Here are four ways you can separate the money wasters from the money makers to ensure your company maintains a healthy bottom line.
Have you ever wondered if your managers will be able to carry on without you? Perhaps you've already tried to hand over the reins only to return as you watched your business struggle. I've experienced this exact scenario several times in companies I've led and it has always puzzled me that smart, well-intentioned managers never seemed to run my businesses profitably -- or at least not as profitably as I did. Conventional wisdom tells us that it's simply a matter of the managers not caring enough about the bottom line. After all, it's a universal truth that you will watch your own money more carefully than others will. But this assessment doesn't explain why some of my past business partners were just as inept at running the business. As partners, they had as much or more money invested than I did, so the "other people's money" explanation didn't hold true. Short of assuming that we've hired incompetent managers or aligned ourselves with lousy business partners, what is the secret to finding people who can lead the company to success?
I recently learned a sobering statistic. 80% of people are money losers. Based on the research of Dr. E. Ted Prince, adjunct professor at the University of Florida and author of the book The 3 Financial Styles of Very Successful Leaders, 8 out of 10 people will lose money when placed in a position of profit and loss responsibility regardless of their education, background or experience. In other words, assuming you are a successful entrepreneur/leader and managing your company to profits, the odds of picking a successful replacement for you from your team are only 1 in 9 (since only 2 in 10 people are profit making and you are one of them, that leaves 1 in 9). But if such a high percentage of us are essentially hard wired to lose money, how can we identify those of us who won't lose money?
I talked with Dr. Prince about this problem and he explained that people have an ingrained financial signature that is made up of two underlying financial templates: Resource utilization vs. value-added. For most people, the balance of these two traits leans toward the resource utilization side, which essentially turns them into money losers because their predilection toward consuming resources is greater than it is toward adding value. This financial signature cannot be changed, but fortunately it can be identified. How? Aside from hiring Dr. Prince to assess your managers, here are four things you can do immediately to help ferret out the money losers.
See what they order for dinner. Many seasoned executives are familiar with "the waiter test." This happens when a hiring executive takes a potential new hire to dinner and watches how he treats the waiter. Many people will put on their best face for the new boss, but treat the waiter poorly. How the potential new hire treats the waiter is considered by many to be the true indicator of how he actually treats other people. Likewise, by watching what someone orders for dinner on the company tab, an executive can get an idea of how that person spends money -- especially company money. Did they order the most expensive item on the menu? Did they browse the wine list looking the most exclusive bottle? If they did, they are probably high on the resource utilization scale.
Find out if they developed anything unique or legitimately useful in their last several positions. This information will tell you if they are truly someone who adds value or if they are just a placeholder manager. Look at the managers in your own company. Who is legitimately adding value? Who is creating new systems, or solving problems that increase the bottom line? Boilerplate achievements such as "managed XX number of people" are not an indication of someone with a high value-added orientation.
Ask other people about their spending habits. Nobody ever feels they are a big spender and certainly not a money waster, but surveying other people's opinions of their spending habits will give you a better idea of their resource utilization habits. Do they explore less expensive options? Do they look for good deals? If the people around them say "no," watch out for their spending habits with the company checkbook.
Be wary of grand thinkers. Most of us are taught to admire grand thinkers and we can easily be seduced by their visions of changing the world, but the path to such grandeur is almost always extremely expensive -- and money losing. Furthermore, grand thinkers often do not have the mind for the details and incremental efforts that are required to reach such great heights. Consider Sam Walton's frugal ways and mind for detail as he built Wal-Mart store by store vs. Carly Fiorina's failed efforts to remake HP in one grand merger with Compaq.
Most leaders are measured by their vision, their passion, and their ability to inspire others. While all of these things are admirable qualities and are in many ways necessary to grow a company, they mean little if the leader drives the company to financial ruin. If you've successfully grown your company, then it's safe to assume you are in the 20% of people who are not money losers and actually have the nose for profit. But the odds are against you in finding others who also have a profitable financial signature. Look at your managers, watch how they use their expense accounts, ask what they've done to uniquely contribute to the bottom line, and don't be seduced by their charisma and grand visions. After all, true leadership is about performance and there is no better measurement of performance than a healthy bottom line.