Are You Making a Profit, or Working for Free?

[Drago Stanimirovic]

There’s a trap I fall into all the time. And I suspect almost everybody who runs a business does.

We do things for free. Not because somebody asks us to. Most of the time, we don’t even notice we’re doing it. There’s a problem at 5:30, so you stay until 7. Some paperwork needs finishing, so you finish it at home. A client needs something that isn’t really your job, but you know how to do it, so you do it. The website needs changing. You can change it. A contractor doesn’t show. You deal with it. Someone has to make the phone calls, check the numbers, chase the documents, meet somebody at the property or answer an email on Sunday.

It’s your business. Your goal is your priority. So you do whatever needs to be done to finish the job. That’s admirable. It’s also terrible accounting. An employee works eight hours and then works another four. Somewhere, somebody notices those extra four hours.

The owner works eight hours, realizes the job isn’t finished and works another four. Cost to the business? Apparently zero.

Human beings have this wonderful ability to create more capacity simply by working longer. And when it’s our own business, we can keep doing it for an astonishingly long time.

Real estate makes this particularly easy. Suppose your properties generate $2,000 a month after all the expenses you normally count. Sounds good. But you’re also handling tenant calls. Meeting contractors. Checking invoices. Dealing with repairs. Showing units. Doing paperwork. Chasing people. Solving whatever strange little problem appeared this week.

Maybe it’s only 15 hours a month. You don’t send yourself an invoice, so the spreadsheet still says: Profit: $2,000.

Now disappear for a month. Take a vacation. Switch off the phone. Somebody still has to do those things. Suddenly there’s a property manager. Maybe a handyman. Maybe a bookkeeper. Somebody has to handle leasing. Somebody has to answer the phone when the tenant calls.

Suppose replacing everything you were quietly doing costs $1,200. Was the property really making $2,000? Or was it making $800 and giving you a $1,200-a-month job? That’s the uncomfortable part.

We tend to treat our own time as infinitely expandable because, technically, it is. Need another hour? Work another hour. Need Saturday? There goes Saturday. Need a skill you don’t have? Learn it. And we can justify almost all of this because we’re working toward our own goal. I certainly do.

But free labor is still labor. And I don’t mean that in the usual “my time is worth $300 an hour” sense. I’ve never completely bought that argument. If nobody is actually standing outside your door offering you $300 for the next available hour of your life, your time doesn’t automatically have a $300 opportunity cost.

There’s a much simpler question. If you stopped doing this task, what would the business have to pay somebody else to do it? That’s not an imaginary number. That’s a real expense that happens to be hidden because you’re absorbing it yourself.

And perhaps there’s nothing wrong with that, especially when you’re starting. Your willingness to work longer, learn things, solve problems and do jobs other people would charge for may be one of the few advantages you have. You may not have cheap capital, employees or a huge network. But you have yourself. Use it.

The danger comes later, when the business grows and you keep calculating its profitability as though your own labor still costs nothing. You can end up with a wonderfully profitable operation that works beautifully as long as the owner works nights, answers emails on Sundays, learns three additional professions and never goes anywhere.

So here’s the test I’ve started thinking about. Imagine you disappear for three months. Nothing dramatic. You’re sitting somewhere nice with your phone switched off. What would have to be hired out? Who would have to replace you? What would all of that cost? And after paying those people, how much profit would your business actually produce?

Because there’s a difference between owning an investment and owning a job. And there’s an even stranger third possibility: you may own an investment that only looks like an investment because you’ve been doing the job for free.

Do you do the same? How much unpaid work are you quietly contributing to your own “profitable” business?