The psychology of entrepreneurs - managing for profit

Published: by

In my experience, I have come across countless entrepreneurs who are street-smart with a real flair for sales. Yet many of them (I would not go so far as to say most, but I am tempted) regularly run into financial difficulty within their ventures. A question I have been asked time and again, as I have helped these owner/managers fix their businesses, is why so many of these talented people can start a business, actually know how to sell and recognize its importance, yet so very few can operate towards profitability?

I believe the answer lies in the single most important element in any organization or business situation: psychology. In my consulting business, the single most valuable asset is the psychologist I regularly utilize. She rarely meets a client face-to-face or by phone, yet she is capable of evaluating the behaviours of individuals with whom I come into contact and understanding what motivates them and, more importantly, how to neutralize their issues while leveraging their strengths. I have often said that a crucial differentiator for Atomic Inc is our recognition of the human element and human-focused talent. Psychology is everywhere: in human resources, in organizational structure, in sales, in marketing, in call center optimization, in just about every aspect of the business. But nowhere does it come to the fore as forcefully as in the habits and behaviours of the entrepreneur.

In many cases, the entrepreneur is someone who saw other businesses grow to millions or more in sales, and said to themselves, "I can sell that!" The pivotal word here is "sell." Although a business must sell to generate cash and survive, the focus of most entrepreneurs, and their strength, is in sales. Put in pure financial terms, entrepreneurs are emotionally all about the top line. The method by which the top line generates bottom-line profits is often a mystery or, worse, uninteresting to the sales-oriented entrepreneur. The direct result is that the entrepreneur may get lucky and have enough sales to cover costs, or, in most cases, they may run a business that loses money not only for them, but also for their equity and/or debt backers. Without a solid grasp of operations and the numbers, the entrepreneur cannot:

  • Determine what the business's costs should be at any given level of revenue
  • What the right mix and fixed and variable costs is
  • How variable profits actually are, and plan accordingly
  • Set targets to determine if the business is succeeding, even on the revenue side alone, and adjust plan to suit
  • Determine cash requirements for survival
  • Gain confidence of lenders and investors
  • Manage inventory to avoid unnecessary purchases, which has a very real cost, or under-purchasing, which leads to last-minute premium-priced stocking, along with lost business or even repeat business and negative reputation
  • Determine which if any initiatives are good investments and which are just a distraction or, worse, a waste of precious cash
  • Survive

The short form is that business is about profits, profits are about revenues minus costs, inventory is about systems and discipline, and without numbers, a business is highly likely to fail.

The real challenge is that sales, not numbers and operations and financials, is in the DNA of most entrepreneurs. The question that has been raised time and again, including recently by a banker who asked me for ideas as to how to reform an entrepreneur, is how to change the behaviour sufficiently to turn a business around.

The solution is fourfold. Entrepreneurs, repeat after me:

  1. "I have a Problem": The entrepreneur must recognize, if only for a short time, that, like any addict, s/he has a problem. They are great at sales, but if they want to make money and grow a successful business, they have a shortcoming that must be addressed.
  2. "I need help": The entrepreneur must get help. An expert in operations need to be able to show the entrepreneur how much money they could be making, dangle it in front of them, get them to salivate. The one thing that will get an entrepreneur more excited than sales, is actual cash into his/her pocket. The cash comes from profits.
  3. "I need method": The entrepreneur must be given a system that suits their personality as best possible. Don't expect a sales-oriented entrepreneur to do QuickBooks, Microsoft Dynamics, or PeopleSoft every day, let alone manually handle the numbers in a spreadsheet. The manager needs a system that is minimally invasive of their current structure, yet provides significant additional insight.
  4. "I need accountability": The entrepreneur needs his or her feet held to the fire. This is done in two ways. First, the expert must walk them through the process, going over the numbers with them as often as possible (daily, weekly, whatever is appropriate for the situation), until the owner begins to see the benefits and can stand on his/her own. More importantly, there must be tangible benefits. Investment tranches, subsets of an entire investment given to the business at predefined times conditioned on achieving well-defined milestones, are an excellent method used by venture capitalists the world over. I have personally advised bankers to use this method. Give the entrepreneur enough funds to get to the next milestone, but condition the next tranche on placement of a cost- and inventory-management systems.

The great challenge is often to get the entrepreneur to agree to change, and ease into the change until it becomes true habit. The balance of support between help from the expert combined with conditional financial assistance from investors can go a very long way towards the behavioural modification necessary.