This is the first post in an ongoing series of posts, inspired by daily phone sessions between myself and one of my clients, Shondale Gray of the Forgiveness Campaign. The idea behind the sessions: Share business strategies and information that I’ve learned. We call them “Teachable Moments” because that is what they were for me and what they were designed to be for her.
The “moments” are there to call upon because of a commitment that I made to myself as a teenager to learn something new every day. I used to track the learning but learning is a habit that can become all-consuming if practiced properly. At a certaiin point, we have to put what we’re learning into practice or the entire effort is a waste of time.
When I was a student at New York’s High of Art and Design (A&D, class of ’79), my home room and 10th grade social studies teacher was Mr. Sosnow. A&D had a very large student population and therefore, staggered the lunch periods during the day. There were also two “sessions” for student arrival/attendance: The early session, which started at about 7:30am and the late session, which started a couple of hours later.
Depending on which of the two sessions you attended, your lunch was scheduled during one of four lunch periods. Mr. Sosnow’s class fell immediately after my lunch period. On the first day of the class, Mr. Sosnow comes into the room, turns and writes on the board capital letters, “FIRST RULE OF ECONOMICS: THERE IS NO SUCH THING AS FREE LUNCH.”
Most of the A&D students paid for their lunch but students that demonstrated economic hardship (like me) received lunch at no cost, unless they wanted to pay for an extra milk or a desert or anything that was not a standard part of the lunch.
Mr. Sosnow turned to face us. There was no, “good afternoon,” no “I’m Mr. Sosnow your social studies teacher.” His first words to us were, “Here’s the first rule of economics: There’s no such thing as ‘Free Lunch’. Sombody, somewhere is paying for that lunch.”
Of course, all of us knew what he had just said was true but most of us never paid much attention to the money trail before sitting in his class that day. Mr. Sosnow’s First Rule of Economics extends into every aspect of our lives. It applies to the pens, paper and notepads that we take home from work. It applies to credit card and insurance fraud. It applies to the municipal and government services that we take for granted. And, it applies to every hour of our business operations.
That last point is the most important point to consider as a business professional. This applies to owners, managers and line employees. Because each hour of business operation has to be paid for by someone, every hour has a tangible cost.
It always amazes me when I meet a business owner or manager that has no idea about how much it costs them each hour to operate their business. You know they have no real idea because they are willing to spend three hours on a task in order to save $10 or drive 20 miles out of their way to save $100. While it is true that the value of an individual’s time is a variable cost based on a variety of factors, the costs of operations is much less so and should include costs associated with both projected and actual revenue.
Put differently, if you want to make a million dollars a year, you have to value your time accordingly. Add up the total costs, which include your projected earnings, rent, utilities, employee costs, etc. and divide the result by the total number of working hours (number of staff x number of hours worked) to arrive at your hourly costs of operations. You can conduct a similar exercise to arrive at the actual costs of each individual in your employ but the simple formula would be three times salary. There are more sophisticated formulas that you could use, but the previous are good starting points.
You’ll quickly discover that your hourly costs of operations are measured in hundreds or thousands of dollars. That’s why spending an hour to save $20 is a waste of time. The actual hour probably cost you $200. Now, multiply the impact of these supposed money saving activities across an entire year and you’ve hit upon a key reason why so many small businesses will say they have plateaued: A poor methodology for the investment and measurement of time as a resource.
The person paying for the free lunch is you.
To resolve the problem, establish hourly receivables or benefit value that exceeds the cost of time expended. In other words, there are always two ways to make money: earn it or save it. If your hourly costs are $200 and the three-hour drive saves you $1000, that’s a good use of time but only if you are not neglecting $1000 in potential receivables in order to make the trip.
Lot’s of people cheat by putting in ungodly hours each week (I’m guilty of this). However, that only lowers your hourly value while simultaneously and only artificially lowering costs. The real negative impact of the practice is on quality of life. “So,” you ask, “how do I fix this?”
- Determine your actual hourly costs. If you already know this number, then you’re ahead of the game. If you don’t then break out the Excel spreadsheet and start plugging in numbers. Don’t forget to base the costs on your projected and/or desired revenue, not your actual. If you plan solely based on the actual numbers, you’re likely to realize a lot less because few people actually achieve what they’ve planned. You’ll need to differentiate between costs that are fixed, like rent, and costs that are variable, like technology (each employee may have differing tech requirements).
- Practice comparing costs to benefits and encourage your staff and consultants to do the same. If you ask your staff, they’ll tell you all the ways that they can do their jobs better, smarter, faster, etc. They know how to but are rarely given a reason to. One of the primary money wasters that I’ve seen is the result of bosses that force employees to do it “the company way” instead of encouraging them (and rewarding them) for discovering, sharing and implementing a “better way”.
- Understand the difference between High Value Activities and Low Value Activities. It always amazes me when I see a CEO that is spending her time taking packages to FedEx instead of using that hour to reconnect with a customer or research changes in the industry that will impact or benefit her company. Remember: The higher you are on the organization chart, the farther-reaching your vision, planning and activities should be.
- Keep track. Like many things in life, you won’t know if your new attention to value is working if you don’t keep track of activities and their outcomes. As you discover ways to better utilize time, be sure to add tasks to fill the gaps or the addage that “work expands to fill the time allotted for it” will apply.
- “Stop me before I kill again…” If you’re in the habit of living in the weeds instead of in the clouds, then much of what I’ve written here will be hard for you to accept or practice. Instead of rationalizing your behavior by applying artificial benefits, ask yourself if the behavior has just killed an opportunity to do something else that would mean more to your business had you gotten it done. I have one client that has spent that last six months telling me how she needs to focus on new business but she has no problem meeting friends for 2 hour lunches in the middle of the day. At the end of the month/quarter/year, those lunches will have cost her much more than she realized.
- Hire the best in the world to do what needs to be done. The faster that you make this a reality, the faster you will reach your goals. Everytime you start a task, ask yourself, “If I could hire anyone else in the world to do this task, would I still want to do it myself?” Each time that the answer is “no” but you find yourself doing the task anyway, you’re paying for that lunch.
There’s a lot more that can be added here. It’s a simple premise that takes a minute to fully apply, and that’s fine. The idea is to understand the opportunity and apply the lesson accordingly.