While having lunch with a client, he asked me a question. “Why don’t most small business owners make the right money?” Having owned a few small businesses myself, I could easily tell him why business owners had poor financial returns.
Five Key Financial Mistakes
Although there are countless reasons for a weak financial return, I have narrowed the causes to five key mistakes that I have personally witnessed. These factors have considerably hindered the attainment of significant financial return. Even in client organizations that have, in the owners view, provided substantial return, I have discovered that as many as 4 points were left on the table.
But, before I reveal those five mistakes, let’s describe what real financial return means. Real financial return occurs when ownership has W-2 compensation that is above the market for comparable employment. In addition, there is an above market return on any investment in the business. This is computed over no less than three fiscal years and no more than five fiscal years, ongoing. A great methodology for this measurement is the MAT (Moving Annual Total) calculation. With an established variable base line, you will always know when you have fallen below market or are reaping above market financial returns.
Why above market? Well, if your wages are the same or lower than comparable employment and your investment would throw off an equivalent market return, why own the business? Given the amount of risk, headaches and legal exposure in running a business, it makes sense to reach for something better.
Only the W-2 compensation depends on the company size, industry, and other factors. A profit distribution or stock dividend, which is also expected, is not (by percentage) dependent upon the company size, industry, etc. If it were, there could always be some justification for an inadequate financial return.
Having defined the right return, here are the five primary mistakes that hinder a proper financial return.
1. Unbalanced Portfolio
In any investment we make, i.e. IRA, stocks, bonds, money markets, etc., we expect a positive return over time. Business owners, or for that matter, career-minded individuals, should also expect a return and growth beyond W-2 income. If the return is deficient, as defined above, the organization may not be structured (balanced portfolio) in a way that would allow for a proper financial return. An analysis will reveal the imbalances so that you can restructure.
2. Inappropriate Talent
If you have been following me at all, you know that I believe this is the most vital component to a profitable business. More than ever, character, natural enthusiasm and belief systems are the foundation of an achieving team.
3. Undefined Strategy
Strategic Planning is an oxymoron. The development of strategy is futuristic. Once developed, strategy requires management commitment to every decision and tactical action carried out by the organization. Tactical planning and its driving force are derived from an established strategy.
4. No Plan, Only a Wish
Annual Business Profit Planning is a set of documents that clearly define the financial parameters, contribution margin objectives, marketing plans, business development tactics and related operational planning. Without a documented plan and real time Deviation Analysis, leadership and their followers are left to their own agenda. Whatever results come about, positive or negative, are outside of their control.
5. No Reinvested Profits
Organizations must continually reinvest in analysis, planning, talent and technology to establish and gain market share. Like profit from selling a stock, it is reinvested rather than left sitting idle and not supporting growth opportunities.
There is no denying that for some, just the mere fact of owning a business has its own rewards in self-worth and other gratification beyond getting the right financial returns. And I believe the following quote to be true.
“If your only goal is to become rich, you will never achieve it.” — John D. Rockefeller
However, having said that, Rockefeller accomplished and contributed much, while always having an above market financial return for any business he owned, making the right money…and you should too.
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