The Flywheel and Building Your Business

imageWhen I started my first company, my mantra was “more with less”. Especially when it came to people. I had been blessed with the experience of watching a couple of companies fail largely due to too much overhead i.e. too many people. I use the term “blessed” loosely since I experienced those failures first hand and that is never a pleasant experience. However, it did impress upon me the importance of managing cash flow, hiring at the right time and carefully watching the level of overhead in my businesses. It also made me slightly paranoid about having too many people on board.

Many small business owners view employees as a necessary evil. You need people to do the work but people can be complex from a management perspective. Payroll happens regardless of available revenue or cash flow. Having employees creates risk – financially, emotionally and legally. I can completely relate to those fears. I was recently in a conversation with a seasoned business owner who described his expansion and contraction experiences with me. At one time, he had 13 employees and had deliberately downsized his operation when he realized that, at that size, he was working harder for greater revenue but less profit. He was now much happier without the people headaches and was making more money.

That makes complete sense, doesn’t it? If you can generate about the same amount of revenue without adding people, why increase your costs? The logic will work, to a point. Contrast that with a physician who has her own practice. She can only see so many patients in a day, week, month. Her income is not only limited by her time, it is also limited by payers who dictate how much she can charge. She can only grow her income by adding ancillary services (like medication dispensing) and/or adding people who help her leverage her time. Enter the “flywheel”.

The notion of the flywheel as it relates to business was introduced to me a few years ago by a friend who was constructively criticizing me for not leveraging myself more effectively. Wikipedia says that “a flywheel is a rotating mechanical device that is used to store rotational energy and then used to deliver energy at rates beyond the ability of a continuous energy source.” In other words, you apply initial energy and the flywheel leverages that energy to keep spinning even in the moments that you stop applying energy. You see, my reluctance to hire was also limiting our growth – I just didn’t recognize it. As the business reached a certain size, it reached the limit of my span of control – I became the bottleneck. Like the physician in her practice, I could only do so much in a 24 hour period. If I stopped or maxed out, I had no leverage, the flywheel wasn’t spinning.

For me, the flywheel metaphor was very powerful. I realized that we were not going to grow without more people – more leverage. I also realized that the business owner I described earlier hadn’t achieved the flywheel effect with his 13 employees – proper leverage (hiring) would have increased revenue and profit with less of his time. Of course, it isn’t always linear (or rotational :)) – not all investments pay off as expected and not all hires provide the leverage you wanted. However, you are limited – time, knowledge, focus, creativity – you can only apply so much of yourself before you are tapped out.

This is easy to see when the company is large with many departments and functions plus the revenue to match.  It is much more difficult to see when you’ve got four people in a small office and each is wearing five hats and you are wondering how you are going to cover your next payroll. You can’t imagine how you could afford that one extra person let alone the additional four you’ll need to serve that new account you’re trying to close.  No, adding people is not an easy decision but it is the difference between treading water/maintaining and growing.  You just have to decide.

How will you get that flywheel spinning?

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