Chief Executive Boards Blog

When is Your Independence Day?

2009-07-05T08:26:00.000-07:00

The July 4th weekend reminds us of the political, religious and economic freedoms we enjoy as Americans. As part of that economic freedom, we Americans enjoy the most fertile climate in the world for business formation and ownership. Yet many of us have created businesses that demand most of our time -- the exact inverse of freedom.

A great blog article by Bernadette Doyle, "When's Your Independence Day?" reminds me, in her words, "Chances are you started your business to enjoy more autonomy and freedom in your business. So, in the words of Dr. Phil, 'How's that working for ya?'"

It's an excellent article, and worth your time and reflection. In it, she raises several key points:

As Robert Kiyosaki explains in his book The Cash Flow Quadrant, there's a huge difference between business ownership and self-employment. If you own a business, it will run whether you're there or not. If that's not the case, you're actually self-employed -- you don't own a business -- you own a job.
If you believe you can't be away from the office for a day (or a week), she's talking about you
It doesn't have to be this way
You need a different plan
You probably need someone (or a group of someones) to help you with that plan. Not coincidentally, she suggests a coach or a Mastermind Group.
And, finally, she writes, "No matter where you are starting from, you could be experiencing business in a whole new way, making more than you ever dreamed possible and doing so in a way that is fun and enjoyable for you."

You can't believe the number of "business owners" I talk with about Chief Executive Boards International who tell me "I just don't have the time to do that." I can scarcely keep myself from challenging, "Are you serious? You don't have the time to spend eight of the 200 working days in the year away from the office, figuring out how you can spend most of the 200 working days of the year away from the office??"

CEBI Members, sometimes hearing this excuse from people they nominate for membership, tell me "That's a person who really needs this." In fact, CEBI members say the advice, counsel and support of their fellow members results in more enjoyment of their business, more income, and more free time to enjoy the money.

Are you a person who really needs a better plan? Who owns a job and would like to own a business? Who needs someone (or several someones) to help you with that?

If you don't choose CEBI, wouldn't it be helpful to choose some other resource, coach, advisor or Mastermind Group to help you create some freedom from your business? Think about it.

If you've successfully reduced the dependence of your business on yourself, please click Comments below and share with others how you did that.

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Terry Weaver

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

It's Better to be Alone Than in Bad Company

2009-06-30T10:08:00.000-07:00

At a recent Chief Executive Boards International meeting, a member mentioned that one of his inside sales people had put up an online "store" site, selling products very similar to those his company sells.

The member didn't realize the cancerous implications of keeping such a person on the payroll, and his Board didn't waste any time mentoring him on the need for swift and sure action to get this employee out the door. There is no excuse or resolution for a breach of trust -- it's time to terminate the employee and get on with life.

One member quoted his immigrant mother, who has a 2nd grade education, saying, "It's better to be alone than in bad company." A profound observation worth remembering.

Bad company attracts people of bad character. And your company attracts people of bad character, if you either hire or retain people of bad (or even questionable) character. These are insidious forces, and have ways of propagating that's both subtle and cumulative:

Imitation -- People see others behaving unethically, and they copy that behavior
Reduced Inhibition -- People see others behaving unethically, and they conclude that the company doesn't care, or perhaps even condones such behavior, so they drop all boundaries of ethical behavior and assume "anything goes."
Self-Selection -- People tend to join up with those of like mind. Unethical employee behavior, believe it or not, tends to attract unethical employees. In this same conversation, another member cited his experience with having to completely shut down a remote office, after digging into problems of poor financial performance. Turns out most of the employees were drug users, and some were dealing drugs out of company trucks!! More on organizational cultures......
Self-Separation -- It's been said "bad money drives out good." It's equally true that people of bad character drive out people of good character -- they just don't want to be around people they don't trust or respect. You lose good people as a result of keeping bad ones.

So, when is it time to do something about a character problem? This week. More....

You may have acted to terminate a person of bad character, and then been totally surprised about what others told you after the fact. If you've had such an experience, please click "Comments" below and share it with others.

Get a Good Deal on a Lease -- Act Now

2009-06-29T22:07:00.000-07:00

A Chief Executive Boards International member asked his fellow members for some cost-reduction ideas to save his business from a severe cash crunch. In the next breath, he mentioned his lease was up for renewal within the next year. It happens that this member is in a specialized business in a specialized building in a severely depressed local economy.

The members unanimously advised him to run, not walk, to the landlord, requesting several things:

An immediate rent abatement, or rollback -- perhaps to or below the original base rent (before escalators) of the current lease.

A renegotiated renewal at an even lower lease rate -- asking also for an option to terminate in the case of sale, liquidation, or bankruptcy

At least 2 months' rent at $0, commencing with the start of the new lease

The members' rationale was straightforward. First, you don't get what you really need without asking. And, secondly, the lessee (CEBI member) is holding all the cards in this deal. It's highly unlikely the landlord could find a replacement tenant any time soon, and he probably knows that. The peace of mind that the lease is even renewed at all should be worth something in rent reduction. And, finally, the lessee knows that the landlord owns the building free and clear -- he's not in his own cash crunch trying to meet debt service demands of a mortgage holder.

Tough times call for tough actions. Have a look at your own lease, and if you see a renewal in the future perhaps now is the time to renegotiate that. You'll never have more bargaining power. Here's a recent article from Inc. Magazine with a multi-part strategy for getting your rent reduced: http://www.inc.com/magazine/20090501/how-to-get-a-good-deal-on-a-lease.html This article makes the important point that you probably don't want to go this one on your own, and further that a good real estate Attorney might be more help than a Commercial Broker.

If you've had some success in reducing your lease expenses, please click "Comments" below and share that experience with others.

I Followed My Board's Advice -- And Focused on My Strengths

2009-06-25T18:00:00.000-07:00

I heard from a Chief Executive Boards International member that he had taken his Board's advice about an issue facing his company, and that the results far exceeded his expectations. I asked the member, David Dorn, founder of Red Oak Medical, a provider of specialty medical equipment, to write a guest article for Chief Executive Blog, which turned out to be half experience and half testimonial. Here's what David had to say:

"I was reminded at a recent CEBI board meeting of the singular importance of profitability to the survival of my business. It may seem obvious, but with the various challenges facing my company simultaneously, I see in retrospect that I lost focus. Our company had been through a difficult time of declining revenues, and in order to maintain profitability, expenses had to be cut. At previous Board meetings I heard members report on the benefits they experienced in their companies after confronting the difficult issue of letting employees go and taking action in this regard when necessary.
"This has always been a challenge for me. I made the decision to let our Director of Operations go, who was the highest paid employee on payroll and had at one time been a key employee in our organization. The reality in the moment was, however, that we could no longer afford her as a manager. I expected to save money, but what I was surprised to find was that our company actually became more efficient operationally without her in that role. Payroll expenses came more in line, and our internal operations became smoother.

"Another key piece of advice I got from my CEBI Board members was to focus on my strengths, or what I do best – and delegate all other tasks. I brought in a financial controller so I could focus on sales. This resulted in increased revenues in Chicago, our main market area. In addition, we have been able to move forward with our initiative to cultivate new satellite markets. I hired new sales reps to open our first two new territories: Indianapolis and Milwaukee. Both have gotten off to a strong start.

"The guidance and business intelligence I have gotten through my participation in CEBI have been instrumental in helping me to develop professionally and keep my company healthy and growing."

David is not alone. While his own experience may seem obvious to you as a reader, it's likely that something similarly obvious is getting in the way of your company's growth. If you're a CEBI member, bring that continuing obstacle up at your next Board meeting.

If you're not a CEBI member, Click here for information on how to become one.

About our guest author: David Dorn is founder & owner of Red Oak Medical, a provider of CPAP equipment, supplies and services to patients in Chicago, Indianapolis and Milwaukee.
Red Oak's dedicated team of professionals are committed to helping patients derive the maximum possible therapeutic benefit from their CPAP treatment.
Learn more about Red Oak Medical at http://www.redoakmedical.net/"

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Terry Weaver

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

Front of Mind -- Maintaining Visibility with Prospects and Customers

2009-06-22T11:43:00.000-07:00

I made a presentation that was surprisingly well received at the 2009 Spring Summit of Chief Executive Boards International. The topic was, "Front-of-Mind -- Better, Faster, Cheaper." The point was that prospects, and even customers, forget about who you are, what you do, and how you might be able to help them. And they do so frighteningly quickly.

Click the icon on the right for a Video Blog Article on what Front of Mind is all about, and why you'll want to consider E-Marketing tools as part of your customer contact arsenal.

My own testimonial: This stuff works. CEBI has been sending an E-Newsletter to both members and prospects every month for the past 18 months, and the results are amazing. Here are a couple of typical email responses we've received lately, 1-2 days after sending a monthly newsletter.

From a prospect who first inquired in March of 2006: "I am ready to join your organization"
From a prospect who first inquired in January of 2006:

"Terry, I think it is time for me to join your organization"

We've had no other communication with these two people (both now members) for over 2 years. Our E-Newsletter alone kept CEBI on their radar until they each decided they had a need for a source of some new ideas.

If you've had some success with E-Marketing tools to keep your message in front of prospects and customers, please click "Comments" below and share them with others.

Look for People with a Lot of Tools on Their Belts

2009-06-21T13:50:00.000-07:00

In a recent meeting of Chief Executive Boards International, the discussion turned to the current largest-ever pool of available talent for hire. One of the members mentioned he had just hired someone who had "a lot of tools on his belt." Interesting mental image -- remember Schneider, the building super on the 70's sitcom "One Day at a Time"? Well, maybe not quite like that....

Seriously, in many businesses, particularly smaller ones, breadth is a lot more valuable than depth. We can generally outsource for special skill needs. What's more scarce is the person who is good at a whole lot of things, rather than excellent at only 1 or 2 things. A friend of mine, Joe Trotter, used to call these kinds of people "decathletes" (a combination of speed, power, jumping ability, and endurance).

If you're trying to explain what you're looking for in a broadly-talented candidate, try using phrases like, "a lot of tools on his belt", or words like "decathlete". These word pictures help another person understand your meaning and remember it in a more vivid way.

And, once again, don't overlook gray hair, a common attribute of broadly-experienced people. In his recent newsletter, John Mauldin of Outside the Box quotes David Rosenberg of Gluskin Sheff drawing the following insight on the latest unemployment numbers:

" ..the only segment of the population that is gaining jobs is the 55+ age category. This group gained 224,000 net new jobs in May while the rest of the population lost 661,000. In fact, over the last year, those folks 55 and up garnered 630,000 jobs whereas the other age categories collectively lost over six million positions. This is epic."

Other people are scooping up this talent pool, and you can, too -- just don't wait too long.

If you're doing some hiring and have made some amazing talent "finds", please click "Comments" below and share them with others.

Leverage -- The Capitalist's Best Friend

2009-06-14T20:06:00.000-07:00

In recent meetings of Chief Executive Boards International, members have brought up number of topics relating to both recovery and growth strategies. This week, the topic of "Leverage" came up. Now, the term leverage in most business owners' minds relates to financial leverage -- leverage of money or capital. And that usually conjures up thoughts of debt, which with some business owners shuts down the conversation.

But just a minute. Can't almost anything be leveraged? What does that mean, anyway? I think it means you get more out than you put in. Let's look at the physics of where this term came from. A lever, sitting on a fulcrum, applies leverage to a physical task. The "price" of that leverage is distance moved by the load (less than that moved by the force).

The "output" of that leverage is the multiplication of force, allowing, for example, the movement of a 400# load (not something most humans can lift) with a 100# force -- interestingly, in the opposite direction, which can be applied by almost any human weighing over 100#.

So, how do the concepts of leverage apply to the 4 factors of industrial production -- Manpower, Materials, Machinery and Money? Let's have a look:

Manpower -- You leverage manpower by buying hours from employees and selling them for more than you pay for them. Easy to see in a service business -- In my IT services business, I used to buy hours for about $40 (payroll) from employees and sell them for about $125 (billing rate) to clients. Not a bad model. In manufacturing, the hourly cost is built into the manufacturing cost, which is supposed to be far less than your selling price. You scale a manpower-leveraged business by selling (and buying) more manpower. Classic case -- professional services.
Materials -- Leveraged by selling things for more than they cost you. In the case of a distributor, you buy an item for $75 and sell it for $100. Not a bad model, especially if you never touch or inventory the product. Again, in manufacturing, the materials cost is rolled into the manufacturing cost. You scale a materials-leveraged business by selling (and buying) more materials. Classic case -- distribution.
Machinery -- You buy a machine that's capable of producing widgets in quantities far beyond the "per-unit" cost of the machinery (considering capital cost, maintenance, depreciation, etc.) In the manufacturing model, most of the leverage over the past 200 years has been in machinery. Machines make things better, faster and cheaper than people do. You scale a machinery-leveraged business by selling more products and buying more machinery. Classic case -- basic manufacturing.
Money -- You buy (borrow or invest) money at a rate far below the productive value of the money. Money invested in inventory selling at 8 turns/year has a huge ROI, considering it presently costs only 4-5%. Money invested in machinery (or other fixed assets) should produce an ROI of at least 25% -- in many cases taking out manpower. You scale a Money-leveraged business by selling (and buying) more money. Classic case -- Banking.

But the lesson that came out of most of these conversations among business owners was the leveraging of the owner himself (or herself). You leverage yourself by figuring out your own "best and highest use" of an hour -- the one thing you can do for an hour that earns the company the most money -- and buying other people's time to do absolutely everything else. It doesn't matter that they do it worse than you -- as long as you're not spending more total salary dollars than you can earn yourself by pursuing your "best and highest use." That's sometimes called "opportunity cost" -- the cost (in lost opportunity) of you spending an hour doing something yourself rather than an hour at your best & highest use.

Many businesses initially grow because the owner is the primary rainmaker -- the lead salesperson. If that's you, don't do anything else, at least in the early going. Buy other people's time to take care of the zillion other things that are needed to manage a business.

You'll quickly realize that you're selling most of your waking hours and sales are flat. I've learned over the years that regardless of the business, there's a physical limit to what one person can sell. So, without stopping your own sales efforts, hire a sales person and attach him to your coattails. Show, train, coach and mentor until that person can sell. If that doesn't work, fire him and get another one. Again, it doesn't matter whether he can sell as well as you. You're probably paying him 1/4 your own hourly income, so you're actually ahead of the game if he's only 1/4 as good as you are (you have 25% more sales). If he's half as good, you've leveraged yourself by 50%. Then get another one. Eventually, you'll need to offload managing that sales force to a sales manager. Again, not as good as you, but not as expensive either.

And then we come to the pinnacle of the business owner's best and highest use -- working "on" the business. Developing and communicating vision, charting direction, managing and monitoring the company's strategies. One of our members took a hard look at how he was using his own time, and concluded "My company has been without a CEO 80% of the time."

Are you performing at your best and highest use within your company? If you've discovered ways to leverage yourself, please click on "Comments" below and share them with others.

Acquisitions -- Why Buy when You Can Build?

2009-06-09T09:56:00.000-07:00

In a recent meeting of Chief Executive Boards International, a member brought up a failed acquisition attempt. This member is in a pure advisory service type of business, and had attempted to acquire another practice in his same market space.

After hearing some details of the failed deal, the Board gave him a completely different perspective on the acquisition, a regular occurrence in these meetings. Turns out the member was looking a business, represented by a broker, at a valuation of roughly 3 times gross revenue. The member was proposing $1 million cash, and $3 million owner financing over 7 years. A handsome price to buy only a client list. The deal failed due to the buyer's inability to obtain financing on the $1 million.

The Board questioned not only the lofty valuation, but also the buyer's likely "conversion ratio" of the existing clients. In any personal service business, there's a degree of chemistry between the client and the provider, and that might be tough to transition to a new organization. At any rate, the existing clients have a reason to shop around as a result of the change of ownership.

Then came the paradigm-shifting difference in perspective. The question was asked, "If you were willing to fork over $1 million in cash to buy this business, what would happen if you invested $1 million, say $250,000/year, in stepped-up marketing and sales activity in your existing business?" "Why", the member said, "I could explode my growth with that amount of sales & marketing effort." And then, of course, he wouldn't owe the other $3 million on the back side, either.

A strange thing happens when we use our taxable income, rather than cash flow analysis, in considering an acquisition opportunity. IRS allows Goodwill (most of the purchase price of a service-based acquisition) to be amortized over 15 years, straight line. Thus, the first $1 million of the purchase price looks like only a $67,000 annual hit to earnings, despite the fact that you're either $1 million poorer or $1 million more in debt. Somehow, in the mind of the business owner, that's "less bad" than four years of $250,000 in additional sales and marketing expenses, making the income statement look $183,000 worse (in all four years).

What's that reason? I think it's ego. We get our sense of accomplishment and self-worth all tangled around our income statements and tax returns. We forget about our long-term strategy, the long-term value of growing our businesses, and the ultimate "end game". We just say, "That's going to cost me $250,000 in profit -- I'd never want to sacrifice that." In fact, $183,000 less taxable income actually saves most business owners at least and additional $80,000. So, the Government is helping you defray the cost of that additional sales & marketing expense. Not to mention that it's fun to say on the golf course, "I acquired a business." Lots more sex appeal than "I grew my business with money I saved by not acquiring one."

We've completely ignored interest in this simple analysis, both of which tilt it further in the direction of "grow your own" vs. "buy". To be more rigorous in comparing cash flows, one could look at the loan amortization cash flow of the $1 million over, say, 7 years at, say, 6%, and do this example on that basis -- $175,000/year in growth funding vs. debt service.

Now that you think about it, what would benefit your business more -- a $1 million acquisition or $250,000 "invested" in a pure growth strategy for each of 4 years running?

So, you never want to acquire a business, right? Of course there are exceptions -- I'm not arguing that acquisitions are never a good idea. Here are some of the litmus tests that could be applied to an acquisition that might make it worth a serious investment:

A platform company -- It's surely easier to build a business from an established brand, organization, facility, customer base, etc. than to start one from scratch. Even then, you need to have a clear-cut vision for how you're going to transform the acquired business into something far more successful than the one you're paying for.
A new platform for your own company -- An acquisition in a new product/service segment that would be expensive to break into from scratch. An expansion into a geography where the seller has facilities, customers, brand recognition, etc. that would cost you a lot to establish.
Intellectual property -- The seller has specific know-how, whether patent or trade secret protected, that you can't figure out any other way to acquire (or can't acquire separately from the business).
Human Capital -- This one is dicey, and assumes you can win the hearts and minds of key players the seller has groomed over time, to fill holes and gaps in your own management team.
Eliminating a Competitor -- If you're in a narrow niche, and you can take a meaningful competitor out of action, there may be some benefit to your base business, as well as the acquired portion.
It's really cheap -- Some businesses sell in distress. If you come across a real distress sale that you're completely convinced you can turn around in MONTHS, not years, you may have a bargain on your hands.
Leverage -- You don't use your own money, and your return is many times the cost of the money you do use.

Bob Pritchett, author of one of my favorite business books of all time, Fire Someone Today, says, "In acquisitions, the buyer is the loser." If you're thinking about an acquisition, order the book and read only Chapter 18. Pritchett makes the case that the seller always knows more than the buyer will ever learn in due diligence, and there's a litany of things that you won't see, including the difficulty of integrating newly-acquired entities (and people) into your company.

So, Pritchett suggests, "Ask crazy questions", like, "If I am considering buying customers or employees, what would happen if I took the acquisition cost and offered it directly to the customers or employees in cash instead of paying it to the business they are associated with?"
Which is very close to the question this Board posed to the member -- "What would happen if you took the acquisition cost and spent it on growing your own (already successful) business?"

If you've experienced an acquisition that either validates or disputes these ideas, please click "Comments" below, and share your experience with others.

Are You Voting Yourself Unnecessary FICA Taxes?

2009-06-06T12:05:00.000-07:00

If you're an S-Corporation or C-Corporation, you may be voting yourself an additional tax burden by the way you choose to pay yourself -- through salary and bonuses (W-2) or through shareholder distributions.

If you're an LLC, you have the choice of paying taxes as an S-Corp, thus making the ideas in this article applicable to yourself, as well.

We're talking about FICA and Medicare taxes, which apply only to your W-2 income, not your shareholder distributions of retained earnings, one alternate way to withdraw money from your company.

At a recent Chief Executive Boards International meeting, a member said he was putting cash back into his company to keep it afloat during a period of negative net profit and cash flow. Not pleasant, but it happens sometimes. When asked whether he was still taking a salary, he replied "Yes, and I've reduced it to $90,000." The discussion that followed centered on the tax he was voluntarily paying (FICA and Medicare) by continuing to pay himself well, despite a lousy year and the need to return the same money to fund the company's temporary losses. The problem is that he's taking a voluntary 15% haircut on those W-2 dollars -- both the employer and employee sides of the FICA/MC tax. In fact, if he immediately reduced his salary to a still-reasonable $40,000 (for running a small company at a net loss), he'd save both the employer and employee sides of the FICA/MC tax, or 15% -- $7,500 per year.

Disclaimer: This article is not tax, legal or financial advice. It is an invitation to examine the way the Social Security System actually works, so you can use your best judgment in setting your own compensation as a business owner.

There are widespread misconceptions and misunderstandings about FICA and medicare taxes and how they benefit business owners long term. Those misunderstandings tend to cause people to pay more than they need to and get less benefit than they expect.

First, let's qualify this discussion to the case where there's a single owner or a small number of owners who can manage both salary and distribution decisions between themselves.

Then, let's examine how the Social Security system actually works and what benefit you're getting for any "discretionary" difference in salary you award yourself (what you actually pay yourself, vs. what IRS determines to be "reasonable"). For every $10,000, of that discretionary difference, you're voluntarily kicking in $1,500 to the Social Security system. Now, this discussion is just about what you're paying yourself in salary from an S-Corp or C-Corp, BEYOND what's considered "reasonable" by the IRS. ZERO is not "reasonable". What's "reasonable?" Some use an old CPA "rule of thumb" that salary should be at least 60% of total owner/operator's cash compensation, the 40% remainder being shareholder distributions. Some say 50/50. Others use an "hourly wage" theory. Here's a long thread of discussion, although dated, that's most interesting (and colorful): http://www.taxalmanac.org/index.php/Discussion:S_Corp_Owner_Salary_vs._Distributions

Most people willingly pay FICA/MC taxes, thinking they're "building" their eventual Social Security benefit. When you examine the mechanics of how your contributions actually affect your benefit calculation (available at http://www.irs.gov/), you might be inclined to change that viewpoint. The problem is in the underlying math. The core calculation for Social Security benefits is a thirty five year average of earnings -- the 35 highest years' earnings during your working career, using the thirty-five highest years of W-2 income, as adjusted for inflation. Here's the detail on how that works: http://www.ssa.gov/OACT/COLA/Benefits.html

The devil's in both the average and the "highest years" part. If, for example, you pay yourself $100,000 when $50,000 may be "reasonable", you'd think you're adding $100,000 to the average calculation. If you have 35 years of salary history, however, you're only replacing a lesser year that's adjusted for inflation -- perhaps to, say, $30,000. Thus, you've contributed $7,500 in additional FICA/MC for only a $70,000 boost to your total 35-year income (affecting its average by only $2,000 when divided by 35).

Now, here's the other part -- how your payout is actually calculated from that 35-year average. Having lived with a progressive income tax system (the more you make, the higher marginal tax rate you pay), you might not be surprised that Social Security benefits are progressive -- in reverse -- the more you made (and paid in FICA), the lower marginal payout rate you get. Here's the actual math, based on this year's adjustments (monthly benefit):

90 percent of the first $744 of average indexed monthly earnings, plus
32 percent of average indexed monthly earnings over $744 and through $4,483, plus
15 percent of average indexed monthly earnings over $4,483.

So, if your indexed average lifetime earnings top about $54,000, your incremental benefit rate is only 15%. An Engineer's starting salary beats that.

With that in mind, let's examine the choice you're really making -- whether to give yourself a marginal raise of, say, $10,000/year (just considering the raise itself). And, for simplicity, let's assume that's not just washing out a prior inflation-adjusted year. That raise would boost your lifetime earnings by $10,000, but after you divide by 35, it actually changes the 35-year average by only $286. And, if your career inflation-adjusted average beats $54,000, your incremental Social Security benefit increases by $43. per year. Even in the next-lower bracket, it increases by only $92/year. Combined employer/employee FICA + Medicare on the $10,000 raise is a haircut of $1,500. Does that sound like a good deal to you? Of course, a $10,000 pay cut saves you $1,500 you can invest right now. At only a 6% long-term return, that's $90/year income, starting right now, and you still have the $1,500!

It's even worse if your spouse is on your payroll. Since your spouse automatically gets 50% of your own Social Security benefit, it's highly likely that her (or his) Social Security contribution is totally lost (unless his or her 35-year average income is more than 50% of yours -- rare, but possible.

Social Security is not a system that's built to favor or benefit high-income individuals. It wasn't designed for that. What you have to decide is how high you want your income subject to FICA & Medicare taxes (W-2) to be, and develop a rationale for why that's "reasonable", if ever questioned. In a lousy year, "reasonable" could arguably be a pretty small number.

Note that $106,800 (for 2009) is the maximum salary to which FICA applies, and is also the maximum amount applied to your 35-year average income calculation. The Medicare cost component of roughly 3% (employeer + employee sides) applies for all W-2 compensation in excess of $106,800.

Disclaimer: Information contained in this article is neither legal, financial, nor tax advice, and may contain inadvertent factual errors. If, however, these ideas cause you to re-examine your own salary, please check with your own legal, financial and tax advisors to be sure it's right for your specific situation.

Footnote: If you're serious about analysis, get your recent "Social Security Statement" (they send those out annually) and then go get the Indexing Factors for Earnings: http://www.ssa.gov/OACT/COLA/awifactors.html Enter your estimated retirement year, and you get the factors by which your earnings history is indexed to today's dollars. Multiply those factors by the respective years' earnings history. Then sort (descending) the resulting annually-adjusted amounts and total the best 35 years.

If you have viewpoint to share on this topic, please 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

3 Wealth Creation Systems -- Which One are You Betting on?

2009-06-01T20:21:00.000-07:00

About 2 paragraphs into this article, you may wonder, "where's he going with this?" Stick with me -- there really is a meaningful point here.

In their book Revolutionary Wealth, Alvin and Heidi Toffler asserted that there have been only three basic systems of wealth creation since the dawn of mankind -- agriculture, industrial production and knowledge.

I recently experienced a 40-year reunion of my high school class in a small farm town in rural Kansas. The population when I lived there was 1400, and has now declined to about 900. I was awestruck by the decline in business activity and infrastructure.

Main Street is deserted on Saturday -- there were no cars parked on either side of a full city block in the central business district. The town used to be served by two rail lines, one on either end. One set of those tracks is completely gone, and both former stations are vacant lots. All three farm implement dealers --each of whose owners had kids in my class-- are out of business. The bowling alley is closed. There's only one small grocery store (used to be three). There isn't a restaurant open for breakfast. The former cattle auction complex is a vacant lot. And, finally, only 16 HS seniors graduated in 2009, only two of whom are headed to a 4-year college. This is for a consolidated high school serving half a county!

40 years before, the same high school graduated 44 seniors, with at least 20 continuing on to 4-year degrees. This "brain drain" fortells an under-educated future population -- something Kansas has never before dealt with.

Relating this to my brother last night, he asked "Why is it that the opportunities, earning power and standards of living appear to be higher for people leaving these small communities and moving to cities?" A very insightful question, I thought.

I'm no demographer or economist, but the answer I gave him was this: The economic system of agriculture is not leverageable by the addition of people. You can't throw more people or more money at a section (1 square mile, 640 acres) of land and grow more wheat (at least not much more). I use this term "leverage" a lot, and here's what I mean by "leverage" as applied to the traditional factors of production, land, labor and capital:

Land -- Required in massive amounts by agriculture. An acre (44,000 square feet) of land will produce about 40 bushels of wheat at a price of about $7/bushel -- $280 of annual output per acre.
Imagine the productive capacity of 44,000 square feet of manufacturing, or 44,000 square feet of office space housing software developers. Or even 44,000 feet of warehouse space for a distributor.
No contest -- land used for almost anything else produces thousands, perhaps millions of times the economic return per acre of agriculture. Much higher "leverage" for most any alternative use of land.

Labor -- You can't grow more wheat by throwing more labor at an acre. You generally can, however, increase the density of people in a plant, an office or a warehouse and increase output. In industrial or knowledge-based models, you leverage manpower by buying hours from employees and selling them for more than you pay for them. Easy to see in a service business -- In my IT services business, I used to buy hours for about $40 (payroll) from employees and sell them for about $125 (billing rate) to clients. Not a bad model. In manufacturing, the hourly cost is built into the manufacturing cost, which is supposed to be less than your selling price. And that's scalable -- if you can sell more, you can hire more and make more. This is leverage of labor -- not a choice in agriculture.

Capital -- Generally fixed assets, such as machinery and buildings. In manufacturing, you buy a machine that's capable of producing widgets in quantities far beyond the "per-unit" cost of the machinery (considering capital cost, operation, maintenance, depreciation, etc.) Or you expand a building and fill it with lots more such machines.
In the farming model, most of the leverage over the past 100 years has been in machinery (replacing labor) -- massive harvesting combines allow one person to harvest all the wheat on a section of land in a few days. Add a couple of truck drivers and you have a harvesting crew. With the exception of irrigation (not so practical on a wheat farm), you can't produce more wheat per acre by throwing more machinery at it -- thus, leverage of machinery is not a choice in agriculture.
Then, there's leverage of financial capital. You buy (borrow or invest) money at a cost (interest rate) far below the productive value of the money. With the exception of irrigation, you can't invest more money in an acre of land and produce more wheat -- thus, there's even limited leverage of money in agriculture. In fact, it's arguable that if you didn't inherit the land -- if you actually had to borrow money at the historical average prime rate of about 8%, you couldn't make money in wheat farming at all.

So, in answer to my brother's question, I'd say that agriculture, which is roughly 10,000 years old, has reached its limits as a wealth producing system, and has been eclipsed by both industrial production and knowledge work as systems far more effective in leveraging the traditional factors of production -- land, labor and capital. Unfortunately, those economic systems also argue for higher-density worker populations -- cities.

Thus it follows that people have been leaving and will continue to leave communities dependent upon agriculture as an economic system and migrate to communities able to leverage their "labor" far more highly.

This essay is admittedly limited to economic analysis, and completely ignores quality of life factors. Having grown up in a farm community, I can vouch for the fact that there isn't a much more comfortable, safe and relaxed place to live, work and raise kids. Those things have a value to many people, and are the intangibles that keep the still-needed people (although in smaller numbers) living and working in the small US communities that produce most of the world's food supply.

Toffler predicts that industrial production will be next to decline in importance as the third system of wealth creation, knowledge, asserts its intrinsic advantages.

So, are you betting on industrial production as your wealth-producing system? It has some limitations of its own, although not as pronounced as those limiting agriculture. Here's another chapter, comparing and contrasting the leverage of industrial production with that of knowledge.

If you've come to some realizations about the basic wealth-producing potential of your own business model, please 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

Plan Now for Your Upcoming Needs for Cash and Credit

2009-05-10T13:48:00.000-07:00

Thankfully, the popular press has decided that the recession is beginning to moderate and that a recovery is beginning to show itself. I'm not an economic forecaster. I am, however, listening to business owners across the country every day, particularly at events like the recent national Summit of Chief Executive Boards International. And I'm hearing business owners say things like "My quote volume is up", "I'm hearing from customers who had projects on hold", and "Our backlog is holding steady, rather than shrinking."

While admittedly not highly scientific, our recent Main Street Economic Survey of over 100 small-to-midsize businesses revealed an anticipated upturn in 3rd or 4th quarter 2009, with 2010 being a return to an "average" year of growth in both revenue and profitability.

Regardless of the timing, as a recovery picks up steam, businesses that are still standing are positioned to grow remarkably. That is, if they've prepared themselves to do so.

Most business owners focus on their income statements. While the income statement will look great during an upturn, when business is growing and accrual basis profitability is growing. Key words in that sentence -- "accrual basis". Many business owners neglect forecasting their balance sheets. And it's not directionally hard to predict that a business that's steadily growing both revenue and profitability will, in fact run low on cash. Why is this counter-intuitive statement true?

It's the lurking devil of timing. Here's the scenario:

Revenue turns up, requiring more labor, which needs to be paid for weekly. It requires more overhead, which needs to be paid for monthly. It requires more material and/or inventory, for which most businesses get 30-day terms, but is generally needed around 30 days before it gets turned into revenue.

The upturn in revenue, therefore, produces a "giant sucking sound" on the bank account, as those resulting cash needs have to be met before customers pay.

Most healthy businesses run an average of 45 days between billing and collection of receivables (Days Sales Outstanding = DSO). And that 45-day average is from the date billed. Generally the additional material, inventory and labor required at least some cash even prior to that 45-day clock starting.

So, the collection of not only the cost but also the margin resulting from these increasing sales lags the cash outlay by roughly 60 days (if you're on top of your receivables, and maintaining a DSO of 45 days or less). That produces what I call a "bow wave" of receivables -- for each month's growth in revenues, the receivables grow by double that amount (since they take almost two months to collect). Example: If revenues grew $100 last month, that money is still in receivables and adds to this month's additional increase of $100 in receivables for a total growth in receivables of $200. And next month will be the same, assuming your continued growth month-to-month.

And then what? Continued for any period of time, the accrual basis income statement continues to look great, and the balance sheet looks like:

More Inventory

More Receivables

Less Cash -- (it became inventory and receivables) and subsequently less and less cash, the more prolonged and successful your growth cycle becomes

which can also result in the need for:

More Fixed Assets (machinery)

resulting in

Even Less Cash

So, what's the solution? Granted, some of your growing cash requirements can be met by profit, collected through receivables, although delayed by the DSO. Sustained long term, however, you're going to need cash from elsewhere to fund these working capital accounts. That's where banks and credit lines come in. They're in the business of providing that working capital, so the owner doesn't have to put even more of his own capital at risk in the business, and can, in fact, harvest some of that increasing profitability into his own personal investment portfolio. Why not, since you're probably paying taxes on it already (if you're an S-Corp or LLC)?

Perhaps an upturn for your business isn't just around the corner. Perhaps it is. Either way, you're going to need some more cash to fund that success whenever it happens, and now is a great time to get that Line of Credit (LOC) secured and in place. It's more of a hassle and takes more calendar time than you think, so don't wait until you actually need the money.

And how much? Your CFO could forecast it for you. Or, given the simple example above of funding just the additional receivables for a 60-day estimated lag, if you expect your business to grow by, say, $1 million annually (roughly $80,000/month), you'd need about $160,000 to cover just the additional receivables. Perhaps securing a $200,000 LOC would be a good start. That way, instead of the business being strapped for cash, you can distribute the expected $100,000 in pretax profit to yourself and invest it in something outside the business.

Oh, yes, there's an additional counter-intuitive dimension to this. As your growth subsequently flattens, even at a higher level, that "bow wave" of receivables flattens also, and, in fact, the checking account grows, as those prior months of previously-growing revenue become cash. Likewise, it grows even more if the business takes a dip -- you actually begin harvesting cash out of the reduced receivables that result from the reduced revenue. That's when the need for the line moderates or goes away and you pay it down.

If you've learned some things about how to effectively use debt in your business, please click "Comments" below and share those lessons with others.

What Elephants and Epidemics Can Teach Us About Innovation

2009-05-03T19:15:00.000-07:00

Twice a year, a small group of Chief Executive Boards International members and spouses participate in a Chief Executive Retreat. These two to three day events, including no more than 16 couples, take place at small, 4.5 to 5-star boutique resorts.

At a recent Retreat we used Frans Johansson's book, The Medici Effect (What Elephants and Epidemics Can Teach Us About Innovation) as a workbook for some innovation/creativity exercises during the member sessions, with some remarkable results. You'll want to get the book yourself -- this article includes only a few key ideas that Johansson fully develops, illustrates and supports with examples.

Johansson cites the Medici family of ancient Florence, Italy, as an example of what can happen when people from all different backgrounds, experiences and talents come together to share ideas, experiences, and world views. The result was a new world, based on new ideas -- The Renaissance, spanning the late 14th century to the early 17th century.

He divides ideas into two distinct groups -- directional ideas and intersectional ideas. Directional ideas are defined as those that originate and pursue essentially the same directional path as past ideas from the same body of knowledge. These include ideas for refinements, enhancements and improvements of existing products, services, practices and processes. There's nothing wrong with directional ideas. They are the most-practiced, and most-taught. They are the cornerstone of continuous improvement. They are taught in Engineering, Medicine, Law, and MBA schools.

Directional ideas, however, rarely result in a breakthrough innovation. They are, rather, the things that drive quality, time and cost reduction -- Better, Faster and Cheaper. They are the tools of managers, rather than innovators.

Intersectional ideas, on the other hand, produce leaps of progress in new directions. They become the roots of years of directional improvement, and can affect the world in unprecedented ways. Thus, intersectional ideas lead to innovative, rather than simply improved results.

What gets in the way of intersectional ideas? Johansson coins the term "Associative Barriers" -- the natural, cognitive barriers, developed in the human brain over millennia, that search for order in things, group concepts together and provide the structure of our thinking. They are prized by many as problem-solving skills, including intuition and logic, allowing a talented problem-solver to quickly arrive at a solution that will work. They are the result of our experience, education and mentorship. One could draw the conclusion that education itself, particularly in technical fields, is the enemy of innovation.

Innovation, however, requires low associative barriers -- thinking that doesn't follow the prior directional line. Sometimes referred to as "outside the box". But how do we get there? Johansson suggests:

Learn from people outside our own field (and comfort zone)

Mix a range of cultures and cultural experiences

Look for people who simply have low associative barriers (sometimes known as "creatives" for that reason)

Put ourselves in situations outside our natural networks. That's the mission of Chief Executive Boards International -- "We Share Ideas." Perhaps better stated as "We Share Ideas, through interactions of members with different experiences, backgrounds and talents."

And, finally, Johannsen offers some exercises that can be used to reduce associative barriers. We tried a few of those exercises at the Retreat, and the results were surprising. One of the most interesting was the "thought walk" -- a stroll around the resort, each member individually noting things he or she saw that might have some intersectional relevance to an innovation challenge posed by one of the members. A means of randomly combining concepts, which breaks down associative barriers.

The member who posed the business challenge that was the topic of the "thought walk" was amazed at the imaginative ideas generated by other members' random combination of concepts. He left the session with several ways to pursue his problem that had never before occurred to him.

The Medici Effect is a good read, an interesting perspective on history, a set of examples of innovation and several effective exercises to help a group break down the associative barriers that keep intersectional ideas from coming to the surface. Link to "outline" book review...

If you've read a book lately that you think might be of interest to CEOs and business owners, please click "Comments" below and share it with us.

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Terry Weaver

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

8 Easy Places to Find Content for Your E-Newsletter

2009-04-27T18:20:00.000-07:00

The 2009 Spring Summit of Chief Executive Boards International included an all-member Forum session on Business-to-Business E-Marketing. Members shared both questions and ideas on how to use web-based tools to enhance the sale of complex products and services to other businesses.

Of course, selling consumer products (books, shoes, electronics, etc.) on the Internet has been honed to an art. But how can a business that doesn't have relatively simple products to put in an online "store" use the tools of the web to reach their customers and prospects?

One of these tools, an E-Mail Newsletter, provides direct, regular "touch" of customers and prospects, reminding them of your company and your message, and refreshing their "front-of-mind" recall of same. Many companies have resisted E-Newsletter marketing, saying, "I (we) could never come up with enough content to put out an E-Newsletter on a monthly, or even quarterly basis."

In the Forum session, members shared the variety of rich sources of content for E-Newsletters, much of which is readily available, either within the company or the industry at large. Of course, a newsletter should contain original content. But it doesn't all have to be brand new. For example, consider repurposing or recalling content you already have on hand, such as:

Application Data -- Application Notes, Field Engineering Reports, and "best practice" FAQs. Write a couple of sentences highlighting a current industry issue or situation, and then link to the article.

Articles or White Papers -- Easy to re-position or recycle as current information of interest.

Press Releases -- If your press releases and announcements aren't already posted on your website, post them ASAP. Then occasionally reference a press release in your newsletter.

Case Studies -- You may have case studies of product applications or services you've provided customers or clients. Post these as pages on your website, and occasionally summarize one in a couple of paragraphs in your newsletter, then link to the complete case study.

Blogs -- Your company may use blogging as a means of quickly capturing ideas from customers or staff. Surf your own blogs and highlight interesting posts in your newsletter. Industry or Trade Association blogs are another such source of fresh, timely content.

Ask the Expert -- Perhaps your site has an "Ask the Expert" section, and hopefully you're posting the answers to these inquiries to enhance the content of your site. Occasionally pose one of those questions (or a variation on one) in your newsletter and link to the answer.

Purchased Content -- There are numerous sources of newsletter content available for license. These can be ready sources of ideas in a "slow month".

Trade Publications -- Your industry probably provides an online magazine. Write a two or three sentence "teaser" about one of those articles, and then link directly to the industry publication's article.

The important thing about an E-newsletter is not that it's all new, original content. What's important is that it's relevant content that the reader finds valuable and usable. Don't fall for the temptation to put a lot of commercial content into your newsletter. If your newsletter works, there will be plenty of time for that.

Remember, your E-Newsletter is content all its own for your website. Be sure you post an "archives" page of your past newsletters on your website -- each one becomes another page, therefore enhancing the "importance" of your site to search engines and crawlers. Check out the CEBI Newsletter Archives page as an example.

If you have questions, comments or experiences to share about E-Newsletters, please click "Comments" below and share them with others.

The Bezzle -- Is it Happening in Your Company?

2009-04-10T11:16:00.000-07:00

Members of Chief Executive Boards International meet regularly to share ideas, observations and concerns. Curiously, something that ISN'T on most business owners' or CEOs' radar screens is employee theft -- generally charged (if prosecuted) as embezzlement.

Some business owners regularly review their internal controls to be sure they have precautions in place to prevent or discover employee theft. Most don't. As a result, they're surprised and angry when an employee theft comes to light.

Embezzlement happens in all scales, in all sizes of companies. Here are a series of articles on embezzlement in small, closely-held companies:

An employee forging checks to a fake company

An outsource provider falsifying invoices

An employee giving himself a raise, plus a separate case of an employee skimming checks

One of the more sophisticated embezzlement schemes of recent memory is the Enron scandal. Enron execs "stole" money from investors in a surprisingly simple scheme. They conspired to falsify company results in a web of interlocking businesses -- each one reporting "profits" from selling things back and forth between each other. Investors, believing they were buying into a high-performance energy company, provided plenty of capital, bidding up the stock price. As the deal began to unravel, Enron execs, who had generously awarded themselves low-priced stock options, cashed in and pocketed the money. The company collapsed and employees, investors, suppliers and bondholders were victimized.

A more recent example, perhaps the granddaddy of embezzlement, is the Bernie Madoff scandal. Bernie stole money from investors in a Ponzi Scheme -- taking money from investors, and pocketing it himself (where in the world has he hidden $50 billion??). He embezzled from his own company, thereby stealing from his investors. A fox watching his own chicken coop. As that tale unravels, it appears he also paid his accomplices well -- New York has just charged the former chairman of GMAC Financial Services with civil fraud. Apparently he was receiving a commission of roughly 20% on funds he channeled to Madoff from his wealthy clients. And he didn't think that was unusual??

And, finally, the "creative" investment vehicles of this decade, including securitized mortgages and derivatives, permeated the financial services sector, accounting for the depth and breadth of this recession and the resulting stock market decline. And, distressingly, so "creative" and complex were these schemes that even the institutions promoting them didn't seem to understand them. Madoff and the Enron execs were out-and-out thieves. The crooks in a pyramid that securitized bad mortgages stretch all the way out to the brokers who falsified borrowers' incomes on loan applications -- it's going to be tough to round all those guys up.

A recent article on National Public Radio tipped me off to the curious coincidence of timing in the two blockbuster embezzlements (Enron and Madoff) coming to light -- an economic downturn followed by a stock market selloff -- Enron in 2001 and Madoff in 2009.

The article pointed out that John Kenneth Galbraith identified this segment of a market crash as "The Bezzle" in his 1954 book The Great Crash of 1929. The Bezzle is the period in a market downturn when embezzlement comes to light -- when the laws of gravity are restored and there's no longer upward market momentum bringing more victims in to reassure (and bail out) the prior victims.

Galbraith writes:

"To the economist, embezzlement is the most interesting of crimes. Alone among the various forms of larceny it has a time parameter. Weeks, months, or even years may elapse between the commission of the crime and its discovery. (This is a period, incidentally, when the embezzler has his gain and the man who has been embezzled, oddly enough, feels no loss. There is a net increase in psychic wealth.) At any given time there exists an inventory of undiscovered embezzlement in -- or more precisely, not in -- the country's businesses and banks. This inventory -- it should perhaps be called the bezzle -- amounts at any moment to many millions of dollars. It also varies in size with the business cycle.
"In good times people are relaxed, trusting, and money is plentiful. But even though money is plentiful, there are always many people who need more. Under these circumstances the rate of embezzlement grows, the rate of discovery falls off, and the bezzle increases rapidly. In depression this is all reversed. Money is watched with a narrow, suspicious eye. The man who handles it is assumed to be dishonest until he proves himself otherwise. Audits are penetrating and meticulous. Commercial morality is enormously improved. The bezzle shrinks."
John Kenneth Galbraith
The Great Crash 1929

One thing that a recession flushes out is The Bezzle -- there's no place to hide and the perpetrators are run out into the open. You may have been damaged by the Enron fraud. No doubt you've been damaged by the recent meltdown of financial institutions, leading to a credit crunch, leading to a stock market selloff.

Perhaps you're more damaged than you think. If Galbraith was right, the "inventory of undiscovered embezzlement" may extend into your own company. Somebody may be stealing, and it's most likely discovered when you dive into the books yourself to look for the profit leaks in a weak year. Even if you didn't find any evidence of embezzlement, do consider a financial controls audit -- it could be good insurance against the next cycle, when you become "relaxed, trusting, and money is plentiful."

If you've found an employee theft scheme that you're willing to share, please click on "Comments" below and share it with us.

Theft and Embezzlement -- Another Interesting Case

2009-04-10T09:49:00.000-07:00

I'm constantly amazed at the amount of employee theft and embezzlement that persists in American companies, large and small. And also amazed at the fact that most business owners and CEOs are convinced "It's not happening here."

Another of those stories surfaced recently in our local market (Upstate South Carolina). In that scheme, a man operating three local businesses (apparently fronts pretending to be trucking, warehousing, etc.) was charged with mail fraud and money laundering that took place over a 6-year period. The amount of the fraud? Four Million Dollars! Like many, this was an imaginative scheme.

The victim was a $20 million Oregon-based company owned by a private equity group. The scheme was built around falsified freight invoices, charging for freight that was never hauled. You might suspect an "insider" accomplice in such a scheme -- surely somebody would notice all that freight cost and ask some questions, wouldn't he? From news accounts, it sounds as if the person approving and forwarding those invoices was a contract employee of the scammed company, located in yet another state! Apparently he invented the scam, and the recently-charged local guy just helped step it up by providing even more fake invoices (for a 50% cut).

Simple deal -- one guy produces invoices. Another, as a work-at-home contract employee, approves and submits them as legitimate and the company pays them. The guy generating the fake invoices was apparently also very good at fielding questions about those invoices from "real" company employees. Considering the 2700 miles between company headquarters and the perpetrators, one can assume nobody drove past the "freight terminal" and realized there were no trucks.

I believe such stories include great lessons for business owners, such as members of Chief Executive Boards International. They're tipoffs to things we should be watching in our own businesses every day, and pitfalls we don't have to suffer if we learn from the misfortunes of others.

If you have a tale of an imaginative embezzlement, fraud or employee theft scheme, please click "Comments" below and share it with us.

Occam's Razor -- A Modern Guide to Decision-Making

2009-04-07T17:09:00.000-07:00

Ken Keller, a great friend of Chief Executive Boards International, suggested another idea that may be of help to CEBI members and readers.

Occam's Razor (aka Ockham's razor) is a problem-solving principle attributed to a Franciscan friar, William of Ocham, a 14th-century English logician. The principle is that the explanation of any scenario, observation or problem should be reduced to the simplest terms and simplest assumptions possible.

This is remarkably confirmed by Joe Busby, another friend of mine who has applied incredibly sophisticated neural network and pattern recognition tools to the analysis of massive arrays of manufacturing process data. Know what Joe found? In several cases, an amazing correlation between yield in continuous manufacturing process and outdoor temperature and humidity! Think about it -- a production line making plastic film is instrumented with hundreds expensive sensors and quality measuring devices. Yet, Joe found that the primary factor in making good film at high yields was ambient temperature and humidity.

So, how can we use this in a typical business? It's the philosophical origin of the KISS principle (keep it simple, stupid). In the category of problem solving:

Look at all the asserted root causes of the problem. Pick the simplest one -- likely to be the closest to correct

Consider the proposed corrective actions. Pick the simplest one -- likely to be the one most easily implemented and the one most likely to solve the problem.

When looking for opportunites:

Look at the proposed opportunities, and the complexity of pursuing them. Pick the simplest course -- likely to be the one most successful.

Consider the simplest strategy to pursue an opportunity as the preferred strategy

Ask really simple questions -- likely to get the simplest answers
- What do my customers want from me?
- Am I delivering it?
- The way they want it?
- Are my costs in line?

Action on a sub-optimal strategy is preferred over inaction and further analysis in pursuit of the "best" strategy

Simply stated, when there are two competing ideas or solutions, the one that is simpler is better. What's your experience with simple vs. complex explanations? Or simple vs. complex strategies? Please click on "Comments" below and share your experience with others.

Grey Hair is on Sale -- 7 Reasons to Hire Older Workers

2009-04-03T10:22:00.000-07:00

The "bring your own agenda" nature of Chief Executive Boards International meetings has recently led to some different views and ideas on where and how to fill job openings as business is (or will be) picking up.

The 2009 recession has disrupted numerous businesses, careers and lives. Some particularly disadvantaged casualties are now job seekers in the 50+ age bracket. Many of these people are highly skilled, hard workers who find themselves jobless due to factors far beyond their control. Many have been highly paid in the past, now hampering their marketability in a perverse way. They're simply considered too expensive for many small and mid-size businesses.

This, like other collateral damage of this recession, is a huge opportunity in disguise for savvy business owners. These people not only need work, they need a place to contribute and to be valued. And in many cases they need those things (along with health care benefits) worse than they need the great salaries they enjoyed in the past.

As the recovery from this recession (yes, there will be one) progresses, you're going to need more help. You're still standing, and many of your competitors aren't, thereby putting lots of growth opportunities on the table. Look at this 50+ age group far more seriously than you have in the past. Consider their salary requirements highly negotiable. Many, for example, will be happy to trade salary for time off. Who says you need a 40-hour employee in every position? How about a 30-hour employee for a 25% discount? Let them work it in three 10-hour days, and you've probably got a deal. Many are likely to be so sure of their skills that they'll work for a reduced salary and a performance-based bonus.

Here are at least 7 reasons you should be not just considering, but seeking out workers over 50:

Work Ethic -- The widely chronicled difference in the view of what "work" is between the boomers (now turning 62) and Gen-x (30-somethings) and Gen-Y (20-somethings) will feel good to you, particularly if you're a boomer yourself (over 45).
Maturity -- These are grownups. They understand that if the plane leaves at 7:30 am and they're not there, it's going without them. They realize there are things they don't know. They can look beyond themselves.
Organizational Skills -- These workers have years of experience inside organizations, large and small. They know how things work and how to get things done. And many of them have well-developed leadership skills that may not be required by the entry-level job but will become valuable to you elsewhere.
Responsiveness -- When you communicate with these people, whether by email, phone, or in person, they'll answer you. And they understand "I need you to...." or "We need to..." as a directive, not a suggestion.
Functional Expertise -- If you're hiring for a specific functional specialty, why not look for years of experience, hard knocks, and perhaps continuing education in the field? Many older workers have all that.
Loyalty and Commitment -- These people are not looking for the next rung on their career ladder. You're it. If you treat them even close to fairly, they'll be with you as long as you want them.
Cost -- Most of your workforce takes fringe benefits for granted, particularly health care coverage. Not this group -- they've faced the world without health care coverage, priced it on the open market, and know what it's worth (if available at all). And many will be happy to exchange schedule flexibility for salary. Their income requirements may be lower than you think, or than they used to be.

Consider the value to your business of an experienced, expert and hardworking resource. Granted, he or she may not be a 20-year employee. Chances are, however, a displaced person hired in his or her mid-50s will be around for 10 or even 15 years, if you wish.

What's your experience with hiring older workers? Or if you've used creative compensation, flexible hours or other strategies to hire highly experienced, senior employees at a bargain price, please click on Comments below and share your experience with others.

Sometimes You Have to Explain it a Different Way

2009-03-25T18:16:00.000-07:00

Incentive compensation systems have become a more common topic in Chief Executive Boards International meetings lately. While incentives are common among sales people, you'd be surprised how they drive behavior in other job descriptions.

I heard a remarkable anecdote last week that underscores this point. I heard it from a general manager of a professional services business, in a sector that's hard-hit by the current economic downturn. He's going all-out to secure new business, but it's become clear that some staff and cost reductions are essential to maintain breakeven.

At a recent company meeting (not a new thing -- he's been doing them regularly), he announced an across-the-board 10% pay cut for all employees (including himself). And then he did a brilliant thing -- he announced that anyone who billed 160 hours in a month (most months have 168-176 billable hours) would earn his 10% pay cut back for that month.

He was stunned when a couple of people came up after the meeting, and said "I think I may be able to find some more billable hours." To his credit, he kept his composure -- I'm guessing what he wanted to say was something like, "And despite the fact we've been struggling to increase revenue for the past 6 months, that idea is just now occurring to you??"

There's a reason for this. Even small groups of employees suffer from "crowd anonymity" -- they think someone else is going to do it, or that you're talking to someone else. When it gets personal -- like, "a 10% pay cut that you can recover if you'll do what I've been talking about", somehow they start to get it.

In this case, this general manager is now getting questions almost daily from a staff that wants to make sure they get their billable hours in, and earn their pay cut back. Suddenly, a group of people who "sort of" understood that the company needed them to bill every hour they could is actually doing that. Amazing -- it took a connection between their wallet and their billings to escalate billed hours per month to the top of their minds.

There's actually a second chapter to this story. He subsequently modified the program to a "sliding scale" that incrementally restores the 10% cut, beginning at 80% of available hours billed, increasing to full salary at 100% of available hours billed. Interestingly, this is a clever way to introduce an incentive program to a previously straight-salary workforce.

So, if your company is in need of employees stepping up to the plate, you may have to step up your communication -- from just asking them to pitch in to explaining it a completely different way. Here's a more thorough article on "Incentive Compensation Systems that Work."

If you've successfully communicated to your employees the need for a major change in behavior, with or without a compensation plan change, please click "Comments" below and share your experience with others.

Credit -- Use it or You May Lose it

2009-03-20T10:48:00.001-07:00

News Flash: Banks, credit card companies and other lenders are reducing "dormant" lines of credit. Why might that be a problem? We'll explain later -- first, some background.

Credit is a topic that's surfaced regularly in recent meetings of Chief Executive Boards International. Granted, most business owners are borderline allergic to debt. That emotional bias aside, debt is one of the tools in the business owner's toolbox, and it's there for a reason.

Simply stated, debt is a good thing whenever you can

Be confident of available cash to service the debt (from within the business or elsewhere)

Get a far better return on the capital from investing in something than the interest rate on the debt

Have a fallback strategy by which to retire the debt if you absolutely had to (with cash from within the business or other sources)

Get over your debt allergy

"Cash is King" -- seen almost daily in the business press, has rarely been more true. A more financially sophisticated view might expand that to "Available Cash is King." In fact, your existing credit lines qualify as available cash. And CEBI members are making good use of available cash right now, for things like:

Buying durable inventory at distressed prices (from suppliers or competitors)

Buying equipment and machinery at distressed prices (from almost anyone)

Buying real estate at distressed prices

Investing in people, promotion, training, maintenance, etc. to ensure the company's market strength in a recovering economy

Pulling cash out of the business and investing it personally in good opportunities (distressed equities, real estate, etc.)

Let's agree, then, that keeping your credit lines open and available is an essential strategy -- in case of a short-term need for cash for almost any reason. And at current interest rates, almost any use of capital will return 2x - 10x (or more) the cost of renting the money (interest).

The news flash you should be aware of is that banks and other lenders are reducing lines of credit that aren't being used. Credit card companies are reducing limits or cancelling credit cards that aren't being used.

So, what's with this lender behavior? Simply stated, it's the way bankers think. They see a credit line as a potential need for cash, of which they might have short supply. And in some arguably circular logic, comprehended only by bankers, they see taking an unused line down from $250,000 to $100,000 as somehow making themselves $150,000 better off -- despite the fact it wasn't being used anyway. Oh well.

How might you keep this from happening? I may be a good practice to just exercise each or most of your credit lines on occasion. You fire up your standby generator every month or so, right? It doesn't take much diesel fuel, and you don't run your plant on the generator all day, do you? Wouldn't make sense. You do this to be sure the generator will be there when you need it.

Likewise, you can exercise your credit. How much available credit do you have in your wallet? For many of us, it's over $100,000. And if one of those credit cards goes away, it's correspondingly less. Fact is, your credit score is based on your current outstanding balances as a ratio of your total available credit limits. Why not use each of those cards regularly to keep the issuer interested (even if you pay it off every month and don't pay a dime in interest)? They're happy as clams with a 2%-3% merchant fee for an average of 20 days' float. It's easy to see, also, that getting limits raised on your credit cards works in your favor -- just make the phone call.

At today's interest rates, exercising a $100,000 hit on your revolving LOC for a week costs you maybe $100 in interest. Do it every 90 days or so -- good insurance. You might want to do the same with your home equity line. If you don't use it, you may lose it.

The premise of this article is that you're a savvy business owner who sees (or is watching for) opportunities to invest available cash in high-return strategies, and that your credit lines can provide that cash quickly when those opportunities come up. It further assumes that you shouldn't be the source of that cash. Instead of keeping $100,000 on hand in the business for a "rainy day", pull it out of the business, out of reach of creditors and lawsuits, and use $100,000 from the bank. Don't spend it -- invest it in an asset for your own balance sheet.

Think about it -- would you rather have an additional $100,000 on your personal balance sheet and $100,000 of debt on the company's, or zero on both?

The idea that debt isn't intrinsically bad and that available credit is an essential business strategy is provocative, and not a widely held view among business owners. Whether you agree or disagree, please click on "Comments" below and let us know.

Roles & Responsibilities -- Director, Manager, Supervisor or Coordinator?

2009-03-12T07:22:00.000-07:00

We're happy to say that the Chief Executive Boards International Blog is becoming something of an "ideabook" for small and midsize businesses. A few weeks ago, I received a request from a blog reader, asking if we might suggest some "criteria for determining what level of responsibility an employee should have to be titled Director, Manager, Supervisor, or Coordinator."

An interesting question, and, I believed, something that might be a useful reference for lots of small and midsize businesses, like those whose owners and CEOs are members of Chief Executive Boards International. In general, smaller companies have a hard time with title alignment, and perhaps a set of guidelines is a good place to start. So, here's my point of view:

Coordinator -- The people with whom she works have NO organizational reporting lines -- they don't work for her, and she can't do anything about getting them hired, fired, or raises granted. Supervisors are important, but not in control -- their job is to do the best they can with the situations they're given to coordinate. They're a span-breaking mechanism. See: http://www.chiefexecutiveblog.com/2008/01/do-you-have-too-many-direct-reports-six.html

Supervisor -- Deals with individuals and tasks. People are directly responsible to the supervisor (they work for her and no one else). Supervisor may or not have hire/fire/salary authority. They surely do have recommendation authority over who gets hired, fired, or a raise. And they get to say what someone must do, vs. a Coordinator, who's just telling them what they should do. They're a span-breaking mechanism with authority.

Manager -- Deals with groups and priorities. Allocating resources to the most important projects and initiatives. Mostly a tactical perspective -- takes things that Directors & VPs have defined as important and makes them happen. Key element among managers is finding a way to get done what the organization (read Directors and VPs) has defined as important, done. They should be measured on results expected. They make hire/fire decisions, and make them quickly. See: http://www.chiefexecutiveblog.com/2008/01/when-do-you-decide-to-do-something.html

Director -- This title should be a real big deal (as should VP). This is a person who decides where we're going, not how we're getting there (left to managers). A person who has a sense of mission, some vision, and who's adding energy to the system. Someone without whom the organization couldn't move forward. They set organizational goals, either themselves, or collaboratively with the Managers. See: http://www.chiefexecutiveblog.com/2008/01/employee-goal-setting-that-works.html
They define the direction of change, and effect change. See: http://www.chiefexecutiveblog.com/2008/01/newton-was-right-effecting-change-in.html

If you haven't done so recently, I'd recommend you read Jim Collins' book Good to Great. Here's a "Leadership Pyramid" offered by Collins. Supervisors should be operating at Level 2.5, Mangers at Level 3, Directors at Level 3.5, and VP's at Level 4. The CEO should be operating at Level 5 (if you're not operating at Level 5 most of the time, see: http://www.chiefexecutiveblog.com/2009/02/20-ceo.html).

If you have other viewpoints or alternate definitions for these jobs, please click on "Comments" below and share them with us.

Beforemath 2 -- Are You Ready for Less Business?

2009-03-09T07:25:00.000-07:00

A contingency plan, by definition, is a degree of readiness for an event of some reasonable likelihood. Generally, the timing thereof is beyond your control. So, you imagine the possibility, imagine the impact and define your response. We've used the term "beforemath" to describe this degree of readiness. Here's an everyday example of "beforemath."

At a Chief Executive Boards International meeting, a member shared his "beforemath" plan for further slowdown in his industry. He's looking at the general uncertainties in the economy, and is concerned that perhaps his business will slow down to the point he needs to take actions to reduce his fixed costs.

He has predefined a couple of "triggers" that will determine whether he kicks his beforemath plan into action. Namely, two consecutive months of a net operating loss of $20,000 or more or a drop in his backlog of unexecuted work to ten weeks or less. Easy things to measure, and he won't have to think about whether it's "time" if either of those happpen. This is an important part of a beforemath plan -- to know exactly when you're going to invoke it.

His beforemath actions are a predetermined set of cost reductions, staff reductions, etc. that will reduce his fixed costs, allowing him to operate at neutral cash flow or better at a reduced level of revenue.

Do you have a beforemath plan that's similarly specific? Please click "Comments" below and share it with others.

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Terry Weaver

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

Why Isn't My CPA Asking These Questions?

2009-03-02T09:32:00.000-08:00

A surprising number of business owners think their CPA is watching their books for things to be concerned about. In my experience, that's rarely the case. Here's what some Chief Executive Boards International members discovered about that assumption: http://www.chiefexecutiveblog.com/2009/02/how-much-is-not-having-cfo-costing-you.html

In my business coaching practice, I generally find myself drilling into a client's financials, asking questions like "What's this?", "Why did you book it that way?", "Why is gross margin % bouncing around month-to-month like a random number generator?" etc. And as I explain why those things are important, it's almost predictable that the client will ask, "Why hasn't my CPA ever asked me any of this stuff?"

And my now-practiced response is, "Did you hire him to do that?" They look at me quizzically, and then I ask, "Did you hire him to coach you, to help you improve your business, or did you hire him just to do your taxes (and perhaps an audit)?" At that point they realize that, as conventionally defined, a CPA is not a CFO. There is a huge difference between the two. Let's take a look at a quick comparison between them:

CPA	CFO
Compiles financial statements from client-provided data	Plans, considers and decides how financial transactions will be booked, consistent with the objectives and strategies of the business
Works mostly in the past -- from historical data	Plans, forecasts, budgets and projects the future financial performance of the company, in light of the company's objectives, strategies and capacity to perform
Delivers financials weeks or months after the close of the accounting period (month, quarter, or year)	Focuses on a clean, quick, and solid closing of the books within days of the end of the period. Generally has daily or weekly real-time key indicators of performance or trouble, shared with key players in the company.
Compiles financial statements in accordance with statutes and practices consistent with the type of business	Analyzes results in the context of the company's objectives, strategies, and owners' intent for the business. Establishes key indicators that provide early warning for management
Compiles financial statements that can be relied upon by 3rd parties, such as banks, creditors and investors	Works to maximize the value of the business to the owners, including investors, while remaining within loan covenants, creditor requirements, etc.
Assumes you (the owner or CEO) are going to read and understand the financial statements as delivered	Makes certain you (the owner or CEO) understand the financials, the trends and the issues they identify. Reads them to you, if necessary.
Does what he's hired to do -- generally Taxes and Audits -- including mid-year tax planning, quarterly estimates, and appropriate posting of expenses	Does what he's hired to do -- help you strategize, plan and operate your business to your maximum financial advantage, within the law.

In reviewing the above, it's probably obvious why your CPA probably can't be your CFO. He's not in the game. You haven't been paying him to come over, sit in your planning and management staff meetings, and get fully engaged in the business. He has, in most cases, no perspective by which to help you plan, forecast or monitor financial performance. Because you haven't invited him in (and paid him to come).

Now, please don't misunderstand -- I'm not saying the services of your CPA aren't valuable -- they are. And I'm not saying you can't engage your CPA or someone else from his firm as a part-time CFO. Most CPAs would be thrilled to have a client actually engage them to help improve the performance of the business.

You'll have to pay him to do that -- probably a monthly retainer. You'll have to spend time with him, and you'll have to think to schedule and invite him to meetings where strategic or major tactical initiatives are going to be debated and decided. In the case of most of my coaching clients, I find myself filling that role, at least partially. I have one client who has a former corporate CFO, who now works for the client's CPA firm, on a monthly retainer to perform the duties and services in the "CFO" column above.

In this case, he's hired the same guy to wear both hats, and the two engagements are explicitly different -- a part-time CFO on retainer, and a CPA working on a conventional fee schedule, doing conventional reporting, tax and audit work.

Think about it -- is your company without a CFO? Can you really afford that (or do you know how much it's costing you):?

If you've either hired a full-time or engaged a part-time CFO in addition to your CPA, please click "Comments" below and let us know how it's working out for you.

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Terry Weaver

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

Why Kindle if You Don't Have to?

2009-02-20T18:24:00.000-08:00

Tobin Wolverton is President and founder of thatworks, a business interiors and office furniture provider. He's also a member of Chief Executive Boards International. During a recent meeting, he mentioned that he was thrilled with a Christmas gift he'd received -- an Amazon Kindle.

I asked Tobin to write up his experience with his Kindle, and here's what he has to say about it:

"As a slightly late adopter of technology, I usually wait a year or so to purchase the newest gadget. But typically after purchasing the newest gadget I always wish I had made my life easier by being an early adopter!
"I love my MP3 player for music and my Blackberry for keeping in touch quickly. But my newest favorite device is the Amazon Kindle – a revolutionary device for books!

"While similar in application to an MP3 player for the ability to download and listen to music, the Amazon Kindle allows you to download and read a variety of books, moving seamless from one to the other, with one device. No longer do you need a stack of books on your nightstand or in your briefcase. The Kindle allows you to access to many hundreds of books on just the internal memory – and provides an SD memory slot for even more books if needed. And Amazon allows you to access to many newspapers, magazines and books (literally hundreds of thousands) that can downloaded wirelessly at your command – wherever the Sprint wireless network is available.

"As a business owner I always like the bottom line and I am sure you are now wondering what the costs are for this device. Once you purchase the Amazon Kindle for about $350 the wireless is free and the books/magazines and papers are less expensive than you can purchase them locally. I sat on the sofa a few Sundays ago and downloaded the New York Times Sunday edition for $.75! Books are typically $9.99 or less. The savings of your reading material will more than offset the cost of the Kindle over time. [Ed. note -- Amazon has just released the next generation -- the Kindle 2]

"I am finding I am reading more than ever, especially business books and historical fiction, because the materials are more easily accessible. If you are wondering how you can keep it all together while gaining access to new ideas consider the Amazon Kindle as the latest tool of technology to help you."

It's been amazing to me that in the two weeks since that meeting, I've heard two other people bring up Kindle in casual conversation. Based on this microscopic market sample, it's my prediction that this product is reaching a "tipping point" -- a point where it begins to spread virally, by means of a "word-of-mouth epidemic" : http://www.chiefexecutiveboards.com/bookreviews/bookreview039.pdf

So, if you, like most Chief Executive Boards International members, are looking for ideas to improve either your business or your life, you'll find them in books. And you may find those books for a fraction of the time and effort of buying and waiting on them, on your Kindle.

If you've also discovered Kindle, please click "Comments" below and let us know how you like it.

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Terry Weaver

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

How Much is Not Having a CFO Costing You?

2009-02-14T14:36:00.000-08:00

At a recent meeting of Chief Executive Boards International, a member voiced the concern that his company was getting into a cash bind, and he was getting worried. As the Board asked more questions about that, it turned out he didn't have a line of credit for his business. Incredible, in these days of 5% interest. It was just something he hadn't taken the time to set up. As the Board asked more questions, it turned out that he wasn't exactly sure why he was getting into a cash bind -- something to do with "a lot of inventory" and "some slow-paying customers", he thought (maybe).

As the Board drilled a little further into this, he said he really didn't have timely monthly financials he trusted. Bingo. At that moment he aligned himself with, in my own experience, the majority of small business owners who have financial statements that are late and lousy -- they're completely useless as tools to manage a business. At the worst, they're just wrong -- actually presenting a business owner with a mistaken picture of where he is.

Again, in my experience coaching business owners, the first thing we generally find is that the financials are lousy. Most owners pay attention to the things they know -- the core business -- and don't pay much attention to the financials because they don't themselves have a finance background. Generally, they use their financials once a year (or perhaps quarterly) to figure out how much to pay in taxes.

Another member at the table said, "You need to get that fixed immediately. My company is in serious financial trouble today because I didn't realize a year ago that my financial statements were faulty. I didn't realize that each month's apparent profit was offset by costs being charged to prior months that hadn't been closed. I thought I was recovering, and in fact I was digging a deeper hole."

Not having rock-solid, timely financials is like flying with no altimeter, no compass and no artificial horizon. The FAA won't allow that, and for good reason. Those pilots crash.

Yet another member said, "I very nearly sold my company into failure. I realized I was having financial problems that I didn't understand, and finally bit the bullet and hired an experienced CFO I couldn't afford -- for $80k. After a couple of days examining the books, she came in, wide-eyed, and asked, "Are you scared?" [Ed. note: I HATE it when a CFO gets wide-eyed] "She had discovered that by the time we shipped and paid for everything I'd sold, and the customers waited 45 days to pay us, we'd be out of cash. [Read: Game over] "Not having a CFO almost cost me my company."

He went on to say that with her help he survived that scare, and then his new CFO installed systems, controls, forecasting and disciplines that not only saved his company, but also were worth several times what he was paying her (in improved results). Thankfully, just in time before he became another small-business failure statistic -- road kill on the entrepreneurial highway.

So, we're hopeful the member who brought this up gets his financials shaped up into the decision-making tools they're supposed to be. And that the member in trouble because of lousy financials caught it in time to recover. And we're thankful to a member who once again reminded us that failure to fully understand the company's financials is one of the top 3 causes of small business failure. He was standing at the edge of a financial cliff without realizing it, and when he looked down he didn't like what he saw.

Most business owners imagine that their CPA "would let me know if something was wrong." That's an unrealistic expectation for at least two reasons. First, although there are a lot of exceptions, most CPAs do not have CFO experience. They report the news, they don't forecast or shape the news. Secondly, it's generally not their job, as they perceive it. If you hire them to prepare monthly statements and do your taxes, they actually believe you're going to read (and understand) the monthly statements and that the data you gave them to prepare them was accurate. It's like wondering why the scorekeeper at a football game didn't call better plays.

If you've had an awakening to the need for better and more timely financial statements, or the need to hire either a part-time or full time CFO, please click "Comments" below and share your experience and knowledge with others.

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Terry Weaver

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

Aristotle's Rhetoric Revisited -- 5 Ways to Improve Your Closing Ratio

2009-02-10T08:20:00.000-08:00

A good friend of mine, Ken Keller, is a retired CEO who I greatly admire. Ken invited me to lunch last week. He has been following the growth of Chief Executive Boards International since I bought the business from its founder in 2004. At that time, he immediately recommended CEBI to one of his business coaching clients, who remains a member to this day.

We were talking about things we at CEBI have learned about marketing, positioning and selling CEBI over the past 5 years. I made the observation that our selling breakthrough has been the realization that selling even a simple membership in a great organization is a relationship-building process. Like myself, Ken learned to sell large-ticket items through personal visits, buying lunches, etc. That simply isn't practical, selling a lower-ticket annual membership to people across half of the US.

So we've learned to build relationships electronically -- first through fax-back, then phone, then email, then newsletters, more email, etc. A lot of electronic "touches" that get us closer to prospects and also keep us closer to our members.

He said, "You know, Aristotle's Rhetoric described all that in the 4th Century BC." And I thought this E-Marketing stuff was new! Ken's a well-read guy.

He went on to explain that Aristotle's Rhetoric was an essay on the art of persuasion, sometimes called The Rhetoric, The Art of Rhetoric, or A Treatise on Rhetoric. Some historians believe it was never intended for publication, but may have actually been a collection of his students' notes, taken at his lectures -- Sort of an ancient forerunner of blogs.

Ken's lunch-table summary of the Rhetoric was:

Good Character
Good Will
Good Sense

Sometimes more academically described as:

Credibility (ethos)
Emotions and psychology of the audience (read: prospect) (pathos)
Reasoning (logos)

Curiously, sales training and sales people have spent an inordinate amount of time on the third element -- the "good sense" or "logic" of the sale. Hence "features and benefits", demonstrations, calculations of ROI, economic justifications, and on and on.

Aristotle's point, and Ken's as well, was that these actually need to be taken in order:

First -- Good Character. The prospect has to trust you and believe that what you say is true. There's a credibility-building phase in a relationship that has nothing to do with your company or what you're selling.
Second -- Good Will. The prospect has to believe that you do, in fact, care about an outcome that's at least as beneficial to herself as to you. It's important that he believe you're more concerned with a good outcome for him than an order for yourself

Third -- Good Sense. Ultimately, you'll need to roll out the features and benefits, the economic justification, the ROI calculations, etc.
Another good friend of mine, a career sales person of big-ticket capital equipment, once said, "In most cases, the buyer decides what he wants to do and who he wants to do it with, and then works up a set of numbers that justify his original decision. Roughly translated -- decision made on the basis of Good Character and Good Will, then justified by Good Sense.

A Sandler Training franchisee said it another way: "A customer has to trust you enough to give you money to solve a problem."

There are other instances of Aristotle's Rhetoric, sometimes to define organizational values. Rotary International has a code of conduct for its 1.2 million members called the "4-Way Test":

Is it the truth?
Will it build goodwill and better friendships?
Is it fair to all concerned?
Will it be beneficial to all concerned?

It's not hard to connect the dots between Aristotle's Rhetoric and those ideas, is it? Besides a code of conduct, I believe the 4 Way Test was also intended to persuade people that Rotary was a group of people to whom they would want to belong.

So, how can you use these ideas in your business and your selling activities? Here are five ways you can deploy Aristotle's Rhetoric -- a set of selling principles known for 2400 years:

At the outset, ask the prospect about herself and her company -- find out what matters to her. She'll tell you what she will buy if you can let her do the talking. This is very difficult for most sales people.
Find some "common ground" -- something in common that would build her trust in you. Perhaps your prior experiences that relate to what she's doing, what your kids do, who your spouses know, mutual acquaintances, etc. People tend to see others being of good character if they have things in common -- particularly mutual acquaintances.
Help her understand that you're there to help her -- if that results in an order, fine. If not, you've done what you came to do -- help her become more successful. Good will is just that -- the willingness to help someone whether there's an order in it or not.
Then go for the logic -- the features, benefits, ROI, etc. Enough said -- you know how to do all that, or you can find an army of people in your company who do. Many of them claim to be sales people -- they just don't sell very much.
And, above all, behave in a manner that always underscores your Good Character, Good Will and Good Sense. Your prospects and customers instinctively apply that value system, even if they don't articulate it themselves.

If you have some ways you keep Aristotle's three elements of persuasion in their proper order, please click "Comments" below and share them with us.

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Terry Weaver

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