The 7 Habits of Highly Chilled Small Business owners
This is the third article in a monthly series on small business owners I have met or worked with over the years who developed beautiful successful businesses.
Stories of successful real business owners
In 35 years of doing business and working with some of the most inspiring people I’ve ever met, I’ve learned a very important lesson: Success in small business starts by building great habits. I call these practices the “7 Highly Chilled Habits” and I find they’re best illustrated with the stories of real business owners who I happen to have had the pleasure of coaching.
The articles are based on my E-book, The 7 Habits of Highly Chilled Small Business Owners. All of my books and other resources are available for free here
Highly Chilled Habit #3:
Be On Top of the Numbers
In order to build a Highly Chilled business, you must keep your fingers on the pulse of all your business’ key health indicators, every week
The most focused business owner I’ve ever met is Narinder. I could tell a story about Narinder to illustrate almost all of the 7 Habits of Highly Chilled business owners, but this one about numbers is probably the most important.
More than 15 years ago, Narinder started his first small supermarket business in Sydney. This is his website. Over time, the business has grown enormously, and his stores are starting to pop up across the inner city.
Each of Narinder’s stores is profitable, his staff love working there and when he opens a new store, customers bring flowers to welcome him to the neighbourhood. As I said, there are many things Narinder does well, but the habit he’s developed to an art form is that of being on top of the numbers religiously, every day and every week.
Investigate the Numbers
Narinder was awakened to the power of numbers early on. He and I concluded that his first store was not performing to its full potential and we wondered what was wrong, so we decided to investigate. We started by measuring which products and categories sold well and which didn’t. We also analysed which sections of the store realised most of the sales he made. Narinder divided the store into 12 different sections and (with the help of his staff and some simple checklists) set about getting deeper insight into the shopping behaviours of his customers. A month later we had the stats.
It was immediately obvious that 2 sections of the store were visited much less than any of the others. The numbers made it very clear that people simply didn’t walk through those areas. We decided that the store needed to be re-organised and reconfigured. The 2 struggling sections needed lower shelving, more lighting and a different mix of product categories. Narinder pulled out all stops and within a week, the store had a completely different look and feel. After just a month, we were looking at a 9% increase in turnover. 6 months later, sales had grown by 25% with an improved gross margin.
Become a Devotee at the Church of Business Numbers
These days, Narinder measures everything on a daily, weekly and monthly basis. He has developed the habit of having his teeth in the numbers – and he’s never letting go.
Remember, if you want to become a Highly Chilled business owner, you must learn to love the numbers and regularly measure the ones that matter most to your business.
Your Homework (The Chilled Kind)
Here’s a short exercise you could carry out to start the process of making this habit your own.
Ask yourself: What would be the 15 (or so) key indicators of the health of your business?
Next, ask yourself: How could you have each of those indicators expressed as a number on a scale?
Practice Highly Chilled habit #3: Instruct someone else in your business to get you those 15 numbers every week and every month for you a in a single report.
The reality is that most small business owners operate in a constant state of overwhelm and stress. We feel that, at some level, our skills don’t cut the mustard, and we often have no idea where to focus our (very) limited time when faced with seemingly endless priorities.
Sound familiar? This is why “Fun in Business” matters. If your business is fun, you won’t be overwhelmed. If your business is fun, everything is working: you’ve got time to do the things you enjoy, your staff are happy, you’re making money. Need I say more to entice?
Fun may seem like a very strange and whimsical concept to focus on when we’re talking about growing a business. After all, isn’t fun reserved for time spent socialising at the pub or lazing about on tropical islands? Events that happen outside of business hours. Experiences that are paid for by your business, but otherwise entirely unrelated.
Perhaps not. In fact, I believe that Fun in Business is actually a hard-nosed business management principle. It is that deep sense of reward and satisfaction you get to feel as a result of building a business that hums along like a well-oiled machine.
Anyone else tired of focusing on all the serious stuff? The things that get drummed into us by patronising business management books and gurus? IT systems, contracts, staff management, sales and cashflow are all very important things, of course, but – in my humble opinion – they’re not where we must start.
We must start with fun. Why? Because if your business is fun, it means you
are making money
have enough time to do what you need to do
are proud of the stuff your business makes or delivers
know exactly where you’re going and why
have happy customers
have engaged staff
have balance in your life.
In the beginning, when we are first getting started in our business, there is usually a high level of that kind of fun around. Everything is new, exciting, adventurous and challenging. However, after a while, the real world comes rudely a-knocking and we suddenly find that
we aren’t making as much money as we thought we were going to
we haven’t been able to take our daughter to soccer training
our clients haven’t all become our greatest fans
our staff aren’t the perfectly aligned human beings that we expect them to be.
When this realisation sets in, we start to feel like we have become a slave to the business. We get worried that the light at the end of the tunnel may not be sunshine.
We try telling ourselves that “Rome wasn’t built in a day” and we “have to take the rough with the smooth” because, like Churchill said, “Never, ever give up!”. We push harder and longer, holding onto the hope that good times will surely follow.
This is Business Hell, and it’s where most of us spend our time: Chasing our tails. Managing crises. Operating as a “Jack of all trades, master of none”. Living in a constant state of overwhelm.
After 30+ years in business (and working with lots and lots of business owners), I have come to believe that the only way out of this overwhelm is to ensure that business itself is fun. Deep and meaningful fun.
One of the greatest challenges for businesses, especially small ones, is that there are so many priorities competing for your attention on a daily basis. It feels almost impossible to decide where to focus next.
Many business owners also lack confidence in their aptitude for certain business development tasks. After all, you started this endeavour on the back of your skills as a carpenter, accountant or architect; not your background in sales, marketing, staff management, etc. Nobody taught you how to write an operations manual or create a cashflow forecasting spreadsheet, did they?
The result? Most of us revert back to “picking up the hammer” (because that is the one skill we know like the back of our hand), managing crises and being reactive to whatever is thrown at us. Like I said, Business Hell.
A New Tool for Your Toolkit
The concept of Fun in Business is an incredibly powerful tool, designed to keep you out of reactive crisis management mode so that you can focus on what is most important for today, tomorrow, next week, next month, next year and beyond.
Here’s how to use it in practice.
Think of a scale from 0 to 10. Let’s call it the Fun in Business scale.
10 on the scale? This past week in business has been so much fun that you can’t wait to get up and go to work. You’ve gone home every day with a big smile on your face. You’ve achieved great things. You had a wonderful time with your co-workers. Everything at work (or in business) has been just brilliant.
0 on the scale? Entirely the opposite. Your week at work has been simply awful on every single level. Pass the vino now.
Now ask yourself the following questions:
What number on the Fun in Business scale would you give your last week at work (or in business)? Let’s say 4.6.
Thinking ahead, what number on the scale would you like next week to be? Perhaps a 5.
What one, two or three actions can you (or we, as a team) take to progress from 6 to 5 on the Fun in Business scale, next week?
These questions, asked consistently, will cut through all of the crises and competing priorities, leaving you relentlessly focused on the next most important thing that must be done in your business.
These questions, answered individually or within a team (anonymously and with the results averaged), will set you up for having hugely productive conversations about how to make tomorrow just a little more fun than yesterday.
I promise, when you commit to building a Fun Business by regularly asking yourself these pivotal questions, you will have taken the first step to building a business that sustains you for years to come.
Remember, a business that isn’t fun won’t be around for long!
Your Homework (The Fun Kind)
Now, I’ve got a hunch that you’re a hands-on kinda person, so here are some actions for you to take that will help make your business more fun. Answer the following questions and start thinking about how you can make intentional changes. The results will be more illuminating than you might think!
Make a list of the 20 most fun experiences or most exciting times you’ve had in your business.
Write down the 3 things you like most about your business.
Write down the 3 things you like least about your business.
I believe the question about making money is even more important than the growth question because I have seen many businesses go bankrupt even though they were growing. Business growth only makes sense if you end up with more money in your bank account as a result. A business that doesn’t make profit and generate cash flow is a hobby.
So, these are the most important rules about making and keeping money in your business.
No profit, no business. So is profit is the Purpose of business?
John Mackey is the founder of a large international chain of organic supermarkets called Wholefoods Markets. The company has been highly profitable ever since John founded it in the early eighties and it has paid a dividend to its shareholders every year of its existence. Amazon purchased the company for untold billions of dollars and John Mackey is now one of the world’s richest people. John clearly knows a thing or two about building great businesses and about making money.
John Mackey also wrote a book however, called Conscious Capitalism and in it he says something that made the penny drop for me. He says this:
“Thinking that the Purpose of business is to make money is as silly as thinking that the Purpose of people is to eat food. We need to eat food, we eat food all our lives, and good food is better than bad food and without food we die, but eating food is not the reason we exist. We eat food so we can make good on our Purpose in life”.
John says it’s the same with business and money. The business must make money and profit and generate cash flow (and plenty of it!), but only so that it can make good on its greater purpose.
So, let’s be clear about that: making money is the means to an end, and without profit and cash flow, the business cannot perform its function.
Pricing: Someone’s going to be the most expensive, why not you?
Everyone can sell cheap. It takes no special skill or approach to sell cheap. It takes incredible skill and focus to be the cheapest, make a profit and be around for the long haul. Very few businesses can do so consistently. The only three I know of are Aldi, Ikea and Walmart. I’m sure there are others but they’re few and far between.
If you make low pricing your main differentiator and competitive advantage then you better be the most disciplined and focused business out there because there will always be someone knocking on the door undercutting you and you’ll constantly struggle to make enough money to survive, let alone build a beautiful business and life. Competing on price is simply a dog’s game.
Instead, ask yourself what you need to do to be the most expensive. Raise your prices and see what it takes to sell with higher prices. What else can you compete on? Remember, a beautiful business and life is so much easier to achieve with high margins.
20% Of your customers generate 80% of your profit. Who are they?
You might have heard of the Pareto Principle or the 80/20 rule. This rule can be applied in many situations, but there is no more appropriate topic than a business and its customers.
I can just about guarantee that if you were to run a report listing all your customers on a continuum with maximum profit and cash flow at one end of the scale down to least profit and cash flow (or even loss) at the other end, expressed in dollars, you will find there is a small bunch of customers at either end. There is a small group of customers who you make by far most of your profit from, and equally, there is a small group of customers who cost you most of your money.
The problem is that most small businesses can’t easily run a report like that, but I can tell you it’s worth spending some time figuring it out or buying the software that makes it straightforward.
You will be shocked when you find out how much effort gets wasted on customers who keep you busy but don’t make you any money. Equally, you’ll realise how urgent it is to give more attention to the customers who bring in the majority of your money (because they might leave if you don’t!).
The three C’s: Collect Collect Collect. Why does it matter so much?
I’ve seen many businesses make profit and grow yet struggle and even go bankrupt. The problem in those businesses is cash flow. It may seem obvious, but making profit is pointless if it doesn’t hit your bank account. You’d be surprised how often I talk to business owners who complain about never having enough money to pay the bills while having tens or hundreds of thousands of dollars in outstanding debts.
In my days as a builder, a recurring problem was not finishing the jobs to 100%. Sometimes for months, we’d leave a few defects outstanding because they were small and we had moved on to the next project.
However, that meant we couldn’t collect the final invoice, sometimes for months. In other businesses, I see that people finish the work, but wait until the end of the month or sometimes even longer before they invoice the client. Finally, most small businesses do not have a simple and consistent collection system.
These three factors mean that your business is functioning as a bank for your customers. Your money is in their bank account and it’s of no use to you there. You must then constantly rob Peter to pay Paul, you can’t take advantage of early payment discounts from your suppliers and when your business is in growth mode, the problem compounds exponentially.
It’s even true that you’re cheating your customers by not completing, invoicing or collecting. Your customers want nothing more than to have their work done quickly, and when the work is completed well, your clients feel they are in your debt, and they want to remove that feeling as soon as possible. With every day that passes, that feeling of indebtedness changes and if they don’t receive your invoice until a week or a month later, they’re actually not so keen to pay you anymore.
Profit and cash are not the same. What’s the difference?
As I mentioned above, many businesses fall over even though they make a profit and grow. I also mentioned the compounding problem of growth. Here is a super-simplified example:
Let’s say you start in month 1 with a bank account balance of $1,000. You sell $1000 worth of stuff this month and after expenses, you have $100 leftover. That should mean you are $100 better off at the end of the month than you were at the beginning.
However, if you’ve only collected $500 of that $1,000 in month 1 and the balance follows the month after, you’ll be $400 worse off at the end of month 1 than you were at the beginning. The bank account balance at the start of month 2 is now $600.
Now, if in the next month you grow 20%, sell $1,200 and make the same profit percentage (10%), you will have made a total of $220 ($100 plus $120) profit by the end of month 2.
We’ll assume that you collect at the same level (50% in the month and the rest follows the month after). So, the starting balance at month 2 is $600 plus the remainder of the collections from month 1, making $1,100. Deducting the expenses of month 2 ($1,080) leaves a balance of $20 plus collections for the month of $600, so your balance at the end of month 2 is $620. In other words, after 2 months of profitable and growing trading, you’ve gone backward by $380 – and that’s if everyone pays within payment terms. If only 5% of your customers are late payers, you will go back even further at the end of month 2 (and so on).
This is a highly simplified worked example, but it demonstrates the principle precisely. For this reason, in a growing business, you must give at least equal attention to cash and profit all the time. You could argue that cash is even more important than profit for two reasons:
You can continue to run a business as long as you have cash to pay the bills. There are many examples of big businesses that operated for many years without making profit, but who didn’t run out of cash (Amazon is one such example, Tesla seems to be another current example).
Profit can actually increase your cash stress because more profit leads to paying more tax and tax simply sucks cash out of your business.
Do you know your breakeven? Do you hit it four times every month?
One of the most important things I do with new clients is find their breakeven.
Breakeven is the number of dollars you must sell every month (or every day, week or year) to pay all the bills for that month. In other words, what does it cost to open the doors and turn on the lights? I find that the simplest way to establish your breakeven is this:
Look at last year’s profit and loss (P&L) statement and find the total of all the overheads, fixed costs, rent, insurances, electricity, marketing costs, subscriptions, etc. Add to this the monthly repayments of loans and lease payments. Now divide that number by 12. This is the amount of gross profit that the business must generate every month, 12 months of the year.
By looking at the P&L for last year (or any other representative period), you’ll be able to see what percentage of revenue your gross profit amounts to. For argument’s sake, let’s say your monthly overheads are $20,000 and that, in the past year, your gross profit has been 30% of revenue. Now we can find out how much revenue you need to make to break even by dividing overheads by gross profit to calculate revenue. In this example, it would be $20,000/0.3 = $66,666.00. In other words, based on last year’s figures with a margin for error and inflation of 5% added, you have to sell $70,000 of your products or services every month.
But that’s not the end of the story. In order to survive and actually break even, you must hit this number four times every month:
You must sell $70,000 every month.
You must produce $70,000 worth of goods or services every month.
You must invoice $70,000 every month.
You must collect $70,000 into your bank account every month.
If you miss out by even $1,000 on any one of those four in any month, you’ll have to make up for that $1,000 in the month after.
By introducing this simple discipline, your business and life will never look the same again. By the way, keep in mind that I’ve been ignoring profit in this topic. Obviously, you must make profit as well, but first you must instil the discipline of hitting your breakeven four times every month (at least!).
Numbers: How would you like to be in control of your business?
Finally, I always teach my clients how to put and keep their fingers on the pulse of the key aspects of the health of their business, every week and every month. The numbers. The KPIs.
The breakeven number I talked about above is obviously one of those key numbers, but there are more. Bank balance is a key number. So is gross profit and aged debtors. Then there are various financial ratios, such as the gross profit percentage and ratios like the “debtor days ratio” and the “liquidity ratio”.
Besides financial numbers and ratios, there are many other numbers and ratios in a business that you need to keep an eye on. For example, the number of enquiries in the past month, the conversion rate, average job value, the average sale, warranty returns, customer satisfaction… you name it!
A client of mine who has a furniture removals business knows that he needs to keep a keen eye on his removalist’s wages as a percentage of total sales. If he spends more than 60% of sales on the wages of his boys, he knows he’s not managed the work schedule well enough.
Your business will have its own specific numbers and ratios that can tell you a lot about the health of your business. I often talk about the mailboat report with my clients:
Imagine you are banished to a deserted island in the Pacific, without a mobile phone or email, and the only information you can get about your business is a single sheet of paper delivered by the mailboat every week.
What numbers would have to be on that single sheet of paper to tell you precisely what you needed to know about the health of your business, so you could send immediate instructions back with the mailboat?
All of the above probably sounds like common sense. And it is, there’s probably not a lot you didn’t already know. Profit and cashflow are not inherently complicated concepts to understand. But just like with dieting, we mostly know what we need to know to lose weight (but look at me!!), the trick is in the implementation. That’s where external support comes in and where I and people like me can have a valuable role and make a difference. I’ve written a lot more about coaching, mentoring and finding the right support in your business all through this website and you can download my Free Guide to finding the right coach by clicking on this link.
What does it take to make a success of your small business… how can you avoid adding to those frightening statistics about failure rates of small business.
In this series of articles and associated webinars and workshops, by Roland Hanekroot you will learn the basic concepts and get the knowledge need to become a successful ‘Business-Owner’, as opposed to a struggling ‘Business-Doer’.
The format of each episode in the “First Steps” series is to explain the basics of the topic and then in line with the principles of New Perspectives business development programs, to suggest some “First Steps” you can take straight away to put the knowledge into action.
In the fifth of these articles we’ll look at the numbers and ask:
How do we do business by the numbers and why?
Doing business without numbers is like playing football without a scoreboard. You simply cannot run any kind of business for any length of time without keeping your eye on the numbers.
This is a fact.
You may not like numbers and you may believe you are no good with numbers and you may want to just “get on” with running your business.
Well I have good news and bad news for you:
Bad news: You’ll simply have to get over your dislike and your hurdles.
Good news: Numbers are a lot simpler than you think, you don’t need all that many of them and you won’t have to find them yourself.
Numbers are important because they are the result of measurement and measurement is what allows you to manage and develop a business and stop it from going backwards.
For example you have to know (measure) what is in your bank account if you want to stay alive… No argument there I imagine? Well your bank balance is a number.
You may also want to measure the effectiveness of the money you spend on marketing and again the answers will come in the form of numbers.
You may want to know if you have enough stock on hand to supply your customers in the coming week… The answer is a number.
You may want to measure why your bank balance has been going backwards in the last three months… The answer will be in the numbers.
I trust I’ve convinced you that numbers are key and you just have to get your head around them. But which numbers?
Lets have a look at one of my Business Bedtime Stories.
A Business Bedtime Story
(The ‘Business Bedtime Stories’ are real world case histories that illustrate this months topic in some way)
Once upon a time… a long long time ago in a country not unlike Australia… Michael had a carpet cleaning business …
Michael owned a carpet cleaning business in Sydney and Michael had ten vans on the road with 16 staff. Michael’s life was full of crises, most of the crises involved his staff not delivering the customer service or quality that Michael’s clients expected.
Michael kept thinking:
“If only I had a simple way to measure “Good Work” and “Good Service” that I can apply across the board and use to manage the performance of the guys ?”
Working with me as his business coach Michael learnt that you can create relative measures for intangible things. For example If you were asked to give a score out of ten for how happy you felt at this moment, where “10” was that you felt delirious and “0” meant that you were at risk of self harming, you might say “6”. If I were to ask the same question again tomorrow you might answer “7”. This would lead us to reach a valid conclusion on your state of happiness tomorrow relative to today.
This same principle can be used to measure all sorts of intangible things in life and lends itself really well to measure quality, service and satisfaction levels.
Michael and I went to work to create a self scoring system, where a staff-member filled in a small form at the end of each job in which he gave himself and the just completed job a series of scores out of 100 on a number of different measures (for example: “Give yourself a score out of 100 for being punctual”)
The forms would be collated in a spreadsheet and the numbers averaged for each staff member and for the business as a whole. Every week on Monday morning Michael received a report from his admin assistant with the average performance numbers across the company for service and quality in the last week. At the same time Michael had his assistant call 10% of all clients every week and ask them to rate the completed jobs in a similar manner and these ratings were listed side by side with the staff member’s own ratings. The staff members would be given access to the customer ratings as well and as required Michael would sit down with individual staff members, compare notes and generally help the staff improve on their ratings and become more accurate in their self-scores.
This scoring system completely changed the way Michael thought about managing his business and he realised that the way to build a great company and great business value was to step back and create management systems, scoreboards and dashboards.
Five years later Michael sold his business for a price much higher than he could ever have hoped to gain when we first met.
And Michael as well as the new owners of Michael’s business will live happily ever after… The End
Lessons from Michael:
So let’s have a look at what we can learn from Michael:
First: There are many other numbers that we can focus on besides money in the bank
Second: Measuring intangibles like punctuality is actually quite simple.
Third: Measuring an aspect of business allows you to improve it.
Here is what I’d like you to do: Imagine that you are banished to a deserted Island. And for a period of time, say 6 months, the only information you get about your business comes from the weekly mail boat. The mailboat can deliver you only a single piece of paper with maybe 15 numbers on it and the mailboat will wait for 15 minutes to take your instructions back to your business for that week.
What are the 10 to 15 numbers that will tell you how healthy the business is and allow you to make quick management decisions and instructions that you can send back?.
Most businesses will have a couple of common numbers, such as bankbalance and profitability on their mailboat report, but beyond those common numbers every business owner has his or her own priorities that tells him/her what’s going on. For example, in my business I constantly need to know how many inquiries I have had in the past 6 months, because it gives me a really good indication of the number of new clients I’ll get in the next 6 months. In another business a critical indicator might be the average number of days it takes to get paid, because if this number goes up, the business will to run out of cash.
Don’t do it yourself
I mentioned in the ‘Good News’ that you don’t need to be the one who finds the numbers.
This is actually a critical point. You as the business owner are primarily responsible for keeping your fingers on the pulse, but I want to encourage you to delegate the production of the numbers to others as much as possible.
There are a whole lot of reasons why you should delegate getting the numbers to others. This article is not the forum to go into the detail of those reasons, but let me assure you that business owners who truly manage their business by the numbers, get one piece of paper every week, with the critical numbers from their bookkeeper, one from their sales department and one from their production department. It is simply not the job of the business owner to dive into the bookkeeping system themselves to find the numbers; that is not ‘best use of your time’
So start thinking about that deserted island, what do you need to see on that single page mailboat report to enable you to manage the health of your business?
Your First Steps:
As mentioned at the start of this article, here are some resources and actions you can take right away, that will get you started on implementing the principles I discussed:
A sample dashboard with critical numbers of a past client of mine in the catering industry.
Article about business dashboards by Valerie Khoo in the SMH
About the author and the Masterminds sessions
Roland Hanekroot is a business coach who works with Small business owners to help them have more Fun in their businesses and build businesses that sustain them for years to come. Roland is also the author of “The Ten Truths books for Business owners” (more about the books here: http://thetentruths.com.au)
Every month Roland Hanekroot runs a business development workshop as well as a webinar called “The Small Business Masterminds” more information here and to register for the next webinar or workshop, follow this link: http://smallbusinessmasterminds.com.au/ The first time is free.