Odds are you’re not getting the eight hours of nightly shuteye experts agree you need. Here’s why it matters – for you and your business.

By Anne Fisher

(Fortune Small Business) — Are you getting enough sleep? For years, Cynthia McKay wasn’t.

McKay, CEO of Le Gourmet Gift Basket, a specialty-foods company based in Castle Rock, Colo., spent most of every night wide awake with her mind racing – “mostly due to the stress of business ownership and jet lag,” she says. She managed to drag herself to the office each morning while her firm expanded into countries such as Canada and Australia. But in her permanently exhausted state, she found herself making more and bigger mistakes.

The last straw, she recalls, came when she tossed and turned until almost dawn. After she finally dozed off, she slept right through the departure of her flight to Australia, where she was to have gone to train 17 new hires. McKay, 53, couldn’t catch another flight until the next day. Meanwhile, her would-be trainees twiddled their thumbs, costing her thousands of dollars in food and lodging expenses. “It was an expensive mistake,” she recalls.

You may never have goofed so dramatically, but the odds are you’re not getting the seven to eight hours of nightly shuteye experts agree you need. While some high-achieving entrepreneurs boast of requiring minimal z’s, research shows that our sleep needs are surprisingly consistent. If you fail to get at least seven nightly hours, you’re probably operating at a cognitive disadvantage.

And your health and your business may be paying the price. Business owners seem to share a powerful ambivalence toward sleep, both craving and shunning it. That’s especially true in this tough economy – a recent NFIB poll found that small-business owners are working longer, thanks to the slump – and during a firm’s startup phase. Cornell University sleep researcher James Maas estimates that business owners lose at least 700 hours of sleep the year they launch their firm, or about what a parent loses the first year of a baby’s life.

So what? you ask. Aren’t you more productive when you work 18-hour days? Can’t you just prop up your drooping eyelids by downing yet another cup of java?

Alas, no. New scientific research shows that going without enough sleep for more than an occasional day or two can wreak havoc on your health, memory, concentration, mood, and ability to make decisions – even if you think you’re doing fine.

“We’ve come to view getting enough sleep as optional,” says Mark Rose-kind, a former Stanford University sleep researcher. “Unfortunately, our bodies disagree.”

If you need a good reason to start turning in earlier or sleeping later, the cavalry has arrived. It turns out that far from being a time waster, sleep makes you healthier, smarter, and a better leader – and may even yield great ideas for growing your firm. According to a 2007 survey by office-supply chain Staples (SPLS, Fortune 500), 51% of entrepreneurs say that they regularly dream about work. Of those, 70% report implementing their work-related dreams.

The evidence that sleep matters is irrefutable and constantly growing. Let’s start with a newly discovered link between sleep deprivation and serious illnesses such as diabetes and cancer. A 2008 research project at the University of Chicago’s medical school kept young, healthy volunteers awake for all but four hours a night for six nights running. The result: The levels of subjects’ hormones shifted – in particular a hormone called leptin that affects appetite. They became ravenously hungry, scarfing down pizza and ice cream long after they would have felt full normally, and their blood sugar shot up to pre-diabetic levels – an ominous result after less than one week of inadequate sleep.

Other studies duplicate those results so regularly that researchers now believe that not getting enough sleep is a top cause of obesity and diabetes, both of which are on the rise nationally. At the same time, the World Health Organization (WHO) has gathered data from around the globe showing that sleep deprivation depresses the immune system, to the point where WHO is considering labeling chronic sleep deprivation a carcinogen, comparable to tobacco and asbestos.

Mental dullness

If you’ve ever been so weary that you had to reread the same paragraph many times to grasp its meaning and soon forgot what you read, you already know what sleep researchers have lately proved about the effects of too little sack time on productivity.

“You can turn a smart person into an idiot just by over-tiring him,” says Peter Capelli, head of the Center for Human Resources at the University of Pennsylvania’s Wharton School in Philadelphia.

One experiment at U. Penn’s medical school kept subjects up until 4 A.M., woke them at 8 A.M., and then gave them a series of tests designed to measure memory, alertness, and the ability to react quickly to new information. The researchers were startled to find that subjects’ mental acuity declined markedly after just one night and kept dropping with each successive night of four hours’ sleep. Even more worrying: The study’s volunteers were unaware of their impairment. One woman, so fatigued that she could barely say her name, was nonetheless certain she was able to drive home.

Says David Dinges, who ran the project: “Like people who have had too much to drink, the chronically sleep-deprived have no sense of their limitations.” The consequences can be dire – Dinges believes inadequate sleep was a factor in some of the world’s worst accidents, such as Chernobyl and Three Mile Island. Imagine the implications for your small business.

No matter how much you think you’re accomplishing when you pull an all-nighter, it’s likely far less than what you could achieve if you got some sleep and then returned to work, according to a recent study from the Sleep and Neuroimaging Lab at the University of California at Berkeley. When volunteers were given a list of words to memorize and then were kept awake for 24 hours, their ability to recall the words fell by 40%. Other new Berkeley studies show that the converse is true: Memory improves during sleep, so that if you get a full seven or eight hours’ slumber tonight, your recall of all that happened today will be 20% to 30% sharper than it is immediately after the day’s events occur. No one is sure yet why this is so.

By Anne Fisher

Last Updated: August 25, 2008: 12:06 PM EDT

Robert Stickgold, who studies sleep at Harvard Medical School, speculates that the brain begins a process called memory consolidation just before we fall asleep. As we nod off, it is as if our brains “put stickers on topics for later processing.”

For entrepreneurs, the best reason to get enough shuteye may be to avoid making dumb, costly decisions. Matthew Walker, a Berkeley sleep researcher, recently gave three groups of subjects the same bits of information. Those who walked away and spent at least seven of the next 12 hours sleeping were able to make broader and more logical connections, he says, than those who didn’t get much (or any) sleep or those who tried to analyze the data immediately.

“Many successful CEOs talk about having good instincts,” says Walker. “I would argue that all they’re doing is allowing themselves at least 12 hours to marinate the information they take in – and if those 12 hours include some sleep, they get even better results.”

Battles with insomnia

Nick Friedman, 26, couldn’t agree more. President of College Hunks Hauling Junk, a junk-removal company based in Washington, D.C., with 11 other locations nationwide and more than $2 million in 2007 revenues, Friedman started suffering from insomnia shortly after he and a partner launched their business in 2005.

“Usually I could fall asleep, but I’d wake up at 1 or 2 A.M. and start thinking about everything I had to do,” he recalls. He often went into the office at three or four in the morning, so that he was already worn out by the time everybody else showed up.

Unlike Cynthia McKay with her missed flight to Australia, Friedman can’t point to any one moment when he knew he needed to start sleeping more. But he does remember feeling overwhelmed and anxious, getting bogged down with minutiae, and having occasional panicky realizations that he was losing his big-picture focus, he says.

Happily, Friedman fixed his sleep problem before it did any real harm to his business. (To read about a business owner with a more destructive sleep disorder, see our sidebar, “A business owner’s nightmare.”) At a meeting of the Entrepreneurs Organization, a networking group, Friedman mentioned his insomnia to an acquaintance who suggested that Friedman try an over-the-counter sleep aid. So he bought a generic brand and, after some dosage tinkering, found that half of one tablet at bedtime was enough to sink him into a deep sleep that lasted for about seven hours. (Read about sleep aids’ potential benefits and hazards.) Now that he’s getting enough rest, Friedman has noticed a big change in how he works. For one thing, he’s better at delegating administrative tasks and concentrating on his goal of opening 12 new locations by year-end.

“The more responsibility you have, the more lack of sleep hurts you,” says Shawn McAllister, 33. His commercial construction firm in Charlotte had 2007 sales of $30 million. He argues that entrepreneurs need more sleep than most people, not less, yet rarely get enough, especially in these turbulent economic times. “There’s a mindset that values burning the midnight oil,” he says. “But once you realize how it affects you, deliberately depriving yourself of sleep is actually kind of dumb.”

Like Friedman, McAllister used to find himself at his desk in the middle of the night because he couldn’t sleep. After years of dodging the sandman, he was so exhausted that he could barely get out of bed. He hired a personal trainer to help him get his life under control with a combination of diet, exercise, and “learning how to shut my doors at 5 P.M. so I can wind down.”

Every now and then, if he’s particularly tense – no more than once a week, he says – McAllister takes a prescription sleep aid. “If you’ve always been sleep-deprived, you don’t know any better,” McAllister observes. “But once you start sleeping enough, you notice the positives.” One night a few months ago, he worked well into the wee hours to meet a last-minute deadline. “Now that I’m aware of the effects of being overtired, I remember feeling slow and dumb at 4 A.M. I forgot where I put my gym bag the day before, and just wanted to yell.”

Cynthia McKay’s Australian debacle led her to cure her insomnia. After a few months of trial and error, she succeeded. Her formula includes daily Pilates workouts, the calming influence of a golden retriever she brings to work, and a ban on caffeine after 11 A.M. McKay is also a big fan of power napping, which she says boosts brain function and relaxes her so she sleeps better at night. She finds a short snooze during the day so beneficial that she installed an office sleep room for her staff.

Being able to function better during the workday is great, but what about those entrepreneurs surveyed by Staples who said they actually get work done while catching z’s? When FSB went searching for “sleepworking” business owners, we turned up plenty. Roshelle Jones-Hirvonen of Coconut Creek, Fla., who founded welcome2college.com, is typical. Jones-Hirvonen, 43, thought up almost all her site’s current features while asleep.

“The initial idea was a site to help freshmen adjust to college,” she says. “But in my sleep I’ve had ideas for expanding its scope, such as drawing in parents, sponsoring alumni events, and including local part-time job listings for students.” Her newest features – a channel to teach kids about campus safety, a campus voter-registration drive, and a project with eDiets.com to help newbies avoid gaining the “freshman 15″ – were notions she scribbled down soon after waking.

The great thing about sleepwork is that you can tackle it while lying down – perhaps beside a loved one, with big, fluffy pillows under your head. “I enjoy sleepworking so much that I’ve trained my mind to do it,” says J.W. Dicks, 58, of Altamonte Springs, Fla. (Read more about sleepworking tips.) A partner in the law firm Dicks & Nanton, he has also founded several other businesses, including a real estate development company and a NASD-registered securities firm. But no matter how busy Dicks gets, he makes sure to get eight or nine hours of nightly sleep.

Dicks has grappled with all manner of complex legal and financial issues while wandering in the Land of Nod, but he says his most vital sleepwork has been strategic – how to structure his businesses, which markets to invade and conquer, when to take a calculated risk. Entrepreneurs tend to get so busy that they don’t sit back and take stock or focus on long-range goals, says Dicks. “To me, that’s what the night is for.”

Sweet dreams.

Maggie Overfelt and Shuchi Saraswat contributed to this article. To top of page