I'm guessing you have a wish list for your business. Maybe on that wish list there's an idea for a new product. Maybe there's an idea for how to make an existing product even better. Or maybe there's a plan for how to reach a whole new market. These sorts of ideas might come to you all the time; you're a creative person, after all, since entrepreneurs are creative by their very nature. But now that you're drowning in the daily humdrum tasks of just keeping your business afloat, your ideas get relegated to a wish list—or, more accurately, a when-I-finally-have-time list. And at the rate you're going, you can't imagine ever having time to get to the ideas on that list, even though you know they have the potential to grow your business in exciting ways.
That's the cost of doing your own bookkeeping. That's the cost of managing HR and payroll on your own, and sitting on hold with the cable company when Internet service goes down. For every hour you spend on those boring tasks, you're giving up an hour in which you could have made your business better. That's why it's time—not money—that ultimately drives your bottom line.
Your business will be wildly successful to the extent that you're using your time to become the very best in your niche, whether that niche is manufacturing widgets or making pizzas in a small town or practicing a specific type of law. To the extent that you're making your business the very best it can possibly be in its unique niche, you're carving out a powerful place in the world—but to the extent that you're not, you're not.
And that's why transitioning your business from one that's bogged down in operations to one that's hyper-focused on the business itself means fundamentally changing the way you think about your time. Every hour you spend on QuickBooks is an hour you didn't make your business greater, and that's a cost you can't afford. The key is to transform the way you use your time, from DIYing to focusing on what you do best and how to do it even better.
This might surprise you, but changing your mindset in this way requires putting a dollar value on your time. Why? Because that dollar value will act as a guide in helping you delegate the tasks that are inefficient for you to do yourself.
According to research done by Stanford University, overwork actually leads to decreased output. That is, total output from, say, a sixty-hour workweek is frequently less than total output from a forty-hour workweek—even though it contains 50 percent more working hours!
Why? Your average productivity can drop by 35 percent or more when you're overworked. Meanwhile, mistakes made in those late hours—when you're pushing yourself too hard—can offset the extra time worked by requiring you to spend even more time correcting those errors. Either way, the point is clear: Working smart is more important than working hard.
Think for a second about a Silicon Valley entrepreneur who's lucky enough to have someone investing in her start-up. Let's say the investor ponies up $5 million in seed funding for the entrepreneur's idea. The entrepreneur then has to devise the smartest way to use that $5 million to build the business from scratch.
You might think that scenario is nothing like your own, since you're bootstrapping your business by patching together savings, running on a scant budget, and DIYing everything you can. But no business gets off the ground without seed capital. It's just that in the case of the Silicon Valley entrepreneur, there was an outside investor, while you're self-funding. You don't have $5 million to dedicate to self-funding, of course, but you are using something else of value: your time.
Remember, you gave up your old salary in order to work for yourself. And every day that goes by in which you don't go back into the labor force, you're forfeiting the wages you could be earning. That's why the salary you're giving up is like that $5 million of investment capital. Instead of using your time to earn wages at somebody else's business, you're investing your time into growing your own business. And just like an entrepreneur carefully spending down $5 million of seed funding, you should be laser-focused on how you're using your time, because your time is your seed capital.
What is the cost of that labor?
How much value am I adding to my business?
In the coming pages we'll begin to answer these questions. We'll put a dollar figure on each hour of your work. We'll examine which tasks are—and aren't—worthy of your personal attention. We'll zero in on the value you add to your business by doing the things that only you can do. And then we'll delegate the other stuff, and show you that not only can you afford to delegate, but you can't afford not to.
Agents of Efficiency is dedicated to helping small businesses thrive, and an example of one of our typical clients is a guy who's starting a liquor store in Williamsburg, New York. This guy is super knowledgeable about spirits of every type and variety, and it's immensely clear to everyone that he has all the passion and expertise he needs to establish a great business in one of New York's trendiest neighborhoods.
But how's he been spending his time?
Well, he started out on the same route as just about every other entrepreneur out there: He was DIYing. He was using his daytime hours to struggle through all the paperwork and permitting that's required for starting a liquor business in New York. Then, until the earliest hours of the morning, he was trying to use Squarespace to build his own website. He said he didn't have the money to pay an expert to do those things for him.
So I started talking with him about the value of his time. I asked how much money he used to make before investing himself in his start-up.
Turns out, he was making good money at his day job. In fact, he was pulling in around $85,000 a year. We put that into hourly terms, and figured he'd been making about $50 an hour. What's more, he had part-time work available to him that paid the same rate, though he'd turned it down because he said he didn't have time for side work.
"How many hours have you spent trying to make this website yourself?" I asked him.
He didn't know exactly, but at a minimum, it was dozens of hours. At $50 an hour, that was equivalent to spending at least $1,200 on Web design—and yet he had very little to show for it.
Let's apply those three key questions.
1. Where am I spending my time?
This Williamsburg entrepreneur was spending his time doing amateur Web-design work.
2. What is the cost of my labor?
Since he was capable of earning $50 an hour at a side job, every hour he spent on his website effectively cost him $50 in forfeited wages.
3. How much value am I adding to my business?
We estimated that his DIY Web-design efforts were worth approximately $10 hourly.
What had previously seemed like a sensible course of action—doing the website himself to save money—now looked ludicrous. He had forfeited $1,200 in wages to build a website that was worth about $250. In other words, he had effectively flushed $950 down the toilet by DIYing his website.
So how did we proceed?
We worked out a plan in which he would pick up some part-time work and then use his earnings to pay experts who could quickly and skillfully accomplish the tasks necessary for getting his business off the ground. Then, in the hours he devoted to his business, he would focus on the business itself, which meant curating a world-class selection of spirits and getting to know his target customer.
So all of a sudden, he went from struggling to get everything done—and continually pushing his grand-opening date further into the future—to having the initial paperwork and Web design behind him, and planning a launch that would impress his customers with greater selection and quality than he'd initially thought possible.
This is the all-important difference between cheap and efficient: It was cheap for this entrepreneur to do everything himself, but it was efficient for him to pay someone else to turn out better, quicker results, while redirecting his own efforts toward his area of expertise.
How could he use his $50-an-hour time to add at least $50 of value to his business for every hour he worked?
The answer was to dedicate himself to building a top-notch inventory, so that his store would be a smash hit with his new clientele. Instead of effectively reducing his hourly rate to $10 or less by DIYing, he focused his energy toward the areas where he could add a huge amount of value, and thereby increase his hourly rate—probably many times over.
And just like that, he started to think like a successful entrepreneur. The most prosperous business owners are obsessed with their hourly rate, and increasing it all the time. You should be too. And by your hourly rate, I don't mean your annual salary. Let's say you bring in $100,000 a year. Not bad, right? Well, it makes a big difference whether you earned that $100,000 in four thousand hours—eighty hours a week, or about $25 an hour—or in two thousand hours, or forty hours a week and $50 an hour, instead.
Or maybe you're not ready to hire a full-time employee to reduce your own workload. That's fine; this same formula applies to bringing on part-time help, too.
First, though, you've got to put a dollar value on each hour of your time. For some people, like lawyers, it's easy, because they bill by the hour. In other cases, it makes sense to use the salary you were earning before becoming an entrepreneur; in that case, simply divide by the number of hours you worked in order to calculate your hourly rate. Or you can use a website like salary.com or glassdoor.com to estimate what you would be earning if you weren't running your own business, or what you could be earning if you found a way to take on some part-time or freelance work.
Now let's say you've figured out that an hour of your time is worth $30. And maybe you've been spending about six hours a week on bookkeeping; that means those six hours cost you $180, because that's what you could earn working six hours at a side job.
Now consider that you can easily find someone to do bookkeeping for you at $15 an hour. By hiring a part-time employee at that rate, you've suddenly cut your weekly bookkeeping costs in half and freed up six hours of your valuable time every week, in perpetuity. Not to mention the fact that once this new employee gets the hang of it, he'll probably do it in fewer than six hours (saving you still more money) because it's his specialty, and, for the same reason, he's likely to do a better job than you ever did.
Maybe you'll choose to use your newfound six hours to do some of that $30 work in a side job, in order to take home extra income. Or maybe you'll choose to invest all of that time into growing your business. Or maybe you'll do a mix of the two. Either way, you just saved a bunch of time and money by doing something you thought you couldn't afford. That's the Golden Formula.
But the Golden Formula is bigger than merely a means to increase your personal effective hourly rate. It's just one component of an underlying philosophy that drives the most powerful three-word business plan in the world. Keep reading.