The business ownership myth (and understanding decision-making)

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sharingYesterday, I used an ideal “perfect storm” situation to resolve a significant business imbalance, most of which is entirely my responsibility. I had allowed fixed costs to far outrun revenues for several months. If you have even the smallest understanding of accounting and business fundamentals, you know where these circumstances will take the business unless they are corrected right away.

The solution (before running out of time and resources): Reign in the fixed costs, ensure that waste is curtailed and — in the short term — take aggressive measures to manage cash flow. I need to lead by example, so realized my management salary would need to be slashed in direct proportion to available revenue. Whack. I won’t be replacing my seven-year-old car right away. (I do not believe in financing car purchases — so save up and pay cash. It is fun to see the dealers squirm when they know they cannot make money on the “extras.”)

I reviewed other inefficiencies, and observed as well our sales representatives were performing at uneven levels. In fact, these were adding to the distress. I needed to change the compensation rules to ensure that performance is the key results indicator, and that any sort of automatic salary guarantee would have to go.

However, abruptly switching salary-earning reps to commission is a brutal process. So I decided to create a manageable smoothing process that is still extremely sensitive to actual performance. And I decided to implement the performance-focused strategy in a manner that (even though it creates cash flow stress) minimizes hardship and allows the weaker sales reps time to prove they can bring their work to the proper performance standards before their income declines. This means that serious cash flow challenges will continue for the next few months, but that I not being abrupt, arbitrary, or changing the rules without fair and proper notice.

Then I received the call. When one of the company’s weaker sales representatives phoned to say he was demoralized by the changes, I explained the reasoning and clarified he should not feel any hardship especially since his sales have been totally satisfactory this month, but I could not continue paying him full salary for the months where his performance was below standard, or the company’s debt would skyrocket. “You are the owner,” he said, in advocating that, indeed, I should allow debt levels to increase to where they were about six months ago — before I took some windfall earnings to pay down debt (rather than line my pockets, or perhaps more directly, purchasing a new car for myself). “You are building the value of the business so that we as employees will have to pay more for our share of the company. You are are living off the backs of our labour.”

Ahhh.  The “backs of our labour” myth . . . the idea of the capitalist robber baron, or slave-owner, or feudal master and serf. The perception that the business owner has a virtually unlimited pot of cash and lives high off the hog on the underpaid labour and of struggling employees. . .

Well, yeah, our family has some accumulated net worth. Indeed, I have some money in retirement savings (not enough, but still some) and not-to-much personal debt. And we live reasonably comfortably, in part because our taxation status is better than many regular working people. (We of course pay our full taxes, but business owners in higher-tax countries like Canada have more legal write offs than conventional workers.)

But the the business I own isn’t a money-making pot of gold and, yes, I will expect the employees to pay for their share when it is time to transfer ownership to them — and I will do everything I can to ensure the business has enough value that the employee purchase share is based on a business with real value, and not as a distressed nearly-insolvent organization. However, unlike the start-up 25 years ago — which I achieved with my own resources and absolutely no external capital or salary guarantees — the employees participating in the buy-out will receive full compensation for their work while they buy in to a truly sustainable enterprise.  Is this “living off the back” of the employees?

Yet these myths continue. They are relevant in several ways.

If you are caught in the “us and them” attitude to business owners/decision-makers, you will have trouble truly relating to the owners and decision-makers. Unless you can truly understand the owner’s decision-making perspective, it will be hard to be effective in selling any products or services. Notably, the reaction of one of the company’s long-standing independent contractor suppliers (who earns a reasonably high level of income from us — and several other clients — is that he will need to roll up his sleeves and figure out some cost savng strategies of his own. He also knows some payments to him may be deferred to manage cash flow, but he’ll see his money in the end (and he has enough clients that one slower paying client won’t harm his business overall.)

Crisis can and often provides the catalyst for necessary change. Alas, it is often necessary for businesses to keep challenging circumstances under wraps — you don’t want to demoralize or scare employees who want stability, not chaos, in their lives. However, there comes a point when you cannot leave problems unchecked and, in these circumstances, pulling out all the stops I think is better than handling things in dribs and drabs.

Finally, I think it is always important to lead by example, but with fairness. So, while I’m administering a shock treatment to my own salary, I’m providing employees who need a boost, a more gradual solution.

Businesses have ups and downs, sometimes in line with overall economic cycles, and other times, because of internal variations. Business owners need to understand and respect that employees often don’t have the perception of the owner, but equally, employees should realize that the ownership perspective for a healthy business is not built on exploitation, but sustainability. I don’t think we could survive long “living on the back” of our employees — but I surely know that owners cannot carry the weight of employees under their backs, as well.

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