Parkinson's Law and Profit First
When we teach the men in our online mastermind groups about the purpose of financial success, we get mixed reactions. While I would never point fingers or put anyone down, it’s good to remember we grow up in a culture known for celebrating greed and excess. You have to expect that it influences all of us to some extent.
So entering a culture like Iron Sharpens Iron, where we encourage men to grow their business for very different reasons, there’s a learning curve. It’s kind of like how we teach them to pursue healthy marriages with their wives; you can’t take cues from society. It’s simply a very different way of living, and it doesn’t always make sense to newcomers.
Mike Michalowicz’s book, Profit First, has been on our minds all this month. Our mastermind groups study it, and we’re encouraging more and more men to get serious about the process is teaches. In re-reading the book, I came across a little bit of history that will help you understand the framework of our thinking when it comes to company profit.
Back before even I was around, a philosopher by the name of Northcote Parkinson observed that demand for something expands to match its supply. Think here of something you see everywhere, like the iPhone. As Apple patented and manufactured more and more of them, the demand grew to what it is today.
Most people react to an abundance of money in a parallel sense. If your business suddenly takes off and revenue growth explodes, one of the first tests you’ll have to pass is self-control. It’s easy to assume you’ve struck gold, and life will be on Easy Street from here on out. As a Christian life coach, I hope you’ll hear me: wrong answer.
But Parkinson observed something else in his law - scarcity of something triggers frugality and creativity, two of the essential building blocks of a successful enterprise.
Author Ron Carucci, in his book Rising to Power, observed high percentages of failure among executives who get beyond startup mode and into scale. Part of the reason for their failure is that leaders and companies lose these two ingredients. Massive business growth will automatically trigger new additional spending, and more reckless leaders usually put that spending on steroids. Along with the frugality goes creativity, to be replaced by rigid policies, enforced by a private company that behaves more like a state bureaucracy.
OBSERVING PARKINSON IN YOUR BUSINESS
It’s one thing to have business coaches tell you to remain frugal and preserve the creativity of your startup phase, and another thing to execute. To borrow a comment from Dallas Willard, “It really is ‘that simple’ … but then you have to do it.”
I’ll take the occasion to tell you, however, that the most successful and high-impact entrepreneurs I know are the people who do exactly that - they continue to behave as though they’re just getting started. “Every day is Day One,” as Amazon is fond of saying.
Let’s take some simple equations here, and say that your business is grossing $1 million per year. Well, if you’re following Profit First, you should be growing your profit account first. But after that, plus your operating expenses and saving for taxes, let’s say you can afford to pay yourself a very comfortable $100,000 salary.
Now even though the temptation’s there, if your revenue was to suddenly double to $2 million per year … is it absolutely necessary for your salary to double? I’m not saying you shouldn’t treat yourself and your family if you do well. I firmly agree with the Bible when it says, “The worker deserves his wages.”
However, a surge in demand for what you provide doesn’t necessarily mean you were personally responsible for it. It could be that your marketing team suddenly hit pay dirt with their messaging, or your production team improved its output. One thing’s for sure, if you’re doubling revenue at that level, you’re not doing it alone. You need a lot of things to go right, which requires a lot of the right people doing them.
In cases like these, I tend to think the first places to put extra money are profit, expenses and taxes. You should also put some money toward incentivizing your team to keep up the good work. If you rely on powerful suppliers and vendors who grease the skids for production, you should thank them financially. If you’re a fan of the Spider-Man franchise, you’ll remember that “with great privilege comes great responsibility.”
Maybe you could do with a slight uptick in personal compensation. But that has to come last, after you’ve fed and watered the entire team and fueled the machine that’s supporting you. If you have twice the applause from the market today that you had yesterday, it’s a good bet it’ll spread even more - and your workload, expenses and responsibilities will grow with it.
TITHE 90, LIVE ON TEN
We love this concept, and an entrepreneur who purposely avoids raising his own compensation beyond what’s necessary can go to some amazing places in the future. Instead of looking fruitlessly to luxury goods, lavish vacations or some far darker things to excite your weary soul, you can become extravagant in generosity.
When you observe Parkinson’s Law in your business, it leaves you some room to be very generous to all kinds of people. One young man in our masterminds online told me his father-in-law used to take everyone to dinner in a skyscraper revolving restaurant at Christmas. Family, staff and friends were all invited, and the business paid the bill. Now it’s his turn - and he can’t wait.
Another man I know who provides business coaching services was very excited when he followed Profit First and realized the business could afford a team celebration. He once worked for a man who would take each employee and their spouse in a stretch limousine to a ritzy restaurant in the Upper West Side of New York City. He decided to do the same thing.
I can’t tell you personally how much joy it’s brought to my life to do things like this and not even flinch. You don’t worry about credit card debt, or whether you’re dipping into your tax money. It’s all preset. You just follow the rules, and like clockwork, all the bills get paid and you get to bring joy to everyone around you. Everyone’s happy, everyone feels important and rewarded … and you get to shed tears for the privilege of being in the position to pay.