Street Smarts

by Norm Brodsky

  from purchasing to bookkeeping to managing credit and col ecting receivables. I sometimes went with him on his route. I’d ask him a lot of questions, and he’d explain the logic of what he was doing. That’s how I learned some of the most important business concepts I use to this day.

  At the time, however, I didn’t appreciate the education I was getting. I was only eight years old. The custom peddler was my father.

  It’s ironic, I suppose, that growing up I never wanted to go into business. I had no desire to fol ow in my father’s footsteps. After col ege, I went to law school, figuring I’d make my fortune in law. But life is funny, and I eventual y wound up in business anyway. Only then did I begin to realize how much my father had taught me.

  He was the one, for example, who first explained to me the importance of maintaining high gross margins. He cal ed them something else—big markups—but the thought process was the same. “Always make a good sale with a big markup,” he’d say. “Make sure your customer is someone you can col ect from.” “Don’t take advantage of people.” “Be fair.” Those are fabulous business lessons embedded in my mind, and they came straight from my father.

  Then there were his expressions. “Don’t worry twice,” he’d tel me when I’d get anxious about an upcoming event—a final exam, for instance.

  He’d ask, “Have you done your homework? Are you prepared? ” I usual y was. “So don’t worry twice.” In other words, don’t waste time and energy on problems that may never arise.

  Or when I complained about not knowing what to do with my life, he’d say, “There’s a mil ion dol ars under your shoe; you just have to find it.” It wasn’t until I became an entrepreneur that I understood what he meant.

  Or when I talked about things I’d like to have, he’d say, “You don’t ask, you don’t get,” whereupon I’d request a bigger al owance. He’d smile and say, “Nice try, but just because you ask doesn’t mean you’re going to get it.” Much later I came to understand that he’d been giving me my first lesson in sel ing.

  Lessons like these sunk in when I wasn’t looking. They became habits of mind that led me to do certain things reflexively, without even noticing what I was doing. One of my best habits, for example, grew out of my father’s practice of breaking down problems and chal enges into their basic components. He believed that most issues in business—and in life—are fundamental y simple, even though they may appear complicated at first.

  He taught me that, to deal with them, you have to examine the underlying elements and figure out what’s real y going on. Never assume, moreover, that the real issues are those you see on the surface. That way of thinking has been one of my most powerful business tools over the years.

  Indeed, I believe it’s such mental habits that al ow people to become successful entrepreneurs. I myself have been an entrepreneur for three decades. I’ve built more than eight companies, including a messenger business that made the Inc. 500 list of fastest-growing private companies for three straight years and a records storage company that I sold for $110 mil ion in a leveraged buyout. Along the way, I’ve had the privilege of meeting many other successful men and women company builders, and I’ve noticed that most of us share these mental habits. They are the secrets of our success. (Wel , one of them. It certainly helps to have a life partner like my wife of thirty-nine years, Elaine, without whom I would not have achieved anywhere near the amount of success that I’ve enjoyed.)

  Now, I realize that not everyone wants to hear this. A lot of people starting out in business would prefer to have a step-by-step formula or a specific set of rules they could use to achieve their goals. The problem is, there aren’t any. Rather, there’s a way of thinking that al ows someone to deal with many different situations and take advantage of many different opportunities as they arise. To be sure, having that mentality doesn’t guarantee that you’l succeed at everything you do, but it does improve your chances significantly. You win more than you lose, and the longer you stay in the game, the more often you come out on top.

  I believe most people can develop the habits of mind I’m talking about and use them to acquire the wherewithal to live whatever kind of life they want. Not that every person wil be successful to the same degree or in the same way. In business, as elsewhere, some individuals have God-given gifts that al ow them to play the game better than others. We can’t al be Tiger Woods, or Picasso, or Shakespeare, but anybody can learn how to play golf, or paint, or write a sonnet, and we can al learn how to be financial y self-sufficient as wel .

  That’s an opinion, I might add, that has been repeatedly tested over the past seventeen years—ever since I began mentoring Bobby and Helene Stone, an experience I recount in chapter 1 of this book. My work with them led to an article in Inc. by Bo Burlingham, who later became my coauthor when we launched our column, “Street Smarts,” in December 1995. Through the column, I came into contact with literal y thousands of people who wanted to start a business, or who were in the process of starting a business, or who already had a business and were wrestling with one problem or another. They wrote me from al over the United States, Canada, and Mexico, as wel as from countries as far away as Korea, Lithuania, Brazil, Singapore, and South Africa. They were software developers, insurance brokers, headhunters, artists, swimming pool instal ers, concrete road pavers, furniture builders, Web site designers, machine-tool salesmen, butchers, bakers, and candlestick makers. (Al right, maybe not butchers, but the others for sure.) They had tile-making businesses, diagnostic imaging facilities, cosmetics companies, bel ows-making factories, recruitment services, violin shops, investment firms, consulting practices, dot-coms, movie chains, and just about every other type of business under the sun.

  I read al their e-mails and responded to as many as I could. Every year, I also chose eight to ten of the writers to mentor on an ongoing basis.

  Some of them you wil meet in the fol owing pages. Their goals ran the gamut from building a giant business to starting a day care center to simply achieving financial independence and having more time with the family. Everybody, after al , has a different definition of success. What we have in common is the desire to have happier, richer, ful er lives for ourselves, and create a better world for our children and grandchildren. My goal was to help the entrepreneurs develop the mental habits that would al ow them to do that. Judging by what some of them have accomplished, I have to believe that my efforts were not entirely in vain—which is not to take anything away from the people themselves. Building their businesses has been their doing, not mine.

  I should note, moreover, that you don’t have to have a mentor like me, or a father like mine, to acquire the mental habits needed to “handle the enormous variety of chal enges you’l face in the cause of building a business.” Many of my own habits I’ve developed the old-fashioned way—by making mistakes, fal ing on my face, picking myself up, and figuring out how not to do it again. But you know what they say: A smart person learns from his or her mistakes. A wise person learns from other people’s mistakes. I guess that makes me smart. I hope that, through this book, I can help you to be wise.

  CHAPTER ONE

  How to Succeed in Business

  I began my career as a business mentor and teacher of entrepreneurship on a cold evening in January 1992. My wife, Elaine, and I were at a restaurant with our friends Bobby and Helene Stone. They’d suggested we eat someplace less expensive than usual. When we got there, we found out why. Bobby told us that he’d been laid off from his job as a computer equipment salesman—a job he’d had for fourteen years. He was very distraught about it, and angry. He swore he’d never work for someone else again. He said he was going into Helene’s home business, sel ing computer supplies out of their basement in North Bel more, New York.

  “That’s great, Bobby,” I said. “Do you have a business plan?”

  “What’s a business plan?” Bobby asked.

  “A business plan lays out what you expect to do,” I said. “You need it so yo
u’l know if you have a viable business.”

  “The business is definitely viable,” he said. “It’s been going for seven years with just Helene and her assistant, Paula, working part-time out of our home, and no one doing sales. And I think I’m a pretty good salesman. How could it not be a viable business?”

  Helene couldn’t have disagreed more. “This man is nuts,” she said. “There’s no money. We can’t even pay our bil s. We’re looking for a home equity loan to pay off our biggest supplier.”

  Bobby said Helene was being too negative. Helene said Bobby didn’t know what he was talking about. I said, “Look, do me a favor. Don’t do anything rash. Bring al your paperwork to my house, and we’l sit down and see if you have a viable business here.” I was thinking I’d give them a little advice, and they’d take it from there. It turned out, however, that they needed a whole education.

  And that proved to be the most interesting aspect of the situation. I mean, it wasn’t clear to me at that point how much you could teach people about business. Could you take a middle-aged couple who weren’t businesspeople, who knew nothing, real y, about creating a successful business, and show them how to do it? Or did people have to learn from experience? I wasn’t sure. It had taken me a lifetime to learn what I knew about business. A lot of lessons had come from getting whacked in the head. I certainly didn’t learn how to do business in a classroom—and I have degrees in both law and accounting. Indeed, I’d had to unlearn a lot of the stuff I’d been taught in school. And how much of business is instinctive, anyway? How much do you learn as a kid before you’re even aware it has anything to do with business at al ? I didn’t know, but I was curious to find out.

  First Things First

  Bobby and Helene came over to our house a few days later and brought with them the information I’d asked for about the business’s sales, costs, and expenses for the past year or so—in other words, everything Helene had taken in, plus her receivables, and everything she’d paid out, plus her payables. I told them we’d go over the numbers after dinner. First, however, I wanted to discuss their goals, which is where I always like to start.

  Now, understand, the initial goal of every business is to survive long enough to see whether or not it’s viable. I don’t care what business you’re talking about or how much capital you have. You never know for sure if a business is viable until you do it in the real world. But viability is just a step on the way to somewhere else, and I want to know where somewhere else is. I want to hear what people have to say. What I’m listening for are goals that can’t be achieved by business, or goals that wil get in the way of the business, or goals that are total y unrealistic given the particular business you’re looking at. I’m listening for what’s real y motivating people. Usual y, it’s something emotional.

  Bobby and Helene told me they wanted to earn a living out of the business. Fair enough. But Bobby wanted something more. At that moment, what he real y wanted was revenge on his old company. That was normal, but it wasn’t going to get him anywhere except maybe to burn some bridges. Revenge had nothing to do with Bobby and Helene’s long-term goal, which was to become financial y independent and never be in this situation again. So, by identifying the goal, we were able to get those emotions out of the way.

  Once you’ve decided on the goal, you come right back to the issue of viability. I told Bobby and Helene, “Look, I don’t know if you have a real business here, and I also don’t know if you can run it like a real business. But first we have to see if it’s even worth trying. We have to be sure that, on paper at least, it looks as though you have a shot at making it work.”

  Bobby immediately began to tel me about his marketing plan and his projections. I cut him off and asked Helene for whatever information she had. She spread it out and started explaining it. I said, “You don’t have to explain. I can read.” I went through it, made some quick calculations, and said to Helene, “Here. I’m going to show you that your assistant, Paula, made more money last year than you did.” I pointed to some numbers.

  “These were your sales for the year,” I said, “and these were al your expenses except Paula. You subtract one from the other, and here’s what you get. Would you please read that, Bobby?”

  He said, “$ 10,000.”

  I said, “Right, $10,000. OK, now look over here. This is the total you paid Paula. What does that say? ”

  He said, “$ 15,000.”

  “Do you understand what that means?” I asked.

  He said, “I think it means the business lost money.”

  I said, “Very good.” I turned to Helene. “You lost money. Now you have some decisions to make. The business appears viable on paper. But you do have to reduce your expenses, and you’re also going to have to put some money into the business. I don’t know how much yet, but it wil be a substantial portion of your savings. Are you wil ing to do that?” I knew the capital they needed would have to come out of Helene’s savings account.

  She said she had to think about it.

  The next day, they laid off her assistant, Paula, explaining that Bobby was coming into the business and it couldn’t support both of them. Helene told me that she and Bobby were both in tears. “I was hysterical crying,” she said, “because this was just done to him, and now we were doing it to someone else.” But it was a necessary move if they real y wanted to make a go of the business. As Helene put it, it was “reality smacking us in the face.” There they were, just the two of them in their basement by themselves. Letting Paula go meant they were in it for the long haul.

  Doing the Business Plan

  Most people are scared going into their first business, which is a good reason for having a business plan. It helps to demystify the process. It takes some of the emotion out of the situation. But you can’t create a business plan unless you understand cash flow, and people starting their first business seldom do. They confuse cash flow with sales or with having money in the bank. They believe that to be successful, al you have to do is generate sales. In fact, what you need is the right kind of sales. The wrong kind can drive you straight into bankruptcy.

  To avoid that, you have to realize, first, that your capital is limited. That goes for everyone. Nobody starts a business with unlimited capital. The whole idea is to make sure, number one, that you have enough capital to begin with, and, number two, that it wil last long enough to determine whether or not the business is viable. By viability, I mean the point at which the business is generating internal y the cash it needs to pay its bil s. It can survive on its own. A business plan is essential y your best guess as to how you’re going to get there.

  Now, when I say business plan, I don’t mean anything elaborate. I’m talking about a modified, down-and-dirty income statement and cash flow statement. I just want a reasonable expectation of sales by month for a year. That’s what I asked Bobby to give me. What he came up with was ridiculous. He was wildly overoptimistic, which is typical. People on their first business venture are always overoptimistic—at the same time they’re scared to death. It’s weird, and it’s also dangerous, because it leads them to make bad decisions about how to spend their limited capital.

  With Bobby, I had to start al over again. He had based his projections more on what he thought they needed to live on than on what he could actual y sel . He justified them by looking at his record with his old employer, where he’d been sel ing computer-cleaning equipment at $12,000 to $20,000 per unit. It never crossed his mind that it might be different sel ing computer supplies at, say, $40 per order. So I made him focus as narrowly as possible. This was January 1992. I said, “Let’s take July. What can you do in July?”

  He said, “$20,000.”

  I said, “There are twenty working days in a month. That’s $1,000 per day. Is that realistic? Your average order is $40, so you’re talking about twenty-five orders a day. In eight hours. That’s three orders an hour, with phone cal s. That’s an order every twenty minutes. For a whole month. Can you do it?” Th
e point was to make sure he was dealing with reality. What I wanted were reasonable projections, educated guesses. Bobby realized that his sales estimate for July was way out of whack. So he came up with a new one, and then we worked forward and backward, month by month, until we had a year’s worth of sales.

  Then came the most critical step: determining gross profit. Once you have reasonable sales projections, you can break them down by product category and calculate the cost of goods sold (COGS), or, in service businesses, the cost of sales. You subtract COGS from sales, and you have your gross profit or—expressed as a percentage of sales—your gross margin. In my opinion, gross profit is the single most important number in any new business. It determines everything else about your business—the amount of capital you need, the volume of sales, the overhead you can afford, the time it wil take to determine viability, even viability itself.

  Say you’re sel ing an item for $1 that costs you 90¢ to produce or to buy. Your gross profit is 10¢ per item, or 10 percent of sales. Suppose you need $5,000 per month to cover your overhead. To get it, you have to do $50,000 per month in sales. Now, let’s say it takes you three months to col ect your receivables. You’d have to put up more than $100,000 in cash to get the $5,000 per month you need to break even. That’s usual y not a viable business.

  And gross profit is the linchpin, the deciding factor. You have to pay al your expenses out of gross proht—your salary, your rent, the phone bil , gas, electricity, photocopying, whatever. If your gross margin is 10 percent, you need $ 10 in sales for every $ 1 of expenses just to break even. If your gross margin is 40 percent, you need only $2.50 in sales for every $ 1 of expenses. That difference is crucial when you’re working with limited capital. The higher your gross margin, the fewer sales you need to cover expenses, and the longer your capital wil last. And, for most start-ups, time is survival.