Gasoline for the Economy

Ever see gasoline thrown on an open fire?  Impressive!  The economy, like a campfire of burning embers with occasional flickers of flame, just got a dose of gasoline. The recently-passed tax bill (extension of the "Bush Tax Cuts") is more than just an extension. It also includes a little-reported provision by which Social Security (FICA) taxes are rolled back by 2% for one year, beginning January 1, 2011. Actually, I don't understand the lack of press attention to this landmark tax cut. 

Perhaps it's because the press doesn't get it. I'm no economist, but the potentially explosive effect of a 2% net raise in the paychecks of 99% of American workers is, I believe, going to be stunning. This is the largest net tax cut of the last 2 decades. Let's remember what FICA is. It's a flat tax that everyone on every payroll in America pays, from the first dollar of income. It's based on total compensation -- salaries, bonuses, commissions, etc.  Income tax cuts, on the other hand, only affect about 1/2 of US households -- the other half don't pay income taxes at all. 

It's true that FICA phases out at $110,700 of wages per person, so someone earning more than that individually gets only a $2,200 instantaneous net annual raise. Only? One blogger stated, "A 2% cut in the employee portion of FICA really isn't a big deal." A 2% instantaneous raise for everyone in America -- from minimum wage on up? Not a big deal??

Think about it. If every employer in America suddenly conspired to raise every wage in the company by 2% it would be reported galactically, and we'd expect an explosion in consumer spending due to the additional disposable income. The magical part about this, unlike an ordinary income tax cut, is that it's in the first paycheck of 2011 and every paycheck thereafter for a year.

This will have a remarkable effect on the economy in 2011. If your business, personal or investing plans for 2011 were not contemplating significant economic growth, think again. Paydown of consumer debt has been a drag of roughly 1% on the GDP for 2 years running. That paydown rate is beginning to flatten, as consumer debt has reached historical norms.

This additional 2% of gross wages in every pay envelope in America will be like gasoline on a smoldering economy. If they had this card up their sleeves in Washington, I wish they'd played it 2 years ago. That would have worked far better than the indirect and oddly-distributed "stimulus" strategies. Granted, it would have been nice if the employer's share of FICA was rolled back by 2% as well, but not nearly so instantly stimulative.

Hold onto your hat for 2011.

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Terry Weaver


CEO
Chief Executive Boards International
http://www.chiefexecutiveboards.com/
TerryWeaver@ChiefExecutiveBoards.com


 

Vagueness Leads to Socks, Ties and Underwear

A Christmas Season ad campaign from a new online retailer, The Art of Shaving admonishes:  

Repeat after us:  "I will not be vague about my wants, because vagueness leads to socks, ties and underwear"

In the recent past, I've seen innumerable cases where business owners have undershot the specificity and clarity needed to effectively communicate with their employees. In their book Switch, authors Chip and Dan Heath say, "Script the critical moves -- be clear about how people should act.  Don’t think big picture, think in terms of specific behaviors."  Let them know exactly (not vaguely) what it is you expect them to be doing and accomplishing.

In an age-old text on leadership, Leaders: Strategies for Taking Charge, author Warren Bennis says, "The management of meaning and mastery of communication is inseparable from effective leadership." In business, leadership is all about clarity and frequency of communication.

A recurring commonality among non-performing companies is lack of clarity of expectations and measurable goals. The secondary effect is a lack of accountability -- people aren't clear on what they're supposed to be accomplishing and there aren't solid measurements of success in place, so trying to hold anyone accountable is impossible. The result?  People keep coming to work, exchanging their time for money, and resolve to just "do the best we can." Sound familiar?

As you lead your organization into 2011, you may want invoke the leadership corollary of this ad campaign:

"I will not be vague about my expectations, because vagueness leads to mediocrity, frustration and disappointment."

Happy New Year from Chief Executive Boards International!

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Terry Weaver


CEO
Chief Executive Boards International
http://www.chiefexecutiveboards.com/
TerryWeaver@ChiefExecutiveBoards.com


 

Do You Own a Business? Or Are You Self-Employed?

Lots of people who say they own a business are really self-employed. They own a job. In his book The Cashflow Quadrant, author Robert Kiyosaki defines owning a business as "You own a system and people work for you".

I was recently speaking to a group of early-stage business owners and some people thinking about starting businesses. We were talking about leverage -- the practice of getting high returns from less-expensive resources.

When you use the term leverage in business, the first thing people think about is financial leverage -- you buy a machine that returns 25% on your investment, and you do it with money you borrowed at 6% interest. Do that over and over, and you've leveraged the use of someone else's money into a handsome fortune.

Leverage also applies to people. You buy someone else's heartbeats to do something you'd otherwise have to do yourself. In what job do you hire that first person? To relieve a bottleneck. Find the thing that's constraining your business from growing, and hire someone to fix that problem.

In the case of a self-employed person I recently met, his problem is the usual roller coaster of sell-deliver-sell-deliver. You can't sell while you're delivering the service, and you can't earn revenue while you're selling. In this case, the delivery process is pretty simple -- requiring only basic carpentry skills and maybe 2-3 days of training.

The selling process isn't very complicated, either. Perhaps a 1-2 week learning curve for someone with some basic sales skills, practicing a sales cycle measured in days, not weeks or months. Find someone who can do it, and he'll be earning commissions his first month. If he can't do it, find someone else who can. Set the commission structure so that the house (the business) earns 4x+ more than the sales person.

The critical success factor in business ownership is finding other people who can do things you're now doing yourself. They don't have to do them as well as you can -- that's rare, in fact. If their ability is only 60%-80% of yours, just scale the compensation accordingly and you're still making money.

Then what do you do with your time?  Work on your business instead of in it. Look for the next bottleneck to your growth and then hire a person to do that job. Sooner or later you hire a General Manager who can supervise all these folks and you can spend the majority of your time working on the business to make it better and more self-sufficient, vs. in the business, which usually keeps it from growing.  Find the best and highest use of your time, and focus your efforts there. 

What are you doing to leverage your best and highest use?   Click "Comments" below and share those ideas with others.  

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Terry Weaver


CEO
Chief Executive Boards International
http://www.chiefexecutiveboards.com/
TerryWeaver@ChiefExecutiveBoards.com


 

5 Reasons to Revisit Your Pricing Strategy

 

Would you like to make a lot more money without working any harder at all?  One of the things I love about Chief Executive Boards International is the window I have on leading-edge trends in mid-sized businesses. The entire reason for this blog is to share those with you in near-real time.

I'm just recently hearing from CEBI members and other business acquaintances that they're starting to creep prices and they're holding. I'm not sure of the reasons for that, but a few possibilities come to mind. 

• As the economy continues to perk up, commodities prices are rising, particularly metals
• There's lots of talk about inflation (although I think it's not imminent)
• Prices in most industries haven't moved in quite awhile
• As your customers businesses improve, they can tolerate your price increases 
• In many industries, capacities are down and supply is tightening up

The point is, any reason (excuse) will do. What's important to understand is how much price increases improve your business so much more than growing your business. Why?
Let's say your business is doing well -- producing a 10% pretax net on sales. So, for $100,000 in sales, you clear $10,000. In that model, to grow your net profit $1,000, you have to grow your sales $10,000, right? That's finding 10% more orders, using 10% more labor, 10% more raw materials, and increasing your working capital by 10%.  Working 10% harder.

Let's consider the alternative -- a one percent price increase. Sell the same $100,000 worth of product for $101,000, and what happens? The price increase drops all the way to the bottom line -- friction free. No more labor, no more material, and nobody has to work any harder. Yet your net profit increases by 10%.

What if some customers won't buy at the higher price? One clever member did the math really quickly, noting that if you raised prices 3% and lost 20% of your volume, you'd still be ahead. How? At $80,000 in revenue, you'd expect to make $8,000. With a price increase of 3% on the remaining $80,000 in revenue, you're selling it for $82,400, and your net becomes $10,400. With 20% less of everything required.

Now, this is an admittedly simple example. For one thing, it assumes all costs are variable costs. Nevertheless, if you can start creeping prices, even on part of your products or services, you'll be surprised at the impact on your profitability.

What's your recent experience with price increases -- either your own or from suppliers?  Click "Comments" below.
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Terry Weaver


CEO
Chief Executive Boards International
http://www.chiefexecutiveboards.com/
TerryWeaver@ChiefExecutiveBoards.com


 

If It Isn't Written Down, It Doesn't Exist

 

If it isn't written down, it doesn't exist. "Not true for me", you say? A Chief Executive Boards International member brought this idea back from his National Board to his Local Board. A lively debate followed, with the Board largely agreeing with the premise. So, what does this apply to?  Here are a few areas that came up: 

• Strategies -- A strategy you can't write down is unlikely to be well-enough conceived or communicated to actually work.
   
• Accountability -- If you expect to hold anyone accountable for a goal, a level of performance or a scope of work that isn't written down, you're probably dreaming.
  No job description = no accountability, usually because the employee, despite your own conviction, doesn't really understand what the critical performance dimensions of the job are.
   
• Processes -- Business owners are always saying, "They just don't do it the way they're supposed to."  When asked, "Show me the documentation of how they're supposed to be doing it", the conversation usually stops.  Processes that aren't documented (flow charts, checklists or stepwise instructions) regularly break. Some never did work right.
   
• Business Goals -- Goals (or Objectives) that aren't written are usually not achieved. What happens is that written goals usually beget written strategies. It's those strategies and the written action plans that go along with them that cause the organization to achieve its goals.
   
• Organizational Alignment -- It's almost impossible to align departments, people, activities and compensation with the organization's Mission and Objectives without all that being written down. What's the responsibility of each Department? Each Manager? Each Employee? If that's not written it's certainly arguable that it doesn't exist.
   
• Employee Performance -- Written performance appraisals are done for a reason. Namely, so it's crystal-clear to the employee what he's doing well and what he needs to improve. Try defending a wrongful discharge or age discrimination suit without written documentation of the employee's performance.
   
• Personal Goals -- People who write down their personal goals are many times more likely to achieve them than people who say, "I have my goals in my head."
   
• I've run this idea by a couple more Local Boards and I haven't heard a credible rebuttal. So, I've come to believe if it's not written down it doesn't exist.

So what do you say?  If it's not written down, does it exist?  Click "Comments" below.

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Terry Weaver


CEO
Chief Executive Boards International
http://www.chiefexecutiveboards.com/
TerryWeaver@ChiefExecutiveBoards.com