For taxation, legal and asset-protection reasons, many business owners run their business in a legal entity, such as a company or trust. However, they still regard it as an extension of themselves.
This can lead to poor decision making, such as when Jack who came to me with cash-flow issues. He did not pay himself a fixed salary but drew money out of the business when he needed to. He did not separate his money from the business’s money.
Another client had a habit of hiring family and friends without clearly defining their roles or conditions of employment. The positions and conditions were often altered to suit the employee, not what was best for the business.
Treating our business as another real person (irrespective of its legal status) can be useful in making many decisions. As a business mentor, I often suggest clients do this if they are confused about their priorities.
Christopher Hsee, a psychologist at the University of Chicago, says the following when it comes to decision making: “If this happened to someone else and they ask for your advice, what would you tell them to do? I oftentimes try to make decisions that way, by putting myself in someone else’s shoes.”
Some of the business decisions this approach can help with include:
1. Spending money
Many business owners mentally “mix their money”. This means they regard the business as their banker, spending when they feel like it or when they think the business can afford it. Regarding yourself as an employee of the business on a salary obviates this problem. In other words, making money decisions based solely on what is best for the business reduces perks and self-indulgence.
2. Business value expectation
Behavioural economics tells us we suffer from the “endowment effect”: we tend to over-value the things we own and the longer we own them, the more we over-value them. Business owners who have worked hard and identify themselves emotionally with the business – for example, describing the business as “my baby” – can put a monetary value on what is, in fact, an emotional value. They then get frustrated when they try to sell their business and can’t get what they think it’s worth.
3. Hiring and de-hiring staff
When it comes to hiring staff, it’s important to ask yourself some questions:
- “If I had no connection with this business, what would its hiring criteria be for a new role?”
- “Would they hire my relatives or friends?”
- “Would it retain all my current staff?”
When hiring staff, it is critical you are objective and do what’s best for the business.
Ensure you do the following:
- Make your business your biggest client (this means working on your business, not in it).
- Treat it as you would advise your best friend when making important decisions.
- Sleep on big decisions (this is not procrastination, it is common sense).
- Count to 10 before responding to someone who is annoying or pressuring you.
- Get someone else to negotiate for you if you are feeling emotional about a major decision or conflict.
I work with business owners to help them get clarity on where they are, where they want to go and how to get there. Email me at email@example.com.