by Norm Brodsky
Take away that fact, and the whole picture changes. You’re no longer playing with your savings or with bank loans or with capital from other investors. After critical mass, you’re living off your own internal y generated cash. You have profits to put in the bank. You may decide you want to invest some of them back in the business, and I think you should. It’s important to explore new avenues, especial y if you have a strong customer base. You might even take on some additional debt, which you can pay off out of profits. Yes, it’s a little more risky, but you have the luxury to take more risks, to try some experiments, because you’re playing with your own money. If you invest intel igently, you have the chance to help yourself and your customers and strengthen the business. And because you’ve reached critical mass, you can take the chance without putting the business in jeopardy.
Not that you can get reckless. Unfortunately, many entrepreneurs do become reckless when they hit critical mass. Often they get there by some combination of luck and instinct, without ever understanding the dynamics of their business or coming to grips with the sales mentality. They make it anyway, and the sales mentality runs wild. A whole new set of emotions comes into play. The fear fades, and they feel excitement, elation, enthusiasm bordering on euphoria. They throw caution to the wind. They want to jump on every new opportunity that arises. And if your basic business is strong enough, you can get away with that for a while. Sooner or later, though, you’re going to wind up in trouble unless you stick to the rules and stay on top of the numbers. Because the numbers help you balance your emotions. They keep success from going to your head. They remind you that, while your cash may be self-generated, it is not unlimited, and it can stil run out.
So you have to keep yourself from getting carried away. You have to learn how to avoid making emotional decisions. That’s a very long process, but it’s important. Because in business, you have to try to be objective, to be as clear as possible about what you’re doing and why, and about what the likely consequences wil be. You can use the tools of business to help you do that, to help you gain perspective. In the end, you may decide to go with your emotions anyway, but at least it’s a choice.
And that’s where Bobby and Helene were after the first two or three years. They had a bunch of choices to make. How fast did they want to grow?
How big did they want to get? Did they want to keep working at home? Did they want employees? It was up to them. By that point, they had the tools they needed to make those choices wisely.
Most important, they had achieved the goal they had set for themselves when they started. In their third year of business, they did $482,000 in sales, up from $162,300 in the first year, and their average gross margin had held steady at 39 percent. They were financial y independent.
“It’s funny how things have changed,” said Helene as she looked back. “A few months ago Bobby asked me, ‘What would we say if I was offered my old job back?’ I said, Absolutely not.’ I never want to be at anybody’s mercy again. Why should we give our talents away? We’re smart enough to take care of ourselves. Besides, I think we have more security now than we ever had before: ’
“Anytime you work for someone else, it’s total insecurity,” said Bobby. “It real y is—especial y the way things are today. Look at al our friends who’ve been laid off. I said to her, ‘That wil never happen to me again.’ And I felt very good about it.”
“One thing Bobby always said, and he turned out to be right about it,” said Helene. “He said, ‘Security is not the job. It’s the confidence you feel in yourself.’”
“‘Yeah,’ I said, ‘there’s no such thing as job security anymore. The only security is your own sense of self-worth and your knowledge about how to earn a living.’ ”
“Even when he was working for someone else, he said it,” said Helene. “I always thought it was just one of his optimistic little sayings. But you know what? It turned out to be true.”
The Bottom Line
Point One: Don’t let your emotions lead you into hasty decisions that wil make it more difficult for you to achieve your real goals.
Point Two: Make sure you understand what cash flow is and figure out in advance where it’s going to come from.
Point Three: Control the sales mentality and balance it with a business mentality before it’s too late.
Point Four: Learn to anticipate and recognize the changes in your business by developing a good feel for the numbers.
CHAPTER TWO
The Right Stuff
In the years since my first experience as a business mentor for Bobby I and Helene Stone, I’ve worked with dozens of people who were trying to start a business, and dozens more who already have one. They often ask me what it takes to be a successful entrepreneur, and I tel them that the most important quality is resilience. I’m talking about the ability to bounce back from failure, to turn around a bad situation, to profit from your mistakes.
That’s because everybody makes mistakes, plenty of them. What’s more, we keep on making them as long as we’re in business. Sure, we like to think we’l eventual y get so smart we won’t make mistakes anymore. Forget about it. You wil never stop making mistakes. Hopeful y, the new ones won’t be the same as the old ones, but they’l be equal y painful. They’l bug you just as much. They’l make you just as mad. As upset as you get, however, it’s important to bear in mind that failure is stil the best teacher around. You’l do fine as long as you’re open to the lessons it’s trying to teach you.
Here’s a typical example from my records storage company, CitiStorage. I stil remember the moment, many years ago, when I found out we’d lost one of our biggest customers. It was five o‘clock on a Friday afternoon. (Somehow these things always happen at five o’clock on a Friday afternoon.) One of my salesmen cal ed me in my car and told me we’d just received a fax from the customer, a major law firm, announcing its intention to move its boxes out of our facility when the contract expired three months later.
Now you have to understand that, in this business, moving your boxes is a big deal. Not only is it a hassle for customers, but there are various removal fees they have to pay. So it’s a real loud message when a customer leaves, and this one came completely out of the blue. I was stunned.
“What are you talking about?” I said. “Man, how could we lose this account? What happened?”
The salesman didn’t have an answer, and we couldn’t get one from the customer. The people in charge at the law firm wouldn’t see us or talk to us on the telephone. Our urgent messages brought perfunctory replies: “The decision has been made, and it is final.”
Obviously, we had screwed up. The guy who had closed the account had left us five years before, and we hadn’t stayed as close to the customer as we should have been. A week or so after receiving the fax, I came up with a proposal that final y got us a meeting with the firm’s managing partner—to no avail. The situation was too far gone. We could offer good financial terms, but we couldn’t fix problems that had been festering for years. Our competitor matched the terms and got the account.
So I cal ed my managers and salespeople together and said, “What did we learn from this? What do we have to do differently in the future?” The real lesson, I knew, was not that we had made mistakes. You always make mistakes. We failed because we’d waited too long to find out about them. We decided that, from then on, we’d go to each customer eighteen months before the end of the contract and offer to negotiate a new one. If the customer hesitated, we’d know right away that we had a problem—while there was stil time to fix it.
As soon as we began implementing the new policy, we made a very important discovery. We had unhappy customers and didn’t know it. One customer was upset about our system for providing information online; we fixed it. Another customer felt it deserved a lower rate because its volume had increased dramatical y; the customer was right, and we made amends. A third customer didn’t like a particular aspect of our inventory system; we changed it. A fourth cu
stomer was miffed that we hadn’t been sending regular monthly reports; we started sending them.
So, in four months with the new policy, we made four improvements, pleased four customers, and locked up four accounts, and al these benefits came from one failure. In the long run, that failure proved to be one of the best things that ever happened to the company.
Groundhog Day
Now, obviously, it doesn’t help to be resilient if you don’t learn from your mistakes. That’s a chal enge for some people. They suffer from what I refer to as Groundhog Day syndrome. It has to do with the tendency to fal into self-destructive patterns of behavior even though you end up getting repeatedly whacked in the head—more or less like the character Bil Murray played in the movie Groundhog Day.
I know one guy, for example, who put together a successful clothing business and then started taking out huge amounts of cash to build a palace for himself and his wife. When he ran into business problems, he discovered he didn’t have the resources to weather them. In the end, he lost both the company and the house. So what did he do? He went out and started another clothing business, got it going, took out the cash, built another palace, ran into business problems, and lost both the company and the house. Two times in a row.
That’s not as unusual as you might think. I know another guy who makes a habit of buying companies, raising tons of money from investors, and then paying himself so much in salary and perks that the company doesn’t stand a chance. To be sure, he believes that each business is going to be wildly successful and that he deserves every penny he makes. But he always winds up where he started: broke. He’s done that five times.
Or consider my friend Ralph (not his real name). His downfal is leverage. He’s great at starting companies and getting them up and running, but then he starts leveraging them like crazy so that he can chase after business opportunities. He’l do whatever is necessary to get the credit he needs—even to the point of fooling around with his financial statements. Not that he intends to defraud anyone. He’s just so focused on growing that he doesn’t consider the possibility of things going wrong. Of course, when you push things too far, they do go wrong. Sooner or later, Ralph always lands in a pile of trouble.
Those cases may be somewhat extreme, but Groundhog Day syndrome is not a rare affliction. To some extent, we al have habits of mind and ways of thinking that repeatedly get us into trouble, and it’s very difficult to change them. For one thing, we don’t like to admit that we’re the cause of our own problems. There are almost always other culprits around—people who didn’t do what we wanted or factors beyond our control. It’s easier to blame them for our misfortune than to take responsibility for it, and so we let ourselves off the hook. But we do ourselves a disservice in the process. The most valuable business lessons we can learn come from facing up to our weaknesses.
I’m speaking from personal experience here—specifical y, the experience of my greatest business failure, the bankruptcy of my messenger business in 1988. Starting from scratch, I had built Perfect Courier to $30 mil ion in sales, making the Inc. 500 list of fastest-growing private companies three years in a row, and then merging with a public company, CitiPostal, and landing on the Inc. 100 list of fastest-growing public companies in 1987. But I wasn’t satisfied. My dream was to have a $100 mil ion company. So when a shortcut came along, I took it, merging with a $70 mil ion company cal ed Sky Courier in 1987.
Sky, it turned out, had problems—big problems. For openers, it needed a quick injection of $5 mil ion in cash. I decided to take the money out of Perfect Courier, which in itself wasn’t necessarily a mistake. Even if Sky had folded and the investment had been lost, Perfect Courier would have been able to survive and keep growing at the same rate as before. But I soon realized that the $5 mil ion wasn’t going to be enough. Sky needed $2 mil ion more in cash, which I also decided to get from Perfect Courier. In addition, I subsequently agreed to pledge several mil ion dol ars of Perfect Courier’s credit to keep Sky alive.
Those two moves were very serious mistakes. They put my principal business in jeopardy. I knew that, if I lost the second round of money, Perfect Courier would be hobbled. If we got in trouble with the credit guarantee on top of that, Perfect Courier might not be able to survive.
But despite the danger, I never even considered turning back. I didn’t think I had to. I was sure I could handle whatever came along. I’d been in tough situations before. I thought I was invincible. What I didn’t take into account was the inevitability of unpredictable events. First came the stock market crash of October 1987. Particularly hard hit were the financial printers with which Sky did a lot of business. Overnight it lost 50 percent of its sales. Meanwhile, fax machines—which had been around for twenty years—suddenly reached a kind of critical mass, which had a devastating effect on the messenger business. Instead of sending documents by courier, more and more people were faxing them. Within a matter of months, Perfect Courier’s business dropped by about 40 percent.
The combination of factors was overwhelming. In September 1988, my companies filed for protection from their creditors under Chapter 11 of the bankruptcy code. By the time we came out of Chapter 11 three years later, our workforce had shrunk from three thousand people to about fifty, and our sales from $100 mil ion to a very shaky $2.5 mil ion.
Believe me, that’s culture shock. It took a few years before my head cleared enough for me to figure out what had real y happened, and why. The process took time partly because I had such good excuses. After al , who could ever have predicted that the stock market crash and the fax machine would hit us at the same time? In my gut, however, I knew that blaming circumstances was a cop-out. The real question was, how had the company become so vulnerable to those developments?
It was extremely difficult for me to come to grips with the answer to that question. It meant admitting that the bankruptcy had a lot to do with my personality and decision-making process. Nevertheless, I eventual y forced myself to acknowledge what I knew to be true. I’d taken a lovely, secure, profitable business and destroyed it by exposing it to a level of risk it should never have faced. I’d done it, moreover, because of something in my nature. I enjoy risk. I like to go to the edge of the cliff and look down. That’s the personality trait behind my own Groundhog Day syndrome. This time, circumstances had pushed me over the edge of the cliff, but in fact I shouldn’t have been anywhere near the edge in the first place. I’d taken a foolish risk and put everything I owned in jeopardy. As a result, hundreds of people had lost their jobs, and many others—including me—had suffered through a nightmare.
Hard as it was to admit al that, the act of facing up to it proved to be one of the most liberating experiences of my entire business career. Not that I decided to change my personality. I knew I couldn’t, and I real y didn’t want to anyway. Rather, I began focusing on what I could do to avoid ever having to live through that Groundhog Day again. I realized, for example, that I seldom heard the advice people gave me and often wound up ignoring good advice as a result. So I trained myself to listen more closely and make sure that I at least understood the advice I was getting, whether or not I chose to accept it. I also made a point of seeking out the opinions of people whose judgment I respect but whose instincts differ from mine. And I came up with certain rules to force myself to think through the consequences of major decisions before making them.
Mainly, however, I adjusted my thinking about risk. Don’t get me wrong. I’m as much of a risk taker as ever, but these days the risks I take are calculated ones. In particular, I calculate the danger that a decision of mine may cost other people their jobs. That was without doubt the most important lesson I learned from the whole episode. Through the agony of the layoffs, I developed a new understanding of the awe-some responsibility CEOs have for the lives of their employees.
Out of that understanding came the cardinal rule I use in evaluating every important decision I make: always protect the pot. Once you have an ongoing, viable busi
ness, you have to put its welfare first and never do anything that would place it in jeopardy. It’s al right to invest in a risky venture, provided your core business wil be safe even if you lose the entire investment and some unexpected calamity comes along as wel . It’s a rule I’ve fol owed scrupulously thereafter. My business was healthier, and I was happier, as a result. Best of al , I could wake up every morning and know that—unless it happened to be February 2—it wasn’t Groundhog Day.
Focus, Focus, Focus
Aside from resilience and the ability to learn from mistakes, what an entrepreneur needs most is a capacity for discipline and focus. People who’ve never built a business don’t understand that. They think the secret to success lies in spotting great opportunities. I remember an old friend of mine who dropped by my records storage business one day. He hadn’t seen it for years. As he looked around at the thousands and thousands of boxes in the warehouse, he could hardly believe his eyes.
“This is incredible,” he said. “You saw an opportunity, and overnight you’ve turned it into a successful business. It’s amazing!”
He should only know, I thought. The truth was that I’d spent more than a decade building my storage business by that point, but a lot of people would rather not hear about that. They like to think that successful entrepreneurs have a magical touch. Al they need is the right opportunity and presto! it becomes a business.
That’s one of the great myths of entrepreneurship, and it gets many would-be entrepreneurs into trouble. They waste time and money chasing after business opportunities, hoping to identify one that wil guarantee success. But the world is fil ed with great business opportunities, and none of them guarantees success. Spotting them is the easy part. What’s difficult—and essential—is developing the discipline and the stamina to stay focused on a single opportunity until you’ve turned it into an established business that can stand on its own.
