Looking Back, Looking Forward
This book is available on Amazon for a low cost if you would prefer to read it on your kindle or iPad.
New Age/Self-Help Thinking
Your Customer Is Not Your Friend
You’re Not a Bank
Success Does Not Mean Competency
Who are you?
Entrepreneur, Owner, or Manager
This book is a designed for individuals who are considering opening a small business. I wrote this book in order to provide inexperienced small business owners some basic advice concerning their choice to open a business and the decision-making surrounding this choice. The focus of this book is primarily to generate critical thinking concerning ownership of a small business. It is my intention to help people make proper decisions concerning business choices and practices by reflecting on many personal experiences in business ownership.
Having owned several small businesses, I have found that the success or failure of many businesses hinges on the business owners perception and understanding of their business. This is not a book about optimism or affirmations concerning a business. This book is a practical, critical, (and hopefully entertaining) guide intended to provide potential owners with some insight into their own thinking and practices with business.
People all the time decide to start their own businesses for a variety of reasons. I have found that there is a great deal of misconception concerning the reasons for opening a business. Most books of this nature start off by asking “Why do you want to own a business?” When you really think about it- this is a stupid question. Your reasons for wanting to own your own business are yours and to be quite honest, it doesn’t matter what your reasons are, as long as your reasons include making money and trying to create a sustainable business model that can support you. All the other reasons do not matter.
We often give too much credence to concepts such as motivations and intentions. When I was a kid my mother once told me “You have to really like what you do, otherwise you will not be successful at your job.” This was perhaps one of the dumbest bits of advice I was ever given. There are many people who are highly successful at what they do and don’t like it. I and many business owners have started companies for no other intention than to make money. The idea that we have to think or believe specific things about business is really a myth that has been generated by lack of understanding and lack of critical thought. It may help to enjoy what you do because it will make the work less unpleasant, but this is not necessary. Think about it like this- how many people enter into a profession and business because they like it, only to find that they hate it after a few years? Many. Anything you do as work has the capacity to burn you out and owning a business is no different.
What is detrimental to a new business is entering it with misconceptions and poor thinking that makes you think you are doing it for the ‘right’ reasons. People believe ridiculous ideas concerning businesses. Many of these concepts center on moral justifications and what I refer to as new age/self-help thinking. People also have very unrealistic ideas when planning to enter a business which includes their perception of a good business and their own self-perception. These preconceived notions are really detrimental to our thinking and prejudice our decision making. A critical examination of these concepts highlights this problem.
What is ethical and what is unethical in business is an area of applied ethics which fills the shelves of libraries. A very basic problem that bars many people from ever entering a business is the fact that they cannot get past the ethics of what they are doing. I have a friend who for 20 years talked about opening a business, still does today. For the first year or two I entertained his ideas, but I quickly realized that my friend was never going to open a business and here is why.
My friend and I kicked around several business ideas before I quit trying to work with him. One of the first ideas I presented him with was a proposal to open an online lending service similar to many that exist today. My friend would not have anything to do with that idea because he felt that the lending was predatory and immoral. My next idea was to open a gaming club in which we would charge small monthly fees for members and sell merchandise. (Role playing online and traditional games.) My friend attacked this idea because he felt that gaming was wrong because it reinforced inactive lifestyles and promoted violence in people. What was interesting about this situation was that all the ideas I had concerning businesses were relatively low cost and easy entry at the time. His moral hang-ups profoundly limited our choices of business. After about two years of going back and forth, I gave up because all of the business models that were being considered were expensive, required long hours, risky, or were just too competitive. It has been 20 years since those conversations and my friend has still not decided on a business model and probably never will.
I do not blame people for allowing moral justifications to interfere with their business planning and decision making. I am guilty of the same issues. The reason that this problem exists is due to the fact that people are indoctrinated with this type of thinking from the time they are born. It is almost impossible to start a business and operate it without having these prejudices enter into play.
A great example of this problem can be seen in a prior business I owned. I once owned a moving company, after working in the moving industry for almost a decade. When I entered into this business I had all these ideas about how I was going to run an ethical company that did not take advantage of workers and customers. Herein was the problem, while I was trying to actualize what I thought was the right way to operate this company, the employees were robbing me blind and the customers were suing me. The reason that this occurred was due to the fact that I thought there was a right (moral) way to run the company. Never mind the fact that I had years of experience working for successful companies- no, they had to be wrong and I was going to reinvent the industry. This endeavor was a catastrophic failure on so many levels it is difficult to even describe.
One might question how this business failure was caused by moral justifications and the answer can be found in how my thinking was blinding me to the reality of the business I was in. The best example of this can be seen in the dealings with employees. The truth (at least at the time) was that the moving industry was labor intensive and filled with uneducated, drug addicts and alcoholics. I worked in the moving industry for years and I was perfectly aware of this problem. Despite this knowledge, I persisted in trying to run my company in a manner which tried to treat employees with fairness such as paying them more than the standard wage at the time, or providing time off rather than trying to work them seven days a week. For this effort, I was rewarded with people who would not show up on time- if at all. They stole from me and from customers. The first six months in this business I might as well have taken $30,000 and flushed it down the toilet. The reason that this occurred was due to the fact that for years prior to owning this company I became deluded with the belief that if I created a company that operated on principles such as fairness and treated the employees better than my competition, then I would build a great workforce. Treat people good and you get good people, right? Absolutely not.
The truth is that every business has its own idiosyncrasies and as a result each business runs in specific ways which has little to do with blanket moral generalizations. What I mean to say by this is that a business’s characteristics can create situations which do not fit any specific business theory. Academically, we look at business from an aspect that a particular theory or set of theories is going to allow us to develop the business successfully. This might be true in some instances but not in others. For example, green business branding works with companies that do not rape the environment, but you are going to have a hard time operating in green manner if you are a mining company. In the same respect, I really believed that by operating with concepts such as employee development that I was doing the right thing and this would make the company successful. This might have worked under different circumstances, but in my case it failed because of the unique characteristics of the business and my own hypocrisy.
When you look at the situation in a realistic way- the problems are obvious. The company was located in a high crime area with a huge drug problem. Needless to say, this did not promote good human resources. This area was so bad that every day the building suffered vandalism or theft. At one point, I had stacks of police reports sitting on my desk and was wasting tremendous amounts of money on security. The area I was in was filled with drug addicts and criminal elements that simply could not be controlled. Try offering people of this caliber 401Ks or providing sick days! I tried hiring from outside the area and this proved to be futile because many people were not willing to commute for a labor intensive job when they could work for a moving company closer to their home.
The workforce in this particular state was a huge issue. The moving industry in that particular state was strangled by serious labor shortages due to the fact that most people did not want to work in a labor industry. There is a basic common sense factor involved in this situation. If given a choice, why would a person work at a job that required them to work all day moving heavy objects when they can take less labor intensive jobs for about the same money? This was a tremendous problem and most of the moving companies had this same issue. No matter what you paid or offered employees, you ended up with the same caliber of worker.
Sadly, I really have no one to blame except myself. My lack of foresight and refusal to see the business in a realistic perspective caused me to lose tons of money and suffer a near nervous breakdown. Despite the fact that I had been in the moving business for nearly a decade, and knew all of the problems with labor and the industry, I still felt that I had to operate the company in this manner in order to do it the right way. Now what really makes this situation ridiculous was the fact that I was a complete hypocrite in my so-called ethics.
The truth of the matter was that I ended up taking the business from a man who refused to sell after promising that he would. I came to work for this company after taking a pay cut, and leaving a good company, on his word that I would be able to buy the company. After a few months, I realized that this guy was never going to sell and the way he was running the company it would eventually fail and I would have nothing. As the manager, I reasonably could predict when the company would fail and when the end came I took control of the accounts and forced the old owner out. I went to the landlord of the building and he released the old owner from the debt on the lease and I signed a new lease. What the old owner did not realize was that under the law when I signed the new lease everything in the building at that time became mine. I essentially opened a new business where the old one was and took control of the accounts. Now I had no problem justifying taking a man’s company that he had worked at for 30 years and paying him nothing for it. I also did not have a problem firing everyone who I suspected of being loyal to the old owner. The point of this is that I maintained a form or cognitive dissonance in which I had conflicting beliefs concerning what was right and wrong with operating a business. The conflict I held caused that business to eventually fail because I made poor and impractical decisions.
New Age/Self-Help Thinking
One of the most pervasive problems when considering a small business plan and operations scheme is what I refer to as New Age/Self-Help Thinking (NS). NS is a terrible problem and most people do not even realize that they have this issue. Let’s start by defining NS.
NS is a broad category of what people have come to accept as wisdom. We experience NS all the time and do not even question the thinking. For example, people all the time say things like you need to believe in your ideas in order for them to be successful. Or, people think that being excited or enthusiastic about a concept will equate to success. Self-help gurus have been enterprising on this kind of thinking for as long as I can remember. Today, this is often referred to as positive affirmations or positive thinking and includes thinking such as:
- If you believe in an idea- it will happen.
- If you are positive, positive things will happen.
- If you focus on positive thoughts, positive results occur.
It is my personal belief that this type of thinking is a distortion of proper thinking. Being positive or negative may impact our decision making to some degree but simply forcing yourself to be positive or believing in an outcome does not mean it is going to occur. Don’t get me wrong, there is a lot to be said for self-efficacy and willpower. What I am trying to distinguish is NS thinking from objective practical thinking.
NS is an exaggerated view that one’s thinking impacts the outcome of situations or goal accomplishment. Simply believing in an idea will not make it come to fruition. NS thinking tells us that hard work and thinking positively will always yield good results. NS tells us that all negative thinking is bad which includes questioning concepts (because if you question something critically this must be a negative thought.) As ridiculous as this might seem to some readers this is a terrible problem and it leads to poor business choices and practices. Let me put this into perspective with a story.
I had a friend that wanted to open a business and he was a major proponent of NS thinking. He was into the whole life coaching and power of positive thinking concepts. He came to me seeking to come up with a business idea and I agreed to kick around some ideas with him in the hopes of coming up with a concept. So we started coming up with some rough ideas and what occurred from that point was ludicrous. It started with him telling me that I was being too negative and that I wasn't sinking enough effort into what I was doing.
"You have to believe that what you put out to the universe will come back to you." And when I asked "How?" he said "Don't worry about that. It is a matter of faith, the universe will provide."
Evidently, I was not getting this concept and furthermore I was growing irritated with my friend. Wasn't he the one who called me and wanted my assistance with starting a new business? Wasn't he the one that needed my help?
His idea was to start a moving company. I said, "Jerry, all I am saying is that with the economy the way it is right now, it would be unwise to start a moving company. There is nobody moving, other than people in foreclosure and they do not have the money to move."
That was all it took and he launched into a tirade about negative thinking and the universe answering my 'delivery order'. Finally, after listening to his rhetoric I said, "Look, I'm not saying that I don't want to start a business; I'm merely stating that we need to look at alternatives to the moving and storage industry."
This seemed to still his bleating long enough for me to propose different ideas. Jerry was definitely not a stupid person but with his NS ideas concerning positive thinking he was not thinking clearly. The Great Recession was underway and this guy wanted to start a moving company when people could barely afford to pay their mortgages. I don’t care how positively one thinks- opening this type of business was a bad idea in this circumstance.
So I proposed some ideas and Jerry seemed to go along with these thoughts. That was on a Saturday, but on the following Monday I found myself screaming at him. The phone rang and I answered and Jerry started right in, "I guess I was wrong about you with trying to do a business. I guess you're not going to be serious about this business." That was when I started losing it, "Jerry, what the hell do you want me to do? It has only been two days. I can't get a business off the ground in two days."
He said, "Well I don't know how you can be serious if you're still at your job?"
Was this guy kidding? Did he really want me to quit my job and try to start a business?
"You know Jerry, what the hell have you done besides pump me with sunny talk about positive thinking and the universe answering my phone calls?” In that moment, the truth came to light.
"Well I guess my needs are more immediate than I like to admit."
"What do you mean Jerry?"
"I have been living in my apartment with no power for five months; I got fired from my job."
I responded, "Jerry, how did you think you were going to get a business started?"
He again began talking about the power of positive thinking, his life coach, and other nonsense.
I said, "Jerry, you can ask the Universe for whatever you want but that doesn't mean you're going to get it.”Was it really possible that my friend of thirteen years had gone completely out of his mind? As I contemplated his sanity, I realized the real danger in this type of thinking. My friend Jerry had always been a hardworking man, in fact, I once worked for him. But here he was living in an apartment with no electricity, with no job, and paying a life coach a hundred dollars a month to keep him thinking properly.
Jerry, like most people, is not a moron; he is really just another person being seduced by a good con. The big secret is that there is no secret! NS is all crap. The goofballs who write this stuff try to fool people with their psychobabble/techno-babble double-talk. Poor Jerry was just the victim of a good con.
While Jerry might be an extreme case, this kind of ridiculous thinking is pervasive. If we go back to the moving company example, it is easy to see how even subtle NS thinking can be damaging. I had a company that was failing and losing money month after month and I kept working at it despite the mounting losses. A good business person would have walked away from the situation. I even had people tell me to close up shop and I did not listen. I was working 70 hours a week, 7 days a week, and could not get this company to work but I really believed that if worked hard that my positive effort would pay off. I wasted three years, unknown amounts of money, and compromised my health trying to make this terrible business run correctly. At the end of three years, I gave the business away because I could no longer work at it.
As one can see, both Moral Justifications and NS thinking can have a terrible impact on business development and operations. While one might think that the issues I had were grounded in lack of planning such as not having a contingency plan, the reality was that I did have a contingency plan but never acted on it. I was confident in the fact that positive thinking, hard work, and trying to run the company the right way, was going to naturally lead me to success. How wrong I was!
The real rub in all of this was the fact that within a five mile radius of my moving company was three other moving companies that had the same labor issues and same location problems but were successful in spite of these problems. Sadly, my company might have been successful if I had not held so many ridiculous beliefs. While I was trying to counsel my laborers and develop a positive workplace culture, my competition was micromanaging and using hostile work environments to maximize productivity and profit. When I was trying to keep a steady workforce by working people in slower months, my competition was laying people off. It was ridiculous to think that I was going to be able to run this company on theories and positive thinking. But the rub gets worse, the truth is that a person who is thinking poorly, like I was, might actually be successful if the circumstances are only slightly different. For instance, there are some business owners who are actually successful despite the fact that they have ridiculous thoughts and practices. This is often due to many different factors such as economy or the demand for services and products. I have seen business owners who have no managerial skills and terrible thinking but they are completely successful.
I knew a guy named Frank, who owned a liquor store/bar in the inner city and he was madly successful. Frank was also one of the biggest assholes that you would ever meet. He was rude and held highly conservative religious views hinging on being insane. Frank did not drink and would sit at the bar serving drinks, telling his patrons how they were going to hell and how they should not drink. Obviously, this was a counterintuitive practice for maintaining good business and one would think that this would ruin the business. Despite this practice, Frank enjoyed a successful business because he was serving drinks in a depressed and poverty stricken area. Demand was high!
So one might think that none of what I am saying matters, but in reality, people like Frank are just lucky. Situations such as this show us that bad thinking often goes unpunished due to circumstance or just plain luck. These owners happen to own a business that is in the right place, at the right time, and they are successful in spite of themselves. Bad thinking is still bad thinking and for every person that lucks out- there are many more that fail miserably. Do you really want to roll those dice? Of course not and this emphasizes the need to be aware of your beliefs and thinking concerning your business.
There is a tendency in human beings to think of themselves and their ideas in a positive manner. This is understandable because no one really wants to think of themselves or their ideas as being bad. This is a function of ego and it can be very detrimental with starting a business or its operations. I thought I would relate this concept through a few anecdotes that really highlight this issue.
As a business owner, I find that I am consistently bombarded with bad ideas. A few years ago, I was approached by a person who wanted to propose a business idea that he thought I might be interested in helping him get off the ground. I find this situation to be extremely frustrating because people just assume that because I own my own business that I am making tons of money, and they also assume that I would have an interest in their ideas. Most business owners are not making millions and often are struggling with their own business.
For whatever reason, I decided to entertain this person’s proposal and I probably would have been angry if I had not found it so amusing. His concept was Ball Naps.
So what you have is a little napkin which has a like a perfumed cleaner on it…sort of like a wet nap. Now, suppose you are out at a bar and you get lucky. You are going to end up having sex with this girl you met; suddenly you realize that you are all hot sweaty from dancing or being in a crowded bar. You realize that your balls are stinky. Ta da! Ball Naps! You go to the bathroom and you purchase a ball nap from the same machine that dispenses condoms. You clean your balls and you’re good to go!
As bizarre as this idea sounds, this guy was dead serious about it. He really thought this was a great idea, and for whatever reason, he thought I was going to be interested in this product. The really sad reality of this situation is that I could not tell you how many times I have been presented with a stupid idea such as this one.
It takes a lot of honesty and critical thinking to properly assess one’s ideas. It took me years to learn that every idea I had was not good. Even with that realization it took me longer to learn that many of my ideas were just stupid. It is hard to look at your idea, and say it is dumb. I cannot express the importance of the ability to think critically about your ideas.
I have watched people take out loans, dump their lifesavings into concepts, only to fail very quickly in their business endeavor. Being critical of your ideas requires asking some hard questions and answering them honestly. If people asked certain questions it would eliminate so many problems. One question I believe that everyone should ask, “Is this idea original enough for me to market?”
Pizza parlors are one of the most common businesses in large cities and suburban centers. Despite the large numbers of competitors, lack of uniqueness, and high failure rates; people continue opening these businesses. I asked a guy who once owned a pizza parlor why he opened the business and this was the response I received:
I looked at the cost of ingredients and the price of pizzas and I thought that the business had a high profit margin. Although the cost of equipment was high, this cost did not seem unreasonable in light of the high profit margin. When a examined the overhead and the projected sales, the business seemed viable.
This was not a stupid person who blindly opened a business. He did his homework as far as the financials were concerned but what he failed to realize was the concept of brand. He thought that price and convenience were the primary drivers and while they are important there was already so much established competition in this industry, that he failed because he could not establish a deep enough market penetration to make the business sustainable. Had he been critical of this idea, and simply asked the question of whether this idea was original, he may have saved himself a boatload of money. This mistake is common and we see it everywhere.
I had a friend from high school who decided to open a coffee shop. Despite the fact that Carl was living in an area where there was an abundance of these shops he also decided to open the shop in a less expensive location which placed him off the main roads. It was terrible location! Besides the poor location, he was in direct competition with large brewers and he put no thought into product or brand differentiation. This problem stems from a lack of critical thought concerning his ideas. This business cost tons of money to open and closed in three months.
Now this is not to say that people cannot or should not open similar businesses, but potential business owners need to examine their idea to see if it is better or has some brand value that differentiates it from competitors. In an area where I used to live, there was a donut shop that was competing with a larger franchise and grocery stores in the area. Despite the competition, the store had a business that was so strong that on certain days there was a line going out the door. The reason this business did so well was due to their unique method of cooking and toppings for donuts. People could create all different flavors of donuts similar to an ice cream parlor.
While all this talk may seem like common sense, you would be amazed at how many people lose tremendous amounts of money opening businesses that are just plain bad ideas. Bad thinking or unrealistic thinking directly relates with the idea of NS and moral justifications. That natural tendency to consider one’s ideas in a positive light is made worse when moral and NS thinking are added into the mix.
Your Customer Is Not Your Friend
In business it is easy to lose sight of the fact that customers are not your friends. The relationship between customers and businesses can be cordial and respectful, but the bottom line is that customers and businesses always have a distributive relationship. Go to a bank when you have tons of money and watch how you are treated. Now go to a bank when you only have a little money and see if you get treated the same. Your relationship with any business is contingent on your spending and value to that business. People often argue this point with me and they point to companies and exclaim that they have a great relationship with that company. This might be true, but only to the extent that this person is providing a benefit or value to the company. A customer relationship may also be based on price. I have a great relationship with a particular company I deal with because I pay a monthly fee that is under $20. When I have an issue they take care of it right away because that $20 benefit is not worth arguing over and they have a lot of good competition to which I can easily switch, if I am not satisfied.
Customers need to be viewed as important components to your business, but they also need to be viewed quantitatively. How much is this customer worth and is their issues worth the value they place into the company. I had a customer that I gave a low monthly payment for work. This customer relationship was fine until the customer became unsatisfied due to some issues that were beyond both our control. Quickly, the time involved in this relationship became unfavorable for me. To her surprise I told her that I did not wish for her to be unhappy in the relationship, and I refunded her the last month’s charge and sent her on her way. People argue with me about this situation because it was a long term customer. They argue that I gave up $165 per month that was ongoing revenue. This is true but the customer was taking up enormous amounts of time in the last month and I had other customers that were paying three times her rate. By getting rid of that customer, I was able to concentrate on other customers, and gain new higher paying customers.
It is easy to lose sight of the fact that customers are just customers and they are only worth the value they bring to your business. When you begin thinking of customers as anything other than customers you make yourself prone to poor decisions and hesitation. I have done it- it can happen very quickly. I had a loyal customer and she was a good customer for a long time, and when she began making late payments, I figured she was having some issues but I would give her some time to work them out. Then it started with her asking for longer extensions on payments. Pretty soon, she was several weeks behind. After 8 weeks, she owed me over a thousand dollars and could no longer pay. I never could recover the debt.
Had I treated this customer like a customer, this situation would never have occurred. What should have happened was simple. When she began asking me to float her on services I should have said no. Small businesses are not banks and giving people large payment periods is a bad idea because it chokes cash flow, and increases the risk of bad debt. Rest assured that if you went to your customer and asked for more money before you had completed service you would get an earful.
The modern business communities have adopted some very strange and conflicting thinking. On the one hand, many companies promote the idea that they are your friend, even going as far as to call their customers family. But on the other hand, these same companies also operate with the intention of making money and have policies which limit their ability to treat you like family. If you don’t pay you cell phone bill for 30-90 days, then chances are they are going to turn it off. We’ll see how far that family rhetoric and nonsense will get you with keeping your cell on until you can afford to pay it.
A friend of mine had a business and he was complaining to me that he was having cash flow issues. When I asked what the problem was, he stated he was working with some very high-end clients and was having issues with collecting payment.
As ridiculous as this situation sounds, here was a guy who had done the work, had clients who could pay, and could not collect. My friend had fallen prey to a common problem in which he had adopted myths concerning how he should deal with certain customers and money. There are many myths concerning money and how to deal with it, but we will concentrate on a few specific areas which are absolutely vital to small business operations.
Rich people have invented certain social contrivances that most people accept without question. I am pretty sure that rich people invented these social norms because poor people would not be in a position to enforce such thinking. One of these contrivances is the discussion of money. One of the first things that you find out in your first business is that there are many people (and maybe yourself) who are uncomfortable discussing money. This is because many people are told that discussing money is uncouth or rude. I have experienced this on many occasions with high-end or affluent customers. I had a customer who owed me thousands of dollars and was behind by months. He actually had the audacity to get upset with me when I called him asking for the money. He was shocked and offended that I would actually call him and ask for money that he owed me. I find that this type of situation often occurs with rich or upper middle class customers. These individuals are raised to think about money differently than people who are middle class and poor. As a result of being raised in this way, these customers tend to think of “money talk” as rude- but never hesitate to take advantage of the position that it gives them. These customers are likely to be late pays, no pays, or they will find reasons to complain and get discounts when they can no longer postpone payments. I can honestly say that I have lost more money dealing with upper middle class and rich customers than I ever lost dealing with middle class and poor customers. This is because middle class and poor customers are forced by businesses to pay up front, and have less options than upper middle class and rich customers.
I cannot count how many times I have done business with a rich person and they did not pay. Because these individuals are raised with a different understanding of money, they know they can negotiate bills down and get free things if they just complain enough. These are the individuals who will file false claims and complaints against your business.
There is however a means of stopping these problems. It’s very simple and very efficient and it will eliminate most issues with collections. Don’t do work unless you get paid for it. I have learned the hard way not to perform any work unless I have been paid. You need to collect deposits or collect upfront for services and products. If you treat all customers the same when it comes to payments this will eliminate many issues. Many people who are reading this and have businesses that cater to the rich and upper middle class are thinking that what I am saying is stupid. Chances are this is due to the fact that you are rich or upper middle class, and think the same way as the customer. Sadly, you just have not experienced the sting of your clientele, yet.
Rich and upper middle class customers tend to look for situations where they can control the payment or money. Not billing these customers is the worst possible thing you can do because it will eventually bite you in the ass. Look at Michael Jackson. Jackson owed many people money at the time of his death. Because Michael was rich and famous, people extended him services and products thinking he was good for the money. Many people are now forced to sue Jackson’s estate in order to get their money. Whose fault is this- those businesses. If they had charged Mr. Jackson at the time of purchase this would not have been an issue.
I realize that there are small businesses that believe that their entire business is contingent on these affluent customers, and that they must treat these clients differently when it comes to paying. They may be right. My suggestion to these companies is to diversify their clientele and business. Sooner or later it will happen that these types of customers will damage your livelihood. I knew an interior designer who had an incredible business and very select clientele. She operated for years buying and selling furniture for her clients and getting paid whenever the customers felt like it. This situation worked for almost 20 years until one of her customers ordered a tremendous amount of furniture from an ultra-expensive company, and decided he did not want to pay for it. The designer was damaged so badly financially that she had to claim bankruptcy. The lesson here is to get your money upfront and as soon as possible.
You’re Not a Bank
If you walk into a fast food restaurant and order a burger, you are expected to pay for that burger immediately. Now what is funny about this situation, is that the same restaurant that made you pay up front typically has accounts with its suppliers in which it pays for its paper cups and plates on either 30-120 day billing terms. The reason that this situation occurs is due to the fact that suppliers are medium to large corporations that can afford to wait on their money. The ability to wait gives them competitive advantage over smaller suppliers because they can offer their customers longer payment terms and thereby attract more business. The problem in this situation is that small businesses often become drawn into this competition unnecessarily. In many instances, small businesses are forced to deal with these billing terms if they want to deal with large accounts that provide ongoing work.
Each business is different but what I can say is that if you are small company and trying to compete with large companies with 30-90 day billing cycles you may find that this is going to seriously stifle your operations. In most cases, there is no reason for companies to operate on these terms. If you can afford to operate in this manner that’s great because it will give you competitive advantage. But if you cannot afford to operate in this manner, you will likely harm your business. I was working at a company that would offload and store kitchen cabinets for a large distribution company. This account brought in about $100,000 per year. Now it was the responsibility of the company I worked for to offload the trucks, store the cabinets, and then deliver them to the customers. Although the money seemed good I had a lot of serious issues with this account. I sat down one day and figured out the company’s cost for labor and storage to service this account, and when I was done I found that the account was only making the company a few hundred dollars a month. All of the money that was being collected was going to labor and delivery costs. When we really examined the account we were actually losing money because the profit was completely blown out when it took 90 days for them to pay their bills. At any given time we had a minimum of $8,000-$10,000 on open receivables.
This situation might seem ridiculous but there are many businesses that have accounts that are similar. Many of these companies keep these accounts because they believe that by adding the revenue to their other operations that it makes it profitable to maintain. Personally, I disagree with this thinking because the profit of one job should not be contingent on another job on a continuous basis. If a coffee shop holds a sale in which they sell .50$ cups of coffee, the hope is that the sale will generate other sales of food and other products. However, this is a sale, and that same coffee shop would never sell a cup of coffee on a daily basis with its profit contingent on the hope of generating other sales. That’s why these are special events or sales. Yet, there are many companies out there that are holding daily sales with accounts and making little to no profit on these accounts. One might ask why on earth would anyone do this? The answer is so simple that it really defies rational thought. The companies that operate in this manner do so because they actually think they are making money.
It is easy to assume that businesses do their homework and perform cost analysis but the reality is that small business owners often fall prey to big numbers and fail to perform their due diligence. When you get a check for $10,000 from your no-pay account it tends to make you think you are making money, but this is because you are overlooking all of the struggle and cost you had to put into getting that check. There are many companies that actually operate with many accounts such as this, and one might even consider them successful. Where you see the problem is when you compare accounts. The same company that I worked at that had the kitchen cabinet account also had a large well-paying account with a high end furniture company. This furniture company sold furniture that was so expensive that it had to be treated very carefully. This account paid more than double what the kitchen cabinet account paid annually and was three times less labor. (And it paid for the work faster!) The company would have been better off getting rid of the cabinet account and all the cost associated with it and trying to get more higher paying accounts. When I showed the owner this situation, he rejected the idea of getting rid of the account. He said, “Every dollar counts.” There are many owners who think that taking on every job is necessary but the reality is that many of these jobs are nothing but holes to throw money into. Don’t be fooled by large accounts that offer volume work in exchange for low prices. When accounts like this come knocking, you need to perform a cost analysis. These customers know that small companies hunger for business and they take advantage of these companies by offering volumes of work and lots of revenue, but really they are just using you to get the job done and worse yet financing their operations at your expense.
Success Does Not Mean Competency
When I was a manager in the moving business, there was a competing moving company that was making boatloads of money. The company was paying large annual bonuses and large wages. From an external point of view, this company seemed to know what it was doing. The reality was that the company was successful in spite of itself. Every day there were damage claims (more than the industry standard). As well, there were large numbers of thefts and the workforce consisted of convicts, drug addicts, and complete incompetents. If any customer were able to peer into the internal operations they would have run. How could a company with such massive issues be successful? The answer is luck.
In the mid to late 90s the US tech market was booming. Dotcom's were going up and money was flying in every which direction. The competition with technology was so tremendous that companies were racing to install computer systems and begin taking advantage of the advantage of automation. The internet was booming and so was the economy!
One of the primary ways that the company was making money was delivering packaged computers and equipment. There was so much business that no single company could handle it all. As result of this situation, the company was making a fortune delivering tech and this offset all the other issues taking place. The bottom line was that one idiot driving a truck could deliver tons of tech because it did not require any skill beyond driving the truck. The comedic part of this situation was that the company appeared and believed that it was a quality and competent moving company. Even after the fall of the Dotcoms, the revenue that was made, during this time, was enough to sustain operations for several years despite failing markets and diminishing revenues.
Here was an incompetent company holding meetings to discuss customer service or market strategy, while out in the warehouse drug addicts were rifling through homeowners possessions looking for items to sell for quick cash. This company actually believed that it was a competent company that new what it was doing. In the years that followed, the company downsized tremendously and reduced its overall pay structure and bonus system. The company still operates and still believes it’s the best at what it does- despite all its losses and continued struggle. Ironically, this company might continue to operate in this manner for the next 30 years or more. The reason for this is that another boom in the economy could create a similar situation in which the company can continue to operate in this delusion. The lesson here is that success does not mean competency.
One might think that this story exemplifies the fact that a company can operate and be successful without being competent at their job. This situation is really an illusion because during the Dotcom boom hundreds of small companies were started that did the same job as the larger company. Most of those companies do not exist today because the market contracted, and they were left with nothing. The larger company (despite being incompetent) had large contracts which secured large revenue which allowed the company to continue operating and survive the crash. If you own a small business you cannot rely on any one customer or contract to ride through ups and downs in the economy. This makes it especially important that small companies have a high level of competency in what they perform as service or their product selling. By having a great deal of competency, a small company can diversify its clientele rather than depending on economic up turns or chance jobs and accounts.
Another point concerning competency is understanding and being aware of your own competence (or incompetence). Is your company really competent at what it does? Owners often overestimate the competency of their workers and their processes. Going back to the idea of people who open pizza parlors, there are so many people who open these shops and think that they are competent at making pizza. I remember years ago walking into a pizza parlor in a strip mall near where I lived and ordering a slice of pizza. I swear that the pizza tasted like a piece of cardboard with spaghetti sauce covering it. This particular business traded hands on multiple occasions and finally went under after a few years. The problem in this situation is that three different owners thought that they were simply going to purchase a pizza parlor and make money selling a relatively low cost item. There was no thought put into the food quality. Three incompetent owners successfully sank this business which had a good location with easy access from the road and lots of foot traffic. It is difficult to look at what you do and honestly, appraise yourself, and your business as being competent, but it is necessary and vital. Competent companies are successful even when other factors work against them because they create a valuable and desired product.
Who are you?
Entrepreneur, Owner, or Manager
I don’t like the term entrepreneur because it has been applied so broadly that it hinges on being meaningless. For example, today, academics and companies refer to certain types or styles of managers as being entrepreneurial managers (whatever that is.) I think I can break this area of thought down to its lowest common denominator. Essentially, as a small business owner, one needs to have an understanding of his or her own place within a company. You will see the importance of this thinking as we develop our definitions of the owner’s role within specific titles.
Owners hold the legal ownership of a company. Owners of small businesses typically also act as managers of the business due to financial constraints and also to maintain control of the operations. As a business owner, in most cases you will not have the ability to choose whether you want to work as a manager or simply be the owner and have others manage the company. This is an important concept for new business owners. Most owners of small companies must manage the company and if you are opening a small company you need to ask yourself if you are a prepared to be a manager. This is a tough question for most people because the business is their idea and they assume that because they thought of the idea that they are naturally prepared to run the company. Ask yourself these questions:
- Have you defined the operations of your company? E.g. the daily work and processes that must be performed?
- Are you prepared to run the operations of the company on a daily basis doing the same redundant tasks repeatedly?
- Are you prepared to deal with employees and their many problems?
- Are you prepared to hire and fire people and do you have a plan for hiring?
There are many more questions that need to be asked but these give you the drift of what I am saying. Most people who open businesses erroneously believe that they are going to create a business that after a little work is going to somehow be self-sufficient. They believe that they will run the company for a period of time and then have someone else manage it. If you are thinking this way, you need to stop before you get into the business. Any business that you start, you must be prepared to manage that company for an indefinite period of time.
There are many (I would say most) small business owners who opened their business with the idea that they were going to create the business and move onto another endeavor. Most of these individuals fail in their business or find themselves squeezing a living out of the company for the next 10 years or more. One of the misconceptions that reinforces this thinking is that many owners enter into the business with a slanted view of management or lack any formal training as managers. These owners typically find themselves hating the very thing that they started, and this is really because they were unprepared for the task of managing the business.
Managers are individuals who oversee the operations of a business and it is their job to make sure that the company is running properly. Managers do not act as owners and have very little responsibility to the welfare of the organization beyond performing their jobs competently and making sure that subordinates perform their jobs. It is important to understand that most managers wear a leadership hat, but only within the sphere of authority that they are given by the company.
Managers are typically not creative people and most do not even understand management theories. This is not completely the fault of the manager because they are typically confined by the policies and operation’s requirements of the company. Think about the bulk of managers that are out there- most simply oversee work and make sure that it is completed properly. Most managers are not very good at what they do. Look at the fast food industry and think about the people who are running these establishments. Most of these managers were hired and promoted within, or came directly from high school or college with no experience. These managers are taught to follow protocols, policies, and work within the business model. In general, we can view this management system as successful because large fast food companies continue to earn enormous profits and expand. However, this does not mean that these managers are good managers. The fast food industry and most other non-skilled companies consistently experience high turnover both with mangers and with employees. These managers tend to micromanage, become frustrated, and burnout quickly. The point of this argument is that when you open a business with the thought that you will hire someone to manage it, you must either resign yourself to mentoring someone for a long time to get a quality manager, or turn the reigns over to a run of the mill manager who will likely have no loyalty to you or your company, and will simply try to get the job done in the least expensive and efficient manner. As a small company, you will likely suffer for having a manager of this caliber because you will experience high turnover and other costly problems.
Defined simply, entrepreneurs are individuals who develop and start businesses and their models and assume the responsibility of the success or failure of the endeavor. Entrepreneurship is a misunderstood concept because many people think that everyone who owns a business is an entrepreneur and this is not the case. For example, if you purchase a franchise, you are a business owner not an entrepreneur. The reason for this is due to the fact that you have not developed that particular business model. You have simply adopted another person’s idea and are following that model. This is a great choice if you are a manager or business owner who simply wants to have a working business that all you need to do is follow protocols. The real problem is that many people who open businesses are not thinking of it in these terms and suddenly they are faced with having to create a new model for the business.
In the moving business, helpers become drivers, and drivers often become owners of their own companies. However, these drivers are often unprepared for the administration and daily running of the business. They often lack the charisma to deal with employees and customers. More importantly, they have grown into a business that lacks any unique model and there is nothing to distinguish them from other companies. Some will make it, but most will fail.
The same can be said for restaurant owners. Many of these individuals lack any real model for their new restaurant because they are either opening a business that is similar to another business, or only looking at the numbers. Possibly, they are people who have worked in the industry, and think because they can cook that they will be able to make a restaurant run based on this skill and experience. These individuals are often wrong because they have given no consideration to their role in the business.
You need to define what kind of business owner you want to be. The word entrepreneur carries a large positive connotative quality but it is also not the typical business owner. If you are planning on opening a business, and it is a business that already has competition because of similar businesses, then you either need to rethink your business, or look at purchasing a franchise. Opening a pizza parlor is not a unique business. Unless you have some form of product differentiation that truly distinguishes you from other pizza parlors, you are making a substitute business. While this might work, you would actually be better off buying a franchise that has a working model and brand name. It is far more likely that you will succeed in this endeavor then opening a pizza parlor and having to develop a brand and working model.
Say that you were a manager working for another company and you decide that you want to own your own business. Say you managed a coffee shop and you decide to open or purchase your own coffee shop. If all you are doing is opening a coffee shop and implementing the knowledge that you have acquired from your management experience, you are likely to fail in your endeavor. The reason you are going to fail is due to the fact that you have not developed a brand or model that can differentiate you from the original business. Even if you have learned from mistakes in the old business you will not be creating something new. For this reason, you should consider opening a franchise.
Knowing yourself is pivotal in the success or failure of a business. It took me three years of running a moving company to realize that I am not a good manager. This was a hard lesson for me because I had always worked for other companies in the capacity of being a manager and was able to prosper. In truth, I was simply following the protocols and policies laid out before me. When it was time to run my own moving company I was completely unprepared because I had no unique model and no real brand value to differentiate my company.
The other reason that I was a bad manager was due to the fact that I did not like performing the same repetitive task over and over again. As the owner of the company I found myself having to perform a large amount of the physical work along with managing the administrative end of the company. I also had to deal with employees in an entirely new way. It was one thing to manage their work, but as an owner I was suddenly faced with having to deal with all their personal problems and their workplace problems. I was not prepared for all the problems that come with employees such as workman’s compensation claims and complaints to labor boards. I also worked more hours and made less money than working for other people. Ultimately, my failure in this business taught me that I needed to analyze my own beliefs concerning being a manager and owner. The truth that I discovered was somewhat shocking even to me. I learned that:
- I am not a good manager, and I had convinced myself that I was because I had worked as one for so long.
- I am not good at dealing with employees, and realized how bad I was when I had my own company and had to contend with their issues.
- I also was not good at managing most customers- frankly they pissed me off.
When I came to these realizations, one might think that I would have concluded that I did not need to be in my own business. In contrast to this thought, I realized now more than ever I needed to be in my own business. My reasoning for this was due to the fact that I was not going to be able to rise within corporate ranks due to my inability to deal with people. What this meant was that I needed to construct a business model or adopt a business model that would suit my desires and abilities. This thinking opened a new world of possibilities for me with businesses.
I have learned that being in business is not confined to specific functions, tasks, or models. Being in business does not mean that you must have a typical brick and mortar business, nor does it mean that you must have employees. The majority of most small businesses are single owner businesses without employees. These are individuals who run small businesses that are often owner operated companies such as e-commerce sites or services such as plumbers or other skilled tradesmen.
Rather than trying to fit yourself and all your attributes and flaws to a specific business model, it is best to find a business that you can mold around you. For me, this took self-examination and research. I decided that I wanted to enter the writing business and work from this angle. I had no idea how to go about entering this field but I knew that there was always a market for helping students with writing. I started with a Craigslist account and word of mouth and I began helping some students. Slowly, what started as helping these students with corrections, morphed into a paper writing business. Research papers have a large profit potential because of their ability to be sold and resold. Within a year I was making more money and working less hours than I had ever worked in the past. People blasted my business. Even my girlfriend insisted that I needed to get a real job. Despite the fact that the business was supporting both of us, she could not see this as a real job. This goes back to the idea that people have all kinds of hang-ups concerning business and most of it is misplaced morality and bad thinking.
Beyond the ethics of the business, I realized quickly that there were many angles that could be worked within the writing business. That so-called immoral and unethical business would be the greatest learning experience for me because I was forced to learn about web design and building e-commerce in order to expand and make more money. Now other people pay me to help them sell their products and businesses.
The bottom line is that being a business owner is a choice that needs to be considered intensively and requires tremendous honesty and self-evaluation. If you want to own a business, no matter what the reasons, you need to consider the type of owner and manager you are, and if this is something that will work with the business model you choose. You also need to be able to lose the misconceptions and bad thinking that bar most of us from succeeding. If you can critically examine your flaws and business ideas you may just be able to succeed in a business.