Avoid the Path of Bottom-line Destruction.
By Chuck Violand
The first factor is what we, as the owner of our business, believe about money. The second factor would be the decisions we make, based on these beliefs, which directly affect the amount of money we earn through
In a nutshell, profitability is the direct result of our beliefs and our decisions.
In 2006, I wrote a two-part series in this magazine about how our beliefs regarding money play into the profit we ultimately earn in our business. Based on that article, I’ve prepared a white paper entitled Profitability Starts Between Your Ears, and I would be happy to send that to you. Simply e-mail me a request.
This article is about how the decisions we make in our business, some big and some small, directly affect the profit we ultimately earn. It is not an exhaustive study by any means, and it certainly doesn’t list all the millions of decisions we make every day that affect our profitability. What I address here are five of the more common choices we make that determine the depth of profits we earn. Let’s start with an easy one.
1. Follow the Money
Small businesses are frequently launched by entrepreneurs who enjoy performing a certain service, producing a particular product or who simply feel they can provide their product or service better than anyone else.
Most of us don’t perform in-depth market studies, competitive analyses or feasibility studies to see if starting
our own business makes sense.
Instead, most of us have what Michael Gerber calls an “entrepreneurial seizure” and we go from having a reasonably stable career as an employee to having a miserable job as a business owner — all in one gigantic leap.
We make the mistake of basing our decision to go into business on how much better we think we can execute.
What we need to ask ourselves is, “Can I make any money doing this work?” and “Will I be able to earn enough money providing this service to realize the dreams I risked going into business to achieve?”
If we plan to earn enough profit through our business to build financial security for ourselves, we have to make sure the services we offer are profitable enough to do so. We also need to be sure we’re not continuing to provide a service simply because it’s familiar, nor because we have a romantic attachment to it. Not all services or products will fit when measured against these standards.
When we become satisfied with simply making better money than we made when we worked for someone else, or when we continue to offer services that are marginally profitable, but not profitable enough to build real financial security, we become handcuffed to a job.
2. Respect the Money
We hide out from our money. Financial guru Suze Orman hits the nail on the head when she states that money acts a lot like people. When we ignore it or abuse it, money goes away, just like our friends would if we ignored or abused them.
But, if we pay attention to money and treat it with respect, it multiplies — just like friends. Too often we don’t treat our money with the respect it needs in order to make it grow.
We start off on the wrong foot by calling our money names: Peanuts, moollah, dough, jack, bacon, greenies, smackers, etc. For some reason, we don’t want to call it by its real name. Soon our money develops an identity crisis, gets confused and decides to leave us. Who can blame it?
If that’s not bad enough, some of us abuse our money by treating our business checking accounts as if they were our personal piggy banks. We never establish the discipline to separate our company finances from our personal. As a result, we end up making purchases with company money that bring absolutely no value to our customers or lasting value to our companies — such as that new Harley Davidson purchased with the business account.
The principle of money in a business is pretty simple: Pay attention to it, treat it with respect and it will respond in kind.
This starts with printing your financial reports monthly and reviewing them with the key people in your organization. Even if you don’t know what all the numbers mean — most business owners don’t — it establishes a good habit that will lead to asking good questions and getting answers.
Respecting company money means to use it only to bring value to your customers. I still have not figured out how paying for the owner’s luxury car, boat, motor home, or beach house brings value to his customers. It shouldn’t be used for those things!
3. Keeping Busy
We confuse feeling busy with being productive. A lot of small business owners, especially owners of service companies like cleaning and restoration companies, pride themselves on how busy they are.
But, just because someone is busy doesn’t mean they’re productive or profitable. Many small business owners are adrenalin junkies, addicted to the rush we feel, and the sense of importance we get, when we’re constantly running around.
Some mammals were intended to run in circles. Greyhounds and hamsters come quickly to mind. I’m not so sure the same should be said of business owners. I’d personally like to think we have a higher calling.
Unfortunately, some of us get on that treadmill early, become addicted to the endorphin rush of feeling busy and end our careers pretty much where we started. Only then we’re older, and usually tired, and don’t have much to show for all the years of hard work and sacrifice.
I think a shift of focus is needed. In my opinion, we place way too much value on how busy we feel rather than on how effective we are. If we can accomplish more in half the time, with half the effort, we should. Then we can spend the time and energy we saved with our families.
If you feel like I’m speaking directly to you, allow me to suggest how you can begin to correct this behavior. The next time you greet someone, rather than making conversation by asking the standard “Are you keeping busy?” ask them if they’re making progress or being effective or making a difference. Suddenly, simply being busy won’t seem as important.
4. Doing Too Much
We take short rides on too many horses. There’s an old Western saying that illustrates this point beautifully: “One butt can’t ride two horses.”
In other words, when one person tries to do too many things, he ends up doing nothing. Small business owners are famous for this. Like moths to a flame, we’re attracted to the newest, shiniest object in our orbit, but we’re chasing after so many objects we can’t gain traction with any of them. We then become discouraged or bored, abandon the old ones, and start chasing after the next new object that comes along.
Chasing after too many things keeps us from focusing, from executing consistently on two or three priorities and actually making money while doing so. Trying to focus on a dozen things leaves you focusing on nothing, but man… do we feel busy!
We also end up diluting our cash by disbursing it in a hundred different directions. We dilute our attention by constantly shifting our focus; and we consume our time with all those wonderful distractions.
Not long ago I was working with a company that, while once successful, was now hemorrhaging money. The owners were desperately looking for quick fixes — Band-Aid treatments they hoped would plug some of the holes and turn their company around. They soon discovered there weren’t enough Band-Aids in the box for this strategy to work.
I convinced them to take a deep breath and a step back. I asked them what three things (priorities) they would choose to act upon in order to correct the situation. Pleasantly enough, they came up with roughly the same list of priorities as I had. When they focused on those three things, rather than the dozens of tactics they were “trying” before, they were able to reverse the course of their company.
Incidentally, this strategy of focusing on only three or four priorities works just as well for planning growth. If you use it as part of your strategic planning process, you may not have to resort to using it later to save a troubled company.
5. The Head Rush
We let our success go to our heads. If you’re the owner of a successful business, it’s easy to let success go to your head. We work hard to grow our company, so it’s only natural that we would want to take some of the credit for its success.
But let’s not overlook all the other factors that played a part: Our employees, our customers, our families and friends, vendors and just plain old luck. When we start taking too much credit for our own success, we start down a slippery slope and can lose our way pretty quickly.
If we’re not paying attention, it doesn’t take long for self-confidence to grow into arrogance. If arrogance isn’t checked, it feeds on itself and can turn into an inflated ego. An inflated ego leaves us vulnerable to make business decisions that are irrational, dangerous, and in extreme cases, can cripple our company or even put us out of business. Inflated egos create huge blind spots in decision making that can cost us, and our company, money.
Whenever you find yourself falling into the trap of an inflated ego, it might help to remind yourself that 80 percent of the decisions in a business can be made by a front line worker. The remaining 20 percent is where we, as business owners, earn our keep. When we make decisions that help our company succeed, it’s not an occasion for dancing in the end zone, polishing our ego or lavishly rewarding ourselves. It’s what you’re paid to do! Instead, thank the people around you and your good fortune for being in the right place at the right time.
Avoid the Money Pit
Building a business is hard work, but without smart management it can become a money pit. It’s easy to get caught up in the trap of putting your head down and just driving forward as hard as you can, year after year.
We wrap ourselves up in the righteousness of feeling busy, but too often we don’t really know if we’re making any progress, or even if we’re headed in the right direction.
You can avoid a lot of frustration and start building real financial security for you and your family if you take the time to step back from the daily fire fight of running your business.