The Business Owner-The Utmost Fear

When the competition is fierce and the economy is down, it's natural for small business owners to focus primarily on short-term results -- and on making short-term decisions. While we'd like to think long term, we nearly always operate from a short-term perspective. When revenues are down, customers are deserting, making payroll seems like an impossible dream or cash is flowing in the wrong direction, a short-term perspective is often all you can afford.

Who has time for long-term considerations when the short term is uncertain?

But what if you knew? What if you knew, without a doubt, that you and your business would survive for the next 20 years? What if, for example, you knew:

-- A problem employee will still be on the payroll one or two (or heaven forbid, 20) years from now. Does it make sense to keep ignoring the problem? Do you really want to deal with that employee for years?

-- A disengaged partner won't leave the business of his own accord, and for the next 20 years, he'll make minimal contributions while taking a major share of profits. If you knew that, would you try to address the problem now or decide just to live with it?

-- A small market with a limited customer base will always be small. Would you relocate, expand or find different sales channels, or would you keep complaining about limited opportunities for the next 20 years?

Short-term crises can cause us to ignore longer-term headaches, roadblocks and challenges. We tend to push aside larger chronic problems as we fight smaller, more immediate issues.

So take a step back from the day-to-day and turn the proposition around. Assume hard work, intelligence and persistence will overcome short-term business issues and challenges. Assume you and your business will still be here. In fact, assume you'll still be right here, right where you are today, facing the same problems and frustrations. Then take steps to address them now.

Above all, make sure you never have to look back and say, "I can't believe it's been 10 years and I'm still dealing with this (stuff)." That should be your greatest fear -- make sure it doesn't become a reality.

How your Business Plan Can Be Destructive

We've all heard the expression, "If you fail to plan, you plan to fail." And few people disagree on the importance of a business plan. But too many business plans risk turning against their authors (and often do) because of one or more of these potentially fatal flaws:

1. Being too attached to a product or idea. The "everyone will want this" phenomenons, where you love an idea so blindly that you don't even consider the possibility that the world might not beat a path to your door.

Gut feelings, experience and a willingness to take risks certainly count, but don't get too stubbornly attached to your ideas. Be brutally honest with yourself, and do as much homework as you can. A mentor of mine once said, "Never make decisions based on an assumption that you're your own customer."

2. Overestimating the market. Almost every formal business plan I've ever seen cites impressively researched industry statistics and uses them to come to hypothetical conclusions. Typically they read something like, "We anticipate “NewCo” can capture 1 percent of this $50 billion industry within two years, resulting in revenues of $5 million."

It seems reasonable -- hey, just 1 percent -- but in many industries getting 1 percent market share is a Herculean feat. For start-ups with limited resources, it might even be impossible -- many run out of money chasing flawed assumptions or unrealistic/non-fundable goals. So for the typical entrepreneur, it's better to build estimates from the bottom up (units, distribution outlets, marketing and other resources, etc.) than to back into numbers based on market share.

3. Not fleshing out execution details. In one of my favorite bits, comic actor Sacha Baron Cohen's alter ego, Ali G., is pitching real, unsuspecting venture capitalists on investing in a hoverboard -- a levitating skateboard inspired by the movie "Back to the Future." He hands a plain wooden skateboard deck to an impatient Venture Capitalist, who quickly points out that it's just a skateboard without wheels -- and doesn't hover. Ali G. replies, "It doesn't yet. That's where you guys come in." This happens in real life all the time. The business plan describes a great concept, but with no real-world execution plan.

Determined people with big ideas and dreams often have faith that the missing pieces will just come together. If you're the late, great Steve Jobs, that may be true. Bust most of us aren't, and most don't have the resources for endless exploration. So if you don't know how to execute your idea (much less if it can be executed at all), or you don't at least know of specific resources to which you can turn, then it's just an idea -- not a plan.

4. Overestimating financial results. Business plans commonly make overly aggressive or unrealistically ambitious assumptions about sales, rate of growth, gross margin, profitability timing, cash flow, market share and other tangible results. To be sure, some startups knock it out of the park, but most work their way up slowly, through zigs and zags that rarely follow the original plan. I can't think of an entrepreneur I know whose startup financial estimates materialized as planned. Mine certainly didn't, and I'm as conservative as they come.

Another wise piece of advice I got years ago was to separate goals from estimates. Goals are what you shoot for; estimates are what you bet on! Keeping them separate in your head -- and in your plan -- can help avoid painful surprises down the road.

5. Underestimating costs. This is usually the biggie. "Assume that everything will cost twice as much and take twice as long" may be cliché, but it's always been wise and healthy advice. Running out of cash is, of course, among the top reasons businesses fail, and underestimating expenses is one of the top reasons they run out of cash.

No matter how much homework you've done and how much you think you've nailed down the numbers, add a generous margin of error. If you're seeking financing, you may only get one shot. And if nothing else, think of it this way: chances are you can only be pleasantly surprised if you overestimate.

There are generally two reasons for doing a business plan: one is for yourself -- to organize your thoughts on paper, make sure you really understand and feel good about what you're doing, and give you a path forward (one that will almost certainly change, but a place to get started).

The other is for outside use, which typically means asking for money. There may be some differences in the content and presentation of the plans to suit each purpose, but no matter what, it should be honest, thorough and as realistic as possible.

It's great and important to be positive, determined and enthusiastic about your business, and I'm not suggesting writing a pessimistic or self-defeating plan. I think anyone who has a good idea; a solid plan and the personal qualities it takes to be an entrepreneur should go for the wild ride.

But it's equally important to balance your passion, drive and conviction with a healthy dose of conservative self-evaluation. Challenge everything about your plan, and then challenge it again. Making unrealistic assumptions and/or kidding yourself -- much less others -- can come back to bite you.

I'd love to hear your own business-plan pitfalls or advice. Please share your thoughts.  If you are in need of that business plan assistance, contact me!

Emotional Well-Being (part 4 of 4)

The Misconception: There is nothing better in the world than getting paid to do what you love.

The Truth: Getting paid for doing what you already enjoy will sometimes cause your love for the task to wane because you attribute your motivation as coming from the reward, not your internal feelings.

In 1980, David Rosenfield, Robert Folger and Harold Adelman at Southern Methodist University revealed a way you can defeat the over justification effect. Seek employers who dole out reward – paychecks, bonuses, promotions, etc. – based not on quotas or task completions but instead based on competence. They ran an experiment in which they told subjects the goal was to find fun and interesting ways to improve vocabulary skills in schools. They placed participants in two categories and two groups per category. In one category, subjects would be paid for being good at their task. In the other category, the subjects would be paid for completing a task. The subjects received 26 dice with letters on their faces instead of dots and a stack of index cards each with 13 random letters. The subjects hit a timer and used their dice to make words from the letters on the cards. Once they had used nine letters or spent a minute-and-a-half trying, they moved on to the next index card and kept repeating until the experiment ended. It was difficult but fun, and as the players kept going they started to improve in their abilities.

In the payment for competence category, Group A was told they were being paid based on how well they did compared to the average score. In Group B, the subjects were told the same thing, but there was no mention of any reward. In the payment for completion category, the scientists told Group C each completed puzzle would increase their payout, and Group D was told they would be paid by the hour.

After the games, the experimenters pretended to tally up the subjects’ scores and showed Groups A and B how well they did. No matter how they actually performed, the scientists told half of Groups A and B they did poorly and half they were amazing at the game. Groups C and D, the ones who were paid for completions, were also split. Half got low pay and half high pay. The subjects then filled out a questionnaire and sat alone in the room with the dice and cards for three minutes. During that alone time the real study began. The scientists wanted to see who would keep playing the game for fun and for how long.

The people in Groups A and B, the ones who were paid for being better than average, they picked up the game and played it for over two minutes, but slightly less than that if they were told they weren’t that good. The people in groups C and D, the ones paid for completions, didn’t play it for fun for as long as did the people in the competency groups, and they tended to play longer the less they were paid.

The results of the study suggested when you get rewarded based on how well you perform a task, as long as those reasons are made perfectly clear, rewards will generate that electric exuberance of intrinsic validation, and the higher the reward, the better the feeling and the more likely you will try harder in the future. On the other hand, if you are getting rewarded just for being a warm body, no matter how well you do your job, no matter what you achieve, the electric feeling is absent. In those conditions greater rewards don’t lead to more output, don’t encourage you to strive for greatness. Overall, the study suggested rewards don’t have motivational power unless they make you feel competent. Money alone doesn’t do that. With money, when you explain to yourself why you worked so hard, all you can come up with is, “to get paid.” You come to believe you are being coerced, paid off, and bought out. In the absence of what the scientists called “competency feedback” there is no story to tell yourself that paints you as a badass. Quotas and overtime and hourly pay don’t offer such indications of competency. Bonuses based on a reaching a specific number of completions or reaching a quantified goal make you feel like a machine.

If you pay people to complete puzzles instead of paying them for being smart, they lose interest in the game. If you pay children to draw, fun becomes work. Payment on top of compliments and other praise and feeling good about personal achievement are powerful motivators, but only if they are unexpected. Only then can you continue to tell the story that keeps you going; only then can you still explain your motivation as coming from within.

Consider the story you tell yourself about why you do what you do for a living. How vulnerable is that tale to these effects?

Maybe your story goes like this: Work is just a means to an end. You go to work; you get paid. You exchange effort for survival tokens and the occasional indulgence from your favorite store. Work is not fun. Work pays bills. Fun happens at places that are not work. Your story is in no danger if that’s how you see things. In an environment like that Skinner’s assumptions hold true, you will only work as hard as is necessary to keep getting paychecks. If offered greater rewards, you’ll work harder for them.

Maybe your story goes like this though: I love what I do. It changes lives. It makes the world a better place. I am slowly becoming a master in my field, and I get to choose how I solve problems. My bosses value my efforts, depend on me, and offer praise. In that scenario, rewards just get in the way of your job. As Kahneman and Deaton’s study about happiness showed, once you earn enough to be happy day-to-day, motivation must come from something else. As Kahneman and Deaton’s research into happiness and money showed, the only material reward worth seeking once you have a bed, running water and access to microwave popcorn, are tributes, symbols to all of your merit, stuff that demonstrates your effectiveness to yourself and others. Ranks, degrees, gold stars, trophies, Nobel Prizes and Academy Awards – these are shorthand indicators of your competence. Those rewards amplify your internal motivations; they build your self-esteem and strengthen your feelings of self-efficacy. They show you’ve leveled up in the real world. Achievement unlocked. They help you construct a personal narrative you enjoy telling.

The over justification effect threatens your fragile narratives, especially if you haven’t figured out what to do with your life. You run the risk of seeing your behavior as motivated by profit instead of interest if you agree to get paid for something you would probably do for free. Conditioning will not only fail, it will pollute you. You run the risk of believing the reward, not your passion, were responsible for your effort, and in the future it will be a challenge to generate enthusiasm. It becomes more and more difficult to look back on your actions and describe them in terms of internal motivations. The thing you love can become drudgery if that which can’t be measured is transmuted into something you can plug into TurboTax.

Help someone who can't return the favor!

Emotional Well-Being (part 3)

The Misconception: There is nothing better in the world than getting paid to do what you love.

The Truth: Getting paid for doing what you already enjoy will sometimes cause your love for the task to wane because you attribute your motivation as coming from the reward, not your internal feelings.

Self-perception theory says you observe your own behavior and then, after the fact, make up a story to explain it. That story is sometimes close to the truth, and sometimes it is just something nice that makes you feel better about being a person. For instance, researchers at Stanford University once divided students into two groups. One received a small cash payment for turning wooden knobs round and round for an hour. The other group received a generous payment for the same task. After the hour, a researcher asked students in each group to tell the next person after them who was about to perform the same boring task that turning knobs was fun and interesting. After that, everyone filled out a survey in which they were asked to say how they truly felt. The people paid a pittance reported the study was a blast. The people paid well reported it was awful. Subjects in both groups lied to the person after them, but the people paid well had a justification, an extrinsic reward to fall back on. The other group had no safety net, no outside justification, so they invented one inside. To keep from feeling icky, they found solace in an internal justification – they thought, “you know, it really was fun when you think about.” That’s called the insufficient justification effect, the yang to over justification’s yin. In telling them the story, the only difference was the size of the reward and whether or not they felt extrinsically or intrinsically motivated. You are driven at the fundamental level in most everything you choose to do by either intrinsic or extrinsic goals.

Intrinsic motivations come from within. As Daniel Pink explained in his excellent book, Drive, those motivations often include mastery, autonomy, and purpose. There are some things you do just because they fulfill you, or they make you feel like you are becoming better at a task, or that you are a master of your destiny, or that you play a role in the grand scheme of things, or that you are helping society in some way. Intrinsic rewards demonstrate to yourself and others the value of being you. They are blurry and difficult to quantify. Charted on a graph, they form long slopes stretching into infinity. You strive to become an amazing cellist, or you volunteer in the campaign of an inspiring politician, or you build the starship Enterprise in Minecraft.

Extrinsic motivations come from without. They are tangible baubles handed over for tangible deeds. They usually exist outside of you before you begin a task. These sorts of motivations include money, prizes and grades, or in the case of punishment, the promise of losing something you like or gaining something you do not. Extrinsic motivations are easy to quantify, and can be demonstrated in bar graphs or tallied on a calculator. You work a double shift for the overtime pay so you can make rent. You put in the hours to become a doctor hoping your father will finally deliver the praise for which you long. You say no to the cheesecake so you can fit into those pants at your next high school reunion. If you can admit to yourself that the reward is the only reason you are doing what you are doing – the sit-ups, the spreadsheet, and the speed limit – it is probably extrinsic.

Whether a reward is intrinsic or extrinsic helps determine the setting of your narrative – the marketplace or the heart. As Dan Ariely writes in his book, Predictably Irrational, you tend to unconsciously evaluate your behavior and that of others in terms of social norms or market norms. Helping a friend move for free doesn’t feel the same as helping a friend move for $50. It feels wonderful to share a romantic dinner with your date after getting to know them and staying up one night making key lime cupcakes and talking about the differences and similarities between Breaking Bad and The Wire, but if after all of that the other person tosses you a $100 bill and says, “Thanks, that was awesome,” you will feel crushed by the terrible weight of market norms. Payments in terms of social norms are intrinsic, and thus your narrative remains impervious to the over justification effect. Those sorts of payments come as praise and respect, a feeling of mastery or camaraderie or love. Payments in terms of market norms are extrinsic, and your story becomes vulnerable to over justification. Marketplace payments come as something measurable, and in turn they make your motivation measurable when before it was nebulous, up for interpretation and easy to rationalize.

The deal the children struck with the experimenters ruined their love of art during playtime, not because they received a reward. After all, Group B got the same reward and kept their desire to draw. No, it wasn’t the prize but the story they told themselves about why they chose what they chose, why they did what they did. During the experiment, Group C thought, “I just drew this picture because I love to draw!” Group B thought, “I just got rewarded for doing something I love to do!” Group A thought, “I just drew this to win an award!” When all three groups were faced with the same activity, Group A was faced with a metacognition, a question, and a burden unknown to the other groups. The scientists in the knob-turning study and the child artists’ study showed Skinner’s view was too narrow. Thinking about thinking changes things. Extrinsic rewards can steal your narrative.

As Lepper, Greene and Nisbett wrote, “engagement in an activity of initial interest under conditions that make salient to the person the instrumentality of engagement in that activity as a means to some ulterior end may lead to decrements in subsequent, intrinsic interest in the activity.” In other words, if you are offered a reward to do something you love and then agree, you will later question whether you continue to do it for love or for the reward.

(To be continued)