The business owner who wore the wrong hat

Business owners (in particular those who work in their businesses) wear many different hats during their business journey. They can wear every hat at some point every day. That said, there is always a ‘most appropriate’ hat that should drive their behaviour and decisions in any given situation. It is easier said than done and every business owner gets it wrong from time to time.

Before this gets too confusing I will show the different hats so you start to understand what I am talking about. The jumbled mess of circles below represent the different hats.

Now for some examples to describe how the different hats can affect the thinking and behaviour of a business owner:

Employee Hat

A business owner who works in their business and derives ‘active’ income from the business needs to feed their family and pay for their life. This is the most basic and necessary hat, but can also cause the business owner the most short and long term issues.

Potential Issues

1. Treating the business as a job rather than an investment

It is rare that a new business owner will allow enough in their start up budget to cover unforeseen cash flow shortages and unforeseen costs. If they planned for the business to pay them a consistent wage (and don’t have a personal buffer) they will often ‘pull’ funds from the business when it can’t afford to pay them. A more exaggerated version of this is when the business owner borrows money in the business to pay their wages or to prematurely buy non-essential items.

2. Business owners trying to ‘do’ too much in their business

Every business owner will have an area or areas that that should focus on to add ‘MOST VALUE’ in their business. What often happens though is that they try and do too much, either because they like to feel in control or they are trying to ‘save money’. This causes a double edged sword for the business as the business gets less of their strengths and more of their weaknesses.

Leader Hat

Business owners often act as the leader in their business or at least one of the leaders. Being a leader in a private business is particularly hard.

Potential Issues

1. Being friends with staff

The owner is often friends with their staff and takes their business very personally. They have the dubious task of trying to ensure performance is achieved and stay friendly with their staff at the same time. This can create a dilemma between the business needs and their personal needs.

2. Working less than you should

There is often a misconception that owning your own business means you can work less because you are the owner. The issue with this is that you are the example the staff will follow. The behaviour of the owner contributes significantly to the culture and attitude of the staff. It is what they do when you are not there that matters. Their behaviour in your absence will be driven by their level of respect for the owner.

Director Hat

Business owners who are also directors of the company face many challenges and potential conflicts between their legal obligations as a director, being an employee, shareholder and lender. Directors are often asked to guarantee the payments of the business to creditors. They may also have loaned money to the business. On top of this they are personally liable for superannuation and PAYG tax if the company can’t cover it. These director responsibilities and others put their loan and personal assets at risk if the business isn’t successful.

Potential Issues

1. Director obligations versus keeping the business going

I don’t think there are many businesses that always fulfil the definition of solvency: Being able to pay all debts as and when they fall due. In reality all business owners make deals with creditors, lenders and the ATO as cash flow shortages occur. If a business owner tries to hang on too long to save the business they will put themselves at risk personally if they are a director.

Partner Hat

Business partnerships can offer significant benefits but also be the cause of conflict and frustration for business owners.

Potential Issues

1. When the honeymoon is over focus on the business not the partners

Like a marriage, partnerships and new businesses start off enjoying a honeymoon period. At the start excitement is high and the realities of the known and unknown are not yet clear. As risks or opportunities increase, people (the partners) tend to start thinking about what they are contributing versus their partner/s. If this is not managed the business can suffer when the partners lose sight of what the business needs from them and instead focus on what they are getting; or not.

2. Avoiding the tough conversations and decisions

Partners often become friends and find it hard to have the tough conversations and make the tough decisions. The business can suffer as a result. Being in a partnership is not easy and the partners must be comfortable being straight and honest with each other to ensure the business thrives.

Lender Hat

Business owners often lend money to their businesses. This puts their personal wealth at risk and can cause friction in partnerships and at home during challenging times.

Potential Issues

1. The business can’t afford to pay agreed loan interest and/or repayments

This can create personal problems for the business owner. Business owner loans need to be set up properly to protect the business owner, both financially and in their relationships. Further, the business owner needs to accept (and explain to their spouse) that the business may not always be able to pay interest and repayments on time so that a realistic expectation is created.

Shareholder Hat

The most important hat for the business owner to think and act from is the shareholder hat! See the diagram below

What does the business need?

This is the number one question that all business owners should ask during the journey. Further the business owner should ask ‘what does the business need from me?’ to gain clarity around their personal priorities and achieve business success.

Whilst all the other hats have their place from time to time, it is the shareholder hat that is most important. If the business gets what it needs (including from the owner/s) all of the other hats will be satisfied as a result.