In our market-driven capitalist society, business leaders are taught that, when it comes to financials, you should strive to make as much profit as possible. But if you want to run your business a different way–one that is focused on keeping promises to your customers, employees, and other stakeholders–this profit-first approach won’t work. If you focus on maximizing profit alone, you’ll inevitably be forced to make decisions that go back on those promises.
A better way to think about your financials is to consider what you need to do to reduce layoffs if or when your business is faced with an economic crisis. Thinking about your business this way will make you more sustainable and prevent you from making decisions that benefit your short-term bottom line at the expense of long-term safety and success.
In sixteen years as a CEO, I have consistently tried to focus on money only as it pertains to the overall health of business. Yes, businesses need to make money in order to survive, but they absolutely don’t need to make money at the expense of their communities. Here are a few strategies I’ve learned.
5 Ways to Produce Purpose-Driven Financials
- Analyze the data. In order to make good decisions, you need to familiarize yourself with the current state of your company’s financials. How much money do you have in the bank? What is your expense-to-earnings ratio? How do the various facets of your business contribute to your overall bottom line? Even though I haven’t been overseeing our finance department for several years now, I still check our bank balance every day and every so often I do a deep dive into a specific corner of the business so I can see what’s working and spot potential errors. Having this information allows me to better understand our business and therefore make better decisions.
- Plan for the worst. When the 2008 recession hit, we lost 20% of our revenue almost overnight. Many economists predicted that the downturn would last a long time, so we had to come up with a plan that allowed us to stay in business while losing 20% of our revenue. We realized that having a 20% profit margin would make up the difference of this revenue loss, so we set that as a goal for ourselves, not just during the recession but well beyond. Aiming for a high profit margin means that we are always trying to reserve cash that we can use in case of a crisis.
- Keep cash on hand. Speaking of cash, it’s good to have access to as much of it as possible. Many profit-driven companies don’t like to keep cash on hand because they’d rather distribute it to investors and executives, but this leaves them with very little liquidity in case of an emergency. Having a big profit margin will make this easier and it will also allow you to secure a line of credit, which you can also draw on if necessary.
- Diversify your cash reserves. In addition to the money you have in the bank, it’s good to consider other cash reserves you can draw from in case of an emergency. A line of credit, as mentioned above, is a good option. You can also set aside some savings in a personal account. Keeping some money separate from the company will also protect you in the event that a creditor goes after the company or you end up in some sort of legal battle. Even if the company has to liquidate its cash reserves, you can still use your personal savings to bail it out. You can also consider an insurance policy that will kick in in the event of a specific crisis.
- Minimize debt. If you’re a profit-first company, then it’s good to take on a lot of debt. Borrowing money allows you to grow more quickly, which in turn increases your revenue. You can then distribute any profits to shareholders and executives without worrying too much about the long-term impact on the company. This, however, is short-term thinking, and as we’ve seen with the recent pandemic, companies that have leveraged themselves in this way either go under or have to beg the government for a bailout. Meanwhile their employees and customers suffer as they did not get a chance to benefit from that short-term growth. Instead, try to minimize debt as much as possible. This might limit what you can do in the short-term, but it will make you much more financially solvent and better able to take care of your people if a crisis hits. It also means you’re not beholden to outside investors who might demand you make decisions that aren’t in the best interest of your customers and employees.
Changing Your Mindset
While these tactics are useful, the biggest hurdle to rethinking your financials is your own mindset about how a business should be run. Having been taught to believe that success and stability requires a lot of money, it can be difficult to break yourself of this thought pattern.
Whenever I find myself succumbing to this line of thinking, I remind myself of one of my favorite quotes from David Bazan, a singer-songwriter in Seattle: “I would trade my kingdom for someone to ride with.” We’re told that being financially stable comes from having a lot of money in your bank account. That’s one measure, but I think it’s exaggerated. I think doing what you love and finding things you love to do is another form a financial security.
When people ask me what it was like to “sacrifice” my $1 million salary in order to pay all of our employees a $70,000 minimum wage, I tell them it wasn’t a sacrifice at all. I feel happier today knowing that my employees earn a living wage than I ever felt as a millionaire. This knowledge helps me stay motivated and helps me clarify my thinking around financial and other decisions.
If you’re still skeptical, another thing to keep in mind is that approaching your business this way will set you apart from the crowd. While a lot of companies talk about purpose, very few actually make it a priority, and if you can demonstrate that you are leading your company by a different set of values, people will want to follow you. I find it cynical to think of purpose as a marketing tactic, and that’s not the role that it plays in my life, but given how cynical our world can be, I have seen this line of thinking help to convince people who might be stuck in old mindsets.
Another thing to keep in mind if you’re not sure how to move forward is that you don’t need to change everything overnight. Make a 1% change to your business to see how it feels. Once you get comfortable, try a 10% change. Our $70k minimum wage made headlines, but it was not the first step we had taken toward more equitable pay at our company. For several years prior, we had experimented with an aggressive compensation program and we’d found that worked well for us. In many ways, our $70k living wage was just one more step in that journey.
Leadership is about creativity and experimentation. There is no one right way to go about it as long as what you’re doing feels right to you. Ask yourself what you’re in business to do and how you can further that mission. Asking the right questions will help you figure out what you need to do.
Gravity CEO Dan Price writes frequently on American business. Follow him on social media @danpriceseattle.
This post was adapted from “CEO Corner: How to Lead During a Crisis,” part of the free Gravity Talks webinar program.