Most remodelers seek to grow their businesses. Motivations for doing so vary. The main reason is to increase earned profit. Unfortunately, many grow but only end up with what I refer to as “psychic equity,” a currency you cannot deposit in the bank.
It’s easy to identify psychic-equity type of owners. When you ask them about how their businesses are doing, they refer to total revenue generated rather than their profits. Those who grow without profit typically don’t know how to properly price their work.
They also don’t know how to measure profit during the conduct of business. These shortcomings almost always lead to bigger problems as volume increases.
Put bluntly, risking business growth without well-deserved profits is a stupid thing to do. There’s hope, however. Most owners aren’t stupid, but they do stupid things due to ignorance and lack of experience.
To help you avoid growing without profits, I want to introduce the Peter Principle. The success of any business is predicated on the quality of its employees and their fit with the positions they hold. Now, ask yourself honestly: Are you the right employee to fill the position you put yourself in?
Advancing to a Point of Incompetence
According to Wikipedia, the Peter Principle is a phenomenon in which successful employees get promoted to a point where they reach a level of incompetence. Whether we are referring to your employees or you as the business manager, you need to be aware of the risks you may be taking by advancing them or yourself into positions for which you are not trained nor prepared to take on.
Here’s how this happens in real life. Your lead carpenter leaves, and you advance the most experienced person on your team into to the position and title of lead carpenter. Advancing employees this way—without the training and experience they need—puts your business (and that employee) at risk.
The business is at risk because the employee’s performance is likely to fall way short of the true job description of a real lead carpenter. At the same time, the business is likely overpaying the employee for a job the owner is falsely assuming he or she is capable of handling.
This blind assignment without checks in the system is an abdication of responsibility. It puts the employee at risk of their job and their job satisfaction when eventually both the business and the employee experience poor or even embarrassing results.
One example was shared with me by a remodeler whose newly promoted lead carpenter was put in charge of overseeing a large addition. That individual subsequently made a bunch of mistakes that necessitated replacing a new concrete foundation because it was 3 inches out of square. The employee and the business suffered. Due to this embarrassment the employee (who was very successful in his previous position as carpenter) left the business.
Are You the Right Manager?
Now that you are aware of the Peter Principle, I ask you consider how it might apply to you in your position as business manager. Are you on the path to growing your business but are not yet educated or experienced to oversee properly and successfully?
If you are planning to grow, as the manager have you already designed and put systems into place to get ready for and manage the growth you desire? Are your employees ready for the new job positions and related responsibilities that you expect of them?
I bet many of you have already grown your business too far and too fast for you and your employees’ abilities. The obvious gauge for measuring your performance should be your profitability. Is it where it needs to be? And can you even measure it day-to-day?
In addition to paying yourself a salary, is your business also earning a minimum 10 percent net profit as a return on investment? Or are you growing your business out of profitability and into extinction due to incompetence?
Biggest Reason Small Businesses Fail
The most common reason small businesses fail is because even if they are profitable, they don’t have the money they need when they need it. They suffer from cash flow problems and can’t pay bills on time. The second most common reason businesses fail is the owner grows the business faster than the systems required to manage that growth.
Again, these challenges don’t happen because the business owner is stupid; the owner suffers from the Peter Principle. The business owner is the one who advances employees, the business and even themselves before they are ready to be advanced. Reason No. 1 for small business failure is caused by reason No. 2, both caused by the owner.
Education Plus Experience
If you want to avoid the effects of the Peter Principle at your business, education and experience are the secrets to success. This article can serve as part of your education. I hope you see the decision is all yours.
You can either heed the warnings of the Peter Principle and avoid growing to a point of incompetence, or you can gain the knowledge and experience required for you and your team members to grow it successfully.
Remember, most remodelers are not stupid; they simply suffer from ignorance. Now that you are aware of the two most common reasons for failure, as well as the Peter Principle, you can no longer claim ignorance regarding the risk of advancing employees into new positions before they are ready.
I also want you to consider being purposeful about how much you grow your business. It’s better to not grow and remain profitable than it is to grow to unprofitable incompetence and to eventually fail or ‘Peter’ out. QR
Shawn McCadden is a speaker, business trainer, columnist and award-winning remodeler with more than 35 years of experience. He can be reached at shawnmccadden.com.