Work Toward Reward! How to avoid burnout as a business owner.Chia-Li Chien
Chia-Li Chien | July 09, 2012
Fifty-four percent of participants in our Value Growth Institute annual BVD (Business Value Drivers) study indicated that the number one priority in their businesses was to retain clients, closely followed by increase revenue and profitability at 52%. That being said, the reality of how small business owners go about accomplishing these priorities will show in their financial performance (though financial performance is only one of three measurements of a valuable business).
For the past few months, I’ve noticed many of business owners seeking me out for advice because their business is in financial crisis and the owners are burnt out. I often council owners or entrepreneurs to locate the root cause of their financial stress—not to focus only on the symptoms. The symptoms often are described as: negative profits, negative cash flow, an open business line of credit with the owner’s primary resident as collateral, getting more loan money from the bank, or seeking equity ownership in exchange for cash to deal with debt or capital expansion. The list goes on and on.
As I further examined these businesses, it appeared the root cause of their financial stress falls into three major categories that impact the value of the business— 1) Increase Recast EBITDA 2) Reduce Risk 3) Employ high-yield capital.
In specifically working toward the goal of Increase Recast EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization), you should be aware that this is an accounting term and used commonly in business performance review, valuation or transactions. The value drivers to Increase Recast EBITDA include 1) increase sales 2) lower cost of goods sold and 3) control operating expenses.
- INCREASE SALES
The competition is fierce out there. You face competitors out bidding your bid. You can’t fathom how your competitors can stay in business by providing a service or product at a loss. You wonder how long they can sustain their business.
I always encourage owners to think outside their current offering. For example, Jane (not her real name) has been in a niche industry as a professional service provider (not her real industry) for more than ten years and has one product with close to 1,000 customers. Revenue rebounded after the financial crisis in 2008 and is reaching the $5MM mark this year. Although Jane just began showing small positive net profit, the cash flow is still extremely tight and there is no cash reserve in place to expand into more territories.
Anticipating customer growth, she got a call from a major competitor. The competitor offered to buy her out. If Jane moves forward with the buyout, their product will dominate the market. However, the buyout term is simply to pay off Jane’s overall debt. Perhaps that is not a strong enough offer. There will be no financial reward or gain to show for more than ten years of hard work.
Consolidating competitors is one of the great strategies to increase sales, but it comes with a price. According to Middle Market M & A: Handbook for Investment Banking and Business Consulting by Kenneth H. Marks, statistics show that poor integration resulting from post M&A transaction may not yield anticipated growth or ROI.
Although Jane has not moved forward with this competitor’s offer, here are some of her options worth considering:
- Stay focused on niche markets and go deep into one vertical then horizontal. Seek out alliance partnerships to expand her market.
- Diversify products by re-packaging or bundle different products. One general product is too high of a risk. This requires innovation from her team.
When in stress, innovation is hard to come by due to the team’s focus on survival. For more information on innovation, please read my previous article titled Innovate and Re-Package Your Products and Services.
- LOWER COST OF GOODS SOLD
As technology advances faster than ever, the cost of keeping Jane’s team up to date becomes quite expensive. Many Fortune 500 companies have outsourced many of their functions to India, China or even the Philippines. The bottom line objective is to lower the cost of goods sold and boost net profit. (Although the complexity of outsourcing is not a subject in this article, it is something worth looking into.)
For years, companies seeking to outsource one of her departmental functions have approached Jane. She has always been concerned about the quality of the work and communication. The reality is that unless Jane looks into the ROI of her team she will not know if it is smart to outsource.
The business model has three general components: 1) business purpose 2) core competencies and 3) profit formula. Core competences include key resources and key processes. Ideally, invest in your core competencies and outsource the non-core competencies. You can greatly lower the cost of goods sold to boost your net profit. For more information on this, please read my previous article titled Should You Outsource Certain Services?
- CONTROL OPERATING EXPENSES
Jane actually operates at 70% of her overall capability. That means 30% of her workforce is being wasted, and she continues to pay for this in overhead. This leads to unfavorable net profits and tight cash flow. Of course, at the end of the day, I like to renovate every client’s business model, which takes time to adjust and diligently implement. Controlling your operating expense may mean trimming under-used capacity, equipment or human capital. It could also mean trimming unnecessary office space that has been empty for over three years. (Many of my clients sublet their empty space out to subsidize their operating expense. This is something obvious and easy to do for most owners.)
In March of 1999, Bertrand Piccard completed the first non-stop balloon circumnavigation around the globe. One day, while on the journey, he realized that if he flew at a higher altitude, he could fly faster and get to his designation earlier than expected. He reported to his weatherman that he had already moved to a higher altitude. His weatherman told him to come back down to the lower altitude and Piccard argued in favor of his increased speed. His weatherman put it in layman’s term and said to Piccard, “Look, you can travel faster toward the wrong place or maintain a slower speed and reach the right designation!”
Piccard’s flight reminds everyone that you must have a weatherman in your business with the strategic and long-term view of where your business is heading. I am the weather woman for my clients. I can help carefully plan and execute the value drivers to Increase Recast EBITDA to increase your business value. You may reach your business goals at a slower pace than you expected, yet you ultimately reach the right designation—your financial independence! Proudly claim the rewards that compensate you for taking the risk of owning and operating your business!
So what’s your choice? Increase sales as fast as you can or increase the value of your business at the right altitude and pace?