It’s Free!

free

It’s a typical day at Bob’s Company, Inc. Bob notices that a recently-hired employee is now eligible for dental benefits. So, Bob hands her an application. As he walks away, she asks, “What’s the cost?”

Bob’s reply? “It’s free. The company pays for it.”

If this was a movie rather than an article, the startling shower music from “Psycho” would come on at this point.

Or maybe it would turn into a take-off from “Young Frankenstein.” Instead of “It’s alive!” the line could be “It’s Free!”

Shame, shame on Bob. He wasted a terrific opportunity for a “teachable moment” with a new employee.

Of course it’s not “free.” Every benefit provided by the company costs good money.

Free. What was Bob thinking? He should have responded something like this: “Our dental insurance costs about $25 per month. The company pays for it. It’s part of your compensation – just as our other benefits are.”

Too often employees think only about base wage or salary when the subject of compensation arises. This happens because we business owners and employers let it happen. You’re likely to hear something like “I make $35,000 per year.” You are very unlikely to hear an employee say, “Well, my base is $35,000, but on top of that my employer generously pays another $12,000 for my health insurance. Counting my paid time off, my other benefits and my payroll taxes, I cost my employer a whopping $58,000 per year.”

So, how do we get our “bang for the buck”? How do we get our employees to recognize and appreciate all aspects of the compensation package – so the company can enjoy a fine ROI in the form of increased employee satisfaction, improved productivity and reduced turnover? How do we drive the “entitlement culture” out of our companies?

Here are some approaches to use:

  • During hiring interviews, listen for signals. If the candidate is focused like a laser beam on your vacation plan or grimaces noticeably when you explain that you don’t pay 100% of the health insurance, these are not good signs. (Note: Yelling “Next!” is not a tactful way to end an interview.)
  • Your candidate job offer letter should outline the entire compensation package and focus on the total value – not just the salary.
  • Make ongoing education part of your company’s culture. Talk about the cost of doing business. Let your folks know how much insurance rates go up every year. Make sure the employees know that they have a vested interest in the company’s success … if they help the company succeed, you can continue to subsidize their insurance costs and provide excellent benefits.
  • Print a year-end statement for each employee, showing his or her total compensation and benefits costs.
  • Consider all aspects of compensation costs when budgeting and projecting pay increases. Example: Let’s say you like to provide an average 4% pay increase per year, and your total company compensation expense (including benefits) is $800,000. A 4% overall increase is $32,000. If you expect your health insurance to go up $5,000, you now have $27,000 left for salary increases. (Back to education: Explain your rationale and the math to your employees. Involve them in the decision. Maybe they want more salary increases and are willing to bear more of the insurance costs. If they help make these decisions, you’ll get better buy-in.)

You invest lots of money in your company in the form of salaries and benefits. Chances are, payroll and related expenses are the largest line items on your income statement. Spend the additional time and effort to maximize the investment. Done right, it can pay you back many times over.

PS: Bob’s story has a happy ending. He realized the error of his ways and corrected his statement to his employee.


What’s Your Number?

numbers

“What gets measured gets managed.”

 It’s hard to argue with that piece of wisdom. That said, here’s another old saw to consider:

“If everything is important, then nothing is important.”

Between these two valuable quotes is a balance and a guideline for business owners.

All businesses have certain numbers that define success. Some, like profit, are universal. Every business must take in more than it spends, so an argument could be made that this number – profit – is a definition of success for every business.

But what about other numbers? There’s certainly no shortage of other things to measure – sales, costs, margins, cash … the list goes on and on.

They’re all important. But don’t forget: “If everything is important, then nothing is important.”

Focusing on a small, carefully-selected handful of numbers and actually doing things to improve them is much more likely to lead to overall success than scattershot oversight of dozens of different numbers.

Some business owners create a scoreboard or “dashboard” of metrics – to pull selected numbers out of the blizzard of income statements, balance sheets and other reports – and single them out for an appropriate amount of attention.

This is how the “What gets measured gets managed” piece comes into play.

So, how do you cut through the scads of potential metrics which might be worthy of your undivided attention, and discover the select few which will truly make a difference?

Think about your business. Two questions:

1)    Are there things related to your specific business model that are absolutely critical to ongoing success? For instance, if you are the low price leader, then cost of sales is likely a primary area of focus.

2)    Are there things going on in your business right now that deserve attention? Examples might include things like declining quality, too much dependence on one customer, or high employee turnover.

If you find that there are specific things that warrant a permanent place on your scoreboard, then add them and leave them there. Or, perhaps you’ll discover that a temporary issue needs attention – so it gets a spot, only until it is resolved.

In most cases, these big-picture, corporate-level “critical numbers” will have underlying “drivers” – activities which must be done to move the number in the right direction. A simple example: weight loss. If your critical number is pounds, the drivers would be calories in (eating) and calories burned (exercise.)

The best drivers measure activities and behaviors, as in this weight loss example. If you want to change a number, you’ve got to change someone’s activities or behaviors.

These are the numbers that deserve a significant amount of time and attention. That’s not to say other numbers aren’t important. They’re just not as important.

Identify and break out your critical numbers and drivers. Get them on a scoreboard for all to see. Talk about them. Teach and learn about them. Assign responsibility for them. Track them. Most importantly, be sure to move them in the right direction.

Your business will be more successful for the effort.

No Sweat Compensation Planning

You’re sitting in your office, and like most business owners, you’re up to your elbows in a variety of challenges and opportunities. Suddenly, one of your employees appears at your door and asks the dreaded question, “Since my anniversary date was two weeks ago, am I due for a review and a raise?”

You buy some time by telling the employee you plan to work on it within the next few days. But you can’t help feeling guilty. First, you just lied because until you were reminded, you had no idea that the review was due and had no intention of addressing it. Second, you feel a sense of guilt because your lack of a systemized approach to reviews and raises repeatedly ruins your schedule.

As if this wasn’t enough, the next interruption is your accountant who brings the news that salary expense is way over budget, ending with, “Oh, and by the way, we just got our health insurance renewal. It’s going up 22% next year.”

Most small business owners operate in exactly this fashion. The employee anniversary date, by default, creates the expectation of a raise. (Reviews are generally dreaded by all involved, but as part and parcel of an annual raise, they go along for the ride.) Health insurance and other compensation-related expense increases take us by surprise. We’re supposed to be in charge of our companies, but we’re at the mercy of employees, vendors, and arbitrary schedules.

It doesn’t have to be this way.

How about a system that lets you take charge of schedules, accurately budget for increases in salaries and benefits (and actually stay within that budget), and eliminates the constant stream of mid-year raises?

Sound too good to be true? Read on.

First, who says that an employee’s anniversary date has to trigger a review or a raise? I suggest you do two things:

  1. Perform all the performance reviews in your company within a 2-3 month timeframe, near the end of your fiscal year.
  2. Schedule all pay raises to kick in at the same time – the beginning of the new fiscal year.

What does this do for you? For one thing, it eliminates the constant stream of interruptions and unplanned, hastily-prepared reviews (which hopefully equates to better, more thoughtful reviews.) It also gives you the structure to proactively look at your entire team and corresponding salary expense at one time, and to take the time to budget this expense for the new year.

Yes, it can be a lot of work. Yes, it requires plenty of discipline and organization. But in my mind, the benefits outweighs the costs. You’ve got to do this work anyway, right?

Here’s another change to consider: Try to move your health insurance and other benefit renewals to coincide with the start of your fiscal year. Then, by the time you’re doing your annual planning and budgeting for the new year, you’ve got your renewal quote in hand – ready to be plugged into your budget.

Finally, here’s the biggie: Lump ALL of your compensation-related expenses and focus on that number, and not just on the salary expense. Aim to keep this number growing more slowly than revenue. Better yet, manage to keep it growing more slowly than your gross profit. After all, that’s the number that pays all your overhead expenses.

So, if in the past you tried to have an average annual salary increase of 4%, consider having an annual total compensation expense increase of 4%.

This way of thinking requires some trade-offs. If health insurance is going up a bunch, it may eat up some of the funds that would otherwise be available for raises.

This approach also requires you to have some frank discussions and some educational sessions with your employees. Most are probably unaware that you pay FICA, Medicare and unemployment taxes. They may not know about your cost for their health insurance, worker compensation insurance and other benefits. One way to drive home the total cost to the company is to prepare a year-end summary for each employee, detailing each compensation-related expense.

Eliminate the chaos and take control. Spend some quality time once a year doing this admittedly hard work, and the rest of the year you can focus on growing your business.

Track Your Numbers Manually

One of the best things to happen to small businesses – heck, to businesses of any size – is computerized accounting.

Can you even imagine someone sitting down with a two-column ledger book and documenting each individual sale, line by line? It’s the way companies did it for centuries, until recently. We’re fortunate to be living and running our businesses in the modern era.

Despite my high praise for computers and all the things they can do for your business, I still urge you to manually compute your most important numbers. That’s right – use a calculator and a pencil and write them down. Every month.

Here’s why:

It’s so easy to nonchalantly look at a report – like a computer-generated income statement or balance sheet – and put it aside. Critical numbers don’t necessarily jump off the page at you.

In fact, your basic reports may not even give you certain important ratios. If you track revenue per employee, the ratio of current assets to current liabilities, and other key ratios, you may well have to calculate these manually.

My recommendations:

  • Determine what numbers, ratios and other key performance indicators are important enough to track monthly.
  • Set an acceptable range – maybe even specific high and low “red flag” limits – for these indicators.
  • Create a routine for this work. Set aside some time, and use the same format each month. You might do your calculations in the margins of your computer-generated reports, you may use a blank sheet of paper, or you might design a fill-in-the-blanks form. It doesn’t matter how you do as much as that you do it.
  • Working from your computer reports, find the numbers that you’ll need and do your calculations. Do it religiously each month.

If everything is within acceptable range, terrific. Celebrate with your team and maybe even give out some sort of reward for a job well done.

When you find numbers that are out of whack, spring into action and do something about it.

Of course, timely monthly reports are key to making this work. If you’re getting your reports weeks after the month closes, that is a problem that also needs to be tackled.

Using this simple and low-tech approach, you’ll quickly develop a “feel” for your numbers and will stay on top of problems while they are still small and manageable.

Common-Sense Small Business Policies and Procedures

Successful companies don’t make it up as they go along.

For your business to be successful, you need a set of policies, procedures and systems.

Policies

Whether written or not, every company has policies. Policies cover things like whether a product can be returned, under what circumstances an employee will be fired, how long an employee needs to be on the job before being eligible for health insurance, and whether company computers may be used for personal emails. Here are some guidelines:

  • Keep your policies simple, clear, and as few as possible.
  • Don’t create a policy for everything, but do create them for important issues.

A good time to develop a policy is when someone asks for the first time, “What’s our policy for …?” If you don’t have an answer and you expect the question to come up again in the future, you may as well develop a policy to cover that situation. Discuss among the management team or, if appropriate, get an attorney involved.

Procedures and Systems

Can you imagine a fast food restaurant that allowed each employee to decide how to make a burger? Or a bank without formal processes for accepting a deposit? I’m not suggesting creation of unnecessary red tape or nonsense. I am suggesting that …

  • once someone spends the time to figure out how to do something, it’s a waste to let other employees spend the time (also known as “money”) to figure it out again.
  • it is irresponsible to let the company’s know-how go out the door daily at 5PM.
  • you don’t want important business processes to be done “Jim’s way” or “Judy’s way.” You want important business processes done the company’s way!
  • the only path to consistent product and service quality is to have simple, clear procedures and systems.

So, what’s the difference between a procedure and a system? I can probably best explain by example.

Let’s take hiring. You might have a procedure for conducting an interview. (I use the word “procedure” pretty loosely. It might just be a simple checklist. In my mind, a procedure is anything in writing – even in pictures – to guide the steps someone takes to accomplish a task.) You also have a job application and a form asking for the applicant’s approval to perform various background checks.

All of these checklists, procedures and forms make up a hiring system.

Please don’t get hung up on these terms. Feel free to give these things different names. The important concept is documenting:

  • what you do
  • who does it
  • when it gets done
  • how it gets done in sufficient detail to ensure quality and consistency, and prevent duplication of effort.

Let’s look at another example that can help make my point. Suppose you start a store and are the only employee. In the early days, you’ll be doing all kinds of tasks … some simple, and some complicated. One task might involve buying and restocking product for sale in your store.

Let’s say you hire a new store sales employee, Kathy, and you want her to take over the purchasing process. Your training choices include:

  • Show her how you do it, and hope she takes notes or has a good memory, or
  • Type up a simple procedure and give it to her while she’s being trained.

Which do you think will work out best?

If you go the route of most small businesses – which is to show rather than write a procedure – eventually Kathy “gets it.” She starts doing the job, becomes good at it, and over time probably adopts new approaches to the job that you don’t even know about. These changes may impact important things like your cost or delivery lead times. But, none of her improvements get written down.

After a year on the job, Kathy quits. All of this knowledge that Kathy gained – which belongs to you – walks out the door.

So you hire her replacement and show him how to do it the old way. You haven’t been involved in purchasing for over a year. Kathy handled it. You don’t know anything about all the changes she made to the process. You’ve lost a year’s worth of important business knowledge … because nobody bothered to write down a few simple bits of information.

So, even if you’re the only employee, take the time to write down what you do and how you do it. Put it in your computer and print it out. By the time you have your first employee, you will probably have a good start on an procedures or operation manual. Think how much easier it will be to train your folks and how much smoother the operation will run.

Remember: Successful companies – like yours – don’t make it up as they go along.