Analyzing Profit Margins FAQs Part 1: Perceptions

Can our personal beliefs about money influence our company’s success?

How do our perceptions impact business decisions?

Why is the “Fake It Till You Make It” mindset dangerous?

I answer these questions—and much more—in my Live Facebook Video. Check out the recorded video here, or read the transcript below (including bonus content!)

 

Facebook Live #3

Topic: Analyzing Profit Margins

Recorded: Thursday, 08/02/18 10:30 a.m. – 11:00 a.m. Pacific Standard Time

 

Introduction

Today, I’m sharing a topic that many of my clients don’t like to talk about, even though it is an extremely important part of running a business. It’s actually something that I avoided for a while, because I personally don’t enjoy some aspects of it.

This topic is business finance, and specifically Profit Margins.

I have a background in healthcare management and have worked with healthcare organization doing financial analysis.

My interest in finance is to analyze the numbers in order to understand and fix deeper issues; but sometimes it is difficult to apply the results as a business owner myself. There are many challenges to running a business, and I commiserate with you if you’re a business owner or if you are responsible for the finances. It can be very difficult to overcome the barriers that keep you from becoming profitable.

In my experience, even the most intelligent, knowledgeable, and hard-working business owners can get confused about profitability. This surprised me. For some reason, I expected that if an owner has a lot of training and is an expert in their field, they would automatically know how to run a business: how to make money and make sure they don’t spending more than they bring in.

But, as I’ve discovered from conversations with highly trained, educated, well-meaning business owners, this is not always the case.

If you’re watching this and you…

  • understand finance
  • know how a Profit and Loss statement works
  • are very comfortable with the numbers in your business

…then that’s great. I applaud you. You can keep reading (or watch the video) to gain additional insight.

But if you are the other half of people who feel uncomfortable with financial sheets, reports, and the concept of handling money, this topic is for you. Talking about this may even make you feel nervous or even ashamed.

If this sounds familiar, then what I’ll be sharing will be especially relevant.

Wealth, Stability, and Guilt

I believe it’s impossible to separate our feelings about money (which can include worry, shame, and fear) from the process of generating a profit.

As a business owner myself, it can be difficult to find a balance between wanting stability, building wealth, and grappling with past experiences where I didn’t have enough money.

This topic (what I call Transaction Avoidance Syndrome) comes up so often in that I decided to start talking more about it. Read an in-depth article about it here.

Real-Life Story

One of my clients is a physician who has owned her practice for over 8 years. She struggles to make a profit, even after all these years. She feels stuck. She is accomplished and well known, but she feels trapped and unable to share her feeling of overwhelm and failure. Her situation makes her feels ashamed, because she doesn’t have much to show for all of her hard work.

This situation is not unusual, yet we don’t like to talk about financial failure.

We prefer to talk about success, and “crushing it,” “reach your goals,” “push the boundaries,” and “living the good life.” This focus on outward success comes from a cultural expectation that may be unhealthy and out of balance. We may emphasize outward action yet cover up an underlying discomfort with our inability to generate a healthy profit. As a result, we could decide to get in further debt and overextend our resources.

A lot of the clients I work with have the opposite problem. Rather than focusing on wealth-building and aggressively pursuing fame and fortune, they are extremely concerned about

  • building strong relationships with their customers,
  • showing that they care, and
  • establishing trust.

They stay far away from an over-consumer mindset and anything that would demonstrate greed.

Unfortunately, this type of Yin imbalance—one that emphasizes generosity and receptivity to the exclusion of acquiring profit—can go too far. Owners with a Yin imbalance may create systems that are inefficient; they may not generate enough to pay their bills, which can put the business at risk.

Shame and Failure

“Shame” is a word that comes up quite frequently in my coaching discussions with medical practitioners and other business owners.

I have written about several concepts related to this:

These articles delve into the emotional aspects of how we make business decisions. Our emotions play a huge part in why we make decisions, and decisions are ultimately the driving force behind whether we achieve our goals or not.


That was an introduction to my philosophy about money, boundaries, and profit.

Next, I’ll share some of the barriers that can keep business owners from succeeding.

Barriers to Financial Success

I mentioned a client who felt stuck. She was afraid to look at her finances but terrified of her business failing.

She told me that the main reason she hired me was because she wanted help uncovering some topics that are very difficult to face alone.

I believe there are two main reasons why businesses fail:

  • a lack of insight and self-awareness, and
  • a lack of business knowledge.

Biased Core Beliefs

Sometimes, these core beliefs are really deep inside us. We don’t always want to talk about the reasons why we do thing. But because decision-making in business ownership has a lot to do with your beliefs and philosophy, we need to get to those root ideas in order to understand why the outward decisions are happening.

Through my sessions with this practitioner, she realized that she had a lot of deep-seated anxiety from past experiences where she did not have enough. She experienced a lot of loss early in life. So she was concerned about making enough money to keep her family safe and secure.

Yet inadvertently, her business choices caused the opposite to happen: she was giving services away for free. She felt nervous charging appropriately for services, partly because of the feeling of financial insecurity in the past.

These beliefs were manifesting in the behaviors and internal processes of her practice. Although it was difficult to see at first, I helped her to uncover the root of this: her choices to avoid making decisions about money.

Lack of Business Knowledge

Another client mentioned that she never learned business in medical school. The finance, sales, and marketing aspects weren’t high on the priority list; it was more important to get educated and enter the “working world.” If you are a practitioner who joined an established practice, then it had the policies and procedures already set up; but once you start your own business, it can be very difficult to know how to establish rules, what problems to watch out for, and which indicators show that your company is doing well or not doing well.

Many people decide to use my services because of my Devil’s Advocate perspective, and my ability to cut through emotions and find the root causes.

Fear, Money, and Cognitive Bias

Fear can often drive our decisions. As I mentioned, Transaction Avoidance Syndrome is a subconscious avoidance of a topic that can be very difficult to talk about. The inability to succeed financially can lead to a feeling of shame.

Our culture encourages and rewards people who “fake it till you make it,” which is a façade of outward success and independence, when in reality we may financially struggling. This contrast—between a fake outward appearance, and the actual numbers—can lead to cognitive bias where we think everything is fine, even though it’s not true.

Read more: What Happens When We Avoid Pain in Decision-Making?

pain, pain avoidance, avoid, avoiding, decisions, decision-making, management, risk management

 

The Fear Response

We respond to fear with one of 4 responses:

  • Fight (aggressive and hostile)
    • We engage and resist the idea of financial failure.
    • This can lead to annoyance, resentment, and anger about the topic
  • Flight (deny and avoid)
    • We could avoid the topic by “running away,” and refuse to talk about it
    • Can also lead to self-sabotage (a common theme for some of my clients)
  • Freeze (rationalize and distract)
    • Indecision about important issues
    • Pretending that everything is fine when it’s not

The Freeze response is the most dangerous, because the problem continues to happen, yet you’re not adjusting or making changes. The “Fake It Till You Make It” mindset is in this category; it’s the pretense of control while remaining in an untenable position.

The most healthy response is:

  • Face (assert and mitigate)
    • This happens when you acknowledge the issues that cause you to feel afraid, and then make decisions with authority.
    • You are then able to see the situation from a logical, problem-solving point of view

fear, fear response, fight, flight, freeze, face, fight or flight

 

When it comes to finances, many of us tend to get angry (Fight), avoid (Flight) or shut down (Freeze). These are not great responses.

When you Face the problem, on the other hand, by understanding what is going on in your business and how you can make changes, there is a much better chance that you’ll overcome those barriers and be successful.

Finances and the Strategic Growth Sphere

The topic of money can be very emotion-filled.

Our choices about money are based on our core beliefs and philosophy (which can be subconscious). These beliefs are often rooted in childhood and adolescence. The way your parents talked about and treated money can have a profound effect on how you treat it.

Additionally, our beliefs and philosophy impact our decisions.

Strategic risk has to do with a company achieving its long-term goals and objectives. All money-based decisions are important, because finances are a critical aspect of keeping a company growing.

I use a Strategic Growth Sphere, which is based on the Balanced Scorecard.

If you’ve never heard of it, the Balanced Scorecard is a classic strategy tool that is used to show the 4 aspects of a business:

  • Processes (Internal Workflow)
  • People (Customers and Employees)
  • Profit (Finances)
  • Proficiency (Learning and Development)

To achieve success, you need to grow the sphere in all 4 quadrants at the same rate.

(The original concept of a Balanced Ball Diagram was created by Mark Vincent and Matthew Parker).

The Strategic Growth Sphere
Enter a caption

If you don’t increase profit along with people, processes, and proficiency, then you’ll have lopsided and unhealthy growth.

The Financial quadrant is an essential area in making sure that your company can continue to operate. If you run out of cash, you will not be able to sustain the company for much longer.

And if you’re not aware of how much cash you have left, that can lead to making lot of bad decisions, or indecision (feeling stuck). This can then cause you to feel embarrassed, ashamed, overdrawing on your bank account, missing payments…. a downward spiral.

Why We Should Discuss Uncomfortable Topics

Our biases and blind spots can lead to poor choices.

I like to talk about this topic partly because of my personality type. As someone with a Myers-Briggs personality of INTP, I can be somewhat controversial and confrontational. If you know me personally, you are aware that I like to debate, experience situations first-hand, and “destroy things” to truly understand how they work.

In the past, I tried to get along with everyone and not ruffle any feathers. I avoided topics that are difficult to talk about in an effort to bring harmony.

But that’s not who I am. Although I have tempered the way I present difficult topics and how I present them, the underlying truth still needs to be at the forefront of the discussion.

The Healing Element of Destruction

I think it is important to talk about things that are controversial, because they need to be discussed.

For business owners, the topic of finance may not be fun, but it is so important to make sure your company healthy.

It’s similar to the role of a surgeon, who must cut healthy tissue in order to heal part of the body that is unhealthy. Surgery is not fun, or pleasant; it can be painful, and there is always the potential for some damage. But surgery can be the fastest and most effective way to identify the cause of negative symptoms. It is often the only way to heal the body of a serious condition.

Similarly, fixing business problems often involves discomfort and pain.

This can be due to mental barriers we set up. We all have

  • biases—a perception that is one-sided and unrealistic; and
  • blind spots—an unawareness of certain key facts that causes us to overlook things.

These weaknesses in our perception can lead to making poor choices due to

  • financial insecurity (anxiety about running out of money, timid decision-making, self-doubt)
  • transaction avoidance (not wanting to charge customers a fair rate, not chasing unpaid bills, feeling uncomfortable with the sales process (selling your services), and with the topic of money in general
  • business indecision (feeling frozen about spending or saving, feeling overconfident or underconfident, deciding whether to make radical changes)
  • anger turned
    • outward (blaming, shaming, or rejecting others) or
    • inward (feeling ashamed, anxious, and depressed)

We don’t want these negative effects to happen. it would be better to lead your business with confidence and certainty that you’re making the right decisions financially.

This can start by understanding your needs as a business owner, and what your company needs to stay profitable.

 

This topic will continue with part 2: Profitability.


I invite you to join me at an upcoming virtual event!

If you feel frustrated with your company’s profit margins and need to discuss how to make changes, schedule a free 30-minute consult with me today.

Grace LaConte is a Strategic Risk Expert who helps service business owners find and fix organizational vulnerabilities. Using her experience as a Risk Officer in the healthcare and technology fields, Grace shares a refreshingly honest approach to uncovering hidden risks and opportunities. Learn more at http://laconteconsulting.com, or connect with her on Twitter @lacontestrategy.

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