The term “bad debt” doesn’t enter their vocabulary until they suddenly find themselves with a receivable they can’t collect. By the same token, the concept of collection time doesn’t become meaningful until they discover they don’t have enough cash to pay their bills, 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 credit-worthy and finding out in advance how long they take to pay their bills. It also means getting into the habit of regularly checking the state of your receivables, and making sure your average collection time is what it should be.
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 all look for shortcuts. That’s only natural, especially 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 finally 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 fully expected to sell 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.
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 equally 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, of if a truck broke down, the customer would be stuck. Customers willing to put up with that risk were not good candidates for us. Conversely, customers who demanded reliability — and were willing 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 well of us, everybody listened. So I made a habit of treating them with the respect I hoped they would show us as well, and I insisted that our salespeople do the same.
You have no friends in business, only associates.
Some habits are more difficult to maintain than others, and I constantly struggle with a really important one: Don’t do business with friends.
The life plan has to come before the business plan.
“Don’t worry twice,” he’d tell 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 usually was. “So don’t worry twice.” In other words, don’t waste time and energy on problems that may never arise.
You don’t ask, you don’t get.
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 allows someone to deal with many different situations and take advantage of many different opportunities as they arise.
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, all 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.
Then I took them through the process of doing monthly cash flow forecasts, from which they could put together a cash flow statement for the year. I did just enough with them to make sure they had the hang of it. The rest they did at home. With pencil and paper.
No computer allowed.
It was all part of the education process. When you write out your own projections by hand, do you own calculations, and work through the numbers for a whole year, two things happen. First, you begin to get a feel for the business. Second, you start to understand reality. You see that sales don’t necessarily lead to profits, and that making a sale or earning a profit is not the same as generating cash. You get a sense of the connections.
Security is not the job. It’s the confidence you feel in yourself. 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.
Don’t let your emotions lead you into hasty decisions that will make it more difficult for you to achieve your real goals.
First came the stock market crash of 1987. Overnight it lost 50 percent of its sales. Meanwhile, fax machines — which had been around for 20 years — suddenly reached a kind of critical mass, which had a devastating effect on the messenger business. 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.
Hard as it was to admit all that, the fact 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 really 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.
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.
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. All 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 will guarantee success. But the world is filled 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.
They’re mesmerized by all the opportunities they see. I’m constantly hearing from people who have ten different business ideas they’re considering at the same time. They want to know which one I think is the most promising. I tell them, “You’re asking the wrong question. You should be asking, ‘Which business do I want to be in? Which one do I like most? Which one fits in best with what I want to do with my life?”
It was a tremendous accomplishment. Maki felt as though she’d finally reached her goal. But in fact her biggest challenge lay ahead.
Why? Because everything changes when you open your doors and start making sales. There’s a new kind of pressure and increased sense of urgency about dealing with problems. Before you have customers, after all, a delay is not a disaster. If you’re a first-time entrepreneur, you tend to greet each problem with the same reaction: panic. It doesn’t matter that the vast majority of the problems are actually quite manageable. To you, they all look like catastrophes.
To be successful you have to get over your panic. Not only must you develop confidence in your ability to handle problems, but your whole way of thinking about them has to change. You have to accept a never-ending flood of complications as a normal part of the business process, and you have to learn to enjoy that process. How? By getting caught up in the fun and excitement of finding solutions.
Those who persevere win.
You learn by refusing to make excuses and looking deep inside yourself for the reasons things have gone wrong.
Everybody makes mistakes with their first business plan. It doesn’t matter how smart or how careful you are. There will be major flaws.
The point is that you need to give yourself time to discover those mistakes. How? By doing research. By trying to make a few sales. By doing everything you can think of to get as prepared as you can be.
In the long run, that research will turn out to be the best investment you can make in your business. Having done your homework, you’ll be much more likely to raise the start-up capital you’re looking for. More important, you’ll be able to make better decisions about how to spend it.
I was trying to get customers the wrong way. In your case, price is not the main concern of parents. If they’re going to send you their children, they have to know you, trust you, think well of you.
When you borrow from an asset-based lender, you give up control of your receivables. The payments from customers no longer come to you.
While it no doubt would prefer that your company succeed, it has no great incentive to help you get through tough times. After all, it isn’t depending on you to repay the debt. It’s depending on your customers. That’s why asset-based lenders seldom insist that you provide them with audited financial statements. It’s your customers’ creditworthiness that counts, not yours.
With a bank, you’re in a totally different position — because banks are not in the same business as asset-based lenders. They don’t make money by managing receivables. Their profit comes from making good loans. A bank will let you borrow against receivables only if it thinks you’re going able to repay the money with interest. It doesn’t want your receivables. It’s not set up to deal with them.
My point is that, when you borrow money, you enter a relationship, and the relationship will be a good one only if you understand what the other party is looking for. Banks look for good businesses — and good businesspeople — to invest in, whereas asset-based lenders look for good receivables to acquire. That’s why it’s hard to borrow money from a bank: you have to prove yourself creditworthy. It’s also why you have to do more once you get the loan.
His comments were a revelation. I suddenly understood what had happened the first time: I’d landed in the group two. Looking back, I realized that I could probably have gotten into group three if only I’d kept my cool. Instead of blowing my top, I should have simply asked my banker, “What’s the problem? Can’t we work something out?” As it was, my behavior no doubt confirmed the bank’s decision to get rid of me as soon as possible.
Bankers don’t like big, bad surprise any more than the rest of us do. They understand that unexpected things happen in business, but many problems can be anticipated, and bankers want to have as much advance warning as possible. Bankers also need some reassurance that you’re in control of your business. That’s one reason they ask for your annual forecasts.
If your projections are way off year after year, your banker will conclude that you don’t know where your business is heading — or worse, that you’re being dangerously optimistic.
Perhaps you’ll never get that letter or call, but if you do, let’s hope you land in group three. In business, as elsewhere, it’s a lot nicer to be shown gently to the door than to be unceremoniously given the boot.
Receivables are, in effect, loans you’ve made to your customers, and it’s always a good idea to keep an eye on the quality of your loan portfolio.
That type of customer literally takes money out of your pocket. To begin with, you don’t have the use of the money that the customer owes you and promised to give you when you signed him up. Let’s say his outstanding bill is for $1,000. If he doesn’t pay on time, you have to borrow an extra $1,000 from the bank. Suppose you’re paying 9 percent annual interest on your loans. So your $1,000 is really just $910.
Meanwhile, your accounting person is spending half an hour each month calling this guy and listening to his lame excuses and false promises.
My friend told me about a guy with a gear-making company who knows his sales by the weight of the gears that have been shipped.
Indeed, the best businesspeople I know all have certain key numbers they track on a daily or weekly basis.
You can’t value any company simply by looking at its sales. What most buyers are interested in is something called free cash flow, and free cash flow is a function of profit, not sales.
The negotiation began with my call to the broker. That’s a general rule: you start negotiating when you have your first interaction with an outside party.
The best dal in the world is when everybody walks away a little unhappy. You’re not going to get everything you want here, and neither is the bank.
Good things happen when you accept the idea of walking away from a dispute a little unhappy. You stop letting your emotions dictate your business decisions. You don’t get caught up in anger, or revenge. You look for solutions instead of problems. You start to think about outcomes you can live with, rather than trying to get everything you want. In the process, you save yourself a lot of money. I’m not talking only about the legal fees, either. Even more costly is the time you spend thinking about a lawsuit, meeting about it, worrying about it — not to mention getting deposed and sitting in court. When you look at the numbers, it almost never pays to use lawyers to resolve disputes.
Listening is the most important part of any negotiation. Make sure you hear what is really being said.
Go in with no preconceptions, and always assume that the other side is smarter than you.
Develop the habit of questioning what you see on the surface and digging to find out what’s really going on.
In an adversarial negotiation, the best deal is the one that leaves both sides a little unhappy.
I do that sort of thing all the time. A lot of people think it takes nerve, but nerve doesn’t enter the picture. You need nerve only when you’re afraid of being rejected. I have no fears and no expectations in those situations. My attitude is, I’ll give it a shot and see what happens. The secret is an attitude, “You don’t ask, you don’t get.” It was all about losing your fear of asking. You realize that you’ll never get anything unless you ask for it, and so you might as well try. In the process, you accept the fact you’re going to get turned down fairly often. The surprise is that you get turned down a lot less frequently than you’d ever imagine.
“No,” Fred said, “because I know what business I’m in.”
“You’re in the fish business.”
“Not exactly. I’m really in the banking business. I make loans to restaurants in the form of fish. You see, a restaurant is a seasonal business. Like any good banker, I know when my customers are short of cash, and I know when they’re busy. I carry them during the slow periods and collect after they’ve had a big week. They pay me not only for the fish but for the credit I extend to them. I build the cost of the credit into my price.”
Now, normally I don’t like competing on price. It’s a dangerous game. For openers, low price can connote poor quality. People wonder whether you can really provide the benefits you’re promising and, if so, for how long. Competitors will use your pricing against you, telling customers you’re fly-by-night and can’t survive. In fact, you may not be able to survive if your gross margins are too thin. By the time you realize that, it may be too late.
If customers have come to you only because you’re cheap, they’re likely to leave when you raise prices.
That sort of thing is not unusual. Niches come and go, and — contrary to popular belief — most companies don’t start out in one. You generally discover the niche after you’ve launched the company, not before.
Don’t lose your focus. Provide great services at competitive prices and develop a reputation as the class act in town. Give prospects the names of customers they can call to check you out. Above all, don’t bad-mouth your competitor, even if it’s bad-mouthing you. Customers will think less of you if you do.
So what exactly do I mean by reputation? I’m talking about what people think of the way you do business, you they assess your character as a businessperson. Do you compete fairly? Do you run a nice, clean operation? Do you treat your employees well? Do you go around bad-mouthing other companies in the industry, or do you speak about them with respect? Those are all factors that help to shape your business reputation, which in turn affects your ability to hire people, attract customers, get financing, make deals, and do everything else that goes into building a successful company.
I’ve long believed that a good reputation is the most valuable asset you can have in business. What’s odd is the role your competitors play in creating one. Their opinion, I believe, counts more than the view of any other group — because of their credibility within the industry and with potential customers. Competitors have a unique perspective of you and your company. They face the same pressures and have to make the same choices that you do. If you have the respect of your competitors, you probably deserve it. If they think you’re a lowlife, you could be headed for trouble.
“Those are all fine companies, and you’re going to be happy if you choose any one of us. Of course, I think you’ll be happiest with my company.” Then I talk about our strong points, taking care not to say anything negative about the other companies.
“I don’t want to bore myself with small clients, but bigger clients seem out of my reach. Any thoughts?” My advice was to forget about boredom. Growing a business from scratch is never boring. Instead of shunning small accounts, he should sign up as many as he could handle and charge premium rates. In the long run, he’d be much better off with a lot of small customers than with one or two big ones.
You also had to overcome customer loyalty, which was unusually strong. Customers would say up front — when you first went in to solicit their business — that they liked their current supplier and probably wouldn’t switch. When that happens, it’s not enough to tell them why your product or service is better. You have to show them.
Third, and most important, I was building trust. How? By giving away our ideas and our experience. By going forward without any guarantees. By investing a significant amount of time and effort in helping the firm save money, with no promise of a return. In effect, I was making the case that the partner should give us the account because he could depend on us to watch out for the firm’s best interests. I was showing him not only that we could help him save money but that we cared about saving him money, that we were trustworthy. I was giving him the best reason in the world for switching suppliers: peace of mind.
Then, of course, there’s ego. I give tours to prospective customers, and some of them will look around at all the boxes in my warehouses and say, “Gee, are you afraid of having a fire in this place?” In fact, I’m not afraid of a fire, and I might well respond, “No, we’re protected. It’s not a concern.”
But that would be my ego talking. When a customer asks such a question, it’s because she is worried about a fire. Why she’s worried is none of my business. The point is that I need to respect her fear, not minimize it. So my answer is, “Yes, certainly, I’ve thought about the danger of fire, and let me show you what we’ve done about it.” I’m putting aside my ego and responding to the concerns of the customer.
And that is my goal as a salesperson. I don’t worry about closing sales. I worry about making customers feel as though they’ve been heard, understood, and responded to. I want them to leave with a warm and fuzzy feeling. If they do, the sales will follow.
You can’t make the customers feel warm and fuzzy if you don’t listen, if you don’t shut out all your preconceptions and prejudices, your agendas and opinions, and hear what they’re really saying. Doing that doesn’t come naturally. It requires discipline and practice. You have to develop routines to block out the distractions. I myself sit quietly for a couple minutes before taking customers on a tour of our facility, and I try to make my mind a blank slate. I repeat over and over, “No preconceptions. No preconceptions.” I wipe out any thoughts I might have that would keep me from hearing or observing the customers. Yes, I’m going to talk about our product, emphasizing what I consider to be the important features and benefits, but I’m not going to push anything on people. I’m going to find out what they want. I’m going to look for the clues, verbal and nonverbal. I’m going to listen to what they say and what they don’t say, and I’m going to respond accordingly.
The guy is satisfied. He is getting full use of his truck. He’s not letting any capacity got to waste. What could be wrong?
Plenty. For openers, he is no doubt making less money on the sale than he imagines. That’s because he’s focusing on one factor: capacity — what it costs to lease the truck. Meanwhile, he’s ignoring all the costs he incurs only when he uses the capacity — gas, wear-and-tear, maybe labor.
I’d argue that it’s almost always a bad idea to cut prices simply to avoid having unused capacity — for four reasons.
First, there’s the cost of capital. Whenever you make a sale, you are, in effect, loaning money to a customer, at least until the bill gets paid.
Second, there’s the opportunity cost.
Meanwhile, by cutting his prices, he has just brought a new competitor into his market: himself. Customers are not stupid. Sooner or later, they’ll figure out that you’re willing to sell for less. When they do, you’ll have a very hard time getting any of them to pay more.
By then, moreover, you will probably have lost your current full-price customers. The practice alienates precisely those customers you must have to be successful, maybe even to survive. They’ll be furious when they find out you’re charging other people less for exactly the same service. They’ll think you’ve been ripping them off all along. From then on, forget it. I don’t care what price you offer them. Those customers are gone.
Which would you prefer — making fifty sales a year and having a 100 precent customer retention rate, or making a hundred sales a year and having a 50 percent retention rate? I’ll take the former any day of the week.
Another way to build the relationship is to make a point of treating established customers like new prospects. That’s a bigger challenge than you might suppose. There’s a natural tendency to treat customers differently after they’ve been around for a while. You’ll do anything for them when you’re trying to win their business, but once you’ve landed the account, your attitude starts to change. By the time you go back to renegotiate the contract, you’ve developed a whole new set of expectations. You’re not focused on making the sale anymore. Now you’re thinking about getting a better deal. It’s an easy way to lose business. You leave yourself wide open to competitors who are looking at the customer the way you did when you were starting out.
The price of a coloring jumped 85 percent. The increases came as a shock to the customers. Some of them were angry enough to talk about leaving. Even Elaine was upset. She asked Judy why she’d done it. Why such a big increases? Why do them all at once?
“I don’t have a choice. We haven’t had a price increase in ten years. I’ve been giving the staff raises every year, and I haven’t been getting any additional income.”
Two things are happening. First, your profit margins are shrinking — because your costs are going up.
Even if you don’t let the problems go that far, however, you’re damaging your business in other ways by not raising prices on a regular basis. For one thing, you’re gradually undermining the perceived value of your services or products. Like it or not, there’s a natural tendency to link quality and price. I’m not saying you always have to charge as much as the most expensive suppliers, but — if the gap between your prices and theirs get too large — customers will start to regard you as the cheap alternative in the market.
At the same time, you’ll be undermining the real value of your business as a whole. That’s a point most small-business owners miss. They look at the company as a source of income. They forget that it’s also a major asset, probably their most valuable one, and — like any asset — it needs to be maintained. That means, among other things, making sure the company has a strong profit margins — as good as or better than the rest of the industry. If you let your margins erode, you’re going to have trouble when you try to sell the business. Indeed, you may not be able to sell it at all.
It’s sort of like selling a house. If the place needs a new roof, buyers will discount the price accordingly, or they’ll look for a house that doesn’t need one.
Behind every rule there’s almost always a good reason, or at least a good intention. At the time you establish them, the rules appear to make all the sense in the world. And yet, if you’re not careful, you run a high risk of creating rules that will hurt your business. What happens is that you take away your employees’ ability to use common sense in responding to the reasonable requests of customers.
If you’d asked me in the 1980s what I wanted to do, I would have answered without hesitation, “Take my business to $100M.” What else I might do with my life, and why I wanted a $100M company, I never even thought about.
Business is just a means to an end. The question is, what’s the end? Where do you want to go in your life? Where do you want to be in five years from a family standpoint? What do you want to earn? How much time do you want to take off?
Some people, after all, really are driven to grow their companies as fast as possible, and they’re willing to sacrifice plenty of things in the process — including their families. I don’t try to argue with people like that. They won’t listen. I know. I used to be one of them.
I explained to Mike the inherent risk in every business acquisition. For openers, you never know exactly what you’re getting until you own the company and it’s too late to go back.
There are no real shortcuts in business, and when you look for them, you usually get in trouble. It took me a long time to realize that. People like me want instant gratification. One of the hardest lessons I had to learn is that you can’t expect good things — like more customers and better sales — to happen overnight.
To be a good boss, I’ve learned, you need to maintain a certain distance from your employees. You have different responsibilities from theirs. As the boss, you always have to be thinking about what’s best for the business as a whole, and you can’t let emotional attachments interfere with your decisions. Not that you shouldn’t care deeply about your employees and their families, but I believe it’s a mistake to develop personal relationships with them outside the business. Employees should not be your social friends, and your social friends should not be your employees. Yes, you should treat employees with respect. You can laugh with them, cry with them, be happy and sad with them, but neither you nor they should ever forget that it’s a business relationship. If you do, you’re going to create problems for you, for them, and for the company.
Now, that’s advice I wish someone had given me before I launched my first company. I’m not sure, however, that I would have listened. The problem is, it runs counter to all human instincts, and it seems to defy the spirit of the start-up. When you start your first business, you can’t help but get close to your employees. After all, you’re working 60 to 70 hours a week together in an incredibly intense environment, struggling to survive. It’s a thrilling adventure, and you’re depending on one another to succeed. There’s a wonderful feeling of camaraderie, of all-for-one-and-one-for-all. The last thing you want to do is create barriers. Your employees are among the most important people in your life. Why shouldn’t they be your friends outside the business as well?
Then I caught him stealing from me. He’d gotten away with it because I’d trusted him as a friend, and so I didn’t check on him the way I should have. That hurt. It really hurt. Not that the amount was enough to jeopardize the company, but the emotions were just too much to deal with — I mean, much too much. Before I even confronted him, I went home and cried.
Unfortunately, it often takes an experience like that to make you aware of the perils of getting too close to your employees.
The loss of the money was the least of it. Far worse was the sense of betrayal. I felt completely alone. I didn’t know whom I could trust anymore. I decided to trust no one — which was exactly the wrong response.
Indeed, most of our employees thrived under the new regime. Morale was higher than ever. The reason was obvious: People wanted structure.
They wanted to know what the rules are, and they wanted the same rules applied evenhandedly across the board. They didn’t want us to deal with each case individually, as I used to do it. They actually worked better when they believed everybody was getting equal treatment.
The way to deal with employee theft is to improve your systems, not to stop trusting people.
But like many ideas I had back then, that one proved to be an illusion. For openers, I discovered it’s very hard to tell in advance who the best people really are. After making more hiring mistakes than I can count, I came to realize that no matter how sharp your instincts are, no matter how many people you have interview each candidate, no matter how diligently you follow up with reference calls, you simply never know how each individual will do on the job until he or she is actually working for us. Some of the most promising candidates we hired turned out to be duds. Then again, the president of CitiStorage is a guy who nobody thought would last when he first started working for me.
That culture has been by far the most important factor in our ability to build a great team over the years. To be sure, money plays a role, as do benefits, but you can’t hold on to the best people with financial incentives alone. For one thing, it’s too easy for other companies to come along and offer something better. Nobody is loyal to a compensation package. People are extremely loyal, however, to a company that they’re proud of — that competes fairly; that does right by its customers and suppliers; that gives back to its community; and that cares, really cares, about being a great place to work. Not only will such a culture bind your employees to your business, but other people will notice, and the quality of your job applicants will rise.
So how do you create that kind of culture? I believe there are three essential ingredients. The first is mutual trust, which requires clarity about the rules. People need to know what is expected of them an what they can expect in return. My principal rule is simple: I want my employees to give me an honest day’s work. Period. As long as the do so, it’s up to me to make sure they have jobs. That, I believe, is an employer’s primary responsibility. If people do everything you ask of them, they should be able to have confidence that you’re going to keep them employed. Without that assurance you can’t have mutual trust, and without mutual trust you can’t have a healthy culture.
The second ingredient is appreciation for the contributions that employees make. You have to recognize that all the good things you get from the business come as a result of the efforts of others, and you need to show your gratitude.
That’s the culture we have now. The culture of Perfect Courier, my first business, was very different. In the beginning, I didn’t even recognize that we were creating a culture. Entrepreneurs seldom do. The one you wind up with isn’t planned; it just happens. While everybody is focusing on something else — making sales, providing service, paying bills, sending out invoices, and so on — a little community springs up, and it has its own unspoken customs, traditions, modes of dress and speech, and rules of behavior. By the time you become aware of it, the culture is often well established. You can only hope that you’ll like it, because it will probably be a reflection of your personality.
Consider, for example, the phenomenon of creeping expenses — that is, the tendency of all expenses to rise over time. That phenomenon goes hand in hand with another one: the conversion of luxuries into necessities. By luxuries, I mean the expenses that aren’t essential to the company’s well-being. You don’t find many luxuries in start-ups — at least not the successful ones. They realize that every dollar they save will help them meet next payroll and give them the breathing room they need to get the business up and running.
That habit of frugality tends to erode, however, as time goes along. People begin to spend more freely. They start investing in some things (computers, telephone systems, advertising) that will help them maximize their potential to grow. At the same time, they let down their guard in other areas. They have the leeway to spend money on stuff they don’t really need, and so they do. Along the way, often without anyone noticing it, luxuries become necessities, and the organization becomes a little sloppy. Salespeople start thinking they have to use cabs to get around town, rather than take the subway. Office clerks think they have to send packages by courier or FedEx instead of by regular mail. Executives think they have to fly business class and stay in the best hotels. Expenses creep, and overhead balloons.
The danger, of course, is that something unexpected will happen — it always does — and the company will suddenly find itself desperately short of cash. At that point, many companies are forced to do first what should only be a last resort: they lay people off. Layoffs are the costliest way of dealing with cash flow problems. Although the employees who lose their jobs are the most visible victims, the whole organization suffers as the people who are left worry that they’ll be next and start making contingency plans.
By the time you’re in a cash crisis, however, it’s often too late to start thinking about alternatives like cutting back on the luxuries that have become necessities. That’s why the fight against creeping expenses has to be an ongoing struggle.
My third rule will strike some people as narrow-minded, but it’s based on years of experience. The rule is that if you want to apply for some of our sales positions, you must have held at least two prior jobs in different companies, and one of those jobs has to have been in sales. In other words, we don’t hire salespeople straight out of school. Why? Because nobody is satisfied with his or her first job. Well, almost nobody. There are always exceptions. But the vast majority of people finding something wrong with the first real job they hold, no matter how good it is or how well they’re treated.
It’s human nature. You simply can’t appreciate what you’ve got if you don’t have anything to compare it with. So what do you do? You look for greener pastures. Virtually every person I’ve ever hired straight out of school has moved on within two years.
There’s not much point in hiring salespeople whom I now I’m going to lose right after they’ve been trained. Nor is there much point in training salespeople only to discover that they don’t like selling or aren’t comfortable in our environment. In your first job, you assume every company works the same way. In your second job, you learn that different companies have different styles, different benefits, different procedures and rules. By the third job, you realize you’re choosing a company as well as a career.
In theory, salespeople won’t spend much time with a customer if they’re getting only 2 percent from the account. Such systems may or may not weaken a salesperson’s hold on a customer, but they don’t address the underlying problem. The salespeople are still not members of the team. Their focus isn’t on making the company successful.
It’s on looking out for number one.
I want everybody in my company to be on the same team, including my salespeople. That won’t happen unless everybody is paid the same way.
After almost 20 years with a largely salaried sales force, I can assure you that the system we’ve come up with really does work. What’s more, it’s good for everybody, though I have no doubt who gets the most out of it. I do. I get a cohesive company. I get people working together and pulling in the same direction. And while I’ve always tried not to waste time worrying about salespeople leaving and taking customers, the thought doesn’t even occur to me these days. It’s almost impossible to imagine. And that may be the greatest benefit of all: peace of mind.
If you’re talking about an official group that meets regularly, I doubt you need one. A board is useful when you want to take an established business to the next level and you don’t have a management team with the experience to guide you. You might also need a board at some point to enhance your credibility with investors or important customers. For the majority of start-ups, however, a formal board of advisers just gets in the way. On the other hand, it’s always smart to get advice from experienced businesspeople. I’d talk to as many people as I could find with experience in wine retailing and similar business. You don’t need a board to do that.
I thought about that comment for days afterward. If it was only common courtesy for a king to walk me to my car, and only common courtesy for him to find out who I was before we met, couldn’t I do as much for people who came to see me? King Hussein had made me feel about him and his country exactly the way I want my customers to feel about me and my company — warm and fuzzy. I want to send the message that I care about them personally. That’s how you develop long-term relationships.
There was more to it, I realized, than one bad decision. That decision was connected to some fundamental character traits, one of which was my need for instant gratification. I do things on the spur of the moment, without considering the consequences or consulting with other people. And when I set a goal for myself, I’m single-minded about achieving it — even if it turns out to be the wrong goal. Looking back, moreover, I could see that such traits had led me to make countless other mistakes over the years, in my personal life as well as in business. Somehow I had to figure out a way to control those tendencies. I knew that I probably couldn’t get rid of them. They were too deeply embedded in my personality. But I didn’t want to go on letting them make my decisions for me.
So I came up with a rule: don’t make any major decision without taking a shower.
First, understand that there’s nothing unusual about feeling alone and confused. Entrepreneurs are always alone, and we all do a lot of groping in the dark. In fact, loneliness is the biggest challenge we all face. Fortunately, there are many places you can go to get unbiased advice, including industry conferences, business seminars, and networking groups.
Whatever your company does, you need to believe in your gut that it’s the most interesting, exciting, worthwhile enterprise you could be engaged in at that moment, or you’re going to have a hard time convincing anyone else — employees, customers, investors, whoever — to make commitments to you. If I thought storing boxes on shelves was boring, I never would have been able to attract the great people I work with, and we wouldn’t have been able to accomplish what we’ve done.
That kind of enthusiasm is worth all the headaches and heartaches that go into building a company. If you don’t have it, you probably should find some other pursuit. Life is too short to waste your time — and everybody else’s — on things you don’t believe in. Then again, if you do have the passion, you’ll look at entrepreneurship the way I do: as a fantastic journey and a truly fabulous way to spend a life.