How to make “million dollar” decisions

And potentially reap great benefits because of it

Photo by Microsoft Edge on Unsplash

One thing I’ve learned in my 34 years of life, is the human need for “certainty”.

We never take action on something unless we’re pretty confident it’s going to happen, and generally speaking, this is probably a good thing.

Never makes sense to waste your time on something that’ll be a dud, but the hard part about this is ever reaching that point.

For most, they like to sit around and “think” about the issue until they can figure it out, rarely happens.

Very hard to formulate a plan “in your head”, you need to start putting thoughts on an “external surface”, here’s my favorite way to do that:

FP&A

Being a number nerd, I probably have a natural tendency to gravitate towards this, but I’ve found it can help any business owner make smarter decisions.

If you’re not familiar with the term, FP&A stands for:

“Financial Planning and Analysis”

Which can be better looked at as creating “projections”.

I’m not talking about the standard “vague” projections you see with most “fundraising” requests either, because instead, you need to get very granular.

If you’re interested, I wrote an article about this:

3 common fundraising mistakes (and how to avoid them)

But generally speaking, I’ve seen 5 main issues when it comes to doing FP&A “correctly”.

If you don’t have the right data in place, this tactic can lead you into making “bad” decisions, but the proper approach has opposite effects.

Now, you can be fairly certain your decision is going to be a good one, and I want to take a little time talking about “how” to do that.

Not going to be the most intense article I’ve ever written, as it’d take me 500 pages to cover everything, but I can cover 80% of it with 5 main “principles”.

When you insert these, there’s a great chance you’ll make the right decision, and it all starts with:

Principle #1 — Validation

One of the great “blind spots” for most business owners, is the desire for “innovation”.

We all like to create something “new”, or launch an idea that nobody’s done before, but that can have its drawbacks.

For starters, when you take this approach, it’s very hard to know if anybody actually “wants” it.

Don’t care how great the idea sounds to you, when nobody is willing to “pay” for it, then it’ll create a dud no matter what.

Pretty important part of the process, and the same thing can happen with “less innovative” ideas as well.

Sure, there might be a gazillion restaurants in your city, giving you certainty that they “work” — but you’re still not 100% certain people will come into your place either.

Maybe they don’t want “cajun” food, maybe the location sucks, etc….

There’s many reasons this can happen, but from my experience, you can always find some way to “validate” demand before taking action on it as well.

The actual “method” itself will depend on what you’re doing, but one example I always love to talk about is the “Jon Taffer” approach.

Back in the day, he was trying to launch a restaurant, but couldn’t get the funding to do this.

Stuck, he decided to come up with a “unique” idea, which was selling discounted gift cards for his new restaurant.

Not 100% sure how he did this, but I know it was something along the lines of:

“Buy $50 gift cards for $25”…

Doing that until he received enough funding to get everything up and running.

Creative idea in itself, and even though his “intentions” were a little different, you can still apply this logic to validate demand for your current decision.

If you’re looking to build a new “truck stop”, talk to a few operators in your city and see if they’ll put a deposit down for something.

Maybe you offer them 10 “washes”, for the price of 5, I don’t know — but there’s always a way to do this.

When you can validate this demand, everything gets a lot easier, and the caveat with the approaches I’ve been mentioning is how you don’t want to get the “wrong” validation either.

Said differently, if you plan on selling a service for $10K, but then “validate” that by offering it for $1K to the first 3 customers — you’re not 100% sure people will ever pay “full price”.

That’s another consideration, but generally speaking, you can always get a good feel for this.

If somebody buys a discounted gift card for your restaurant, there’s a good chance they’ll come back for full price, if somebody only pays 10% for your service — you’re not sure if anybody will pay the full amount.

Might need to take a more “direct” approach with the latter scenario, validating demand via “full price” offerings, but you get the hint.

There’s always ways to validate demand, most are just too lazy to try, even though it’s a very important part of the process.

When you have this in place, your internal “certainty” goes up, being able to make much smarter decisions because of it.

That’s why I always recommend this, and then we have:

Principle #2 — Detailed Cost Accounting

I used to work as a Commercial Credit Analyst for a large bank, and it always blew my mind with how many people overlooked the importance of detailed cost accounting.

We’d have new “restaurateurs” reach out, trying to build their first bar, sending projections that almost made me angry.

Not necessarily because it wasted my time either, but because they were crazy enough to make million dollar decisions on “low quality” data at best.

Many different ways this happens, but at the end of the day, you need to get extremely granular and figure out every cost that’ll go into your decision.

Some of these are easy, as you’ve likely got a bid seeing how much it’ll cost to build your store, but some of them can get a little complex.

For example, if you are looking to start a restaurant, you’d need to contact suppliers and see how much everything will cost.

From there, you’d need to figure out the “quantity” of ingredients that go into your meals, then see how much it’ll cost to make everything.

After that, you need to figure out other costs (i.e. electricity, water, etc) and then see what you’ll have to charge, in order to make a profit.

Even that can get fairly granular, as you’ll have to account for different days of the week having less demand, along with different months being better than others — but all this is important.

If you can see “realistic” numbers, and understand how it’ll create a desired benefit, it’s much easier to make a smarter decision.

On top of that, when you start crunching these numbers, it’ll allow you to make better “micro” decisions as well.

• What to charge
• If any specials need to take place (that way you can increase demand on Tuesdays)
• Etc…

All this pops up when you begin seeing everything this way, and that doesn’t happen until you do the “dirty work” of detailed cost accounting.

Certainly not easiest (or funnest) thing to do, but it’s extremely important, and then we have:

Principle #3 — Holistic analysis

One of the things I’ve always “loved” about Tax Accountants, is their narrow view of everything.

This is something that became obvious to me during my Banker days, where I had a lot of clients in the “heavy equipment” space, and they’d always want to buy new equipment every year just to save money on tax.

In some situations, it was a great idea, but a lot of times — it did them more harm than good.

When you’re paying $100K/year for something you’re not going to use, just to save $30K in tax, the “math” doesn’t add up.

Sure, it feels good to not pay “the man”, but it doesn’t feel good to spend cash on stupid stuff that’s never going to help your business.

Seeing this, I think it’s extremely important to understand Accounting when doing FP&A, primarily because that’s what will allow you to see everything in totality.

Fairly hard topic to explain as well, because I’d have to teach 6 years of Accounting education in one article, but always try to keep this in mind.

If you’re projecting a large revenue increase, will you need more employees?

If so, make sure you account for their salary in future months, along with the additional payroll tax that goes with it.

All things that seem like “common sense” when you read about it, but as somebody who’s reviewed a lot of projections over the years, I can assure you — common sense is not common practice here.

Think the majority of that comes from simply not understanding “how” to view everything in totality, but it’s also extremely important, as one “minor” decision can impact a lot of different things.

Anyway, that’s it for this principle, which then takes us to:

Principle #4 — Risk Analysis

One weird “pattern” I’ve noticed with a lot of business owners, especially those who are trying to obtain something they really want, is the blindspot of just not analyzing risks.

This is really prevalent when it comes to “fundraising” requests, where they’ll try to gloss over any risks, or just avoid them altogether — probably one of the dumbest things you can do with FP&A.

Don’t care what industry you’re in, there’s always going to be some risks, so it’s important to “seek” them out and then plan for what happens if they become a reality.

For example, if your restaurant starts on fire then what will happen?

Oh, you’ll be covered by insurance?

Nice, are those insurance premiums covered in your financial projections?

If not, then you need to go back and insert them, as everything has to be in alignment.

That’s probably the “main” reason why I like doing a risk analysis, primarily because it forces me to think about things I wouldn’t have thought about otherwise.

Seeing this, I go through and do this now, trying to think about any risk that’s “reasonable”.

Wouldn’t necessarily go to the far extremes, saying:

“Well, tigers could escape from the zoo and tear up my restaurant”…

But I do like to be pragmatic and think about anything that could happen in the near future.

• Recessions
• New competition
• Etc…

A lot to unpack, so I do that now, and then move onto:

Principle #5 — Sensitivity Analysis

With this principle, it’ll vary by situation.

If you only have “one client”, then a “20% revenue decline” might not be the best move, as it’s all or nothing.

On the other hand, if you have a restaurant, then a 20% revenue decline assumption might be the right move.

Very likely that could happen, so I go through here and try to create a few different scenarios.

If my revenue dropped 20%, what would happen?

Would I lose money?

If so, how would I cover the cash shortfall?

Etc…

It’s another great way to force your brain into thinking of “risk mitigation” strategies.

For a lot of my clients, whenever we do see the possibility of having cash shortfalls in some months, we try to get a line of credit from the bank.

Goal is to never use it, but if needed, then that “security net” is very helpful.

Again, something that’s tough to fully explain, but the main point I’m trying to make is looking at everything in totality.

Most put minimal effort into this, overlooking things, and making bad decisions because of it.

On the other hand, when you go through and do the “deep work”, all that changes — leading yourself on a helpful path after that.

The recap

Long story short, most people get stuck in the decision-making process, or simply make the wrong decision — primarily because they don’t put numbers in place and see how it’ll impact their operations as a whole.

When you do this correctly, it’s very hard to make the wrong decision, as you can almost “predict” what’s about to happen.

Nothing in life is fully guaranteed, crazy things can happen, but doing this exercise will get you close to making a “bulletproof” decision — potentially reaping great rewards because of it.

Again, it’s a complex process that’s impossible to explain in one article, but these 5 principles will help you be better than most — so hope that helps.

-Sean