. And those numbers are all great, but the most important one is the fourth one, and that’s cash. All right, so revenue, gross, profit, net profit and cash. And you say, wait a minute, Mike, what’s the difference between net profit and cash? And so the example that I like to use is, somebody buys your marker off of the website and that money that they paid with their credit card doesn’t just magic itself into your bank account. It could take a couple of days, it could take a couple of weeks, believe it or not, it can sometime take months before you get paid from a job. And so very different net profit and cash. And so here’s a shameless plug that I like to do. If you go check out my podcast in the trenches with Michael King, in the trenches with Michael King the very first episode is with this lady Ashley Ultum. She’s a CPA and she did a seven-figure exit from a business, went in, bought a failing concrete company for 400 grand. She said, I can turn this thing around and make it into a $20 million a year business. And guess what she did? And within 18 months he was bankrupt. And people are like, well how the heck did she do that? Cause she was very profitable. Well the problem was is in the commercial construction industry, you can have good sales and you can have good revenue and profits. But a lot of times you don’t get those profits. You don’t get the cash in your account. Maybe it’s net 180, depending on the terms and the project. And that’s exactly what she found is she kept getting more and more jobs, but she’s having to pay her tradesmen like weekly, but she wasn’t getting paid back for net 120, net 180. And so she had to keep funding the business with her personal money. And even with that huge exit she had, she ran out of money and had to close down the business. So it’s profitable. She didn’t have the cash in the bank. So it’s super, super important to be mindful of cash and how much cash that you’re going to need to sustain operations. And so a lot of times for a little baby businesses it’s a lot easier because within a day or two you’re getting
cash. But it’s something to be mindful of.
One thing I’ll close with on that is my favorite things in the world is revenue, is vanity. Profit is sanity. But cash is King. And what that means is, if I told you Mike KFE is killing it, we’re going to do $5 million this year in sales. You might say, wow, that’s really impressive, Mike, great job. But if I said, well, not so fast, I had to sell $10 million in Facebook ads to generate the $5 million in revenue. So I have a loss now a net profit and loss position of $5 million. Well, it’s not as impressive. It’s like, well, cool, you did 5 million in sales, but it costs you $10 million to do it. So the revenue number is vanity. It’s a whole lot like Instagram followers or something. It’s like, great, but are you able to actually do anything meaningful with it in the form of profit? So revenue is vanity, profit is sanity. Is your machine efficient, the Cassius King? Because out of all those thousands of numbers and finance and accounting, only one of them exists in reality. There’s only one that exists outside of spreadsheets. There’s only one you can touch and that’s cash. And that’s the one that pays your employees and your vendors and your mortgage and those kinds of things. So revenue is vanity. Profit is sanity, but cash is the king.
Mike Ayala: So I love, love, love what you’re doing. And for the listeners that say, Oh, that, well, that’s simple, obvious. No, it’s not obvious. I literally, as you were saying this, I remember having a conversation with my CPA when I started my first company when I was 24. By the way, that company year over year doubled every single year. We were on the Inc 2009 fastest growing companies in America list. We’re hiring, doubling our workforce every single year, which also meant I’m doubling my trucks, I’m doubling my capital expenditure. I knew nothing about finances and yes, I always reached out and hired people that were smarter than me, but sometimes when you talk about hiring the right people or the right firm or the right consultants, it’s so important. I remember having a conversation with my CPA after our first year. We started in June and then I’m sitting down sometime in January and I’m like, I think we did $850,000 in that first year in seven months, and we had a net profit of, I don’t know, let’s say a $100,000, and I asked I, I looked at my CPA and I’m like, where’s that $100,000 cash?
Because, if somebody had told me that, my CPA looked at me and they said, well it’s in your business. I don’t know what that means. What they didn’t tell me was look at your accounts receivable. And then also the next thing, and I’d love for you to just talk about this real quick. I completely did not understand debt serve. Cause I’m looking at this, I’m beginning as a young entrepreneur to look at my P & L. I’m beginning to understand my P & L and it says that I made a hundred grand or 120
grand, but I’ve got like $22,000 in my bank account. I’m struggling to make payroll. And you’ve just touched on all of that, which I love. But debt service, just wrap on that for a minute.
Mike King: Well I think as entrepreneurs, the financial statement we tend to gravitate towards is the P & L. That’s the sexy one. It looks good. It’s great. But the P & L is not the most important financial statement. Actually the balance sheet is the most important financial statement. And you know, like that’s where that cash balance lives by the way, is on the balance sheet. And so a lot of times when we use debt, whether it’s credit cards, loans, lines of credit to facilitate operations of the business. So we’re putting stuff on a credit card and then we’ve got to make credit card payments. We don’t see credit card payments on the P & L. credit card payments don’t show up there. They only show up on the other financial statements. And so it’s like you see the profitability there, but you’re like, why don’t I have any more cash? Or likewise, it’s like, well, I’m not showing a lot of profit in my business, but I have plenty of cash. Well that’s cause you’re using your card to pay for all of those expenses. And so it’s really, really important to be mindful of exactly how you’re using debt because it can muddy the waters. And that’s why I had a conversation yesterday with a really good friend of mine and he starting another new business and he said, Hey, should I get a business credit card? And I said, don’t, unless you absolutely have to, don’t get a credit card because it muddies the waters. It’s really, really, really hard for the undisciplined eye to understand how healthy the business is. Because when you start using debt to fund operations of the business, you can get these false senses of security that things are going well when they’re really not.
So it’s really easy to lose sight. When people owe you money and when you owe other people money in your business, it’s really easy to get sucked into that, oh crap, I don’t have enough cash to pay payroll now. Or, I’m frustrated because I’m working harder than ever. My numbers look better than ever, but I don’t have enough money to, I can’t bring any money home. What’s going on with my business. So did that kind of address what you [42:26 inaudible]? Go ahead.
Mike Ayala: Well, one other thing that I’d just like to say, and this is why I think what you do at Michael King and KFE is so important. Because again, me asking that CPA, Hey, where’s my money? There’s a right way and a wrong way to do everything. And even as a young, scrappy entrepreneur, I didn’t have a consultant necessarily in my life that could teach me the balance sheet. And so even I think back to a time on my P & L, I literally had my inhouse bookkeeper create me what I called. It was just a line item on a spreadsheet. So she would export my P & L
and I would have her put a little line item on the bottom called free cashflow. Which basically took my, cause I’m a pretty simple guy at the end of the day. I mean, I’m a big thinker and a visionary and all this stuff, but when it comes to finances, like I didn’t know, right? If somebody had taught me like my balance sheet or taught me how to read that I wouldn’t have necessarily, and again, there’s a right way and a wrong way to do all of this, but if somebody had just taught me how to read my balance sheet, I wouldn’t have needed to make all these extra tricks on my P & L. And to your point, a lot of times as entrepreneurs we focus on that P & L. But if I would have just looked at my cash balances and understood the balance sheet, I wouldn’t have needed all these workarounds. So there’s a wrong way and a right way to do things.
Mike King: You touched on a critical word there. That’s advice I give people all the time. They say, you know, if I wanted to hire a CFO, what should I look for? Or a bookkeeper or a CPA. And the first thing that I tell those people aside from the subscription thing is hire somebody that has the heart of a teacher. It’s so critically important. Like you don’t just need somebody to kind of like, at the end of the day, anybody can come through and do this. It’s transactional work. It’s kind of commodity work. Anybody can do, scrap out a P & L for you or whatever. What you really need is somebody that’s going to have patience and get to know you and teach you what these things are saying. So I would argue that if, if you have a CPA that’s not like, Hey, you have a problem with cashflow right now, even if you don’t ask, that’s a problem. Like I want to work with that person that’s going to be proactively identifying these things and say, Hey Mike, let’s sit down. I don’t think you’re tracking here how important cash flows are. Can we hop on a 30-minute call, then let’s just like go over what free cashflow means and what looks good and what works bad? So absolutely hire somebody with a heart of a teacher, whether it’s a bookkeeper, whether you’re ready for a controller, a tax accountant or a CFO. You want to hire somebody that has a heart of a teacher. Cause this isn’t stuff that you can just be okay with being glossed over and being like, or somebody that’s going to get frustrated with you or can’t explain it in a way that serves you well. So find somebody with a heart of a teacher.
Mike Ayala: That’s awesome. I want to address one thing and just get your thought on it. So a lot of my listeners, I think in general are, a lot of them are business owners, but a lot of them are investing in passive real estate. Maybe they’re a high net worth employee that’s investing passively or they’ve made the transition from buying one or two single families into what we call syndication, etc. And I had this realization because I’ve ran businesses, but then I’ve also invested passively in real estate. When I sold my company in 2014, I decided to go
full time into really a real estate investing business. And I had this epiphany. I made the transition from a passive real estate investor to owning and investment business. So what would you say to the real estate investor, number one, that is investing passively or number two is making that transition? Is it any different? Do we need to look at the same things or how is passive real estate different than a business or is it the same?
Mike King: I think the, I mean the main difference is you’re not involved or as involved in the day to day decision making, but at the end of the day it’s your money and so you can’t just be like, yeah, Bill is taking care of my money for me and not worry about it. I worked with a lady about a year ago that was trying to invest in a retail chain. And she was, it was going to be passive income for her, but she wanted to still cover some of the legal documents just from a tax perspective. But when we dug into it, Mike, we started realizing like, there was no plan for how much free cash this business was going to generate. Without the free cash, she doesn’t get distributions. There was no plan for use of funds on how they were going to expand. They wanted to go from five locations to 20 locations using her money. But how are you going to use that money? They didn’t know. So she could have just sat back and said, Hey, this is passive income. I’m going to be a passive investor. But she started asking smarter questions. And again, at the end of the day, all it was around was what do you think the revenue is going to be? What are the margins look like? What are the gross profit and net profit look like? And what kind of cash is this thing going to generate? Because as an investor, the primary reason I’m investing is because I want additional cash coming into my personal life. And so I need to understand if I have 20% of the business, 20% of what should I be expecting on a monthly, quarterly, or yearly basis. So to answer your question, no that’s why I tell people there’s no such thing as truly passive income. In my opinion, no disrespect, you’re a fool if you just set it and forget it. Like you’ve got to stay on top of it. But again, it’s revenue, gross profit, net profit and cash. And then when people can’t answer that, that’s when you start digging a little bit deeper and asking to see more and more documentation.
So yeah, I think even if you are somebody that’s looking for passive income, still be involved to the extent of once a quarter, probably at a minimum, I want to see P & L’s, balance sheet, statements of cashflow. Maybe have somebody if you’re not strong in those things, have somebody look at it with you. But yeah, like don’t just turn a blind eye and say, hey, this is passive income for me. You need to still pay attention to those fundamentals. Cause that’s just good business.
Mike Ayala: I love it. And as a passive investor, I did air quotations for those of you that are listening, Mike brings up a great point. So, when it comes to smaller private placement, private equity companies, you can definitely, look at the P & L and see all that. What about, what’s your take on the stock market and investing in mutual funds and all that? I mean, you truly are passive. You’ve got no say, there right?
Mike King: Well, you’re passive to an extent. And this is just my philosophy on investing. So yeah, I’m a believer that for me, and this is just based on my risk tolerances and those kinds of things. I don’t like to have my portfolio eaten up more than 20% on single stocks. So 80% or more of my net worth is always going to be outside of single stocks just because of the risks, the inherent risk. You have a CEO that makes a bad decision at a company party. And tomorrow my stock is down 10%. I had nothing to do with it, the company didn’t underperform, crazy things like that can happen. So I tend to stay away from single stocks for the most part. So, okay, well where do I put the money in the market? Well, it’s through mutual funds. And so yes, I am a passive investor in those funds. However, I’m not a passive investor in my portfolio. So I have portfolio strategies that I’m going after. I have long-term plans and you know; I figure out how do I want to divvy my money up across different sectors and I monitor the performance of those funds in those sectors as they relate to my goals. And so every quarter or twice a year, I’m kind of tweaking those things. So I’m passive in the sense that I’m not operating those companies or I’m not digging into the P & L, but I am looking at the fund’s performance. I’m looking at the funds fees, I’m looking at how it’s being managed and making sure it’s still directionally correct with my goals and my priorities. And then I manage my funds, my investment mix accordingly. I don’t know if I dodged your question there.
Mike Ayala: That’s good. Okay, one final thing and then we’ll wrap it up here. So the PPP you know, we’re sitting at May 5th, I think, and a lot of businesses are applying for government assistance, stimulus bailouts, whatever you want to call it. There’s a lot of information flying man.
Mike King: Some of it’s accurate.
Mike Ayala: Yeah, exactly. That’s what’s interesting too. When this first happened. I mean, every email list that I’m on, everybody’s sending me like, Hey, we’re here to help. And like, people that have no business giving me advice on PPP and how to apply, everybody became expert on government bailouts. And it was just interesting to me. So Mike, you actually are an expert. I’ve listened to you
several times. You’ve really dug into this. So what would you advise? You’ve got some resources for people, right?
Mike King: All right, so there’s two primary stimulus packages out there or economic recovery packages that are out there. You’ve got the economic injury, disaster loan, and you have the payroll protection program. And those have both been funded and refunded by Congress, they are for similar but different purposes. So the EIDL is a loan and it’s a very relatively low interest rate. I think it caps it like 3.49% and you can pay that back over something like 30 years. And hat’s to make up for money for the operations of the business that you lost out on because of the impact from the Corona virus. So that’s thing one. You apply for that through directly through the SBA. The SBA has been remarkably slow at processing these. They’re months behind. So just to give you an idea, I applied on March 30th and now we’re on May 5th and I still haven’t received. Even though the preliminary call from the SBA to say, hey, so I was within the first hundred thousand applicants and now there’s five or 6 million people that have applied. So that’s how far back they are, just to set expectations. If you’re hoping for the EIDL, as of today, they’re not even accepting new applicants anymore. Now the one that has been much more successful as the payroll protection program and the intent of the PPP was to keep Americans off unemployment, to keep people employed. It works. So your business suffered, you don’t have that free cash to pay people because of the, maybe your ice cream shop shut down or whatever. So the PPP was intended for you to keep people on payroll so that they can maintain a standard of living.
And that’s done through a bank. You would go to your local business bank; you would apply with them. They then get final approval for the SBA. Once the SBA says, yeah, so your clients is worthy, then the bank would cut you those funds. Now from the time you receive those funds, you have eight weeks to spend it on eligible expenses. So 75% of it has to go towards wages. So that salary, healthcare, 401k everything but taxes. So payroll taxes don’t, aren’t included in that. So you have to spend at least 75% of that loan on things like payroll up to another 25% can be spent on things like rent and utilities, etc. If you spend it that way, then theoretically that loan will be forgiven, and you won’t have to pay it back. For any of that money that loan that’s not forgiven, you have two years to pay it back at a 1% interest rate. So there have been exponentially more people funded for the payroll protection program. One thing I want to highlight is, this money when it comes in, you really need to be intentional about how you spend it and how you track the documentation for where the money’s going because it is something you’re going to have to prove. The burden of proof is on you to show that you
spent it the right way. So I really, really encourage people to reach out to a competent bookkeeper or accountant and say, Hey, before I spend this money, this is my plan. Does this meet to the best of your knowledge? Does this meet the intent of the law and how it can be forgiven? Cause this is one of those things that once it’s done, there’s no do overs. You can’t go back and unpaid somebody’s payroll or whatever. So payroll protection program, the ideal, those are the two programs.
Mike Ayala: I like it. Are you guys offering any kind of consulting around that?
Mike King: So if you go to www.iammichaelking.com/blog. I do post on there a couple of times a week for the most part about the latest. If you subscribe to the blog at the right column, we do announce that we do live zoom calls as information comes up. And so if you want to go to, www.iammichaelking.com/blog, put your name in there. Follow along. We do, I don’t know, sometimes we do four or five a week. Sometimes it’s every other week, but we do these zoom calls and we answer questions. So we’ll kind of teach on something. Like this Friday we’re going to teach on the PPP. And how to track that money. And then Q and a at the end.
So www.iammichaelking.com/blog, click subscribe and you’ll hear all the things, or you can DM on Instagram. I get tons of DMs a day asking questions. If you just have a question with a quick answer, i.m.michael.king. And just shoot me a DM on Instagram or Facebook, same name on Facebook. Happy to answer your questions. This is why we get out of bed every day. We love this stuff. So if you’re confused, if you’re scared, if you’re overwhelmed about any of these programs, just hit us up and we will help you guys.
Mike Ayala: Guys I really appreciate Michael King. I’ve been in business for 20 years. I just love getting into our conversations. We can go all day, but we don’t have time for that. So Mike appreciate you being here. Tell us about your podcast again real quick.
Mike King: Yeah. It’s called in the trenches with Michael King. And we talk with business owners, leaders, executive entrepreneurs about the lessons that they’ve learned while fighting in the trenches of the business battlefield. One of my best, like one of my personal philosophies is that as humans, we learn best by through mistakes. But I also believe that those mistakes don’t have to be yours. So we go and interview other entrepreneurs and they share their mistakes and their lessons learned and how to avoid them so that other entrepreneurs can kind of avoid those same mistakes. So that’s in the trenches with Michael King.
Mike Ayala: And I really appreciate the four core numbers. That’s so valuable. Anything else you’d like to throw out there for the audience or we good?
Mike King: I think we’re good.
Mike Ayala: Okay. Well, I really appreciate your time and just you sharing the
wisdom with us and I look forward to hanging out some more.
Mike King: I look forward to interviewing you right after this for my podcast. Mike Ayala: All right, sounds good.
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