How to be the CEO of a Family Business

Mark sat across the conference table from me utterly frustrated and ready to resign. He'd had enough. Running a $20 million company was not an easy task. He was responsible for four locations, 180 employees, and over 20,000 retail customers. The industry was under assault from Chinese competitors and low unemployment was making labor hard to find. His controller and right hand person was 70 years old and struggling with health issues. But it wasn't these challenges that had Mark on the brink of resignation. It was his family.

Mark’s company is owned by three different generations of family members. Poor estate planning decades ago had resulted in the ownership being handed down haphazardly to cousins, siblings, aunts and uncles. Year's of profitability had trained these family members to expect and depend on their dividend checks. Now Mark needed to replace four aging fork lifts, one of which employees refused to use because of its age and unsafe condition. He also needed to replace the roof on one location and refurbish the showroom in another. He had the money, but on his screen there was an email, from an uncle, four states away, complaining about Mark's "frivolous" spending habits. Mark had no doubt the uncle was more concerned with his upcoming quarterly dividend check.

Mark was just weeks away from the annual family board meeting, and he told me he was done. He didn't know what he was going to do next. His wife had a good job outside the family business, and he'd figure it out in time. He was 51 years old. He had taken the company from $8 million to $20 million in sales. And now he was leaving.

The more I heard about Mark's situation, the worse it got. The fundamental problem was one of role confusion. There were few distinctions between family members. Mark was dealing with shareholders, non-shareholders working in the business, those with family meeting votes and those without, executives and entry level children of passive owners who lived thousands of miles away. It seemed like everyone had their noses in places they didn't belong, and I could see exactly why Mark was leaving. His company had failed to properly identify three distinct roles. We will call them hats, because just like hats you can take one off and put another one on. And you can't wear more than one at a time without looking like an idiot. Here are the three hats family businesses must manage.

The Shareholder Hat

Shareholders own the company. In good times they can collect dividends. In bad times they may have to invest more cash to keep the company going. Sometimes there is one shareholder who owns 100%. Sometimes there are two who own 50% each. Sometimes there are more with wildly different shares of ownership. In most cases dividends get paid out and capital gets raised in proportion to each individual’s ownership percentage.

But there is one just one critical role of shareholders. They elect the board of directors. In this role their votes are usually counted in proportion to their shares of ownership (but not always).

That's it. Shareholders don't work in the business. They don't manage the business. They don't make investment decisions or hire and fire employees. To do those things you must take off the shareholder hat and put on another hat. And that was the biggest problem in Mark's situation. People with a shareholder hat were doing things that shareholders don't do. It is a recipe for disaster and it makes more sense when you understand the other two hats.

The Board Member Hat

Board members are voted in by the shareholders. It is their responsibility to hire the CEO and hold that person accountable. The board is responsible for major decisions such as when dividends will be paid and how much will be paid. The board may also approve financing and capital raise decisions. But the main function of the board is to hold the CEO accountable while serving as a sounding board for long term strategic decisions.

Board members may or may not be shareholders. Having outside board members to provide a different perspective can be very valuable, especially when it comes to breaking tie votes between family members. Outside board members are also able to consider things from an objective perspective not clouded by potential financial gain or loss.

It is important to remember that just being a shareholder doesn't guarantee a board member seat. Shareholders with little business experience or technical skill should probably stay off the board. Unlike shareholder votes board votes are usually counted equally meaning a 1% shareholder appointed to a four person board has a 25% say in appointing the CEO and holding her accountable.

The Employee Hat

Employees are hired and can be fired. They get a paycheck. They have job descriptions, accountabilities and get evaluated for their performance. The CEO is an employee. In that capacity he or she makes a million decisions about both the long term direction of the business and the short term day-to-day operations. The CEO is responsible for the financial performance of the business as well as the culture, public perception, marketplace reputation, and overall influence the company wields. The buck stops at the CEO's desk. In short the board hires the CEO and the CEO hires everyone else.

When the board hires the CEO it should provide an employment contract that guarantees some insulation from shareholders and even the board itself so that the CEO can run the company without undue interference. When you hear about CEO's getting million dollar payouts as part of their severance package this is what you are seeing. Those CEO's were recruited under the following two conditions:

1. If I come work for your board of directors you will leave me alone to do what I do best.

2. If you don't leave me alone you'll pay me a bunch of money to leave.

There were a lot of things wrong with Mark's situation, but this was probably at the top of the list. People like Mark don't suffer fools meddling in their business, at least not without a lot of financial compensation. But Mark didn't have a contract and the board had no financial consequence for its meddling. In the end both sides lost.

The CEO often isn't the only family member in the business. In Mark's case he worked alongside cousins that were store managers and a brother who ran the vehicle fleet. His dad still did some HR work part time. All of them received paychecks. But they all felt entitled to weigh in on daily business decisions because they were shareholders.

Venues

As you can imagine in most small businesses these hats are not defined very well. It is hard to know when to take one hat off and put the other on. But the concept of VENUES can make it much easier. There are venues where you only wear the shareholder hat, other venues where you only wear the board member hat, and everywhere else you wear the employee hat (if you are indeed an employee of the company).

Think about it this way. If you go to a wedding you don't wear your gym clothes. Similarly when you show up to work on Monday morning you leave your shareholder or board member hat in the car. It's time to put on your employee hat and go to work.

The shareholder hat gets worn roughly once a year. This is true of public companies and it should be true of most small businesses. There is an annual shareholder meeting where board members are affirmed or replaced, an annual report is presented and shareholders are given access to board members and executives for Q&A. There is also an investor relations function within the company that disseminates information to shareholders regarding company performance and the status of their share holdings. But that's it. Shareholders don't weigh in on the strategic plan or day-to-day business decisions.

The board member hat gets worn quarterly and sometimes monthly in fast growing businesses. Board members receive updates from the CEO and executive team, ask questions, vote on long term strategic issues and short term decisions requiring capital. Their function is primarily accountability for the CEO and vetting long term strategic decisions. They will review financial performance against expectations and should have a decent knowledge of how the business makes and spends its money. In times of transition the board may hold special meetings as they recruit and hire a new CEO. In moments of crisis the board may be convened for emergency sessions, but those should be rare.

Board meetings are governed by the company by-laws and one or more board members should be familiar with Roberts Rules of Order. Most of the time the formality will seem like overkill, but when you need to address a contentious issue orderly motions, discussion and voting is absolutely critical. The trick is to use them all the time because when you need them most it will be too late if they are not already a part of the board's standard meeting procedure.

How it works in the real world - One Owner/Operator

The single owner/operator has to wear all three hats. Let's address each one in turn.

The CEO hat

We are big fans of Gino Wickman's Accountability Chart idea. This looks similar to an organization chart except that we focus on the 5 or 6 key accountabilities for each person on the chart, not their job title. The CEO should have accountabilities for leadership (what Wickman calls LMA or leadership, management and accountability), success of the strategic plan, financial performance and a few others. Defining these accountabilities is important, especially as the team grows.

Every day the CEO's job is to fulfill these responsibilities. And every day when he shows up for work these are the most important things on his plate.

The Board Member Hat

Most Single owner/operators don’t have a board, but they should. You can recruit some outside advisors to the board and meet with them quarterly. Often the spouse is a member of this group, but not always. Sometimes a CEO roundtable group serves as a proxy for a board of advisors. I think it is better to recruit a small group of 3 or 4 trusted advisors whose sole focus is your business and holding you accountable to your plans. For the cost of a nice meal once a quarter you can add significant horsepower to your business.

Alternatively you can hire an outside firm to act as your board-for-hire. This has the benefit of paying people whose role is to tell you things you may not want to hear. Several times a year they force you to put on the board member hat and critically examine the job you have done as the manager of the business.

The Shareholder Hat

For a single owner/operator this is usually a formality, but an important one. Almost every corporation, no matter its jurisdiction, needs to have an annual meeting to legitimize its corporate standing under state law. This can be done when the tax return is signed or at some other discrete annual event that can be documented. After all it is unlikely that the shareholder is going to appoint a new board and hire a new CEO. But documenting an annual resolution to affirm the existing board, acknowledge newly appointed members, accept the financial statements as presented in the tax return and sign off on any other state mandated compliance requirements is hugely important if anyone every attempts to pierce the corporate veil in a law suit.

Multiple Owners

Businesses with two or more owners essentially follow the same path with a few important modifications:

• The accountability chart becomes critical. Very few "Co-CEO" arrangements work. Someone has to be administratively responsible for the overall business on a day-to-day basis. The formal existence of a board makes this much easier to accomplish because the non-CEO owner knows that several times a year the CEO will be held accountable and the votes will be equal.

• The board or outside advisors should establish a tie breaker vote by creating an odd number of members. Two board members with an equal vote is a recipe for disaster. Without a board the owners try to make board decisions while relying on shareholder voting percentages. The majority owner either tries to cast the tie breaking vote or (just as often) defers to the minority owner in an abundance of unwarranted caution. With three owners this is less likely, but a separate board with outside advisors is still a good idea.

• The annual shareholder's meeting needs to be more than just a formality. In most states the assets of one spouse are joint property in the marriage meaning your partner’s spouse is just as much a partner as the person listed on the share certificate. It makes sense to get everyone in the same room, include the spouses, present the results for the last year, talk about plans that are being executed for the future and give people a chance to ask questions.

Multiple Family Members as Owners

As we move to multiple family members the stakes get higher. Everything that was important for multiple owners to address is even more so for multiple family members:

• Without an accountability chart family members are virtually guaranteed to speak out of turn. Without core accountabilities it also becomes nearly impossible to call out poor performance among family members. It is very common to see parts of the business that are struggling because family members have been given a job title with no specific accountabilities. Job titles might have their place on a business card, but it is much more important to know what the key non-negotiables are when it comes to job performance.

• Outside board members or advisors are necessary to defuse sensitive topics and make sure everyone adheres to the ground rules of decorum and civil discussion. Outsiders also help insulate the business against family factions or sibling rivalries. This is also the critical point at which CEO's can become extraordinarily ineffective if not shielded from board interference by a good employment contract. All of this costs money, but as the complexity of the ownership structure increases so do the costs of managing it all and making sure the company continues to grow and thrive.

• The annual shareholder's meeting essentially becomes an annual family business meeting. And that is a good thing. Having a safe place where family members are not only allowed to ask questions, but are in fact obligated to do so helps make sure the table talk at Thanksgiving remains civil. Establishing clear boundaries where issues are and are not open to discussion is huge for these small businesses. But you have to provide a venue and a structure for this to happen. It won’t magically appear without considerable effort.

If you would like a playbook for setting up the structures above reach out to us with "Family Playbook" in the subject line of your email.

Cleaning up for the Housekeeper

Have you ever found yourself running around the house wiping things down and straightening up BEFORE the housekeeper arrives. It sounds crazy, but we’ve all been there…embarrassed or unwilling to let the world see what’s REALLY going on, how bad the mess really is.

Businesses fall into this same trap when it comes to working ON the business through strategic planning and execution. There is always one more thing to clean up or straighten out BEFORE they can rally the team to build and execute a strategic plan. The list of examples we’ve run into is long.

• “It’s been really busy. Once things slow down a little bit and everyone catches their breath we will be ready
• We just hired a bunch of new people and it would be better if they had some experience first
• Our controller has been out dealing with an illness and we really need her at the table before we do something big like that
• We just started converting our systems over to a new software package and it’s got everyone buried. They won’t have time until we’re done
• Our new sales manager really needs everyone’s help to get things cleaned up in that department before we can talk about business strategy
• We are changing locations and that’s going to be very disruptive. It would be better to wait.
• There’s a new product line we are introducing and that has our full attention right now
• Our org chart is going through some big changes and until that settles down we just can’t manage any more change
• The CEO is about to go on sabbatical for two months.
• There’s a recession coming, let’s get through that before we start building plans to grow the business”

What is it that makes all of these excuses irrelevant?

First, to call them excuses isn’t quite right, because they are born out of a misunderstanding that comes from inexperience in the disciplines of strategic planning and execution. They aren’t excuses so much as they are the reality that faces small business teams every day. They are the whirlwind.

The Whirlwind

In their book The Four Disciplines of Execution Chris McChesney, Sean Covey and Jim Huling coined the term “the whirlwind” to describe the day-to-day responsibilities, fires, rabbit holes, dead ends, employee crises, and customer headaches that exist in our jobs. The whirlwind is inescapable because it is everything you are getting paid to do as part of your 40-50 hour per week job description. In fact, in our work with leadership teams all it takes to be extraordinarily successful over the long term is just 2-3 hours per week away from the whirlwind. This is time when you close the door, go to a coffee shop or work from home on your biggest 90 day priority. The rest of the time we know you will be mostly reactive, living in the whirlwind.

Let go and let your team

It is usually the leader that is trying to manage the whirlwind hoping that one day it will subside and there will be time to actually work on the business. Unfortunately that day is never coming.

The alternative is to let go and allow the team to manage the businesses in the midst of all kinds of whirlwind activities. I said earlier that we have seen every one of the items above used as an excuse NOT to work on the business. You might be surprised to know that we have also seen every single one of those items listed as a strategic priority tackled by a team that was growing the business. That’s right, one business’s excuse is another business’s strategic priority.

What’s the difference between a team that is just trying to survive the whirlwind and one that is tackling huge whirlwind issues and making them strategic priorities? The simplest answer is growth. Businesses trying to survive are usually stagnant. Those with leadership teams addressing the whirlwind in the context of a strategic plan are growing the business. Both businesses are going through the same set of circumstances. One is growing and one is maintaining the status quo.

Status Quo vs Actual Performance

Leaders struggling to maintain the status quo are rarely measuring the actual performance of their leadership team. They have taken on too much of the responsibility themselves, and rightly perceive that it’s not fair to hold people accountable for performance they haven’t been given the freedom to improve.

A different approach is to be transparent with the team and admit that yes, the house is a wreck. However, from this point forward, it is the team’s responsibility to get things in order, not just the business owner’s responsibility. The owner is simply one member of the team and cannot be expected to do it all.

The owner and the team can then decide how performance will be measured. Note we’ve said nothing about the owner setting an unrealistic expectation for performance in the face of overwhelming whirlwind responsibilities. We haven’t introduced expectations at all. We are just measuring how the business and individual leaders are actually performing.

Some important things happen when we start measuring what is actually going on in the business.

1. Leaders who belong on your team accept responsibility for their areas of performance.
2. Those who don’t belong on your team quickly self identify and look for a way out.
3. Reality sets in and people realize that even in the midst of the whirlwind performance needs to continue and improve over time.
4. The biggest whirlwind items, those that affect the entire team, become priorities that marshal the full attention and resources of the team.

We Aren’t as Special as We Think

I met with a business owner once who went on and on about all the reasons now wasn’t a good time for him to work with the team on growing the business. He rattled off three things that I remember well. First, he had just made a big tax payment and needed some time to rebuild cash reserves. Second, his inventory software was changing over to a cloud based system. Third, his controller and right hand person was looking to retire. He was in the pool building business.

So I said, “wow, it must be tough to be the only pool builder in the country with low cash reserves, a big systems upgrade and a key vacancy to fill all at the same time.”

We both knew he wasn’t that special. He had just finished telling me how a friendly competitor had grown 30% while the owner’s wife was battling breast cancer. We both knew a former employee of his who had started a landscaping company that managed to double in size despite losing half his equipment in a trailer fire….without insurance.

My point is that we all think our whirlwinds are special and that they make it infeasible to grow the business right now. But there are other business owners out there facing the same things we are, probably worse. Not only have they accepted the whirlwind as a fact of life, they have made the biggest, most difficult whirlwind problems priorities in a strategic plan to grow the business. And they’ve let go of any need or compulsion to protect the team from the whirlwind or from an expectation that the business still needs to perform and improve.

Start working on the business today. Building a plan to tackle your nastiest whirlwind items is a great place to start. Then get out of the way and let your team do the work. It is likely some of them won’t be up to it, but don’t let that stop you from letting the rest of your leaders shine. Don’t worry, they already know the house is a mess. It’s part of their job to help clean it up. Give them a chance and start growing again.

Two Ingredient Recipe for Growth

If I were to ask you what the two most important ingredients for growth in business are, what would you say? Think about it for a second.

You’re probably thinking about sales, efficient operations, better marketing, great customer service, or better employees.

Though these are often present alongside growth they are not the driving force behind growth. The two most important ingredients for growth are a compelling vision and clearly defined values. Although these are intangible, they are respectively, the destination you grow towards and the solid foundation that will support all that growth.

But what is vision? And what are values? Definitions for these vary depending on who is giving the answer. So here’s how we define them at Axiom, in a practical way that actually works to drive small business growth.

VISION

A statement of the projected future of the organization and its place in the world as defined by the leader.

In its simplest form, your vision is the picture you paint me of what your business will look like down the road. What are we trying to get to? The clearer the picture, the more practically useful your vision will be in your business.

What makes the vision statement important? It unites your organization around a common purpose. It provides a “north star” that every department in your business can use to evaluate decisions and performance.

For example, though sales growth is a great contributor to business growth, how much sales growth is necessary to meaningfully progress toward the vision? Is there a goal your team should aim for? Where [what geographic area] should they focus on growing? What products and services should they lead with? Where should the pricing be? With a clear vision the answers to these question come easier.

What qualities make up a good vision? We’ve written on vision before and you can read all about our thoughts on what makes a good vision, here. But if you want the summary version, a good vision statement must meet these criteria:

• A vision statement is a communication tool; the projected future should be clear.

• Some of the best vision statements contain a number or something that can be objectively measured. Numbers are the easiest way to provide clarity about what your future organization looks like. “We want to be philanthropic,” and “we want to be able to donate $150,000 a year to local charities” communicate the same thing, but one paints a much clearer picture.

• It is set by the leader. Rather than being set by committee, a good vision is set by the business owner and leader in chief.

• It must be aspirational. Your vision should describe a future context. It should give the employees working with you something to work towards.

In order to drive growth your vision statement must play a central role in all of your communication. If it just sits on a shelf it will not do anything. If you use it to set goals, to evaluate performance, to judge the fitness of new hires, to decide which partnerships to pursue and which customers to leave… if you actually use it every day it will make a big difference. When vision is recited by leaders in an organization it can unite your people by giving them a purpose to engage with, together.

VALUE(S)

Enduring and unchanging descriptors of a company’s culture.

With togetherness comes conflict and mess. Values are an important ingredient that direct how your people are to act in pursuit of the vision. Generally, values are unique to each organization and are also set by the leader. If Vision describes where you want the company to go, Values describe the company you are committed to being along the way.

There’s no formula for determining what your values are, but there are a few things to be mindful of when setting values.

• Values dictate your culture. Without values, a culture will still exist...it just may not be a culture you want.

• Values should be easy to remember. Choose a word, then briefly describe what it means. For example, one of Axiom’s values is truth, which means we speak the truth even when it’s difficult (to say, and hear).

• Values should be pre-eminent, not pretentious. It’s what we do that matters. This means two things: 1) Values should be public, so we can be held accountable when we fail. 2) Values should influence every company activity.

APPLICATION

Taking from the last bullet point, it’s what we do that matters; the information in this blog is only going to be helpful insofar as you apply it.

In the past, we’ve written largely to an audience of business owners and given practical advice to match. However, we’ve realized there are two groups that have a vested interest here: employees and employers.

To the Employee. The most practical way you can use this information is by “leading up the chain of command.” The phrase comes from authors Leif Babin and Jocko Willink in their book Extreme Ownership. Stated simply, leading up the chain of command means providing your leaders with valuable information they would otherwise not know so that they can support you with the proper tools and resources. In this case, leading up the chain of command means that if your boss hasn’t talked with you about vision or values that’s as much your fault as anyone’s.

Consider asking your boss questions like:

• How do you see our values influencing daily operating activities?

• What do you hope to accomplish with the company? Where are we going?

• What are the words you want vendors and customers to use when they describe their experience with us?

In every instance, these conversations benefit the organization. If your boss cannot articulate vision or values, you have the ability to stress how invaluable they are. If they have vision and values, and but few people know them, you have the ability to help them hone the message and  then rebroadcast it to the entire team.

To the Employer. Vision and values are foundational ingredients for your success. Without them, you handicap your company’s growth potential. Do you have a vision? Do you have clearly stated and defined values? If not, your homework is straightforward. Step one is to draft a vision statement and a short list of values.

If you have vision and values, step two is to ensure that your entire organization is acutely aware of them, even to the point of annoyance. There are many ways to do this.

• Make them public and visible. Put them on the walls and in the public spaces of your office.

• Make performance reviews an evaluation of both technical skills and adherence to values.

• Adjust operating activities to be reflective of your values.

• Build and execute strategic plans to accomplish your vision. It won’t happen on its own.

It takes a great deal of reflection and intention to define and set vision and values. It doesn’t get any easier when having to do this amidst the day to day hustle. Yet the right ingredients for growing your business are within your control. Focus and align your organization around a shared vision and values, then set your sites on growth.

Responsible Service

The role of customer satisfaction in business is undisputed. Businesses exist because they satisfy a customers wants and needs by delivering products and services for a profit. Without satisfied customers, businesses fail. Yet, despite its importance, predicting customer satisfaction is surprisingly hard to do. There has got to be a better, less dynamic, variable that accounts for satisfaction and that is standard across businesses.

That universal variable is personal responsibility. Customer satisfaction will be higher in an organization where employees have a greater sense of personal responsibility for the customer’s satisfaction. So how would we measure this variable? How does it differ from fault? How can a business leverage this variable?

To answer these questions, I’m separating the topics into two blog posts. Here I’ll talk about personal responsibility and the distinction between fault and responsibility. In my next post, I’ll share the question that each individual in your organization should be asking to build a culture of responsibility and how this transforms any company to be more relational.

Personal responsibility

The variable that you should use as an indicator of customer satisfaction is personal responsibility. Measuring personal responsibility is an inexact science at best, but if we get creative there is a way we can gauge to what extent individuals within the company view their efforts as being responsible for customer satisfaction.

Imagine a company survey that asked employees to fill out a pie chart assigning customer satisfaction responsibility to each department. In this company there are four departments: sales, service, operations and administration. If each department viewed their efforts as equally responsible for customer satisfaction each would draw a perfectly weighted pie divided into four neat pieces. In other words, each department when asked independent of the others, decided that they were only 25% responsible for the customer’s satisfaction.

But imagine a company where the sales department weighed themselves as 60% responsible with the other departments sharing the remaining 40%. Service weighed their portion at 75%. Operations similarly put their responsibility as 65% of the pie. Administration viewed their role as 85% responsible for customer satisfaction. For purposes of our “Personal Responsibility Metric” we don’t care how each department rated the others. We only care how each department weighed itself. In this company the totals don’t add up to 100%. They add up to 285%.

It is safe to say the the company where individuals view their roles as more responsible for customer satisfaction will enjoy higher satisfaction ratings among actual customers.

By contrast, a business where each department thinks customer satisfaction is someone else’s responsibility cannot expect to find many satisfied customers in real life.

Fault vs Responsibility

It’s important to note we aren’t measuring fault. Fault by nature is error-centric, where responsibility is solution-centric. There’s a saying, “If someone leaves a baby on your doorstep, it isn’t your fault, but it is your responsibility.” This perfectly highlights the contrast between two terms that are often used interchangeably.

Don’t measure customer satisfaction on the basis of fault or an employee’s ability to do their job; this doesn’t work. I’ve experienced skilled employees who’ve done their jobs well but left me feeling unsatisfied as a customer. One of our clients experienced the cost of a dissatisfied customer when a $50,000 contract was cancelled. In the meeting to determine what went wrong, we heard mostly fault-finding. Everyone was looking for an individual or process to blame for the customer cancellation. But there was no silver bullet. In the end there was just a string of instances where everyone viewed customer satisfaction as someone else’s responsibility.

The organization where fault finding is the norm — though it is important to identify errors — is ultimately trying to avoid disappointing customers over thinking of proactive ways to satisfy them.

The Role of Culture

How then does a company leverage personal responsibility to improve overall customer satisfaction? Through the culture. Without a culture of personal responsibility, most businesses will default to fault finding in a crisis. This is reactive and toxic to a healthy team. In my next blog post, I’ll give you a very tangible question that everyone in your company should be asking to build a culture of personal responsibility. And I’ll show you how this transforms even the most transactional encounters with customers into opportunities for highly personal relationships with your company. 

Set Better Goals Using the Paradox

Can you believe we are already in July? It seems hard to believe half the year is in the rear view mirror. 

Since your second quarter is over let me ask: how are you doing? Did you hit your quarterly goals or are you still catching up from the first quarter? Have you even thought about your goals for Q3? Are you on track for your year? If you’re like most of us, my guess is that you’ve still got some work to do.

How do I know this? Because countless studies and opinion pieces have been written on goal setting and goal attainment theory. In Measure What Matters, John Doerr, covers Edwin Locke's theory about “specific, hard goals."  Back in 1968 Locke asserted that hard goals were more effective than easier ones. Since then we've developed acronyms for SMART goals and HARD goals, and SMARTER goals. While the acronyms abound multitudes of people, everywhere, every day, still struggle with setting goals and/or executing against them to attain their vision. What you need is a framework to set better goals.

The framework I like for setting better goals is unique because I think it accounts for the two things that are key to all goals: difficulty and simplicity. I call the framework the Goal Setting Paradox. It’s the idea that better goals must be difficult and simple. 

Goals Must be Difficult

Difficulty can be subjective. What is difficult for one team may prove easy for another. There are three ways we can define difficulty to be less subjective.

Difficult goals take more than a year to accomplish.

This means goals are mid-term achievements whose purpose is to propel your business toward the future. Difficult goals may have priorities or tasks that can be accomplished in less than a year, like checkpoints in route to the finish line, but the end result should engage your team for around a year. Difficult goals, proven by extensive study, result in high rates of engagement and execution.

Difficult goals engage more than one department/team

The implication here is that difficult goals utilize the strengths of multiple teams in your business. A perfect illustration for this is Amazon’s original series “GRAND PRIX Driver.” The series follows McLaren’s Formula One racing team as they attempt to regain their competitive standing in the sport of F1. The first season documents the inner workings of McLaren and extraordinary number of teams that must be engaged to build a Formula One car worthy of competing.

Difficult goals require learning and personal growth.

Setting difficult goals will require movement from a context of safety and normal, toward discomfort and challenge. The status quo is not engaging enough for your team to pursue. They won't engage, won't give their best, and definitely won't grow as individuals during the process. When gold is tested to determine its level of purity it is subjected to intense heat that either burns off the impurities or allows them to be skimmed off the molten metal. It's not a pleasant process. Difficult goals have the same effect on team members, but the end result is a more refined, more capable, more valuable product. the fire is hot and acts as a force on the gold.

Goals Must Also be Simple.

It is important to understand that difficulty does not presume complexity. There is a real danger in goal setting of making things more complex than they need to be. But there is also a danger in creating simplistic goals that fail to reach a meaningful level of difficulty. That is why goals must be simple but not simplistic. There are two qualities that illustrate the value of simple goals

Simple goals are well defined and explicit

This involves not only defining what the goal is but also the exact result we should be able to expect when the goal is achieved. Those charged with achieving any goal are going to naturally wonder "why?" Being able to paint a clear picture of what goal achievement looks like and what difference it will make enables the leader to answer that question from the beginning.

When we first get involved with a business we perform a Strategic Assessment that will list dozens of recommendations for improvement (i.e. what we are asking them to do). But we also list why we think the business should adopt our recommendation (and possibly turn it into a goal).  Giving our clients a clear picture of what accomplishment looks like can help them decide if the why and the what are worth their time, effort and resources. 

Simple goals put first things first.

Teams need to step back and ask if the goals they've set are address the most important priorities in the long term success of the business. That isn't to say that long term goals always trump short term goals. On the contrary, it makes little sense to set goals for long term product development when cash flow isn't capable of funding current operations, much less long term strategy. On the flip side businesses that constantly set goals around urgent priorities never develop a competitive advantage because they never consider anything other than the fire that needs to be put out now.

In spite of how you may feel now it is possible to finish the quarter with excitement and a sense of positive inertia. It may just be a process of setting better goals, goals that embrace the Paradox of being difficult and simple at the same time.

The Pure Genius Tax Planning Strategy

We are smack dab in the middle of tax season with only a couple of weeks left before the individual filing deadline. That means S corporation business owners all over the country are wringing their hands, hoping for a great March and April to pay their tax bill. This annual ritual of scrounging for cash to pay last year’s taxes is a huge distraction for businesses. And it leads to all kinds of shenanigans.

Most tax planning advice given to small business owners is based on spending money.

“Buy new equipment before year-end.”

“Prepay next year’s insurance policy.”

“Buy the heavy duty truck for your new ‘business vehicle’ so we can write it all off in year one.”

I’ve heard (and at times have said) it all. Don’t get me wrong, if you are going to spend money, do it tax efficiently. But why spend money in the first place to lower your taxes? Let’s look at the numbers and see how absurd the spending strategy really is.

If you decide to spend an extra $10,000 at year end to ramp up your deductions it might save you $2,500 in taxes. So net-net you are $7,500 OUT of pocket. Decide is the operative word. I am describing a situation where you can spend the money and use the purchase in your business OR you can choose not to spend the money and it won't kill you or have a negative impact on the business.

If you decided NOT to spend that money, your profits would be $10,000 higher and your tax bill would be $2,500 higher. So after paying your taxes you would be left with $7,500 IN your pocket.

You see how that works right? When you're 'smart' and employ the spending ’strategy’ you give up $7,500, but when you act like a fool and pay more taxes you KEEP $7,500. 

Why is it that we lose our minds when it comes to taxes? Are small business owners so loath to render unto Caesar that they’d rather spend 100% than keep 75%? I don’t think so. I think first, they are getting bad advice. And I think second, they are reacting emotionally to the very frustrating experience of having to come up with cash to pay a tax bill. So when someone says “Do this and your taxes will be lower” they just do it without thinking about the bigger picture.

Here’s the truth. Most of the truly strategic tax saving strategies require CASH. And the best way to accumulate cash is to not spend it. So we need a better strategy, one that provides the cash to pay taxes, avoids spending, and allows us to stockpile cash for use in future tax saving strategies. It might sound sexy, but it is dead simple. And those who follow it enjoy...

• Enough money on hand to result in stress free cash flow management

• The opportunity to self fund everything from life insurance to asset purchases

• The resources to take advantage of long term strategies down the road

Let's break this strategy down to four simple steps.

Step 1

Setup a separate savings account to hold nothing but money you will use to pay taxes.

Step 2

Every month close your financial statements (quickly) and multiply your YEAR-TO-DATE net income before taxes by an approximate tax rate based on your tax bracket. Your CPA can help you come up with this. A good place to start is 25%-30%.

Step 3

Compare the result of step 2 to your tax savings account balance. If step 2 is more than your balance put that much money INTO your tax savings account. If it’s less pull money OUT OF your tax savings account and redeposit it into your operating account.

If you make estimated quarterly payments just subtract the payments already made from the result in step 2 before you compare it to your tax savings account balance.

(NI) x (25%) - (E) - (B) = transfer amount

Where...

• NI = Net income

• 25% is your estimated tax rate. This may be higher or lower based on your situation

• E = estimated payments already made

• B = balance in tax savings account

• Transfer amount = amount to move into (out of) tax savings account

Step 4

When tax time comes around your final tax bill can be paid out of your savings account. If you use a conservative percentage (usually somewhere between 25%-30%) you will almost always have extra left in your account after you pay the tax bill. This can be distributed as an extra dividend for you to spend as you like or you can roll it back into the business. If the balance in your tax savings account is not enough to cover the tax bill the remainder is usually not very large and paying it causes none of the disruption to your business or hand wringing that you experienced with your previous tax bills.

If you want to see a simple example of this strategy take a look at the following spreadsheet.

If your business is larger or smaller just add or subtract zeros as appropriate. You should get the picture.

At the end of the year there is $10,750 available to pay the final tax bill. If the final return winds up being less whatever is left over can go to the owner. Also notice that in the two worst months when the business was losing money the owner was able to take money out of the tax savings account and deposit it back into the operating business where it could do some good.

Without this plan the business owner would need almost $11,000 on top of the quarterly payments at tax time. And that’s IF the quarterlies were being made. If he followed the norm and just took the 4% underpayment penalty “loan” from IRS by not making any estimated payments he would be stuck with a $40,000 tax bill. But most likely he would have spent that $40,000 back in December on a new truck to “save taxes”. And, YES, it would have lowered his tax bill down to about $30,000. But where is THAT money going to come from? 

I’ll tell you where it’s going to come from. Next year’s profits. But to pay that $30,000 to IRS the business has to make $40,000 in profits ($40,000 less 25% tax leaves $30,000). In a growing business this snowball continues to get larger year after year. There were a lot of businesses that let that snowball grow unchecked between 2000 and 2009. It never caused a problem because their January, February and March numbers were always solid and higher than last year’s. They cannibalized current year profits to pay last year’s taxes after spending down their tax bill the previous December. And then what happened?

Whether it’s a recession, a competitor who opens up across the street or just grandma’s common sense voice ringing in your head, eventually that unpaid tax bill is going to create some serious headaches. Not only are you running on borrowed time you are just spending more than you should. Remember our example earlier. If you make $10,000 of profit in a month and spend all of it on a blockbuster family vacation not only are you failing to put away the $2500 you will eventually owe Uncle Sam, you are blowing $7500 that you could use down the road to help fund one of those fancy long term tax saving strategies you can never afford because your CPA tells you “I’m sorry, you don’t have enough cash to do that.”

Pay this year’s taxes out of this year’s profits and you will never again dread that terrible, horrible, no good, very bad day called April 15th. 

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