As a business owner, we all have more than one job (many of us carry 4 or 5); but two of those jobs are the same for every business owner.
The first is being a great leader in your business. Whether you are the CEO/President, or a partner who shares the leadership, one of your primary roles is to lead your business. As a leader, it’s my job to make sure that my business is pointed in the direction of new opportunity, that I have good people on my team, and that I’m making money. That’s what CEO’s do.
But even CEO’s have bosses! And, if you are self-employed, then that means that you are your own boss. So every now and then you need to take off your CEO hat and put on your “investor” hat. You’ve got the majority of your personal wealth tied up in this business. How is the CEO doing at earning you, the investor, a return on that invested capital?
When I talk to business owners they tend to judge their performance by:
- Looking at their bank balance. If it’s going up I’m doing well, right? But I can improve my bank balance just by firing someone — does that mean I’m doing my job well? Could that balance be going up by more? How much should it be going up by? Maybe the best thing would be to invest more now for a greater return later?
- Looking at growth in sales. That’s a good number — but more sales mean more work. Am I getting paid well for all that work? Is the work I’m getting “better” work than what I had last year? Is it teaching me things, is it stuff that I can sell again?
- Others just want lower stress. Am I taking time off? Do people like me? Am I growing a team who can handle the day-to-day? Also good indicators, but hardly measures of my long-term business health!
So how should we evaluate (month-to-month and year-to-year) how we are doing as a CEO? How does the investor-you evaluate the leader-you?
I’m lucky that early in my career I led businesses that were owned by other people and every year we had to create a budget for the next year and a longer-term (3 – 5 year) plan that we presented to the owners. The owners that I reported to had two questions that they asked me every year;
- How can the business generate more cash this year?
- How can we invest that cash to generate greater future returns?
The first question came from a firm belief that they wanted their money back now! There’s no time like the present; and a well run, efficient business should produce significant cash flow for the investors each year. For my owners, they wanted to get back all the cash that they had invested in a business within 4 – 5 years! So we would review the budget to look for places to cut overhead costs, to reduce working capital and to improve the cash available to the owners in the current year. This review was detailed and ruthless. It was as if they were a bank and they had loaned us this money — there was no excuse for not paying them back!
But following this, we would have a longer term discussion where we looked at the industry as a whole: what our place was in that industry, and where we thought the best opportunities would be in the future. After cutting our budget to the bone we’d then add back in money that we were “investing” in future growth. It might be new products, more marketing, opening new markets, etc. But any money that got added was tied to a specific outcome: if we spend $X it will return $Y next year, and $YY in the following years. We were making a bet: and if our bets didn’t pay off we weren’t going to get to place more bets!
If you are serious about growing your business, and your personal wealth, then having an annual plan — and holding yourself accountable to that plan — is essential. The more your business grows, the more it’s worth! For most of us, this is the single biggest financial asset we own; we need to be managing it actively. And we need to be willing to be held accountable to the decisions we make with it.
There’s no better way to do that than to create, and review an annual plan.