Designed to be thought-provoking and to give you some ideas and insights about your small business, and how it succeeds.

Here’s the first one:

Found Money Minute – Is Your Business Digging A Hole?

What’s been very interesting to me, and frankly, something I didn’t expect is how much confusion there is about compensating team members.

In speaking with these small business owners, one of the recurring issues that comes up – about 80% of the time – is how to pay team members. Not just “how much” to pay them, but rather “how to pay” them in a way that is both good for them and good for the business.

Even more surprising, to me, has been that fact that the overwhelming majority of these small business owners have created pay structures for the existing team that actually create problems for the business.

What seems to happen is that, because of a lack of clarity about how their business makes money for them, many small business owners end up creating pay structures that encourage their employees to do things that cost the business money. Or to do things that make the employee money, but lose money for the business, and so on.

If you have ever done that in your business, or are currently trying to dig yourself out of a mess that has been created around compensation, there is good news.

The way to solve the problem effectively, for both you and your team members, is to first get clarity around your business model. Then, once you know exactly how and where you make money in your business, it’s actually pretty easy to create a pay structure that is good for both of you.

I’d love to hear any stories you may have about “compensation disasters” you have experienced for inclusion in my next book.

If you start shoveling dirt to fill up a hole, you need to do a certain amount of work just to get “back to ground level”. There is a certain volume of dirt and effort required in order to erase the hole and get the ground nice and smooth again like it was before the hole was ever created.

Now imagine that you had only a certain quantity of dirt and that after you filled in the hole, you would start making a pile out of the remaining dirt. When all the dirt was used (and you probably had a few blisters and a sore back) you would end up with a dirt pile of a certain size.

But what if you exerted the same amount of effort, and used the same amount of dirt but there wasn’t any hole to fill in. The pile you would be making would start to grow above the ground with your very first shovel of dirt.

After using the same amount of dirt as in the first scenario your second pile would be a lot higher than your first one.

Agreed?

It’s obvious, isn’t it?

Research has shown, however, that many business owners actually choose something akin to the first scenario – only worse.

Many business owners actually dig their own hole for themselves first. They do that by selling products and services that don’t make them any money, attracting and selling to customers that don’t make them any money, and doing various activities in their business that don’t make them any money.

Then they use the customers, products, and services that really do make them money to fill that hole.

And only then, after they have dug a hole, and then filled it in again, does their “money pile” start to grow.

If they did the work to analyze the “hole-diggers” in their business and eliminated them (or at least absolutely minimized them) they would end up with a lot bigger pile of money. If the hole was much smaller (or eliminated entirely) they would end up with a lot more to show for their effort. It just makes sense, doesn’t it?

Are you a “hole-digger”?

Take an objective look at your business and its products, services, customers and activities. Try to eliminate the ones that create a hole that you need to fill before you make any money.

You will be happier, and you will have a lot bigger pile of money.

That’s the question your business is asking you – every single day.

At least, that’s what it would be asking you if it could talk. Any business creates financial results for its owners – that’s an absolute truth. The issue is whether or not those results meet your expectations.

If the financial performance of your business fails to meet your expectations, where does the blame rest?

With the economy? With your competitors? With your demanding customers?

None of the above.

If the financial performance of your business doesn’t meet your expectations, the blame almost always rests with you.

Why?

Because it almost means that you failed to clearly define the financial results you want from your business. And when you fail to do that, there is simply no possible way to clearly direct the activities and decisions in your business.

You end up “doing stuff” and “trying stuff” in your business, going along for the ride, and hoping for financial results that please you

That’s insane, and it’s gotta stop.

Now!

So ask yourself these questions.

“What is I WANT my business to do for me?”

“What do I really WANT from my business?”

They are actually pretty hard questions to answer because most business owners have never really clearly thought about them.

But you NEED to answer those questions for yourself.

You won’t be able to clearly direct your business toward creating the financial results you want if you don’t know the answers. And that’s not a place ANY business owner should be.

How?

It’s simple.  Every business has a CFO – someone who guides the strategy, tactics, and operations of the business to produce a financial outcome.  This person, just like in Fortune 500 companies, is responsible for guiding decisions about pricing, marketing, products and services, customers, growth, hiring, and just about any other decision that gets made.

This reason this person is involved in those decisions is that they are ALL financial decisions.  Financial decisions because they all impact the overall financial performance of the business.

The problem almost every small business owner has is that, while the CFO role is present in their business, and while those decisions are continually made, the CFO is also the owner.  This happens by default – the business can’t afford a full-time CFO, but those decisions still must be made.  The person that makes those decisions is the owner.

And while the owner ends up making those decisions, and filling the role of CFO, they do it without even realizing that is what they are doing.  So they do it without the proper information, education, and approach.

The result is that all those decisions that are so critical to the success and financial results of the business are made on an uninformed and ad hoc basis.

It’s no surprise then, that the financial performance of most small businesses is unpredictable (in good economic times or bad).

If you were paying a CFO to fill this role, and he or she acted like you do when you fill this role, they would be fired – maybe even sued for negligence.  Unfortunately, you can’t fire, or sue, yourself.

What can you do?

Become aware of the CFO role in your business.  Become better educated about what that means.  And start thinking like a CFO.  You won’t become one, but you won’t suck at it any more either.

A business model is simply the true underlying structure that drives the financial results for any business.

It’s kind of like the engine room and infrastructure on a cruise ship.  The things that go on “behind the scenes” create the end result for that ship – amenities, luxurious surroundings, great food, attentive service (or not), and many other things just like that.

The same goes on in your business.  Behind the scenes, there are key activities, products, services, customers, and team members that all combine to create the “outward appearance” that you, as the owner, see.  Specifically, those things create the financial results you see manifested in your business.

That may intuitively make sense to you.

The problem is that, almost without exception, I have found that business owners are mistaken about their true business model.

Mistaken?

Yep.

Almost every business owner I have ever met has an incorrect perspective of what their business needs to do to create the financial result they want – they simply are EXACTLY sure what SPECIFIC things the need to do, when they need to do them, and how often they need to be done in order to create their desired financial result.

Even worse, many business owners THINK they do know their business model.  And that sets them up for disappointment, sub-optimal financial results, and quite often outright failure.  This situation is like trying to navigate South America while using a map of Canada.  It doesn’t matter how hard you try, or how many “good” decisions you make based on that map – if the map is wrong you will still suffer frustration, hardship, and failure.

Are you using the right map?

Are you sure?

If you aren’t sure, and aren’t afraid to admit, shoot me an email at steve “at” wilkinghoff.com.

I love talking to business owners and I’m looking for a few business owners who are willing to look inward and discover their true business model.

Is it telling you that if you don’t run out and hire a CFO for $250,000 or more a year, you simply won’t make it?

Nope.  I’m not saying that at all.

Here’s the thing.

EVERY business – yours included – must have the strategic financial insight and discipline a CFO brings. 

Without that insight and discipline you will be operating your business based on pure assumptions, reliance on luck, blindness to what kind of “fallback plans” may be available to you, and that nagging feeling that something might just happen to derail you (remember the economic meltdown?).

Let me give you an example that has fired me up to write this post.

I was working with a client that has built a decent business, with a decent amount of revenue (several million).  But despite that, the business wasn’t making any money for the owner (literally no money – he was fortunate enough to have a healthy income from another business he owned).

Once we did some analysis, it became clear that so many decisions that were made in that business were done based on assumptions and “feelings” that weren’t planned out, or fully analyzed.  The result was that the business lost money on almost all of its decisions, activities, and areas – but made enough money on a very small proportion of them that the business just broke even (without the owner getting any salary).

The sad part was that after a few short months, the owner decided that he would rather keep doing things the way they had always been done.  He simply didn’t believe he needed to apply any strategic financial discipline to his decisions.

Since that time, the business has continued to maintain the same old pattern it always had.  It’s kind of shuffling along like a zombie – not fully alive, but not fully dead either.

The problem was that, in the owner’s mind, he didn’t need the “CFO skillset”. 

In other words, he didn’t see the importance of making decisions strategically, based on careful thought and analysis, and attention to what impact those decisions would have on the financial success of the business.  And since he didn’t believe in the importance of making decisions from that perspective, the business has continued to plod along like a zombie (acting alive, but actually dead on the inside).

So if YOU think your business doesn’t need a CFO, you’re wrong.

Well, maybe you’re right.

You may not need a CFO (most businesses don’t need, and can’t afford to hire a full-time CFO).

But you DO need the CFO skillset and discipline in your business.  At least if you don’t want it to act like a zombie.

She recently revealed that she was forced to declare bankruptcy after her Monster Ball Tour.

Why?

Billboard estimated in May that she earned gross revenues of $227.4 million on that tour. And drew about 2.5 million fans.

Despite those amazing numbers she ended up $3 million in debt.

By letting her creativity and passion run wild without keeping an eye on making money she fell into the trap of believing revenue was all that was needed.

All that’s behind her now and she’s just launched a new album and is generating a bunch more revenue. Hopefully this time she will also focus on making money too.

That way, just like the goal of every business owner, she will get rewarded for her efforts, creativity, and hard work.

If you start shoveling dirt to fill up a hole, you need to do a certain amount of work just to get “back to ground level”. In other words, there is effort required just to restore the ground back to where it was.

Now imagine you only have a certain quantity of dirt and that, after you fill in your hole, you start making a pile out of the remaining dirt. You will end up with a dirt pile of a certain size.

Now imagine that there wasn’t any hole to fill in. And that your pile started growing above the ground with your very first shovel of dirt. If you shoveled the same total amount of dirt in both scenarios, your second pile would be a lot higher than your first one.

Agreed?

It’s obvious, isn’t it?

Research has shown, however, that when it comes to business, many business owners actually choose something akin to the first scenario – only worse.

Many business owners actually dig a hole for themselves first. They do that by selling products and services that don’t make them any money, and by attracting and selling to customers that don’t make them any money.

Then they use the customers, products, and services that really do make them money to fill that hole.

And only then, does their “money pile” start to grow.

If they did the work to analyze their “hole-diggers” and simply eliminated them (or at least absolutely minimized them) they would end up with a lot bigger pile of money. If the hole was much smaller (or eliminated entirely) they would end up with a lot more to show for their effort. It just makes sense, doesn’t it?

Are you a “hole-digger”?

Take a long hard look at your products, services, and customers. And eliminate the ones that dig you a hole that you need to fill before you make any money.

You will be happier, and you will have a bigger pile of money.

We started talking about what makes an ideal source of new leads for him. This was an important discussion because he shares revenue with lead referral sources.

It became apparent rather quickly that we could formulate an objective way to measure whether any particular lead source was better (or worse) than others. And from that we decided that by following this same methodology we could pinpoint how much revenue could be shared with each lead source.

How did we do that?

We took a look at the various stages in the sales cycle (from initial lead through to sale). Using that as our framework we could then examine historic metrics for each of those steps, and then set targets for those same metrics that would drive the overall desired financial result.

In essence we were talking about deriving key targets around the sales cycle that would tell us, up front, what should be done to negotiate with potential lead sources up front.

In other words, we applied Found Money principles to help ensure that money would get made at the very beginning.

You can do the same thing in your business.

And you should do it – RIGHT NOW.

If money can be made at the very beginning – it can be lost there too. Select the wrong lead source or customer source and no matter what else you do – it may already be too late to make any money.