by Norm Brodsky
Table of Contents
PORTFOLIO
Title Page
Copyright Page
Dedication
PREFACE
Introduction
CHAPTER ONE - How to Succeed in Business
CHAPTER TWO - The Right Stuff
CHAPTER THREE - Why Start-ups Fail
CHAPTER FOUR - Where the Money Is
CHAPTER FIVE - Magic Numbers
CHAPTER SIX - The Art of the Deal
CHAPTER SEVEN - It Begins with a Sale
CHAPTER EIGHT - Good Sales, Bad Sales, and the Ones That Get Away
CHAPTER NINE - Customers for Keeps
CHAPTER TEN - How to Lose Customers
CHAPTER ELEVEN - The Decision to Grow
CHAPTER TWELVE - Becoming the Boss
CHAPTER THIRTEEN - The One Thing You Can’t Delegate
CHAPTER FOURTEEN - Sel ing Is a Team Sport
CHAPTER FIFTEEN - Help! I Need Somebody
CHAPTER SIXTEEN - When the Student Is Ready, the Teacher Appears
CHAPTER SEVENTEEN - Keeping Up with the Stones
Acknowledgements
Index
PORTFOLIO
STREET SMARTS
Norm Brodsky is the founder of CitiStorage and seven previous start-ups, and a three-time Inc. 500 honoree. He began writing his monthly Inc.
column (with Bo) in 1995. He lives in Brooklyn, New York.
Bo Burlingham is editor at large for Inc. His previous books include Small Giants, which was a finalist for the Financial Times/Goldman Sachs Business Book of the Year Award. He lives in Cambridge, Massachusetts.
PORTFOLIO
Published by the Penguin Group
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Penguin Group (Canada), 90 Eglinton Avenue East, Suite 700, Toronto, Ontario, Canada M4P 2Y3 (a division of Pearson Penguin Canada Inc.) Penguin Books Ltd, 80 Strand, London WC2R ORL, England
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First published in the United States of America as The Knack by Portfolio, a member of Penguin Group (USA) Inc. 2008
This paperback edition published 2010
Copyright © Norm Brodsky and Bo Burlingham, 2008 All rights reserved
Portions of this book first appeared in issues of Inc. magazine.
Includes index.
eISBN : 978-1-101-19576-5
1. New business enterprises—Management. 2. Success in business. 3. Entrepreneurship.
I. Burlingham, Bo. II. Title.
HD62.5.B75 2008
658.1’1—dc22 2008024979
Set in Bodoni Book
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To Elaine Jerome Brodsky
and
Lisa Meisel Burlingham
Almost eighty years of marital bliss
and counting
PREFACE
The Ten Commandments of Business
Economies go up and down, but the fundamentals of business don’t change. That’s one thing we’ve al learned since the hardcover edition of this book (original y entitled The Knack) first appeared in the fal of 2008. Since the book’s publication people have asked me and my coauthor, Bo Burlingham, to put together a list of the most important rules to keep in mind as they build their companies. Here’s what we’ve come up with: 1. Numbers run a business. If you don’t know how to read them, you’re flying blind.
When I started out, I thought that CEOs ran businesses with the help of their top executives. What I didn’t realize is that a business is a living entity with needs of its own, and unless the leaders pay attention to those needs, the business wil fail. So how do you know what those needs are? There’s only one way: by looking at the numbers and understanding the relationships between them. They wil tel you how good your sales are; whether or not you can afford to hire a new salesperson or office manager; how much cash you’l need to deal with new business coming in; how your market is changing, and what impact the changes wil have; and on and on. You can’t afford to wait until your accountant tel s you these things after the fact. Nor do you have to become an accountant yourself. You do have to know enough accounting, however, to figure out which numbers are most important in your particular business, and then you should develop the habit of watching them like a hawk.
2. Cash is hard to get and easy to spend. Make it before you spend it.
Most people don’t understand the value of cash when they go into business. If they did, they wouldn’t waste it by purchasing brand new furniture, paying designers to produce logos, ordering fancy business cards and stationery, or spending money on dozens of other things that they don’t need and that deplete their start-up capital without getting the business one inch closer to viability—that is, the point at which the company can sustain itself on its own internal y generated cash flow. But it’s not just start-up entrepreneurs who waste cash. The corporate landscape is littered with the corpses of companies whose leaders thought the good times would last forever and spent money they hadn’t yet made on luxuries they didn’t need. I made that mistake myself once and paid the consequences. One of the lessons I learned was: Make the money first. If you’re smart, you’l put some of it aside for a rainy day. Whatever is left over you can spend as you please. You can pay big bonuses to your employees. You can make big donations to charity. You can buy a corporate jet. You can run for president.
Whatever. But first you must earn it.
3. Don’t focus on the top line. Gross margin is the most important number on the income statement.
In the early days of a business, everybody obsesses about sales. We want to see them increase constantly—the faster, the better. But focusing exclusively on sales is dangerous, especial y when you’re working with limited capital. Instead, you should be tracking your gross margin—that is, the percentage of your money left over after accounting for the direct cost of whatever it is that you’re sel ing. (Gross profit is sales minus cost of goods sold. Gross margin is the percentage of sales that represents.) I believe gross margin is one of the most important numbers, if not the most important number, in any business. In the start-up phase, it determines whether or not you’l survive long enough to reach viability. (See chapter one.) Thereafter it continues to have a major impact on your ability to grow the company. It takes the same amount of time and energy to build a low-margin business as it does to build a high-margin one, but you’l have more to show for your efforts if you stay focused on maximizing the gross profit you earn.
4. A sale isn’t a sale until you collect.
Starting out, most of us tend to believe that when somebody buys something from us it’s like money in the bank. Sooner or later, we’re going to get paid. That’s not always true, of course, and just how much sooner or later the payment arrives can make a big difference, but most people don’t think about that
in the beginning. The term “bad debt” doesn’t enter their vocabulary until they suddenly find themselves with a receivable they can’t col ect. By the same token, the concept of col ection time doesn’t become meaningful until they discover they don’t have enough cash to pay their bil s despite having made a lot of sales. Remember: When you deliver a product or a service before getting paid, you’re making a loan to the customer, and you should treat it accordingly. That means determining whether customers are creditworthy and finding out in advance how long they take to pay their bil s. It also means getting into the habit of regularly checking the state of your receivables, and making sure your average col ection time is what it should be.
5. When your short-term liabilities exceed your short-term assets, you’re barikrupt.
The vast majority of people in smal business, I suspect, have no idea what a balance sheet is, or how it differs from an income statement, otherwise known as a P&L (for profit and loss). The balance sheet certainly doesn’t figure into their decision making. It didn’t figure into mine until I wound up in bankruptcy court. There I learned that a company is bankrupt—at least technical y—when its current liabilities (that is, the ones that have to be paid within the next twelve months) are greater than its current assets (the ones that wil turn into cash within the next twelve months). That information comes straight off the balance sheet. I could have saved myself a lot of grief and pain if I’d gotten into the habit of looking at it on a regular basis and keeping track of the most important ratio derived from it, namely, the current ratio, which measures a company’s ability to meet its short-term debt obligations. You calculate it by dividing your current assets by your current liabilities. If the ratio is 1.25 or higher, you’re in fairly good shape. If it’s less than 1.00, you could be headed for trouble. Yes, you may be able to juggle your payables and other short-term debts for a while, but you should move quickly to restore your liquidity. Otherwise, you’re taking a risk of one day finding yourself with no cash to pay your bil s—a potential y fatal condition.
6. Forget about shortcuts. Run a business as if it’s forever.
Building a business is a lot of hard work. Everything that a great company needs takes a long time to develop—a diversified base of loyal customers, experienced managers, a vibrant culture, efficient systems throughout the business, a sales force that works as a team, a great reputation in the industry ... everything. To be sure, we al look for shortcuts. That’s only natural, especial y when you’re on your first venture.
You constantly search for easier ways to make your company grow faster, and sometimes you find them. Unfortunately, they almost always come back to haunt you. I say this as someone who is more impatient than most and who has tried just about every shortcut in the book—
like hiring salespeople from competitors and promoting employees just because they were available. It final y dawned on me that my
“shortcuts” were serving only to prolong the process of building the great company I wanted. Why was I in such a hurry anyway? A great company is one that can last forever, and I needed to make decisions in that frame of mind—even though I ful y expected to sel the business someday. It would be worth more if I took my time and did what was best for the company in the long term.
7. Identify your true competitors, and treat them with respect.
Here’s something else I didn’t know starting out: Everyone who does what you do is not your competitor. Instead you compete against only those suppliers who offer the same services, are more or less equal y reliable, and charge prices similar to yours. That doesn’t mean you won’t meet other types in the marketplace. In every business I started, there were people around who claimed to provide a service like ours at a fraction of the price. Invariably, they had tiny operations with little, if any, overhead. If the owner-operator got sick, or if a truck broke down, the customer would be stuck. Customers wil ing to put up with that risk were not good candidates for us. Conversely, customers who demanded reliability—and were wil ing to pay for it—were not good candidates for the mom-and-pop operations. As for our real competitors, I came to see that they were extremely important to our long-term success. They played a critical role in shaping our reputation in the industry—which was, and is, our most valuable asset—if only because their opinion carried more weight than that of any other group.
When they spoke wel of us, everybody listened. So I made a habit of treating them with the respect I hoped they would show us as wel , and I insisted that our salespeople do the same.
8. You have no friends in business, only associates.
Some habits are more difficult to maintain than others, and I constantly struggle with a real y important one: Don’t do business with friends.
I’ve broken that rule several times and always regretted it. In the early days, I didn’t hesitate to buy products or services from friends. I couldn’t imagine why I shouldn’t help someone with whom I already had a close, personal relationship. But friends, I learned, inevitably make assumptions that hinder your ability to do what’s best for the business. Even though I would tel them up front that they would be treated like any other vendor, they stil expected me to make exceptions for them. When I wouldn’t, the relationship went sour, and I lost a friend as wel as a supplier. It’s even more important to understand that you can’t be friends with your employees. I’m not saying you shouldn’t treat them with respect and affection, but neither you nor they should ever forget that it’s a business relationship. I had seven employees when I started and became social friends with six of them. Al six of those friendships became a problem for the business. And the seventh person? He now runs the company.
9 . Culture drives a company. In the long run, the boss’s most important job is to define and enforce it. When I started my first business, it never crossed my mind that I was creating a culture as wel as a company. I didn’t even realize that companies had cultures, let alone that the culture might actual y affect the business’s performance. It was only fifteen years later—when my wife, Elaine, joined the company—that I began to think seriously about the matter. She introduced programs that fundamental y changed our culture, making it much more employee-friendly, with business games, contests, educational programs, new employee benefits, and group activities of various sorts. I couldn’t help noticing how much better the company functioned as a result. Along the way, it dawned on me that setting the culture was ultimately the CEO’s responsibility. Although Elaine was doing the heavy lifting, she couldn’t have succeeded without my support. Not only did I have to give her the resources she needed, but I also had to modify my own behavior to fit in with the new regime and make sure that everyone else went along as wel . Among other things, I had to learn how to hold my tongue and respect the chain of command. That was probably the most difficult new habit I’ve ever had to develop—and certainly one of the most important ones.
10. The life plan has to come before the business plan.
It took a major whack on the head for me to get my priorities straight. For my first eight years as an entrepreneur, I always put my business goals first. As a result, I missed my first daughter’s childhood. I spent too little time with my wife and friends.
I didn’t do any of the reading or traveling or gardening that I enjoy. My life was one ful -bore, supercharged, nonstop, 24/7 rush to create a $100 mil ion business. As you’l read in chapter two, I eventual y got there—and wound up in Chapter 11. Fortunately, my bankruptcy came early enough in my life for me to learn the appropriate lessons and make a fresh start. The most important lesson was this: Building a successful business is not an end in itself. It is a means to an end. It is a way to create a better life for you and those whom you love, however you—and they—may define it. You need to do the life plan first and then keep revisiting it, to make sure it’s up to date and your business plan is helping you achieve it. That habit, I can assure you, wil prove to be the most important of them al .
I’m sure you’ve
heard it said that four out of five new businesses fail. I don’t know whether that statistic is accurate, but I firmly believe that four out of five new businesses would succeed if the entrepreneurs in question didn’t make the most common mistakes people fal victim to when they’re starting out. If you fol ow these ten rules, you’l avoid the worst of those mistakes and greatly increase your chances of building a business that al ows you to lead the kind of life you want to have. And isn’t that the whole idea?
NORM BRODSKY’S TEN COMMANDMENTS OF BUSINESS
1. Numbers run a business. If you don’t know how to read them, you’re flying blind.
2. Cash is hard to get and easy to spend. Make it before you spend it.
3. Don’t focus on the top line. Gross margin is the most important number on the income statement.
4. A sale isn’t a sale until you collect.
5. When your short-term liabilities exceed your short-term assets, you’re bankrupt.
6. Forget about shortcuts. Run a business as if it’s forever.
7. Identify your true competitors, and treat them with respect.
8. You have no friends in business, only associates.
9. Culture drives a company. In the long run, the boss’s most importantjob is to define and enforce it.
10. The life plan has to come before the business plan.
INTRODUCTION
Street Smarts ... and How to Get Them
We al have mentors in business, although we’re not always aware of the role they’re playing. My first and best mentor was an independent businessman, a solo practitioner, in New York City. His business was custom peddling. He’d visit his customers in their homes and sel them clothing, appliances, whatever. He was like a one-man traveling department store, and he handled the ful range of business functions by himself—
