The start-up was not a new software company, a new cupcake store, or even a new idea. It was actually a remake of a very old idea.Read More
A few months ago I was talking to a 31-year-old entrepreneur, Aalap Shah, who is a co-founder of SoMe, a social media consulting company in Chicago. I have known him for a couple of years now, and this time he didn’t seem to be his usual chipper self.
He confessed that he was wearing himself out trying to balance the needs of his young family with those of his young business. It was so bad that he was actually thinking that maybe he should get a job. A job! I slapped him and told him to get a hold of himself. All right: no, I didn’t — but he was on the entrepreneurial window ledge, and I had to talk him down.
Before I go any further, I have to say that I do not believe in the oft-quoted mantra, “never, never, never quit.” I think there are times when you shouldquit; for example, if you finally figure out that your business is not going to work, or that it is too demanding, or that you just aren’t happy. Entrepreneurship is not for everyone.
As a matter of fact, it is probably a good choice for relatively few. As it happens, I know Mr. Shah well enough to know that he is among those few. I know his talents and his track record. I also know that there have been some underlying issues wearing him down.
I recognized this for what it was, a form of battle fatigue. But after five minutes discussing what his life would be like if he were to go back to the large consulting firm where he used to work and another five minutes figuring out some things he could do to lessen his load, he seemed to relax. He knows he is too crazy to work for anyone else and just crazy enough to be a successful entrepreneur.
When I started thinking about it, I realized that I have similar conversations several times a year with entrepreneurs. Occasionally, I have these conversations with myself. I have been through many storms, have made pretty much every mistake in the book, have written a book, and have come up with four thoughts that can help entrepreneurs maintain their balance — or at least keep them from thinking about getting a job. Not that there is anything wrong with getting a job. That would be a problem only if everyone did it. The world needs entrepreneurs. So here are the things I like to tell entrepreneurs (and sometimes myself) when things aren’t going well.
You are not normal. Where you see opportunity, other people see too much competition or no market. (Sometimes they are right.) Where you see no problem signing away your life — on a lease or a bank loan — other people see only risk and danger. (Sometimes they are right.) When you chase your big deal with not much more than raw ambition and the hunger to succeed, other people may think you are in over your head. (Sometimes they are right.) Thankfully, they are often wrong.
It doesn’t help to torture yourself. For years and years, I would make mistakes — hiring the wrong person, spending money on the wrong advertising, pricing a bid wrong and either losing the bid or getting the job and losing money on it, and a hundred other things. Eventually, I would figure it out and learn something valuable from the experience. After doing this a few thousand times, I have actually become conditioned to not look back. I accept that I will continue to make mistakes and that that is O.K., as long as I do many more things right. I have forgiven myself. Forgive yourself. Move on.
It does help to maintain perspective. Nobody ever said business was easy. But it should become easier as you go along. There are no pity parties in entrepreneurship. At least there shouldn’t be. Deal with it. Fix it. Fire it. Sell it. Ignore it. Do whatever you have to do to move forward. Many people in this world have bigger problems than you and I do. Entrepreneurship is an honor and privilege of living in this country. If you have the brains and the ability and the means to start a business, you are one of the lucky minority who either make money on their own terms, or go broke trying! Hallelujah! God bless America.
Listen to that little voice in your head that says, ‘Get lost!’ I actually prefer a stronger version — when the bank jerks you around, when an employee quits without giving notice, when a prospective customer chooses someone else, when it becomes clear that the universe is not joining you on your mission. It’s generally best to keep this voice in your head, but letting it speak can relieve tension and remind you that you are in control. You can find a better bank. You can find a better employee. You can find a better customer. You are invincible. You have to be: there are people counting on you. You will not be beaten. Like Rocky when he looked up at Mickey and said, “I ain’t going down no more.” You need to have tenacity, resolve and determination. But you also have to do things right. Are you a force to be reckoned with, or a farce to be reckoned with? Don’t ask me. Ask your customers and employees, and maybe your accountant.
As for Mr. Shah, he has just landed two Fortune 500 accounts, and is actually getting home on time, at least some of the time.
A couple of years ago, I was reading an article about a guy in his 30s, David Geslak, who had started a company in Chicago, Exercise Connection, that works with children who have autism. Reading the article, it became obvious to me that he must have his hands full, trying to teach, to develop programs and to give speeches while also building his business. In part because his mission is dear to me — I have a nephew who is on the autism spectrum — I decided to call him to see if I could offer any entrepreneurial advice.
“When you called,” Dave told me recently, “I was making great progress in developing autism exercise programs, seeing results, and getting publicity. But I was having a hard time paying my bills. I was at a crossroads. I had been led to believe that if I followed my passion and worked hard, everything else would take care of itself. What I didn’t realize was that — as you say — if you follow your passion, you may do a great job. But if you don’t get the math to work, you will have a very expensive hobby.”
One of the first things that struck me was that Dave was making keynote presentations all around the world, on a topic that he is uniquely qualified to discuss, and he was charging $250. My jaw dropped when he told me — and then his jaw dropped when I told him that many people making keynote presentations charge between $3,000 and $10,000, or even more.
“I was embarrassed to tell you that I was in the middle of personal bankruptcy,” Dave continued. “It was the result of a combination of me not making enough money and the real estate meltdown. I had bought a small condo that was now way under water. However, I made sure to protect the business from going under, even though I wasn’t making much. I have to make this work — not just for me but for the children and their families. When you said, ‘You need to charge more,’ it was hard to digest, because I wanted to spread my message and not lose a potential customer. I didn’t want them to think I was greedy.”
Greed is not good, and neither is going broke. This is a typical response from entrepreneurs who are not making money because they are not charging enough. They also say things like, “I want to be fair,” “I don’t want to gouge anyone,” or “It is a very competitive market” — or my favorite, “The customers like my low prices.” None of these thoughts have anything to do with establishing prices to run a successful business. It is about charging what you need to charge, instead of what you want to charge, which can actually take courage. To charge what I call the “appropriate price,” you have to take into account supply and demand, your value proposition, competition, and the need to make a profit. Most likely, some customers will not be happy with your price — but that doesn’t mean they won’t pay it. An extreme example is a bottle of water that can be bought for 17 cents at Costco but sells for $3.50 at the movie theater. (It’s chilled!) Let’s not even talk about the popcorn.
In Dave’s case, he was charging $75 per home session, and traveling more than 400 miles a week. But there are only so many hours in the week and what he does is both physically and emotionally exhausting. His rate was less than what most personal trainers charge for in-home training — even though he has far more training, certifications, experience, and expertise than the typical trainer. In an effort to be “fair” to his clients, he was being unfair to himself. After we spoke, he decided to raise his rate to $85 per hour for existing clients and $95 for new clients. This resulted in increased income of about $5,000 a year — in addition the extra income he is getting from raising his speaking fees. The end result is a financial model that works, which has allowed him to hire people and reach more children.
“I realized that you were right,” Dave told me. “If I wanted to keep doing what I believed in, I had to charge enough to stay in business. I could not borrow any more from my parents, which in the end was a good thing since it made me face reality. I have a bachelor’s degree in health promotion. Aside from taking two entrepreneurship classes, that was all of my business experience. The only thing the entrepreneurship classes did was focus on writing a business plan. I spent college summers working at Nordstrom, which taught me a lot about customer service, but I never had any accounting training. If you asked me two years ago what I was, I would have said a coach. Now I realize that I am an entrepreneur who does coaching. Both roles have serious responsibilities.”
One of the discoveries that Dave has made is that exercise for children with autism can be a gateway to new possibilities. The children not only get improvement with fine motor skills, they develop confidence and optimism. He has hired several of them — with pay — to put together his Visual Exercise System, which requires cutting, assembly, and organization of different parts to be shipped out and is also sold at trade shows and conferences.
He believes this will improve the prospects and opportunities for the children, and it is a dream come true for their parents. Don’t get me wrong, this is no miracle cure, but Dave and other professionals have seen some very promising improvements when exercise becomes part of a child’s life. At the top of this post, there is a three-minute, unscripted video that features one of Dave’s champions, Rachel. I think it speaks for itself.
In yesterday’s post, I introduced Michelle VanAllsburg, who owns a salon, The Hair Co., in Grand Rapids, Mich. In debt and under stress, Ms. VanAllsburg contacted me, hoping I might be able to help her figure out how she could sell her salon. But then we ran the numbers, and much to her surprise, it looked as if she was actually making a profit. “But I don’t have any money!” she responded.
Jay: You should have made a profit of $32,000. The fact that you don’t have the cash means you have a cash flow problem, which is different than not making a profit. Just because you made $32,000 doesn’t mean it is going to be in your checking account. This is where Accounting 101 comes into play. It is the difference between your income statement and your balance sheet. The income statement shows whether you are making money. The balance sheet shows where the money and debt are. We need to find where the $32,000 is hiding. The usual places are in inventory or receivables, which you don’t have. But you do have debt. Have you paid any of it back?
Michelle: Yes. It is down about $60,000 over the last four years.
Jay: Ah ha! Are you paying any interest?
Michelle: Yes. Five percent.
Jay: Have you been paying income tax?
Michelle: I don’t know.
Jay: What does your accountant say about your business?
Michelle: She paints a very dismal picture.
Jay: Is she an accountant, or more of a bookkeeper?
Michelle: More of a bookkeeper.
Jay: Well, here is what is going on. You are making money. Last year, you probably paid down your debt about $15,000, plus you probably paid about $3,000 in interest and about $5,000 in income tax. The business made about $23,000 — if you include the interest you paid. You don’t have any money because this is the difference between profit and cash flow. But something here doesn’t make sense. If the numbers you gave me are right, you should have made about $32,000. We need to reconcile this. Check out these numbers and I’ll talk to you next week. Either way, the business should be worth enough money to sell and pay off your remaining debt.
Michelle: I hope you are right! That would be a relief.
We spoke again a few days later, and I asked Michelle if she had reviewed the numbers.
Michelle: Yes. I gave you the wrong revenue number. It was more like $150,000.
Jay: So that would account for about a $12,000 difference in profit — $30,000 times 40 percent. But you would have paid less income tax, which might make it a $10,000 difference. That means you should have made somewhere near $20,000, which is about how much the debt and interest payments were last year.
Michelle: I know! I feel much better knowing that I am making money. Now that I realize that, I am happy to continue owning the salon, because I know that I am paying off the loans from my family.
Jay: That’s interesting. So what was really stressing you out was the fact that you might not be able to pay back your family — not the stress of running the business.
Michelle: Yes. That’s true. As I told you in my e-mail, I have really good people working for me, and I have many wonderful customers that I enjoy working with.
Jay: Oh, by the way, what did your accountant have to say?
Michelle: After I talked to you, I called her to see if your numbers were right. I asked her, “Did I make any money last year?” She said, “Yes. But the profits are paying down your debt.” I asked her, “Then why were you painting such a dismal picture the last time I talked to you?” She replied, “Oh, sorry. I was having a busy week.”
Michelle is hardly alone. Many people think that they can relegate their accounting responsibilities to an outside accountant. The problem is, it has to be the right outside accountant for them, depending on their needs. And that’s the trap.
Many entrepreneurs don’t know what they need. They view accounting fees as just another expense. But like many things, you get what you pay for. If you recall, she is paying $75 a month for her bookkeeping and accounting. How much advice do you think she should be getting for $75 per month? Right. And that’s about what she got. This is not really the accountant’s fault, and this is not an uncommon situation.
It happens every day to people with more guts than money. The lesson here is that before one starts a business, it can be critical to understand basic accounting. And don’t even think of using the “I am not a numbers person” excuse. I know that’s easy for me to say — I am a numbers person – but, trust me, I have had plenty of other areas that I have struggled to learn.
Business owners do not have the luxury of pleading ignorant to one part of the business, whether it’s accounting, management or marketing. This is at the heart of why the failure rate is so high for start-ups. You seldom, if ever, hear owners say they failed because they didn’t meet the accounting, marketing or management needs of the company. Instead, they usually blame the bank, the government or the stupid partner.
Entrepreneurship, first and foremost, is about accepting responsibility. Which is why I think Michelle’s story has the potential to help a lot of people. I want to thank her for agreeing to let me publish it. She is an entrepreneur, a mother and a good sport.