The Poverty Trap
Being busy is great, but is it enough to grow your company?
Escape the snapping jaws of the ‘poverty trap.’
by Chuck Violand
Most entrepreneurs go into business with dreams of creating financial security and a fulfilling lifestyle.
Sadly, the fact is that an alarming number of owners in our industry don’t earn enough profit to pay their bills, enjoy a comfortable living, and put money away for retirement.
They may be the best cleaner in town, or produce the most effective marketing schemes around, or have creative systems — but they don’t make enough money to grow their companies.
When you consider that so many business owners view the sale of their businesses as a primary source of retirement income, many of them earn such small profits over the years that the owner may do little better than break even when he does go to sell it.
This is a shame, because it doesn’t have to be this way.
In her book Confidence: How Winning Streaks and Losing Streaks Begin and End, noted business authority Rosebeth Moss Kanter addresses this vicious cycle when she writes, “Of all the pathologies that accumulate in a losing streak (read: unprofitable company), one of the most damaging to individuals, and eventually to the places they work and live, is passivity and learned helplessness.”
Suffering from Month to Month
Passivity and learned helplessness are the heartbreaking distillate of failing to earn profits month after month.
The owners of these companies start to believe that being profitable is either impossible or beyond their ability to achieve. So they resign themselves, through repeated behavior, to suffer the stress of just squeaking by year after year.
In a two-part article that appeared in the May and June 2006 issues of CM/Cleanfax® magazine, I proposed the theory that the root of earning profits in your business starts between your ears.
I wrote that until you feel you’re capable of earning deep profits, or deserving of them, you won’t make them appear in your business.
What’s more, when you don’t address these underlying causes, you engage in all kinds of intentional and unintentional activities that sabotage your best intentions to consistently earn healthy profits.
It’s Time to Understand
To help us understand some of these self-sabotaging activities, let’s start with two principles.
The first is that cleaning businesses are designed so they can be profitable.
When you decided to go into business, the first questions you should have asked yourself is: “Is this a profitable industry? Can a company doing business in this industry earn the profit margins I want to earn in order to enjoy the lifestyle I want to live?”
The good news is that the carpet cleaning industry is structured to earn healthy profit margins.
The second principle was elicited by Dr. Morris Shechtman in his book Working Without a Net: “There are no business problems — only business manifestations of personal problems.”
The logical extension of this statement is that if our companies aren’t making the profits we need, it’s because we, the owners, are getting in the way.
In nearly 20 years of working with small-business owners, I’ve noticed that a few ways of “getting in the way” are more prevalent than others.
If your company has been performing poorly, reviewing your financial reports can be a painful and disheartening experience.
Since you’re trying so hard to maintain a positive attitude and keep things going, you don’t want to drag yourself down by focusing on bad news.
But ignoring the situation won’t make it go away.
Instead, by facing the situation, you might be able to identify the cause of a problem and get to work on fixing it.
Understanding and tracking the financial performance of your company is fundamental to earning healthy profits. But even tracking financial performance is no guarantee of success.
When your company consistently earns between 25 percent and 30 percent net profit, you should be able to pay all your bills on time and set aside a meaningful amount of money for your retirement.
Two caveats with this: If you do a reasonable amount of disaster restoration work, net profit should be greater than 30 percent; if you’re a solo operator, it should be closer to 60 percent.
So, if carpet cleaning businesses are designed to earn this kind of profit, why do so many of them consistently earn so much less?
The answer to this question leads to the next reason we don’t earn healthy profits.
Failure to Track
All too often, we fail to track the financial performance of our companies on a regular basis.
We would never think of not checking the pressure, temperature, and solution feed on our machines before we start cleaning.
But, somehow we figure that if we ignore the financial performance of our company, or if we avoid printing out and reviewing our financial statements, profits will magically appear.
This is like believing that if we still have checks left in our checkbook, then we still have money left in our checking account.
Sometimes we avoid our financial statements because we’re afraid they will give us unhappy news. (See “A painful experience” above.)
We also need to address another reason we don’t earn healthy profits.
Tracking our financial performance is essential.
But simply tracking it isn’t enough.
We also have to act on the information we get. This can be tough.
It’s much easier to complain about customers, employees, suppliers, bankers, or any other outside force than it is to accept the fact that the financial performance of our company is actually our responsibility.
When you decided to start your own small business, you also agreed to be its chief financial officer.
This means you have a responsibility to your employees and to yourself to understand the information on your
financial reports, to review it regularly, and to make the tough decisions in your company to ensure you continually earn healthy profits.
Some of these decisions include holding people (and ourselves) accountable for producing our work profitably.
It means choosing to do business with customers who will pay us what we need in order to earn a profit, and who will pay us on time.
We also want to carefully track what it costs us to do our work and to make sure we’re producing enough per hour to make a profit.
We also have to make sure we always have enough cash to run our business.
So, we have to track our accounts receivable and make collection calls when necessary. This can be especially tough when you consider that many business owners are confrontation avoiders.
Marginal Profitability Habits
Human beings are creatures of habit. We create habits by repeatedly doing something the same way.
If we’ve established poor financial habits, then we’re much more likely to earn poor financial returns. After all,
that’s what we’ve been practicing.
Eventually, some owners start to accept as standard operating procedure having a small or even a negative balance in their checking account.
They learn to live with stringing out vendors when they call about overdue bills.
They become numb to sweating out making payroll every week, or in worse cases, “floating” everybody’s payroll checks over the weekend, hoping money comes in on Monday to cover them.
If the money doesn’t come in, they cover the payroll checks with a credit card.
To make matters worse, some owners live cash-starved for so long that when some cash finally does come in, they’re inclined to binge-spend on things they really don’t need.
They just can’t resist the urge to medicate their painful, stress-filled situation by buying something. (See “Breaking a bad habit”.)
Without Accurate Knowledge
Some of us simply don’t know how to earn profits.
This reason for not earning deep profits doesn’t fall into the category of self-sabotage if you don’t know what you don’t know.
Nobody has ever taught us, or we’ve never learned on our own. But, if you did know you didn’t know how to earn profits, and didn’t seek help, then that is self-sabotage.
Most cleaners/restorers are good technicians.
The way they became good technicians was by going to classes that taught them how to perform the services they offer. Because they enjoy the classes so much, they go back time after time — each time picking up some new technique that makes them even better as a technician.
But when it comes to making a profit in their business, too many owners are embarrassed to admit that they aren’t making good money, and that they have absolutely no idea how to turn that situation around.
Too often their egos get in the way of asking for help. This is crazy.
Do we think that simply because we chose to go into business for ourselves that we were going to be anointed with some higher level of understanding about how to earn a profit?
Why is it we can readily admit that we don’t know how to remove a particular stain from a carpet, or that we struggle with drying a structure?
We have no trouble calling one of our business friends and asking him for help in solving these problems.
But when it comes to making money in our business, we don’t want anybody to know that we don’t know how to do it.
So we go around expounding on how many trucks we have, or the last big job we did, or how nobody cleans as well as we do. But all the while, we’re living with that empty feeling that we’re not making any money.
Get Out of Your Own Way
Consistently earning deep profits in your business, and creating financial independence for yourself, is a learned skill.
If you weren’t lucky enough to have parents who taught you, or a mentor who took the time to show you, then get to a class or read books or hire someone who can show you.
Don’t put off that decision.
The good news is that the path to earning healthy profits in your business is wide open and inviting you to stroll down it.
Sometimes you just have to get out of your own way.
Breaking a Bad Habit
Unexpected “cash in your pocket” — increased cash flow — can trigger a spending spree for new equipment or other “toys” you want for your company.
The way to break this cycle is simple, but it may not be easy.
You start with fundamentals:
Earn more than you spend. So, if you want to spend more, earn more.
Make sure every dollar in your business is accounted for. Even cash. This means depositing all the money in the bank — the real bank, not “Hip National Bank.” It means purchases are made with checks or credit cards and are accounted for with a receipt. It means not using the company checking account or petty cash box as your personal piggy bank.
If an item won’t generate more income or earn more profit, then it isn’t bought with company money.
What are “Healthy Profits”?
Literally, we don’t know how deep our profit margins should be, so we set the profit bar much too low.
As a result, we work year after year earning marginal profits, and find ourselves at the end of our working careers without enough money to retire comfortably.
Just how deep should profits be to be considered healthy?
Here are a few guidelines you can use, but please keep in mind these are only guidelines.
If your net profit (for purposes of this discussion, I’m including the owner’s taxable wages with the net profit) is any thing less than 12 percent in your carpet cleaning/disaster restoration business, it’s not enough.
It may feel like it, but it’s not.
You’re living month to month, barely earning enough to stay even with cash flow.
If your company is earning more than 12 percent net profit, but less than 20 percent net profit, you’re making progress, but it’s still not enough to create financial independence.
Some business owners have to resort to credit cards and automatic teller machines to cover payroll and other business expenses.
Don’t fall into this trap.