“They’re the biggest installer in the city.”
Good right? Well, not so good. Let me explain.
We were launching a new product line and hired a new sales staff.
None of the product was in stock because… well we hadn’t actually launched it yet. We’d just met with the manufacturers and had a plan. It would still be 2-3 months until the product was manufactured and shipped from China.
Because of this, we still hadn’t developed a pricing strategy and the new sales team hadn’t been told to sell it.
But here we were.
Our new sales rep had just told the Operations Manager he’d “sold” a bunch of systems (that included the new product and installation of said product).
Not only did we not have the product, we didn’t know how we were going to price it, how to install it, nor have the team to install it. The one positive? We didn’t have the product, so some of those problems were problems for another day.
Immediately upon hearing the pricing, we knew we wouldn’t meet our baseline profitability. Shoot… we might not even break even.
The fundamental problem? The salesperson didn’t understand gross or profit margins. Sure, they understood the product (they’d been the one who helped bring it to us), but they didn’t understand the business.
The win? We got the biggest installer in the city.
The loss? We might go bankrupt from it.
It was time to make a decision. Do we let it ride? Hope it works out… Or do we blow it up? Call the installer and tell them we can’t honor the salesperson’s price.
We chose door number 2… sorta. We called the installer and explained the situation. We told them we’d honor the price on x number of units, but would have to revise pricing after that point. Thankfully they were okay with it. They knew the deal was good… probably too good.
And that’s the thing with business.
Some things that seem like wins really aren’t wins.
Last week I tweeted about fake wins vs real wins.
Fake wins make you feel good. But they don’t ultimately get you where you want to go.
So what is a fake win?
- Hurt long-term outcomes
- Misallocation of resources
- Chasing the dopamine rush
- Misaligns with company values
- Distraction from the primary goal
- Overly risky based on the upside
- Procrastinating hard things
- Damages team morale
- Is unsustainable
The real win is the contrast of those things. It’s doing the hard thing today. It’s being consistent in your values and goals. It’s ignoring short-term distractions. It’s getting rest when you need it.
Today, we’re going to talk about fake vs real and how it plays out in business.
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Let’s dive in.
Revenue or profit?
In the chase for growth, businesses too commonly sacrifice profits. The question then becomes “when do the profits come back?”
This is a scary game. Sure, it allows you to claim X% growth or so many millions in revenue. But, what are you accomplishing? Some were relying on selling their business at a high multiple, which is now not as feasible.
What if instead, you focused on profits?
Cut costs, work on supply chain, and chase high-margin clients. All of these will increase what gets to the bottom line, which results in less stress and a more resilient business.
New features or better features?
Some software businesses like to launch quickly and ask for permission later. Others like to thoroughly test and launch methodically.
Either one of these approaches could be a “fake” win. In some sense, iteration allows you to solve the right problems, but it could also be a distraction from a much larger problem you need to address.
On the opposite side, spending much too long on a maybe needed feature, while ignore much more pressing issues, is lying to yourself about what you’re accomplishing.
Only you know if you’re chasing fake or real wins here.
Low days to fill or the right candidate?
When someone leaves, there is a bit of desperation to fill the spot.
But, the wrong hire can cost you a lot of money. The US Department of Labor reports it costs up to 30% of the first year salary.
So, while it may be painful to leave the vacancy open longer, you’re also more likely to get the right candidate by being intentional about your search.
Make sure you have a clear job description, vetted (and position-specific) questions, and interview enough candidates.
Hiring is hard and takes time. Reduce your time to hire by fixing your process or using recruiters, not short-circuiting the process.
Deferred maintenance or long-term stability?
Too many businesses don’t have a capital spending plan. If this is you, reply to this email and I’d love to help.
Sure, it’ll help current profits, but at what cost? Facilitiesnet.com reports that every dollar “saved” by deferring maintenance costs 4x more in the future. I can’t verify the stat, but I don’t doubt it.
Why so much you ask?
- Upcharged repair expenses to avoid downtime
- Wear and tear shortening the lifespan
- Employee downtime cost
- Employee satisfaction
I wrote about maintenance capital expenditure here and how to plan for growth capital expenditure here if you want to read more on how to assess capital expenditure.
To cut or not to cut?
Cutting costs is most often the first response when things get hard. But, what if you cut too much? In the short term, it feels good. It feels like a win.
But when you continue to cut and cut and cut, you can hurt the business.
Cut employee benefits? Sure you saved a penny, but what about the dollars lost to hire replacement staff?
Cutting costs should be a temporary state. If you’re sitting in the “cut” decision too long, it tells me you’re either not making the decision or not focusing on growing the business.
Continual cutting impacts the culture and morale in a way that can’t be reversed.
I know, I’m a CFO, so you’re probably shocked. I’m not cut cut cut. I’m cut pivot pivot.
When things go bad: cut then transition to the next phase.
Accounting profits or better cash flow?
You what I hate about public companies? Accounting shenanigans. Shifting outcomes to hit your quarterly targets is weak sauce.
While not as much problem in private companies, there are still ways to manipulate outcomes for your bankers, owners, or reduce taxes.
What are some common ways companies do this?
- Miscapitalization of expenses
- Related-party transactions
- Overstate inventory
Instead of worrying about accounting outcomes, focus on cash flow. With strong cash flow, you can worry about outside parties less and focus on how to allocate the excess cash.
Fast growth or slow growth?
Inherently, fast growth is what most of us want. But with fast growth comes risk.
It’s taking on more debt.
It’s pushing your team to the max.
It’s accepting lower margins to keep growth going.
Leverage, stress, and low margins are all areas of weakness. They weaken the hull of the ship and eventually, those stress points can break.
We’re seeing this today in the venture capital world. Global VC funding fell 53% year over year in Q1 of 2023, which means businesses needing to raise rounds will either have to take a down round or not be able to raise. Fast growth lead to high valuations, but the downturn means even good businesses will fail because of the debt burden looming over them.
In contrast, slow growth creates strength. It allows you to be resilient. It allows you take advantage of opportunities.
More clients or raise your prices?
More clients always seems good, right?
But what if those clients mean you can’t “service” the business?
You can’t hire more staff, maintain your books, take a day off, or think long-term. But you’re worried that if you raise your prices you’ll lose clients.
The reality is, raising prices is rarely bad.
By raising prices you can focus on who remains, create room to focus on business growth, and actually give yourself a break.
Maybe you make less money at first, but over the long-term you almost always make more.
We could do a whole post on this (should I?), but for now we’ll stop here.
Guess and win or plan and lose?
You know that one time you told someone a price (like our example) and it worked out?
Great… but also don’t do that again.
In business, there is a balance between bias to action and planning too much. Most fall too much towards action, which is why they’re an entreprnuer.
But, as the business matures, you need more plans. Not crazy plans with spreadsheets and MBAs and people too smart to talk to their coworkers. But normal pen and paper plans.
I call the guesses fake wins because they’re not sustainable.
But the real win? It’s creating a plan, even if it only takes 20 minutes, and working that plan.
It’s being more informed on pricing.
It’s evaluating your new product options before chasing one or ten.
It’s considering your staffing need over the next 6 to 12 months instead of just hiring your nephew (let’s be real though, you probably still hire him anyways).
It’s time to grow up and start actually running a business.
Bonus round
Because this concept is so applicable outside business too, I thought I’d give a few examples of that too:
On social media: followers (fake) vs dollars (real)
Reading: finishing the book (fake) vs applying it (real)
Personal finance: the new car (fake) vs saving consistently (real)
Business: traffic (fake) vs conversion (real)
And from my tweet:
When fake turns real
Now, back to the story from the beginning.
When manufacturing cost and shipping was calculated, it was 25% below what was expected. The fake win actually ended up being a real win.
And sometimes that happens. But the fake win turned real doesn’t change the mistake that was made.
I think this is where a lot go wrong. They got lucky a few times in a row and assume that luck is skill. Your ability to discern which one it is will help you improve your decision quality down the road.
