I doubt that anyone is keeping track, but it’s been exactly three years since the appearance of my first column about the offer I’d received for my records-storage, document-destruction, and trucking businesses. (See ” The Offer, Part One ,” November 2006.) Never in my wildest dreams could I have imagined back then that I’d still be negotiating with potential buyers this far down the line. Yet less than two years after selling my business, it feels like d
Over the years, I’ve noticed a pattern among the people who come to me seeking advice. In most cases, the problem they think they have is not their real problem, and so the solution they have come up with is not the right one. That happens partly because they get so close to the problem that they lose perspective. They see something wrong in one area and fail to connect it to what’s happening in others, and so they miss a solution lying elsewhere. Beyond that, I think we all have a tendency to look for the type of solution we feel most comfortable with, given our personality and our skills. Thus, engineers tend to look for technical solutions. Accountants tend to look for financial solutions. And salespeople go for the sales solution–even when the problem has nothing to do with sales. I’ll give you the example of Mike Baicher, whom I’ve written about before (see “The Best-Laid Plans,” January 1997, and “Your Money or Your Life,” August 2003). When I met him, his family-owned trucking business was doing about $1.7 million a year in sales. Today, it’s a trucking and warehouse business with annual sales of $11 million. His drivers, some of whom are independent contractors, pick up giant shipping containers from the New Jersey ports and deliver them to warehouses in the area, where they are unpacked. Four of the warehouses belong to Mike, whose company provides storage services for some of its customers. Other customers have storage facilities of their own. The latter were on his mind when he came to see me about a year ago. He said he was thinking about hiring a salesperson. When I asked why, he said it had to do with the hassles of dealing with customers who used him only for pickup and delivery, not warehousing. For one thing, they often didn’t unpack the containers in time to avoid the late fees charged by the shipping companies–which own the containers–when an empty one is returned to the port after more than five days. Those fees ranged from $65 to $125 a day, depending on the shipper. The problem didn’t arise when the container came to one of Mike’s warehouses, because his people would unload it right away. But customers with their own warehouses waited until the last minute. By the time Mike’s drivers brought the empty container back to the port, the shipping company’s office would be closed, and Mike would get charged for an extra day. “Can’t you pass that along to the customer?” I asked.
As longtime readers of this column know, I strongly believe that when you launch a new business, it’s important to track monthly sales and gross margins by hand for the first year or two. I tell people, “Don’t use a computer. Write down the numbers. Break them out by product category or service type and by customer. And do the math yourself, using nothing more sophisticated than a calculator.” To be successful in any business, you need to develop a feel for the numbers. You need to get a sense of the relationships between them, see the connections, figure out which ones are critical and have to be monitored. Why? Because numbers run businesses. They tell you how you can make the most money in the least time and with the least effort–which is, or should be, the goal of every company. You can give it all away if you want. But first you have to earn it, and the numbers can tell you how to do that as efficiently as possible, provided you understand their language. Tracking the numbers by hand is the best way I know to learn that language, at least as it applies to your particular business. You can switch to computer tracking once you’ve mastered it, but if you let a computer do the work in the beginning, you won’t develop the same intimate connection with the numbers. As a result, you may miss important signposts later on, when the numbers start to change. Those changes can be significant, especially if they come as a surprise. They may herald new competition arriving or indicate a shift in your customers’ preferences or reflect unseen problems with your products or services. There could be any number of reasons for the unexpected changes. But you’ll see them–and be able to respond quickly–only if you get into the habit early on of looking for them and trying to understand what they mean. My friends Bobby and Helene Stone are a case in point. They have a company, Data-Link Associates, that sells computer supplies as well as an improbable sideline: cabinets and cases for firearms. The Stones added gun products at the urging of a major supplier, a manufacturer of office furnishings that makes the gun cabinets as well. More than 15 years ago, I had helped Bobby and Helene get their business up and running. (See Bo Burlingham’s article ” How to Succeed in Business in Four Easy Steps ,” July 1995.) Back then, I insisted that they track their monthly sales and gross margins by hand until the process became second nature. As they’ve increased their sales from $160,000 in 1992 to $3.2 million today, they have continued to monitor their numbers closely. When they notice a disturbing trend, they call me. Not long ago, they called in a bit of a panic. They told me that for the previous five months their monthly sales had been 20 percent to 25 percent lower than normal. Among other things, they’d lost almost all of their “special sales.” Those are nonrepeating, high-volume, low-margin sales–exactly the kind of sales that I wouldn’t let them accept when the company was small but that had become a nice source of profit for them in recent years. I should probably say a few words about why those sales were dangerous in the early days but perfectly fine once the business became established. It has to do with risk. Whenever you extend credit to a customer, you run the risk of not getting paid and being stuck with having to cover the cost of whatever you’ve sold, plus delivery charges. The bigger the sale, the greater the risk. It’s generally a bad idea to take that risk on a large, low-margin sale before your business becomes viable–that is, able to sustain itself on its own, internally generated cash flow. On a $2,500 sale with a 30 percent gross margin ($750 in gross profit), you’d lose about $1,750 if the customer went out of business or just refused to pay for whatever reason. On a $25,000 sale with a 10 percent gross margin ($2,500 in gross profit), you could lose $22,500. Granted, it’s tempting to go for the larger profit, particularly when the sale seems like an easy one, but until your company has reached viability, you have to guard your start-up capital like the crown jewels. You can’t afford the risk of losing a big chunk of it all at once. That $22,500 could be the difference between success and failure. The picture changes, however, once your company becomes viable. Not that you should ever be blas