Clockwork: Design Your Business to Run Itself

by Mike Michalowicz

  The lesson here is, don’t make your metrics “dream numbers”; make them realistic indicators. As I write this, that metric for our member certification is at about 90 percent. That’s lower than expected, and I know that means that members are possibly not engaged in some way. Are we falling short on our support to them, or have they lost interest? I need to figure it out, since I am sure that at least that missing 7 percent will be less engaged, or less prepared, or need extra attention to catch up.

  COLLECT. Repeat after me: Cash is the lifeblood of my business. Again. Cash is the lifeblood of my business. Cash is the most important yet most overlooked part of every business. You could not have a single good client, your services could be horrible, and you could be clueless about how to generate leads, but if you have wads of cash, your business will survive. In our organization, we look for the percentage of members who miss a payment during any given month. If that is over 5 percent, we have an issue. Any time we can make it lower (and we found that offering an annual payment program did) we are feeding our business the lifeblood of cash it needs to sustain. How is cash flowing (or not flowing) through your business? Determine the metric that you can use to measure its health. Your business life depends on it.

  Queen Bee Role. Our QBR is getting the word out about Profit First, and I am the primary (but not exclusive) messenger. The metric for our QBR is how many presentations are happening—speeches, keynotes, webinars, podcasts (our own, or someone else’s)—or interviews. And our QBR is strengthening. As I write this (on a plane, per usual) four Profit First speeches are happening without me. We are measuring the number of “messaging moments” each day. It would be nice to know the audience size, of course. A live event is much more measurable than a podcast. And a podcast is more measurable than a radio interview. So we just measure the number of messaging moments. We have our metric set at two messaging moments per day (fourteen a week), which if I have to do solo, is doable, but barely. And if I get sick, we are in trouble.

  As more people are serving the QBR, that number has become more consistent and I am working less (you know, money on automatic). My personal service of the QBR (I track my work, too) of late is down because I’ve been busy with other projects (hello, writing a book is time consuming!), which detract from the QBR. But as I free the queen (me), other people are carrying the QBR forward. Although writing a book does serve the QBR in the long term, since it’s technically me getting the word out, publishing is a long process, so writing—and rewriting, and editing, and editing some more, and then throwing everything out and starting again (seriously)—is not reflected in this metric. The other folks who are serving the QBR are working well, so now my priority is to build a system to make it as easy as possible for them and for others who also want to speak, while ensuring consistency. And I am doing it by, you guessed it, capturing the existing system: recording my presentations and giving them to folks to present.

  The core four areas—Attract, Convert, Deliver, and Collect (ACDC)—become the gauges on your dashboard—plus the QBR. What you need to do is first identify how you measure progress (or lack thereof) in each of these five spots, and what is your goal for each. The goal of metrics is to measure the effectiveness of your company, and likely areas to find bottlenecks. The metrics act as a simple initial indicator that something is askew and needs your attention.

  A metric is usually a number. It can also be a binary (yes/no or on/off), or it can be something else. But a metric is always measurable and comparable. A metric sets the expectations, and when the actual events that the metric is measuring are higher or lower than expected, it indicates that an investigation of the situation is appropriate, and a resolution may be required.

  Going back to our car example, the car’s speed could be the metric we measure. The speed limit sign could be the “normal” number we want, and the speedometer indicates the actual number. When we go too fast or too slow, there is an inconsistency with the metric and an adjustment needs to be considered. (But trust me, no one drives too slow in New Jersey.)

  In any category, you can have the opportunity for multiple metrics. For example, we also have a convocation metric in deliverables. Convocation is how many members join us for an in-person live training at our headquarters after they join our organization. It is not just critical training; it is critical interaction. New members meet one another and the team at home base (that is what we call the main offices). If members aren’t showing up for convocation, that may set the stage for problems with long-term engagement. The metric is a simple ratio: how many members qualify to be at convocation (which is any new member) versus how many actually show.

  The Profit First method works in part because it has built-in metrics—it is its own dashboard for managing cash and ensuring your business is profitable. The goal is to have a business that both generates and sustains cash and profit. In Profit First, I explain that you need five foundational bank accounts: INCOME, PROFIT, OWNER’S COMPENSATION, TAX, and OPERATING EXPENSES. Then you start allocating funds based on preestablished percentages (which serve as metrics, too) for each of the five accounts. Money comes in and is distributed according to those percentages. If your business can’t allocate money to the percentages set, those percentages serve as a metric, an indicator that something out of the range of expectation is happening, and you need to find out why the business can’t do the allocations, and fix it. Do you have too much cost? Cash flow problem? Not enough margin? The fluctuation in numbers from what is expected indicates you either have a problem (you fell short) or things are going better than you expected (you landed high). In either scenario, you always want to ask why. And seek to fix the bad things and replicate the good things. Metrics are your new best friend; they candidly tell you the truth about any issues or opportunities you have and point you in the direction of a solution—quickly.

  The notion of money on automatic doesn’t mean money falls into your lap without any effort. It’s not a broken ATM that somehow got jammed and perpetually spits money out at you. Instead, money on automatic is establishing a system where you sit back in the control room and watch the flow. Just like any machine, system, or process, it will break at times or need adjustments. Your job is to watch for the anomalies and then seek to resolve them. The key is to have as simple a control room as possible, yet have it monitor the critical elements in your business. Could you have a metric for everything? Sure. But that would be overwhelming. Could you have just one metric? Sure. But it may be too vague to indicate problems and opportunities.

  For example, with Profit First, you set an expected income metric on a biweekly (or weekly) basis. Even a seasonal business can do this, too. Then you compare where you are on that income versus where you expected to be. Something is off? You investigate. You don’t have to read cash flow statements or other reports to see if your business is in need of cash or profit is down.

  Craig Merrills and I met at a conference where I was presenting. We quickly became friends. He and his wife were so incredibly generous to share their vacation house on Smith Mountain Lake, Virginia, with my wife, Krista, and me. We spent a few days together playing cornhole (the ultimate outdoor game that you can play without putting your beer down), firing up the BBQ, and chatting up a storm about all things business.

  Craig runs a Wow 1 Day Painting franchise. He had an uncanny ability to borrow money and justified it because he needed equipment. The result was $109,000 of debt. That’s when Craig put in a few simple metrics to turn things around. He simply set his income target and the percentage of operating expenses (including the purchase of equipment) that he could spend. With a constant percentage of operating expenses, if income slipped, the operating expense automatically received a smaller portion. He only spent money that was pre-allocated to expenses.

  Craig started this process only a year and one month prior to our meetup at his lake house. He threw in yet another three-pointer on cornhole, t
ook a swig of his beer, looked at me, and said, “Now, I am totally debt free.”

  He eradicated his debt because he measured it. He doesn’t read accounting statements; he uses the key metrics on his dashboard to measure cash flow and free up funds to pay down his debt. You may have heard this before, but either way, I hope it lands with you: What gets measured gets done. So, if it matters, measure it.

  You don’t necessarily have to follow my categories or metrics for your dashboard, but I do suggest you have metrics that show indicators throughout your business. Also, try to key your dashboard to somewhere between five and eight metrics. Fewer than that, and you don’t get a full enough picture of what’s going on. But more than that can be overwhelming. Too many dials and too many “instruments” make it difficult for you to notice when something isn’t working, which defeats the purpose of having a dashboard.

  Imagine a security guard on the night shift. The guard can stare at six different screens and easily spot the slightest movement. But give that guard six hundred screens and you can be sure that he will miss something. Every movie where that bad guy gets past the security guard watching the monitors is because the guard has too many freaking monitors . . . or got distracted by the “suspicious noise” of that metal object the bad guy just threw down the hallway. (It always works like a charm.) A dashboard allows you to be the security guard for your business, so the fewer metrics to monitor, the better. And, for God’s sake, don’t fall for the “noise down the hallway” trick—it’s always a trap.

  ONE DIAL AT A TIME

  My lawnmower stopped mowing the summer I started writing this book. It began sputtering randomly, and instead of cutting the grass, it was lightly fanning it—moving the grass from one side to the other. Off to the garage I went to repair this beast once and for all, and I immediately committed the cardinal sin. I tried to fix all the possible causes at once. I cleaned the carburetor, replaced the air filter, changed the oil, and refueled it, all at one time. Then I tried to start the engine. This time, it ran worse.

  Since none of my efforts fixed the problem, I readied myself for extreme engine repair. I gave it new belts, new spark plugs, and flushed the engine with a cleaner. Sure enough, it didn’t work. Finally, after two days of working on the mower, I brought it into a shop. Thirty minutes later it was fixed. The problem? The carburetor was damaged, presumably by me. (I won’t confirm or deny jamming the cover back into place when it wouldn’t close properly.) The original problem was likely a clogged air filter. But even though I fixed that, I “fixed” other things at the same time, which actually caused a new problem, which I mistakenly concluded was the same as the original problem.

  The point is, when you work on multiple things at once to fix one problem, you may actually fix and unfix the solution all in one shot, not realizing that you actually had fixed it and what the cause was. The solution is to work on one piece at a time, and see if that fixes the problem. Start with the most likely issue, test it, and then move to the next likely issue.

  The dashboard of our business is our process. At times things will fail, and when that happens we need to turn (fix) one dial at a time. Take sales for example. Let’s say you notice that you have a big sales drop-off. You notice that lead flow has not changed much at all, and, if anything, has increased, but the sales team is selling way less. You hired a new salesperson who is coming up to speed, and you see that their sales are far lower than you expect. So you set out to fix it. You turn the next “dial” on your dashboard: you give them a new sales script to follow. You give them more leads than the rest of the team, so they can cut their teeth faster. Instead of one of your experienced people giving sales training, you now have two working with the new guy, in the hopes they will gain even more knowledge. With all the fixes in place, sales are sure to increase. But they drop further. Why? Is it the script? Is this person handling too many leads at once? Or maybe the salesperson is too intimidated when two people are watching over their shoulder.

  Rewind and start again. Sales are slower since the new guy started. You conclude that the two things are probably related. You go to the obvious thing, the script, and just turn that dial. You change the script to an easier version. Then you observe. Sales don’t move up or down. Now you go back to the prior sales script, setting the dial back to its original setting, and then move the next dial. Thinking it has something to do with the training, you try two salespeople working with the new guy. As before, sales don’t increase, but in fact drop sharp and fast. Interesting. You found a dial that is negatively affecting sales. Now you investigate this oddity.

  When you go back to just one salesperson mentoring the new guy, sales go up but stay lower than your historical average. Then you try the crazy idea of eliminating the role of sales mentor, and sales go back to normal. Weird. Now you know exactly what is causing your problem, and you do a deep investigation. You discover that your sales mentors, when working with the new salesperson, were putting off their own sales calls. Prospects were calling the mentors and waiting and waiting for a response. So you change the mentoring work to happen after hours and improve it with the use of some technology—recording calls. Now your best salespeople are closing deals, and then going over the recordings of those calls with the new salesperson after hours. And guess what? Sales skyrocket.

  Sometimes, when you spot a problem on your dashboard in one category, the problem can be emanating from another. For example, the challenge with collections is that some people get paid before they actually do the work. That’s great, but if your business has a cash flow issue, is it really a collections issue? When you look at your dashboard, you might see that your sales are down and your leads metrics are right on point. What could that mean? Perhaps because wannabe customers are required to pay up front, no one is buying. The fix? Testing one dial at a time. Try removing the upfront payment requirement and see what happens. If things go back to your expectations, you found the cause. But if it doesn’t fix it, then—and this is the key—put the upfront payment requirement back and then go for the next fix. You have to test each dial independently to find the cause.

  When you turn multiple dials that affect a common outcome at the same time, you cloud the solution. First one change could fix it and another could counteract it, so even though you had fixed it you undid the fix and don’t even know. Other times you change multiple dials and it does fix the problem, but you don’t know which one was the fix. Other times you turn multiple dials and nothing fixes it, but now you are unsure if something did fix it and you also undid the fix with another dial . . . or if none of it fixed anything. Turn one dial at a time—the most likely candidate first—and then measure the result. Reset that dial and try another and measure that. Turn the dials in sequence until you find the cause, and only after you do the single dial turns, consider multiple dial turns where a contingency may be in place requiring multiple dials to be turned to fix it.

  The key is to move linearly through this process, turning only one dial at a time, from the most likely suspect to the least, until you find the permanent resolution. If you try to turn multiple dials at once, regardless of the outcome, you won’t know which dial influenced it. Based on the results, decide which dial to turn next, which in some cases may be a further crank of the dial you just turned.

  Moving one dial at a time seems very time consuming. So the question that begs to be asked is, “Can you ever turn more than one dial at a time?” When analyzing a specific outcome where the dials potentially influence a common outcome, most often the answer is no. You must move one dial at a time. But when your company is working on different outcomes, and the dials are disparate from one another (meaning they address different outcomes), you can turn multiple dials at the same time. For example, I may identify that I have a Convert bottleneck that needs to be addressed and want to try turning the dial of revisiting past prospects that didn’t convert. And I may also have a Deliver bottleneck that has customers wai
ting to talk with an implementation specialist, and I want to try turning the dial of doing group sessions for implementation instead of one on one. Those are distinct dials that affect distinct outcomes, so I can try both simultaneously. That’s a specific opportunity we had in my business, and we turned both of those dials at the same time. And each one improved its specific outcome.

  I know this may seem like a lot of dial turnin’, and you may question your ability to recognize when some aspects of your business need to be tweaked, but you’ve got this. You do.

  FIXING THE GOOD PROBLEMS

  I don’t typically do business calls at one in the morning, but some business crises require immediate attention. I had just arrived on a late-night flight to Berlin, Germany, to deliver a keynote on Profit First and was skimming email half-asleep when I noticed one from Cyndi Thomason with a subject line that read “Gasping for Air!,” which got my attention. The opening line of her email woke me right up: “I’m numb; truth is I’m overwhelmed with opportunity.” I emailed her back to schedule an emergency call. The seven-hour time difference was in Cyndi’s favor, so one a.m. was go time.

  The QBR is a powerful force. Like the force Luke Skywalker used to lift his X-wing fighter out of the swamp. Once you realize that you can move mountains without doing the work, it can cause you to get a little, or a lot, overwhelmed. Cyndi experienced this firsthand, as the closing paragraph of her email revealed:

  “Mike, this niche stuff works, and the QBR works, my worker bees are serving clients like crazy and I’m doing my QBR marketing role. The problem is I don’t have enough worker bees, so does the Queen Bee take a vacation? I’m not sure whether to put the brakes on marketing and I’ve had two other vendors in the space reach out and want me to contribute content.