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Why we’re excited to make less money right now.

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Less Can Be More!

In 2006, we worked hard to become profitable within the first 18 months of building Crankset Group. And the profits went up each year until 2010. Then they started going down and that’s when we got excited. It was a very good sign.

In every business there are cycles of numbers that we should focus on. It’s never neat and tidy, but in general, we followed different numbers at different stages in our business.

The Cycle of Numbers:

Startup? Watch Revenue most.
Don’t bother going through a lot of profitability scenarios until you find out if you can actually sell your widget. Nothing else matters at startup except revenue. Everything else is voodoo and fortune telling. Go sell something. If it doesn’t sell, forget all the rest of the numbers. Our services started selling regularly, so we moved to a new focus:

Early Stage Business? Watch Profitability most.
As soon as you figure out you can sell something, figure out if you can actually be profitable selling it at that price. The polish sausage vendor buys them for $1.00 and sells them for $.95, but thinks he’ll make it up in volume. He’ll just lose more money. Get a good accountant at this stage who can tell you how many widgets you will have to sell per month to be profitable. Then focus on getting there.

Finding Break Even? Focus on Profit
Profitability is theoretical. You’re just making sure you aren’t wasting your time building a business that won’t make it. But Profit is “real”. Figure out your profitability, then focus on nothing but getting to real profit. A good accountant should be able to tell you how long it will take based on selling x widgets/mth at $x per month. Once you break even and start making a profit, the fun begins.

Growing a real business? Focus on Cashflow.
When you finally start making a regular profit, that is a very dangerous stage. Why? Because it is the first time you have something to protect – profit – and you will tend to hunker down and protect it.

Don’t.

If you stop at simple profit based on your own production, you will never grow a real business. Instead of siphoning off the profits and buying a hot tub, it’s time to reinvest them in growing the business to where it can make money while you’re regularly on vacation, or bigger if that is your preference. The problem is that when you decide to grow your business, the profits you worked so hard to realize, will go down or even disappear for a time.

Growth will kill your profit – for a short time
Even though our business has grown 392% in the last four years, our personal income has gone down every year for the last three years. But rather than be concerned, we’re very excited because we understand the principle of growth: growth decreases profit and cash flow. The faster you grow, the less profit you will have right now, but a lot more later.

If you are making less profit because your revenues are bad or your margins are too low, that’s a big problem. But if your profits are low because you are growing quickly, get happy about it. Just watch your cash flow – fast growth can put you out of business if you don’t have enough cash on hand to pay your bills.

Growth slowing down? Watch your expenses
The final cycle – If you decide to stop growing (we plan to keep growing internationally), your profit and your cash flow will return, and if you’ve done it right, you’ll have a lot more of both than when you first starting seeing profit. At this stage, tweaking your expenses will only make you more money.

Make decisions based on where you want to be, not on where you are
Too many business owners focus on expenses early in their business and say this to themselves, “I can’t afford to hire that sales person, buy that truck, install that software, etc.” The problem is that you are looking at an investment (money that comes back in spades) vs. an expense (money that never comes back). When you make decisions based on where you are, you shouldn’t be surprised that you’ll be there again next year.

One final thought – watch cash flow during every number cycle – it can put you out of business at any time.

So don’t be afraid of the growth stage! Give up the profit for a time and grow. You’ll have a lot more of it later.

What to Obsess About as You Grow

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(not profit)

Startup is all about proving you will make a profit someday soon. Once you prove it, you need to forget profit and focus on other things. If you don’t, you may stagnate or go out of business, ironically by focusing on profit.

Too often I see business owners who have worked hard to build a profitable business who never get off the treadmill. The problem is that when the business finally makes money, the founder too often hunkers down and protects their profit, when what they really need to do is move to a new stage – forget profit for a time and focus on growth.

At startup, if you don’t focus on proving your product or service can be profitable, you’re employing the Random Hope strategy of business. But once you’re there, if you want to grow, profit will shrink. It almost always does. Growth usually erodes profit significantly. If you’re focusing on profit, you’ll never want to grow, and you’ll never build a sustainable business.

When growing, here’s some things you should focus on instead of profit.

1) Product development – make it better!! Don’t settle for what worked to get you into business. Be relentless in developing an even better product or service. This could cost you some profit. It’s worth it.
2) Great people – great people are not an expense, they are an investment. Forget your profit, take a lower salary yourself, and get a couple great people. They will help you build a sustainable business, and you will grow much faster with a few key people doing things you’re not good at doing anyway. This will sacrifice short-term profits.
3) Logos, website, marketing materials. Too many businesses make the mistake of focusing on these things when they start (see last week’s post on why that’s a bad idea). But once you know you’ve got something, build a consistent face for your business.
4) Infrastructure (software, leased space, conveyor belts, computers, a bigger truck, etc.). When we cripple along and “make due” because we don’t want to hurt our profits, we are not thinking straight.

Focusing on profit, instead of growth, simply mortgages our future for short-term profit. We sacrifice much higher profits in the future because we’re not willing to take a break from profits to build the business.

The profits you were making early on need to be re-invested in the business in the form of a continually improved product, great people to build around, good messaging and marketing to expand the reach of your business, and infrastructure to support the growth.

Principle #1
Ask yourself this question: “Are you making decisions based on where you are, or where you want to be?” If you are making decisions based on where you are, where do you expect to be next year, or five years from now?

Principle #2
Don’t “go” into business, but “grow” into business.

Don’t spend money on the above things until you know you have a product or service that has proven it will be profitable. Don’t take loans out to build something early on that you haven’t proven has legs. But once you have proven it, then it’s time to make the investments that will take you from short-term profit, to a long-term sustainable business that makes money while you’re on vacation.

Prove profit. Then shift from profit to growth, and know that growth will cut the heart out of your short-term profit so you can build a long-term profitable business.

Growth Can Kill Your Startup…

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And Profit Can Kill Your Growth

Huh? Aren’t profit and growth both good? Only in the right sequence. Focus on the wrong one at the wrong time and either one of them can drive you out of business.

At Startup, It’s All About Profit
Startups make the mistake of thinking what they need right away is growth. We measure growth in a number of ways, and all of them are largely unhelpful to an early stage business:
1) Revenue (is not profit!)
2) Market Share (lots of new customers)
3) Operational scalability (lots of new people, machines or square footage).
4) More investors (lots of cash being invested early on)

Problem: The ONLY thing that matters in the very early stages is finding something that can and will make us profitable for the life of the company. Why? Amar Bhide says 93% of all businesses leave their prime objective to become profitable. I think it’s even higher. If you focus on growth first, you’re almost certain to grow something that won’t be your long-term profit center, and backing out of it could be disastrous.

In 2006 we started Crankset Group believing our main profit center was something we stopped doing two and a half years later, and will never do again. It took us longer than normal to find our profit center, and I’m very thankful we didn’t invest a lot in making it go. Committing a lot of resources to it early on might have us mucking along trying to keep it alive just because we were too vested to move on.

An emphasis on growth before you’re 100% convinced you’ve found your long-term profit center will drain your resources and drive you out of business, by chasing an idea or a product that hasn’t been tested by your customer’s checkbooks (the only true focus group). Find your REAL prime objective, the one that will create long-term profitability, first. It almost certainly isn’t what you planned.

Found Your Profit Center? Forget Profit!
The game shifts radically once you’ve found what will make you profitable in the long run. Most business owners miss this one. I worked for a company that became profitable, decided to stop investing, and three years later, profited and saved their way right into bankruptcy.

Most small business owners do the same thing. As soon as they become profitable, they have something to protect (profit), and they’ll protect and defend that profit so fiercely that they either never hire anyone else to build the chair (I can do it cheaper myself) and never get off the treadmill, or their business becomes obsolete and just fades away. This is where Ray Kroc’s (founder of McDonalds) terse warning applies, “If you don’t want to take a risk, get the hell out of business.”

After finding your profit center, if you are worried about profit, you will likely never grow.

Growth means one of two things – you grow enough to build a true business that can make money while you’re on vacation. Or if you want to be Giant Corporation, Inc., then growth means figuring out how to capture the most market share. Most business owners will never want to be Giant Corporation, Inc., but all of us should grow our businesses to the point where we are no longer hostages, but can very regularly get away and enjoy the fruit of our business. To do that, focus on profit first, than be willing to take the risk to focus on growth, even at the risk of short-term profit.

It’s Worth the Risk
If you take the risk to grow, you’ll make a lot more money in a lot less time, for a lot longer than if you focus solely on profit.

Discipline will not make you successful

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The tortoise wins.

I ran a marathon 30 years ago. While training, my wife, Diane, started casually jogging with me at the end or beginning of my runs. A few weeks before the marathon she ran a half-marathon with me.

Since I had never run more than three miles, I had a five month schedule for preparing for the marathon. I was very disciplined about it, it didn’t matter if it was late at night or raining, I kept to my schedule for those five months and finished my marathon.

20 years later I was only running casually one or twice a week, sometimes less. I was able to keep my exercise going with other sports, but really didn’t have a long term commitment to running. 20 years after the marathon Diane was running four to five times a week faithfully, every week.

Discipline vs. Diligence
I had been DISCIPLINED to prepare for the marathon for five months, but Diane was DILIGENT to keep running a few miles every day, year after year. We hear a lot of talk about discipline, but diligence trumps discipline every time, and is much more desirable in growing a business that lasts.

Tony Robbins says we over estimate what we can do in a month, and greatly underestimate what we can do in a year. Diligence takes the long haul into account and sets us up for long term success. It’s about being the tortoise, not the hare. Diligence keeps us from getting distracted by each new shiny object.

Discipline is motivated by short-term goals. Diligence is motivated by long-term goals, deep values and belief systems.

Discipline is about building a habit. Diligence is about building and sustaining a life and a legacy.

Discipline is about WHAT WE DO. Diligence is about WHO WE ARE.

Things are great; things are not great; things are great…
Why are there so many peaks and valleys in businesses? Too often it’s caused by being too committed to very short term impact (discipline) and not having a good grasp on how to do anything about the long term (diligence).

The priority – the long term
Henry David Thoreau said “Most men lead lives of quiet desperation.” In business, we get a shot at quiet desperation every time we commit to a short term shiny object that we just got excited about. Emotion and shiny objects are a great for recipe for short term shooting stars, but diligence keeps us grounded, stable, shooting for something significant with our business.

Short term goals that aren’t connected to any significant future for our business contribute to quiet desperation – moving from one short term, random, unconnected objective to another. We can look very disciplined about short term goals and never get anywhere. Longer term objectives for our business get us focused on something significant and create quiet resolve.

Investor owned and publicly traded businesses rarely get the opportunity to actually build a business on what would be good for the long term. As a privately owned business, you have the ability to build something that will make an impact for decades to come and create a great legacy by simply being diligent to make decisions that are best for your future, not just your present.

The tortoise really does win. Keep moving, plod along, never give up, stay the course – be diligent.

Diligence beats discipline every time.

Why Good Business Owners Live Disoriented

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There is such a strong pull in our western business culture to ‘have it all figured out.’ But there is a simple, counter-intuitive yet powerful principle that successful business owners know which keeps both them and their businesses growing:

Adults don’t learn unless we’re disoriented.

Think about it. A kindergartner is learning all the time, but adults have it all figured out. Why? Because everything is new all the time to a five year old. They are regularly amazed by how the world works. But adults have it all figured out, even when we don’t. We can’t let anyone know we don’t know something.

Successful business owners aren’t afraid to not know something and the best of them simply “live disoriented”. If we know that we don’t know everything and that life is SUPPOSED to be full of change, healthy instability and new experiences, we are much better prepared to grab hold of the new things that will keep us and our business fresh and growing.

Most business owners are strongly fastened to what they’ve always done, so when something new comes along that would actually push them forward they don’t see it because they aren’t disoriented enough to see the opportunity – they already “know” what works.

When I was in my 30s and had been in business a few years I figured I knew at least 50% of what it meant to be a good business owner. A number of businesses later I was much more certain that I knew less than 25% of what it took to make it work.

Business owners who live disoriented understand that the more they learn, the less they know. Learning just opens up door after door that all provide opportunities for us to continue to grow, adapt, change, and succeed.

When was the last time you were disoriented? Unless you’re disoriented from what you are certain is “true”, you’re not likely to take on any new tools to help you be even more successful.

Bob Parsons (Parsons Technology and GoDaddy) says: “Get out and stay out of your comfort zone.”

Let’s all commit to being five years old again – get disoriented and stay that way. You’ll learn a lot more, be a lot more successful, and make a bigger splash in the world around you.

Kids and Businesses should both grow up.

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Within a few weeks of the birth of our first child, Diane and I were already imagining and anticipating how it would be when he was all grown up, had graduated from college and was out on his own. We had these same conversations after the birth of all three kids.

From very early on we really looked forward to having adult children whom we could enjoy, and with whom we could build adult relationships. We’re now reaping the rewards of those early years of investment and simply couldn’t have better kids to be around.

We haven’t stopped being parents (we were never fans of being “your kid’s best friend”), and will continue to always play a role in giving unwanted advice and meddling where we shouldn’t. But we fully expected and looked forward to that point in our relationship when it would change from one of complete dependency to what we have now, a reciprocal relationship with our young adult children where they now give back to us on a regular basis with their lives.

Maybe Diane and I are weird. From the beginning we thought of our kids not just as kids, but also as adults in the making. We were very aware that at some point the great amount of personal time, emotion, and money invested in guiding our kids would eventually grow into a more of a two-way street. We hoped that as adults, we could all invest in each other, help each other find significance with our lives, and simply enjoy each other for decades.

Maybe that perspective is why I see business differently than other people. I think businesses should grow up, too. I don’t mean “it would be nice if it happened”. I mean we should all, every one of us, expect our businesses to grow up and start giving back to us and to the world around us.

We should assume that at some point our business would move from survival right through success to significance. Everyone would agree that we should intend for our children to grow up, leave home, and become grown-ups we could enjoy for decades, and yet when was the last time we had a similar conversation about our businesses? It’s normal for children to grow up, so why isn’t it normal for businesses to do the same thing? Frankly, we’re in charge of both of them at birth, and if you have had kids, you’ll know that you’ve got more control over the maturity of your business than the maturity of your kids.

And yet most businesses never grow up. We spend decades changing the diapers in our business and reporting to the vice principal on a regular basis to get it out of detention. Twenty years after we hung out our first sign we seem to be spending as much time, emotion, and money on our business as we did the day it was born. Why would we so eagerly anticipate the maturity of our children and never expect the same for our business? Shouldn’t we expect to be able to enjoy our mature business for decades as well?

I would enjoy your thoughs on this.

How to Get Your Business to Grow Up and Run Itself

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Ray Kroc, the founder of McDonald’s, understood that to have his business grow up and run itself, he would need to pay attention to all of the Seven Elements of a Business – so he did.

Kids need to grow up and stand on their own two feet without leaning on you – that is maturity. Your company should do the same thing.

We assume we should wait until we’re big enough before we figure out how to make the business run itself, but – where we start is where we end up. No matter what size your business is, you should be manically focused on getting yourself out from behind the steering wheel from the gitgo. Pay attention to all Seven Elements of a Business, like Kroc did, and watch your business grow up.

Element 1: Vision and Leadership

“I was 52 years old,” recalled Kroc. “I had diabetes and incipient arthritis. I had lost my gall bladder and most of my thyroid gland in earlier campaigns, but I was convinced that the best was ahead of me.” And when he first saw the McDonald’s brothers’ restaurant, he saw what they didn’t, an opportunity to create an international business, not just a restaurant.

“If you’re not a risk taker, you should get the hell out of business,” said Kroc. What risk is holding you back? Get clarity on your vision to take more risk.

Element 2: Business Development

Kroc had to create the need for his product! Fast food was not an existing market – tough job! He clearly knew his niche, learned how to communicate that niche, and stuck to his knitting – he didn’t get sidetracked trying to make great food. And he didn’t let ego get in the way of making money – a very common disease.

Element 3: Operations/Delivery

Work from the result desired. “I didn’t invent the hamburger,” said Kroc. “I just took it more seriously than anyone else…We take the hamburger business more seriously than anyone else.” He built a small business into an international empire by focusing on the operational details and the desired result.

Element 4: Financial Management

When Kroc was asked “What’s the #1 priority for McDonald’s?”, he responded, “The bottom line!” To Kroc, efficient meant most profitable. He didn’t want the best hamburger in the world, he wanted the one that would make him the most profit per fat molecule.

Element 5: Customer Satisfaction

CONSISTENCY of EXPERIENCE was key, not QUALITY of EXPERIENCE. He didn’t need the best food, just the most consistent presentation of it. And if there was trash in the parking lot, that was “a gross affront to me.” A great customer experience was everything.

Element 6: Employee Satisfaction

“None of us is as good as all of us,” Kroc said. A strong believer in teamwork, Kroc knew his growing company could only grow if he had dedicated people. Kroc treated everyone with respect. Every new employee got a badge with the title “Management Trainee” to let them know they all needed to participate in making McDonalds great. His Suggestion Box was legendary.

Element 7: Community/Family/Self

Kroc was an astute businessman who understood that community involvement was a key part of an effective marketing strategy. This tradition of giving back that Kroc initiated so many years ago remains an integral part of the McDonald’s corporate philosophy. Through community contributions, Kroc also established a corporate tradition of creating a positive presence in society.

What did McDonald’s have going for it? Kroc paid attention to all Seven Elements from the gitgo. As small business owners, we’re usually good at a few of the above, and have big holes in a few. Which are you really good at? Whatever you answered, you’re business probably needs help in the opposite ones.

Your business may not be running itself yet. That’s not the question. Are you setting it up to be able to do that at the earliest possible opportunity? If not, you’ll be babysitting it for years to come, and won’t know why every time you come home, your business is there waiting for you!

Let’s learn how to wean our businesses – pay attention to all Seven Elements of a Business. We deserve an empty nest at some point, with a business that can run itself.