For many business owners, December marks the end of another year and January brings about a fresh start. Opportunities abound. Optimism is high. You are finalizing your budget (let’s face it, most of you haven’t finished your budget yet). With the new budget brings opportunities to make new investments in areas that will maximize your performance in the coming year. Owners have the ability to invest in growth areas, and to de-invest in areas that are not producing. This is your chance to REIMAGINE, REINVIGORATE and REINVENT your business.
However, evidence shows that the vast majority of business do just the opposite. In fact, a study by Mckenzie showed that 90% of resources are spent the same from one year to the next. There can be several reasons for this. A large portions of your resources are fixed from year to year. Your largest expenses are typically one of the following:
- Payroll
- Health Insurance and other benefits
- Rent or Mortgage.
These three categories eat up a tremendous percentage of your company’s budget. And cutting any of these will have a huge impact on culture, public perception, customer service, etc. But truly innovative companies find ways to invest in growth areas. In an informal survey, Smartbrief for Leadership found that 28% of surveyed business leaders reported not spending much on growth areas, and only 10% responded that they spent freely on top line growth. That seems to be very much in sync with the McKenzie results.
Where should we look?
The reality is that business owners should be looking at major areas of their business to determine if they are producing the results that they are expecting. If they are not, then they should look at one of three strategies:
- Turn around the poor division
- Combine/realign business to make it more effective
- Sell off or close the poor performing business.
I once worked for a business that had a side initiative to lease out our equipment and facilities to organizations who needed access to the equipment but could not afford it. It provided a modest level of income for a few years. Then technology changed, new entrants came into the market, and the economy took a turn for the worse. All of this reduced demand for the service to the point that it was costing us more to keep the lights on (website, financial reporting, labor to support customers) than we made in revenue. Profits disappeared.
Unfortunately, we did not exhibit the courage to cut it off when we should have. We decided to double down and try to turn around the poor division and wasted even more money on it for at least six months before we threw in the towel. Eventually the inevitable occurred. We closed the division and stopped offering the service. We only lost one employee and we reallocated the other staff. It was painful, but necessary. And, we invested our resources in new growth areas instead of wasting more money.
Most CEOs want to invest for growth
In that same study by McKenzie, fully 83% of CEOs believe more money should be invested in areas that have a greater opportunity for growth. This seems like a no-brainer. But it always seems harder than expected.
How do organizations shift from a traditional budgeting mindset and move toward a growth-oriented investment mindset? Here are a few suggestions:
- Establish clarity around your vision, mission, and values and utilize them to drive investment decisions. Measure each investment decision against these. I often use the analogy that your vision is a destination and values are your guardrails. They keep you from running off the road while you are in pursuit of your dream. When you have investment decisions to make, use your values as guardrails to determine which direction keeps you on the road to your vision.
- Have the courage to make the tough decisions regarding poor performing divisions or products (see the previous section). No one likes to give up. If you are a leader you are naturally wired to build things. Closing a division or service line is not in your DNA. But sometimes that is exactly what a leader needs to do.
- Carve out a portion of your budget for growth and expansion. Set aside a percentage of your budget that will be reallocated to growth areas each year. You only use these funds for creative and exploratory endeavors. Analyze the results of this exploratory work and determine what should continue in the budget the following year.
- Similarly, you can create a separate division to only work on new and innovative solutions or products. For a few years, I led the enterprise architecture group of a Fortune 500 company. One of my primary objectives was to constantly be looking at new technologies, leading pilot projects and shepherding promising new technologies into the mainstream. This model can also work for the organization as a whole. But you have to have the discipline to carve out enough budget to make it successful. And, you must empower your team to make decisions, take risks and allow them to fail. Creating an environment where “controlled failures” can be made quickly and in targeted directions, will lead you to achieve your desired results.
Be Crazy, Not Insane
Some say the definition of insanity is to do the same thing over and over and expect different results. Companies that invest money in the same ways every year and expect different results are, well, insane. For this reason, you must have the courage to take your company out of this endless cycle of insanity and take it to places that you have only dreamed of.
I love working with innovators that have crazy ideas. Most innovation comes out of crazy ideas. I work with innovators that have come up with crazy ideas but are struggling to turn them into a business. Schedule a quick phone call with me today and let’s talk about how I can help bring your dream into a reality.
Now, go be crazy.