Since the material in Greg Crabtree’s book “Simple Numbers, Straight Talk, Big Profits” has been so enlightening, I want to share more from his book to help us all out in the financial arena. This is not the stuff they teach you in school. It has real world understanding of how to look at your business financials from an entrepreneurial perspective.

As I read the book, I was most recently struck by his comparison between businesses and the NFL. Like the NFL, we as business owners have salary caps. The NFL created a salary cap to max out what each team can spend on their players in an effort to create a fair shot amongst all the teams. Now, you may have not thought that you have a salary cap. I didn’t either. However, in reality, we cannot pay ourselves more than we generate in revenue, and we also shouldn’t pay out more than what would be a respectable profit margin.

Greg points out that every business needs to strive for profit. In general, a company with less than 5% profit margin is on life support. One that is greater than 10% is a good business, and a profit margin above 15% reflects a great business. You need profit to pay your debt and to have cash flow to grow the business.

Let’s look at an example of how this works to determine what your salary cap would look like:

Revenue $ 1,000,000

Salaries $ XXX,XXX

Non-Salary Expenses $ YYY,YYY

Pre-Tax Profit $ 100,000 (10% of revenue, the percentage you want to have to be a good business)

Now you can determine your business’ salary cap. Start by adding up all your non-salary expenses and plug them into Y. Then, subtract your pre-tax profit and the non salary expenses (Y) from your revenue, and the number you have left over is your salary cap (X). This is the number you don’t want to exceed in order to maintain the appropriate profit margin to increase your business. Remember, breaking even is dying, and having less than a 5% profit margin means the business is on life support. If this is not clear, get his book, and it will break it down for you very clearly.

What do you do if your salary number is higher than what it should be to maintain an appropriate profit margin? You go back and look at the productivity of your people and determine who is getting it done and who is not. As we grow, we tend to hire quickly and sometimes hire people into roles that do not meet their strengths. As business owners or CEOs, we need to make sure we have the right people performing in the right roles for optimal productivity.

What is your salary cap, and does it give you the profit margin you desire and one that will grow your business?

I caught up with one of my long-time EO friends, Greg Crabtree, at the EO Nerve Conference in Atlanta. We have hung out and experienced EO events around the world, and we are both passionate about EO and the people there that we learn from and grow with. Greg served on the EO Board as the Finance Chair, which was a perfect fit since his unique perspective allows him to explain numbers in a more entrepreneur-focused way rather than typical accountant speak.

I was excited to catch up with Greg and learn about his first book release! He wrote “Simple Numbers, Straight Talk, Big Profits,” and Nerve thought enough of it to share with all the attendees. Greg told me a little about the book, so I have been eager to read it.

Greg opens the book with a really insightfully point: Most entrepreneurs are not clear on the difference between their salary and the return on what they own. Greg continues, “In fact, all of my clients have confused the profits of their business with their salary.” You get paid a salary for what you do, but you get a return on what you own. When you are not paying yourself a salary at market levels, you are distorting your true net profit margins.

When you are not looking at accurate numbers from this perspective, your financial data is worthless. Making decisions from skewed financial data is, as Greg says, like having a compass that is five degrees off in every direction. If you don’t get real with the numbers, then you won’t get where you want to go.

He gives an example of a client that thought they had at least a 20% net profit margin, but when he looked closer he found they were paying themselves a below market wage. When it was adjusted, they realized that their true profit margin was 5% before taxes. Shockingly, he found most of us entrepreneurs are underpaying ourselves. This may be to show off our higher numbers to others or because we really didn’t know the difference.

Greg subscribes to the Economic Research Institute’s Salary Survey Assessor but says you can go to www.salary.com to compare your salaries with the industry averages. After reading just the first four chapters of the book, I see many opportunities to share more insightful wisdom from Greg in future blogs.

Are your net profits where they should be, or are you over or under paying yourself?

In business we refer to a sandbox as the area in which you play or conduct business. It consists of three things: your geographical boundaries, your products or services, and either your client description if you sell direct or your distribution channel if you sell there.

When determining your sandbox, one area of thought is to make sure that the sandbox you are playing in is capable of getting you to the goals you have created for yourself. Problems could include not having enough customers or not having the right customers in your geographical boundaries. The product or service may have saturated the market you’re in, and the client description could have changed or expanded.

In our situation, we found that to reach our goals we need to add a geographical boundary that is larger and more diverse than our existing one in Knoxville, TN. We have the opportunity to open another office in a market that provides this, and we feel this will open the sandbox for us to get where we want to go.

April Cox, my partner and co-founder of Efficience, will be going to Dubai in the beginning of June to start our new office in that fast growing and dynamic city. April has contacts there from her husband and EO members that we have met over the years, so she will be off and running to network and increase our reach in our new expanded sandbox.

Not only will she be in fast growing market, it is also a modern city adapting to the latest technologies. This will be a plus for us at Efficience because we believe there is a better way to leverage technology and growing in a new environment with other companies that believe this also will be mutually beneficial. It takes four hours by plane to get to our office in India from Dubai, so working with our team there will be more “local” for the companies we connect with as we work together.

We are excited for this expansion and the chance to open the door to new relationships, customers, and product opportunities.

Is your sand box big enough to get you where you want to go?

On my entrepreneurial path, I have realized many things come down to a few key decisions. Sometimes they are very tough decisions that can have a significant impact on people’s lives. This is what being an entrepreneur and leader of a company is all about. It is about making the big decisions that will either lead you to your success or demise. The demise part comes by not acting and putting off these tough decisions that need to be made.

These decisions can come in the form of people that should or shouldn’t be with your company, products or services that you should or shouldn’t have, or in the strategic direction of your company.

We have been having a challenge with our solutions sales manager in generating results. When he started, we worked hard to help him gain understanding of the marketplace, CRM, leads source, and messaging. We invested significant time and resources before he even started to make calls or send emails. Then after the calls and e-mails started, the volume of activity didn’t produce the needed appointments to create sales.

This left me with lots of discussions with my partners on what to do. You hate to make a change when you have made a large investment of time or money into something. You listen to the excuses that are made for why the results aren‘t there. You want to go with it, but your gut tells you something is still wrong. We even offered a commission only option as the last attempt to keep a relationship because a very small part of me said he may just need more time. Finally, my partners and I faced the writing on the wall and said enough is enough.

This is never an easy thing to do, and only a sadist would enjoy it. Afterwards, you often realize that your gut was right, and you wonder why you didn’t take this action before, especially when all this evidence surfaces supporting your decision when you finally make it.

I’ve had to do this more times in my career than I would like to admit. When I have to let someone go, I feel like I’ve failed, like I didn’t do a good enough job in the hiring process, which should have prevented this. Efficience has a very stringent hiring process, but it isn’t foolproof, so these things happen.

Whenever you have a parting of the ways, it seems to be inevitably in the best interest of all involved. The person let go learns from the situation and moves on to seek an opportunity better suited for them, and the company also learns from the circumstances and refocuses to find someone better suited for their needs. Obviously, some people deny responsibility and blame the employer, but typically I have seen people move on to positions in which they were able to excel and advance their careers.

We all have strengths, and we just need to be freed up to find them sometimes. Are you holding back and avoiding making a decision that would be in the best interest of all involved?

As an entrepreneur, I consider myself a pretty optimistic person.  I look to the future and see a rosy picture filled with visions of a lifestyle that incorporates my dreams.  I will sacrifice now acknowledging that I will see better times ahead.  Knowing that the little steps of progress I see in my company is leading to something better really gets me excited, and the optimism overflows even more!  Have you ever thought this could be a little risky?  I didn’t, but let’s explore this some more.

When I was preparing for India, I knew I needed some good reading material to entertain me on the 24 hours of travel time I would have each way.  I went to Barnes & Noble to search and came upon a really good book called “Thinking, Fast and Slow” by Daniel Kahneman.    Daniel won the Nobel Memorial Prize in Economics in 2002, and with this book he aimed to “improve the ability to identify and understand errors of judgment and choice in others, and eventually in ourselves, by providing a richer and more precise language to discuss them.”

 I have found this book to be very interesting and mentally stimulating in the same vein that I did with “The Black Swan,” which you can read more about here on my blog.  I have not finished the entire book yet but was very intrigued with a chapter called “The Engine of Capitalism.”  Here, Daniel discusses the advantages of optimism and how it leads to happier, healthier, more resilient people.  The optimists are the inventors, the entrepreneurs, and the political and military leaders, which he points out are not the average people.  They get there by seeking challenges and taking risk.

Most interestingly, he discusses how an optimistic bias can blind an entrepreneur from seeing the full risk of an undertaking or the decisions they make.  In study after study, Daniel shows that optimistic people were not capable of predicting or generating the results they expected.  What do we do with this overconfident optimism?  Daniel suggests one option would be to do a “premortem,” and I see another option of firing “bullets.”

The premortem occurs when the organization has almost come to an important choice but still before the big decision.  They gather a group of people involved in the assessment, and they write a brief history imagining that they implemented the decision and it died, so now they have to imagine they are looking back and come up with reasons why it might have failed. Daniel says this does two things.  First, it overcomes group think when it appears a decision is moving forward.  Second, it opens up the floor for knowledgeable individuals to express their doubts when they may have been suppressed by the leader before.

I think there is another way to handle overconfident optimism, and that is to fire bullets, as Collins discussed in “Great by Choice.”  When you test the market reaction by looking for empirical evidence with small, low risk exposure (firing a bullet), your confidence comes from real world market feedback.  Only then do you fire the big cannon ball without worrying that your optimistic bias got in the way of a venture that could have been devastating to your company.

I know my over eager optimism has gotten in my way and has been costly. How are you managing yours?

Side note on the 4 Billion Customers’ blog last week:  I read David Meerman Scott’s blog this week, reinforcing the mobile expansion to all parts of the world.  He was in the jungles of Central America and experienced tribal people with no running water or electricity using mobile devices to better their world.  Check out his blog.

So much of what we do in business is about the things we need to get done.  I need to write a report.  I need to send e-mails to my clients.  I need to create a budget.  I need to put a plan together for the next quarterly meeting.  On and on it goes with stuff we need to do in order to make progress in our business.  Nothing is wrong with this, especially when it creates progress.  Progress has been determined to be the number one motivator of both business owners and employees.

However, we really ought to find the things that we need to STOP doing!  It is the one thing we, myself included, often neglect to do.  What is it in my business or my world that I need to stop doing?  Business guru Jim Collins and coach to the Fortune CEO Marshall Goldsmith emphasize this topic frequently.  They ask, “What is on your STOP doing list?”

When we want to create value, we want to DO something.  At times, we can create value by stopping the things that are wasting our time, distracting us from important work, and keeping us from clients and other people vital to our business. 

There are various things I find myself doing that I should stop.  I should stop having my e-mail open all day long because I get distracted from what I am working on every time I receive a new e-mail.  I need to stop not writing the important things on my calendar because time management is event management.  I write my blog when I happen to get around to it rather than putting it on the calendar and letting the calendar manage my events.

I also need to stop looking at things once, leaving them, and then coming back to spend more time on them.  I will read an e-mail, leave it to do something else, and continue this process by moving on to something else again instead of taking care of it right then.  This is a major waste of time, and I need to STOP it.  When something comes up, I should get it done now, move it to the calendar to do at a later time, delegate it to someone else, or delete it and move on.

What do you need to STOP doing?

I have tried many times to write a blog on bias in the decision making process, but other current events pushed the issue to the back burner.  How we see the world is crucial to how and why we make decisions.  Ultimately, our success in business and in everyday life is guided by how we perceive the world and how that affects our decisions.

Back in my investment days, I discovered a CIA report called the “Psychology of Intelligence Analysis.”  This held vast information on gaining an understanding on our world view and how we make judgments on incomplete and ambiguous data.  This often occurs when we are analyzing stocks and making decisions without all the data and with the biases built into our thinking. 

Published in 1999 from a series of internal CIA writings from the ‘70’s & ‘80’s, this article by Richards Heuer Jr popped into the public spotlight after 9/11 in the discussions of what went wrong within the CIA causing them to be unaware of and unable to prevent the attacks.  This reveals how we, and even the CIA, are biased in our thinking and how these biases can affect our business and personal decisions. 

Key aspects of the writings emphasize the observer in determining what is being observed and how it is interpreted.  Education, culture, experience, and position influence a person’s perception.  Complex mental processes filter my version of “reality” determining which information is utilized, how it is organized, and what it means.

This creates the mental models or mindsets and all we think we know about a particular subject.  Keeping the mind open to different interpretations in a changing world is the best prevention.  We think we record what we perceive, but Heuer says we actively construct reality.  We tend to perceive what we expect to perceive.  In a classic card experiment, you have various cards with some designed with red spades and black hearts.  When you flash the cards before subjects, the normal cards are quickly and accurately identified.  However, the cards that fail to meet our expectations are missed, even if the subjects were told the changes in advance. 

The next part of the article discusses how much information is enough.  Do we really do better with more information?  The studies show that while we feel better when we have more information, we don’t necessarily make better decisions. 

In the next blog, I will further evaluate the biases we create for ourselves when we confront an issue and the ability of these biases to impact our view or blind us altogether. 

 Since we all have them and before I discuss next week, what do you think the biases are in your decision making?  Are you ready to look within and examine your own biases? I am trying and it is not easy. 

One of my favorite authors, Robin Sharma, also coaches clients like GE, IBM, FedEx, and Coke.  He recently released a video called “The 5 Fastest Ways to Recession-Proof your Business.”  Click here to watch the video.  It is over 10 minutes long, so I will summarize for my blog.

1)  You can’t win a race to the bottom.  Many businesses are cutting prices in an attempt to gain more business and market share.  When doing this, you train your customers to see less value in your offering.  Thus, you will continue to charge lower prices.  This often leads to lost profits and not being able to stay in business.  Sharma suggests you should compete on value by offering superior products and services. 

2)  Shift from busy work to work that matters.  Many entrepreneurs spend significant time on the phone, reading and responding to email, and surfing the internet rather than doing the work that really matters.  Fake work wastes time.  Sharma says that not only should you have a To-Do list but also, and more importantly, a STOP doing list.  Also, focus your most productive time on the highest value work.  Studies show that this is usually from morning to lunch.

3)  Disrupt instead of being disrupted.  Sharma uses the example I used recently of Netflix and Blockbuster.  Don’t rest on your laurels and remain still as the world around you changes.  If you are not innovating, evolving, or even adding incremental value regularly to what you are doing, then you risk the chance of being disrupted.

4)  Grow leaders faster than your competition.  In tough times, you can get distracted and scared dealing with various other issues and fail to take the time to train your team.  Double the amount of time and money you use to prepare your team if you want to triple your profits.  Do this, so everyone, in their role, feels like the CEO.

5)  Take the time to develop your 2.O.  What is going on outside of you reflects your mindset.  Bulletproof your mind to deal with the world by bringing to work the right attitude, the right mindset, the right confidence, and the right gratitude to handle the tough times.  Also, have the right physical stamina by eating right, drinking lots of water, and working out.  When you get all of those things right, you will be amazed by the improvements in your business and your life.  

How recession proof are you?

Many of us out there hold a strong aversion and distaste for meetings. You have heard it before, or possibly even said it yourself: “We do nothing but have meetings around here, so how am I to get any work done?” Why do we have such negative feelings in regards to getting a group of people together to discuss issues and create solutions to move forward?

I believe strongly in the power of the group and think it is vital to bring people together to create the best ideas. If you have read this blog for any amount of time, you have seen me discuss my belief in collective intelligence, an ideal I trust in so much that I even started a mutual fund managed around the philosophy.

When you imagine a good idea occurring, what do you envision? Do you see Einstein with his crazy hair looking up into the sky with a light bulb going off? Do you visualize the lonely scientist looking into a microscope, and then Eureka . . . It happens?

I read about a study in Steve Johnson’s book “Where Good Ideas Come From / The Natural History of Innovation” and was not surprised to find it shows that good ideas happen not in these moments of individual discovery but when a group of people are sitting around a table sharing ideas. I said to myself, “Holy moly Batman! Now I have real evidence to support my gut!”

Psychologist Kevin Dunbar actually set up cameras to watch a research group of scientists work in the early 1990s. His team transcribed all the interactions and tracked the flow of information. Dunbar discovered the physical location where the most important breakthroughs occurred — the MEETING ROOM!

They found the group interactions helped reconceptualize the problem. In his book, Johnson explains, “questions from colleagues forced researchers to think about their experiments on a different scale or level.” Group interactions allowed the more surprising finds to be questioned rather than dismissed, and this led to better ideas and breakthroughs.

So there we have it! Those all day quarterly meetings we have in order to focus, strategize, and plan along with our two day off-site annual meeting have purpose! This can also be said for any other meeting where you need important decisions made or　great ideas from your team. If for some reason the team has doubts, get the book! It is a great piece of evidence.

As we approach Christmas and get to spend more time with our family and friends in a spirited, colorful environment full of lights, we open our hearts and our pocket books to give and share what we have with others.  While I cannot speak for you, it makes me feel good to give to others.  When it is done with sincerity, I feel it has that effect similar to when the Grinch’s heart grows three sizes.  It changed him.  I look to the holidays to have that growing heart experience and hope the holidays have the same effect on you.

However, in certain areas of your business, I feel it is necessary to have a Scrooge mindset.  I have experienced this in the areas of operations management, stop doing , and cash!

For operations management, I find it useful to go through all the expenses on a periodic basis and for each ask, “is this expense necessary and does this add value to my business?”  I always do this at the end of the year and prefer to do it quarterly.  I often discover things we are paying for that no longer need to be paid or that could be modified or reduced.  For example, during this end of year review, I found that we were paying to store outdated documents off-site.  These can now be destroyed, thus stopping that expense.  My team is also reviewing our servers for potential consolidation and fee reduction. What expenses could you reduce or end?

What can we STOP doing in the true Scrooge fashion?  Many times we take on too much and have to stand up and be a scrooge and say, “No, I can’t do that at this time because it will affect my other work.”  It can be most difficult to say no to clients, but as I have experienced, it can be the most important thing you say in business.  You can read much more on this in last week’s blog.

The last and most important area I’ll discuss is cash.  We all know that not having the cash to pay our bills is a bad place to be.  Therefore, being cautious and miserly in this area is prudent in the right context.  Ask the question, “what can we do in order to get cash in faster and pay it out slower?”  Extending cash outflow for thirty days by putting some of our expenses on credit cards could be an option.  What are the opportunities to negotiate getting paid upfront or sooner from clients in exchange for some benefit to our clients?  We have lines of credit in place and credit card availability as a back-up in this area.

As we go into this holiday season and the New Year, I am shooting for balance between being a scrooge in some business areas and growing my heart three times.  Wishing you all a wonderful giving and sharing holiday season!