Are you making money or building a business?
There are a lot of traps you can fall into when you own a business, but one that I’ve seen a lot of recently is the focus of the business owner on maximizing money for the short term. At a quick glance, this makes sense…but this short term profit approach leads to decisions and outcomes that are really unhealthy when it comes to the long term success of the business.
As an example – I talked to a business owner the other day who refuses to hire someone who can do the primary work of servicing customers in his business. Their logic boiled down to a few key reasons:
- No one else could possibly do the quality of work that I do.
- Even if someone else could do this work, it will take a long time, too long, to train them
- My customers are buying me – I don’t have a choice but to do this work myself
- If someone else does the work, I have to pay them, which means I make less money…!
Typically it’s this last excuse that really seals it for them. Here’s the thought process using some simple numbers to keep the math easy. Let’s say a new client deal generates $1000 net of any delivery expenses (Cost of Goods Sold). If I hire someone to handle that client, I would need to pay them $600 – leaving me as the business owner with only $400 net of all costs. However, if I just do the work myself (which will be better and faster than anyone else anyway), I get to keep $1000. (Of course there’s the opportunity cost of the time spent…but that rarely comes into consideration).
You can’t really argue with the math (although you can certainly argue with the assumptions) but at the end of the day it really boils down to a simple question:
“Are you in business to make short term money or are you building a long term business?”
It’s kind of a trick question in the sense that you have to make money if you want to remain in business, but it does get to the mindset of how you look at business growth. Either answer is okay, but make sure you’re clear on what your end goal really is and that you act accordingly.
Here’s another way to look at it – it’s basically the difference between being a freelancer and creating your own graphic arts studio. Here’s a quick breakdown of the differences:
As a Graphic Arts Freelancer:
- You minimize your overhead and maximize your billing rate to get the most profit
- You are trading time for money…which means your upside potential depends on how many hours you can work
- If and when you decide to stop working, your business is worth next to nothing (you might be able to sell your contact list or some ongoing engagements).
- Your day to day operations are fairly simple and you don’t need to manage anyone else
As the Owner of a Graphics Art Studio with several employees:
- You create repeatable processes and automation (systems) for your staff to maximize profits
- Your upside is only limited by market demand and the ability to find the right people to hire
- When you decide to stop working, assuming that you’ve built a solid business and hired the right people, you could sell your business for multiples of your revenue (depending on the industry and several other factors)
- In order to manage day to day operations, you must create repeatable processes and lead and manage your employees to success – not easy…and a different skill set than doing the work
Obviously there are more differences, but it all starts with the idea of focusing on creating something for the long term (the Entrepreneurial Mindset) or trying to maximize your short term profits (the Solopreneur Mindset). And that’s where the trap comes in. A lot of business owners start out with the idea of building a long term business, but for various reasons, their actions are all about generating short term profits.
Early in your business you have to generate revenue anyway you can, or you won’t survive. At the same time, if you want to create long term business value, you have to start planting the seeds…building the foundation of your longer term business model. If you don’t consciously do this, it won’t happen.
That means at some point you will have to hire someone to do the bulk of the revenue generating work that you do. And in the short run, that also means you will make less money and it will be less efficient until that person gets up to speed. But if you hired well and you’re committed to big picture success, that employee will actually end up being better at the day to day work than you are! And more importantly you will eventually make a lot more money with less effort than you can on your own.
Or you can choose to be the best freelancer you can be – it’s easier in the short run and a perfect fit for those who just want to practice their craft.
The point is that you need to consciously decide what you’re doing with your business and don’t get caught in the middle.
What are your thoughts? Do you know anyone who’s trying to build a business but only focusing on short term wins? We’d love to hear your thoughts – share them in the comments below.