Are Mistakes Good?

Posted on February 19, 2012 by John F. Dini

“Experience is a dear teacher, but only a fool will learn from no other.” Benjamin Franklin

Business owners learn a lot from their experiences. As a friend says, “Experience is what you get when you don’t get what you want.”

In many companies, you can trace the history of their employee issues through their handbooks. The dress code says that Fridays are casual days. Then it goes on to say that casual dress does not include ripped jeans, low-cut blouses, flip-flops, shorts, sleeveless t-shirts, pants that drag on the floor, baseball caps, piercings over a certain number, dressing in the clothing of the opposite sex (Real! I’ve seen it!), or graphics that include crude or offensive language.

You can visualize every incident, the counseling, and the subsequent managers’ meeting that added more language to the handbook.

But the experience that comes in operating a business is usually the results of making mistakes. We don’t tend to change our behavior because of our successes. If it works, we don’t want to break it.

You want to do some marketing. You decide to send postcards to prospects. If they buy, you keep sending postcards until they don’t work anymore. As long as they keep working, you keep sending them. When someone says “Where is your Facebook Fan Page?” you respond “My customers aren’t interested in that. They like postcards.”

How do you know?

We fear making mistakes, but if you do what you’ve always done, you’ll get what you always got. (attributed variously to Mark Twain, Zig Ziglar and Tony Robbins.) As an owner, it’s your job to make mistakes. That’s the best way to control their potential damage, and to keep your employees from making them for you.

How do you decide which mistakes to make? That seems like a foolish question. I once saw a business assessment instrument that asked “What is your system for identifying the things you haven’t thought of?” At first blush it seems idiotic, but every one of us would gladly lay out cold, hard cash for such a system.

The problem is, we don’t make the mistakes we don’t try, but we have no way of knowing whether not trying is a mistake. For those of us who founded our businesses, the leap of entrepreneurship was a huge risk. If it was a mistake we failed, but if it worked, if we were tenacious and strong-willed enough to make it work, our appetite for risk began to decline.

When your business is successful, you enjoy the financial trappings of that success. You also feel an obligation to safeguard the livelihoods of the employees who depend on you, and the customers who depend on your product or service. You won’t take a “bet the company” risk except in the most exceptional circumstances.

It’s easy to then progress down the slippery slope of risk aversion. Avoiding a “bet the company” risk progresses into avoiding a bad year, then a bad quarter, then a bad month. If you aren’t careful, it becomes an avoid-loss-at-all-costs mentality. The status quo is safe. Change is risky. Why bother?

But you have to risk some losses in order to have new wins. You have to try new things, or the risk of not changing grows to company-threatening proportions.

Set aside a mistake budget. Periodically, say once a quarter, deliberately spend some time and money on trying something you’ve never tried before. Attempt a new marketing approach. Introduce a new product. Hire for a new position to do something that no one in your company currently does.

If the new idea is a mistake, you have contained the downside risk. If it isn’t, you’ve avoided an even bigger mistake- doing nothing.

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The (pen)Ultimate Hire

Posted on February 12, 2012 by John F. Dini

Every sane business owner will acknowledge that there is a point at which his or her own skills are no longer sufficient to grow the business beyond its current level. The revenue point where that happens differs by industry, but it frequently begins at around 20 employees.

At that point, an owner becomes swamped by the conflicting needs of managing the existing operation, and having enough time to perform the tasks that made the business grow in the first place.

The owner realizes that further growth requires the addition of a key employee; one who can assume some of the owner’s duties so that he or she can focus on organizational development.

The typical plaint in this situation is “I need someone who can think. An employee who can run things without my daily input, so that I can focus on what I do best.”

But there is another version that is materially different, although it sounds the same on the surface. “I need someone who can run this company without me.” is a far cry from one who can handle day-to-day operating responsibilities.

Many owners fail to look beyond the immediate need for task relief  to determine exactly what this key employee’s long-term role will be. There is a big difference between hiring an SIC (Second In Command) and an SIT (Successor in Training.)

A Second In Command is responsible for assuming some of the owner’s ongoing decision-making and management duties. The SIC’s role is to free the owner to do what he or she is best at (or enjoys the most). The job description is based on the assumption that the owner is present, or at least available, to check off on major decisions and give ongoing guidance.

In my presentation to business owners, “Beating the Boomer Bust” I discuss the likelihood that many owners will have to execute their own succession plan by growing a successor internally. This Successor In Training is more than someone who can merely back fill your skill set. It needs to be someone who can eventually replace your skills in the business.

The common wisdom is that an SIC should compliment, not duplicate, your talents. We advise owners not to hire a “mini-me,” since it is unlikely that you can find someone who has the same motivations to cover all the various skills that ownership requires.

Typically, you take your job description (finance, sales, business development, culture, motivation, operations, marketing, management) and subtract those things that you want to continue doing personally. The rest of the duties become the SIC’s job description.

But the intention of many owners is to develop the SIC into an SIT. An SIT is someone who can eventually assume all of your higher-level duties. He or she has to create value while you are still there by filling in the gaps in your skill set, but must also have the potential to grow into a broader role as you prepare to withdraw from the business.

Of course, you are still in for a long search if you seek a “mini-me.” The likelihood is that your SIT will eventually need an SIC of his or her own. If you can’t run the company by yourself, your successor can’t either. If you need an SIC now who pays closer attention to the numbers and ratios than you do, then that person will eventually need someone to focus on sales and development.

Hiring a key executive is the single most important decision you will make. Don’t begin the process by making the mistake of looking at only the needs you have today. A solid SIC will probably take five years to fully integrate with you. An SIT may take ten. The investment can be wasted if you look only at your immediate needs. Start with a longer-term vision of how you want your role as an owner (or as an ex-owner) to play out.

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Can You Build Your Business in Half the Time?

Posted on February 5, 2012 by John F. Dini

I had an unusual coincidence happen last week. Speaking to prospective new members of The Alternative Board (TAB), I wound up with three CPAs in the same meeting. They were from three different smaller firms, and all three identified their current concern as a struggle to develop new business.

The idea of participating in TAB is to set aside time each month to work on, not in the business. When I asked if they might find benefit in doing so starting today, they looked at each other and then at me.

“You don’t understand,” one said. “It’s February. We can’t do anything but tax returns until April 15th.” The others nodded.

I’ve coached and consulted with many accounting firms over the last 15 years. All but a few follow the same pattern. From the first of the year until April they are buried in tax work. April is big for post-deadline decompression and vacations. In May they start looking at the extensions that still need to be done, and catch up on their billing.

In most firms, June begins the partner meetings and planning process. July is when they finalize goals and objectives for the coming year. They work on those initiatives from August (working around the rest of their vacations) to November, with a break for the rush of the October final extension deadline. Then there are the holidays, and in January they begin preparing for tax season again.

But they’re surprised that the business isn’t growing to meet their expectations. After all, they work very hard, and think about business development for almost 1/3 of the year!

Let’s say you made one of those ubiquitous New Year’s resolutions to get into better shape. You exercise diligently from January through April, and then you don’t darken the door of the gym or lace up your running shoes for the rest of the year. What are the odds that you’ll be making the same resolution next January?

It’s easy to pick on CPAs because every business person is familiar with the annual tax cycle, but how many other businesses do the same thing? Retailers for the holiday shopping season, contractors in the spring, health and benefit agents in the fourth quarter.

Do we put planning and development aside in the busy season because we really don’t have any time, or is it because our selective short term memory makes it an easy thing to forget when we are making money?

I work with many firms, including CPAs, whose business grows year in and year out. Their competitors complain that they are lucky, or overly aggressive, or make some other excuse for their success.

The truth is, they build their business development plan on a twelve month cycle. They have time and resources allocated every month of the year. They may not devote the same amount of time during busy season, but they don’t stop working on the business.

Take an honest look at your growth plans for 2012. For many small business owners those plans don’t go much beyond a target number. “We will grow 10% in the coming year.” That’s not a plan, it’s a wish.

If you have outlined something more substantial for your bizdev efforts, what steps have you taken to insure that execution occurs regardless of circumstances? Will that development be put on the back burner in busy season? What if you land a huge order, or a major new customer? What if the employee responsible for the development effort leaves?

If you expect to grow your business year in and year out, the effort for that needs to be consistent. Business development is a twelve month discipline. Starting and stopping produces the results that Aesop described for the hare 2,000 years ago. You lose to the turtle, no matter how much talent you have.

 Picture credit

Posted in Marketing and Sales | Tagged , , , | 1 Comment

One Response to Can You Build Your Business in Half the Time?

  1. John Hollier says:
    February 9, 2012 at 3:57 pm

    John,
    Couldn’t agree more on business owners myopic view of their business, where day to day operations is the only thing they are focused on.

    I touched on this subject in my own blog post “How much time do you spend ‘working ON your business’?”
    http://www.cxcel.com/wpblog/2011/08/how-much-time-do-you-spend-working-on-your-business/

    Keep up the good work,

    John Hollier,
    Chief Collaborator
    Collaborative Xceleration

    Reply

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Tax Deductible- So What?

Posted on January 29, 2012 by John F. Dini

We have done ourselves a disservice as business owners. Too often we have justified an expenditure to non-owner friends as “tax deductible” to show how clever we are.

In doing so, we have confused the public. They see the Federal Government throw billions at favored projects, and they think it is the same money that we are discussing.

Tax credits are not tax deductions. Tax credits are for companies that make a profit, and are then forgiven from paying the taxes on that profit. As many small business owners have painfully realized in the last few years, if you don’t make a profit, a tax credit is useless to you.

The past few years have also seen accelerated depreciation as a regular “tax incentive” (as opposed to a “credit”). Unfortunately, that did nothing to help the struggling companies who weren’t profitable enough to buy new equipment.

Tax deductions are expenses in your business that you pay. They involve real cash outlays. They are merely among the list of things that the IRS says you can include as part of the cost of doing business.

A few months ago I was discussing an event with a politician. He is a local part-time elected official, who has been employed for his entire career. He wanted to hold an event for the town.

I suggested we hire a nearby small business to provide refreshments, in the interest of supporting our own local economy. He said (with a wink),  “Tell them to just donate everything. After all, it’s tax deductible!”

Let’s say a small business provides income in to its owner in the 30% tax bracket. That means he gets to pay 100% of the food cost, 100% of the employee’s wages, and 100% of the gas out of his own pocket for his “tax deductible” donation. A year later he can put that cost down as an expense, and get 30% of it taken off his taxes. I’m certain the official had no idea that it costs the businessman $1,000 out-of-pocket and $700 net to “earn” his $300 tax deduction.

Tax credits are a zero-sum game. With a government that borrows daily to meet its obligations, every dollar of tax credits reduces the pie of revenues. While tax deductible expenses might have the same effect, they cost business owners about $3 in expenses for every $1 recouped. That makes them self-limiting. 

Spending too much money on tax-deductible expenses will put you out of business just as quickly as any other kind. Tax credits, on the other hand, are dollar for dollar gifts from the government.

So the next time you are going to wink at someone about your trip to a conference or tickets to a sporting event, make sure he understands what you are saying. “This is deductible from my profits, just like rent, salaries, employee benefits, and the hundreds of other expenses that I pay to run my company. Compared to them, it is negligible, and I still have to pay 70% of the cost myself.”

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Employees aren’t Partners

Posted on January 22, 2012 by John F. Dini

Many of my clients are recovering from the recession. They are running lean, and have restored their profitability, even if at lower revenues than prior to 2008. Those that had to reduce or freeze employee compensation are seeking ways to share their recovering success.

When cuts were made, whether layoffs, wage reductions, curtailed working hours or just freezing costs, profitability was the universally quoted reason. “We are losing money” or “We have to maintain a safe operating margin” were the battle cries of thousands of difficult conversations with employees.

Usually, those statements came with a future promise. “When things get better, we will (fill in the blank.)” In some cases the promise was simply to go back to full employment or wages. In others it was to “share the wealth” of increased profitability.

Now that the company is profitable again, owners are deciding how much they have to do to live up to these somewhat vague guarantees.

First, employees may need to be educated on the need to restore working capital and retained earnings on the balance sheet. The fact that a company is profitable this year doesn’t make it profitable retroactively. If the last few years decimated liquidity ratios, they must be rebuilt. A strong balance sheet is what carried you through this last downturn, and you have no idea when the next one will happen. Repairing your reserves sooner rather than later is the smartest use of restored profits.

From the same perspective, employees must understand that a return to acceptable profitability does not mean that you are going to pretend the last few years didn’t happen. Employees often expect that you will “make up” any missed raises or lost pay. It is your role to explain that we are going to start acting like a profitable company today, not make it retroactive.

But the biggest danger is the concept of profit sharing. Many employers are telling staff that they will share in the profits. One company I know is earmarking a specific percentage of the profits for distribution. Another is giving every employee a fixed-amount bonus as “profit sharing” for achieving the overall profit goal.

On the surface, it seems to make sense. Employees should understand why profit is a necessary requirement for owning a business. Cutting them in as “partners in profit” on an ongoing basis, however, isn’t necessarily a good idea.

Setting employee expectations of a “right” to profits opens a huge can or worms. What if you decide that the business needs to retain more earnings for future growth? What if a hot market or a big transaction hikes profits disproportionately? Should the bonuses compensate employees far beyond their market value? Is the fact they stuck with you in a single bad business cycle (when there may have been few other choices) a ticket to lifetime largess?

Profit-based compensation should be reserved for those employees who 1) make decisions that directly impact profitability, and 2) are compensated well enough that they can survive if they receive no incentive. Everyone else should have incentives based on their performance, not how the company fared overall.

Sharing profits after lean times is rightly a one-off event. It is a thank you for previous deprivation. Doing it more than once is creating an entitlement that has little effect and big implications.

Posted in Leadership, Management | Tagged , , , , | 3 Comments

3 Responses to Employees aren’t Partners

  1. Ted Reynolds says:
    February 3, 2012 at 9:32 am

    This is an excellent article and I completely agree with the concept that only Exectuive Mgmt should profit share. Incentive based pay for the employees is a good practice, but needs to have flexibility to ebb and flow with the needs of the business being met first and foremost.

    Reply
  2. Larry Amon says:
    March 3, 2012 at 6:51 am

    John, I disagree. I used profit sharing with my employees for 15 years. Each employee in my company contributed to the profits of the company. We were a maufacturing company and everyone contributed, not just the managers. We did set up a system whereby each employee’s share of the profit was based on compensation, years of service, and a performance factor. We met monthly with all employees and reviewed our financials with them. They knew where they could help by controlling expenses and where they could cut costs. they knew the cost of the materials that they were using in the process and could increase the yield and productivity of the operation. When the company was sold the employees were given over $500,000 to be dived up according to the previous criteria. After 25 years they are still there.

    Reply
    • John F. Dini says:
      March 4, 2012 at 9:59 am

      That sounds lile a great system, Larry. I note you said “performance” was a key criteria. I have absolutely no problem with using company profitability as a funding scale for incentive programs. My piece criticised companies that distribute profits as an entitlement, without defining what individuals need to do to earn their share.

      Reply

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