When I consult with small business owners, there is one question I always ask: Are you working in the business or on the business?
At the beginning of the typical entrepreneurial cycle, the entrepreneur is a jack of all trades—bookkeeper, computer technician, customer service representative. He does everything and anything to make the start-up viable. At this stage, he has to work in the business.
As the start-up gains traction, the entrepreneur should begin to transition from working in to working on the business. Unfortunately, many entrepreneurs never make it over that hurdle. Even after the business is past the start-up stage, they are stuck being the bookkeeper, computer technician, and customer service representative.
Time-is-Money Rate
Years ago, I read an article on Small Business Trends entitled “Do You Know Your Time-is-Money Rate?” that provides a great method for quickly assessing whether the entrepreneur should be doing a particular task. The author’s primary goal is to remind entrepreneurs to weigh the cost-benefit relationship for everything: taxi rides, catered lunches, new software, etc.
I would like to extend this a bit farther. I think the real value is getting the business owner to focus on high value tasks.
In the article, you’re told to take your annual compensation (or target) and divide it by 1,000 to arrive at a minimum hourly rate for your services that accounts for business expenses and non-productive time. Most people can’t produce for 40 hours per week every week.
Do or Delegate?
But, the most important use of the method is for a business owner to determine exactly which tasks are appropriate for her attention and expertise, and which tasks should be delegated.
Take information technology services. Say you can buy IT services at $75.00 per hour. Based on the formula, if the owner’s target salary is at or above $75,000 per year, then she shouldn’t be fixing the company’s computers ($75,000 ÷ 1000 = $75.00).
But this simple calculation doesn’t account for the experience and expertise gap. Assuming our business owner isn’t an IT wiz herself, it might take her six to eight hours to complete the same task an IT professional could do in four. Moreover, her lack of experience could mean the work isn’t done correctly the first time, which will require more work in the future to correct.
That’s wasted time, yes, but, as they say, “time is money.” In this instance, the cost to the business is higher if the owner does work personally ($75 x 6 = $450.00) than if an outside vendor were to do it ($75 x 4 = $300.00), despite the hourly rates being the same.
Moreover, there’s also an opportunity cost. The owner’s time is limited and any hours allocated to fixing the computers is time taken away from other activities. The owner’s time is better spent doing tasks that only she can do (e.g. business development, referral source development, etc.).
This method also shows why the owner has to be focused on high value tasks. Above we assumed a target salary of $75,000, but the same calculation works for any target salary. If the owner’s target annual salary is $100,000, then nothing the owner does (at work) should be valued at less than $100.00 per hour. Otherwise, she’s effectively reducing her salary.
Once a business has moved beyond “start up,” no owner of a viable business should do any accounting, bookkeeping, legal or IT work, answer telephones, make copies, or any other tasks that can be bought at a lower effective hourly rate.
So, what is your time worth?
Helping You Make Smarter Legal Decisions
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