You really own a system

Most business owners do not know what it is that they own.  They don’t own the people—we did away with slavery; you usually don’t own the assets—the bank does.  What you really own is a system.  It is a system that converts market demand for your goods and services into cash into your account.  That system is the value of your business.  Franchises sell it—that is what you buy when you purchase a franchise—and that is where the value is.  Unfortunately most owners don’t own a business, they own a job.  The profit and cash flow is produced through their own efforts instead of through the implementation of systems, procedures and controls that produce the cash flow and profit.

In a quantitative analysis of functionality, each function of the business is defined in terms of the result that it must produce. As an organization grows, it becomes apparent that positions are developed around people, not functions. The organization must be re-examined in terms of functions. Positions must be created and defined in terms of what the “system” requires of each position not in terms of what each employee wants to do. The proper assignment of all functions will eliminate gaps and duplication. Gaps are those functions that no one in the organization presently chooses to perform. Presently these unassigned functions all fall to the owner and interfere with his ability to do his job. Duplication is when more than one person chooses to perform the same function. This is the root of “finger pointing” and is often done be employees referred to as “empire builders.” It is critical to remember that you own the business, you own the system and you, and not your employees determine which positions perform which functions. In a small business people often wear more than one hat—which is fine—what cannot happen is more than one person cannot wear the same hat. A company, which does not regularly perform this task, ends up in organizational chaos. Duplication and gaps are the leading cause of inefficiency.

A second common error is defining positions through a list of tasks. That leads to endless and fruitless reviews regarding how many of the tasks were performed and to what level they were completed.  Each function must be defined in terms of a result. It is not sufficient to merely state the tasks that you expect of each person. You must convey to them the result that you expect. Job descriptions must be written in terms of measurable results, not as a list of tasks. Results are measureable and you can’t manage anything that you can’t measure. The results for each function are determined by the results that are needed to accomplish your financial plan. When you have each position’s functions defined in terms of a measurable result you can establish accountability. You cannot have accountability without it.

Incentives now can become rational—they are bonuses paid for performance exceeding the result that you have paid them for. Cash bonuses can only be paid for results that either increase sales above the plan or reduce costs below the plan.

This is often the most important organizational exercise that a company can perform. This analysis provides a rational basis for compensation, accountability and incentives—organizational structure—and is tied to your budget. If you want a job you should get one from a reasonable boss who doesn’t work you all hours of day and night and rarely compensate you appropriately.  If you want a business you have to build it.