The Turnaround Ace

Why the Boss Needs to Pay Herself More


Editor's note: This is the ninth in a series of case studies about business turnarounds. The name and identifying details of the company used as the example have been changed. Problem: A Sweatshop of Her Own Making The owner of a $10 million garment factory in South Carolina has the kind of work ethic we like to see. This 60-year-old woman, the matriarch of a third-generation Vietnamese family, lives and breathes her business, working through most evenings and on weekends. She treats her workers, including relatives appointed to various management positions, much better than she treats herself, making every kind of fiscal sacrifice to meet payroll and keep the business solvent. While Mrs. Nguyen's husband and son are enjoying their weekends off playing golf, she's there on the factory floor doing quality control down to the last stitch and making sure orders are ready to be distributed to her retail customers on time. Still, the family-owned business—which produces affordable clothing for children, toddlers, and infants—was bleeding cash, and until we got there, it wasn't certain why. Mrs. Nguyen is covering all her costs, yet paying herself what is barely a living wage—just $25,000 a year. When I asked her why, she gave an answer that seemed sound on the surface. Since she owns the building and all the machines and materials outright, she reasons that it is better to pay herself based on the rent of the premises than to take it out of the business. She estimates the property's rent is about $140,000 a year, less $45,000 for property taxes and maintenance costs, making her take home just $120,000 (including the $25,000 salary). But a fair market rent would have been closer to $250,000. Based on her own formula for compensation, she was paying herself less than half what she should have been getting. In this way, the business never suffers, or so she assumes. If she has to tighten her belt, so be it. The business will continue to thrive, or at least survive, because what she isn't taking home as pay she's using to pay the bills. It seems honorable, but it is not only fiscally foolish, it masks a host of cash leaks. Pricing, costing, and purchasing processes are flawed, inventory is off, and the day-to-day management of finance is a mess. Receivables are coming in 30 days later than Mrs. Nguyen thought. Her self-sacrifice muddles the math and hides major flaws in her operations. It also sends the wrong message to everyone from her seamstresses to the family members who are living the good life off her sweat and self-sacrifice. That has to change. The Solution: Pay Yourself Like the Boss You don't have to be a martyr to own your business. Mrs. Nguyen is practicing a version of what some business experts call "sweat equity," but I call it working for nothing and being a fool. Sure, there may be tough times when you, and all of your workers, need to do more with less, but a self-imposed pay cut should be the rare exception, not the rule. Instead, business owners should pay themselves a fair market wage for a comparable position in their industry. If you can't afford to pay yourself the first few cents on every dollar your business earns, there's something seriously wrong with your business model. When we showed Mrs. Nguyen the real numbers, it didn't take much convincing to get her to give herself a raise. She was probably so tired and overworked she couldn't see what was really going on in her company. There's another, more symbolic reason why she should pay herself like the boss. Money talks. Everyone in that factory knows that she pays herself like a laborer, and that creates a perception that Mrs. Nguyen isn't really the leader—she's just another laborer. She forgot that in order to succeed you must act as if you are entitled to succeed. You must give the impression to your workers—and that includes family—that you are in charge. There is no need for Mrs. Nguyen to be so tight with herself. We went over her numbers and found her more than $600,000 in annual savings from cash leaks. It will take a few months to get the hemorrhaging under control, but we predict Mrs. Nguyen's business will see a 25% increase in profits in the next 18 months. Success isn't just hard work and being responsible. It's taking charge and being in charge. It's taking care of yourself first so that you can take care of business and be in a position to lead. You are the one taking all the risks, so you should also be reaping the rewards. So make sure you're paid first. Because if you can't afford to pay the most important person in your business, how can you expect to pay everyone else? —With Samantha Marshall
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Cloutier is the founder and CEO of American Management Services, a management firm that specializes in financial turnarounds and profit development for small and midsize businesses.

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