Your team’s sales have dropped, so you decide to pay your salespeople a commission on every invoice they close. The next month sales go up, and you think the problem is solved.
Three months later there is no money in your account. To close more invoices, your salespeople sold to anyone, including customers who paid with a cheque dated four months ahead and customers who still hadn’t settled their last bill. You did fix sales that way, but you wrecked your cash flow.
What is systems thinking?
Systems thinking means that before you solve a problem, you look at what your solution will do to the rest of your business. The commission worked on sales, but sales are tied to when you actually collect the money from customers, and that in turn is tied to whether you can pay salaries at the end of the month.
A while ago I was reading Peter Senge’s The Fifth Discipline, which says the first law of systems thinking is that today’s problems come from yesterday’s solutions. Most of us can remember a few solutions of our own that turned into problems a few months later.
Why do you see the effect of a fix so late?
If the commission had emptied your account that same week, you would never have chosen it. The trouble is that sales go up that same month and the money runs out three months later, and by then you have made ten other decisions as well.
Another of the book’s laws is that cause and effect are not closely related in time and space.
In business anatomy I explain why the pain in one part of a business usually comes from another part. Systems thinking goes one step further and says that pain may come from a decision you made yourself a few months ago.
What to ask before any fix
Before you put a solution into action, ask yourself two questions. First, which other parts of your business does this change affect, and second, when will you notice its effect on those parts?
Had you asked those two questions about the commission, you would have seen that a salesperson’s commission is paid out of money the customer has put into the company’s account. If you pay commission on a sale whose money has not reached the account yet, you are paying it out of your own pocket, and you have less cash every month. So commission should be paid on sales whose money has already reached your account.
After any change you make in your business, keep an eye for a few months not only on the number you wanted to improve but also on the numbers in the parts this change might affect. After introducing a commission, for example, watch both how much you are selling and how much money customers owe you.
If you have a problem right now that comes back a few months after every fix, its root is probably in another part of your business. In a free diagnostic session we will find out together where the problem is.