Whose Advice Are You Going to Take?

Posted by Loren Feldman on Aug 13, 2024 9:01:11 AM


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Introduction:

This week, Paul Downs, Mel Gravely, and Sarah Segal talk about the tricky calculation all entrepreneurs must make between sticking to their vision and accepting advice. Sarah explains why she is reluctant to take advice from people who don’t really know the inner workings of her business, which is pretty much everyone. Paul, on the other hand, says taking advice from outsiders helped save his business during the Great Recession. And Mel talks about why he thinks every business should have a board of advisors—and why he thinks having a board would have saved him from a big mistake he made recently. But then, Paul asks, if you do have a board, can you not take its advice? Plus: Reacting to a recent post on Reddit, the owners discuss the right way to wind down a failing business, a process with which Mel and Paul have some familiarity.

— Loren Feldman

 


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Podcast Transcript

Full Episode Transcript:

Loren Feldman:
Welcome Paul, Mel, and Sarah. It’s great to have you here. I want to talk about advice today. Specifically, how do you know when to take it? I’ve long thought this is a real challenge for most entrepreneurs, because you have to be pretty willful and independent to go into business. There are always people telling you that you’re a little bit nuts to do that. But at some point, you probably have to be willing to learn from others who may have more experience and expertise.

But of course, even if you’re open to taking advice, it can be tricky. Sometimes, as I can certainly attest, you can have very smart and experienced people offering you very conflicting advice. So to start, I’d love to hear, maybe, about the worst advice that each of you remembers receiving in your entrepreneurial career. Anybody?

Paul Downs:
Oh, I’ve got some. My old partner, who I formed a partnership with in 2002, insisted that if we’d simply grew our sales volume and didn’t worry so much about efficiency on the shop floor, that everything would be fine. And that’s an enormous mistake, because we lost a ton of money as we were trying to grow. And then the 2008 recession arrived, and we were in serious trouble. Now, I did survive it. But ever since then, I’ve paid much more attention to profitability, rather than just how many dollars are coming in the door. So, that’s a pretty big mistake. Who can match that?

Loren Feldman:
Well, Paul, first, did that advice or that decision make sense to you at the time?

Paul Downs:
No. But part of the issue back then was that I had never really gotten any mentorship from anybody. I taught myself my trade and taught myself business to the extent that I knew it, which was not much. And my partner was older than me, had owned several manufacturing businesses, and was wealthy. And I figured, “Well, he must know what he’s talking about.” But he didn’t, is the short answer. And the longer part of that story is that all the businesses that he had run previously, he had done with the help of his wife, who was a CPA and was the one who actually kept track of costs and profits and productivity and all that.

And I believe I may have told this story before, but about a month after we formed our partnership and she had started working on my business to get the books in order and sort of get everything shipshape, she just died in her sleep. And so, all of a sudden, I had a partner who was deprived of—I mean, he lost his wife of many years. It was very sad. But he was deprived of the steady hand and the attention to detail that had been a large part of all his previous success. And it took me a long time to realize what we were missing. And so it’s a bad luck story more than anything else. I think that if Mary had continued on working with me, then we probably would have been in much better shape.

Loren Feldman:
Sarah, how about you? Do you remember the worst advice you ever got?

Sarah Segal:
So I’m always very hesitant to take advice in general.

Loren Feldman:
That’s what I’m talking about.

Sarah Segal:
Yeah, just because, I mean, when it comes down to it, nobody knows your business as well as you do. And there are nuances and factors that nobody is ever going to be able to know as well as the person who created the business. I was given advice—and I don’t want to say that it was bad advice—it was just not going to work with the model that I was going to create. It was advice of not taking any clients for less than a $10,000-a-month retainer. And, you know, I was like, “Okay, well, if we do that, in my mind, that will get us to a nice cushiony revenue number pretty quickly, etc., etc.” But what it did was, it gave me clients that I wasn’t necessarily passionate about.

They were the clients that had the big wallets and big budgets, but they weren’t super interesting. And I passed on clients that I was curious about and passionate about and interested in and invested in and really wanted to see their success—because I was trying to meet that number. And as you know, last year, I had some big clients that weren’t necessarily in that bucket of making me that $10,000 a month or more leave last year, and it put me in a hole. And so I’ve spent the last six months rebuilding the company based on small- to midsize retainers with more interesting companies that are more in the lifestyle space that make me happy and I’m passionate about and I liked the owners. Maybe it was good advice. Maybe it was bad advice. But it wasn’t advice that I should have taken.

Mel Gravely:
Both examples, and this idea that entrepreneurs are hesitant to take advice, all come together for me in—it’s gonna sound like a soapbox—but this idea of having a board around you. Because Sarah’s point that no one knows the business like we do is so true. And I don’t think there’s a way to get 100 percent around that. But what I do want around the table are people who are as close as I can possibly get to knowing everything, right? They’re not going to be me, because we feel things about the business that we can’t even articulate.

But when you have a group of people around you that you are talking to regularly, they understand your goal objectives. They know what gets you fired up. They understand the strategy. And they saw you struggle before. They can help you look around corners. Their advice, I think, is more informed about the total situation and not just about their opinion, based on God knows what. And so, Loren, I’ve got at least a story of two people I should not have listened to. But when I look at who’s around the table with me as a board, I have found they give me good counsel because they understand what I’m trying to accomplish better, and their counsel is better. It’s more contextualized than not.

Loren Feldman:
It’s funny. I was going to ask you about that, because you’ve mentioned this on a previous episode. And I think, in fact, after we stopped taping that episode, I think you said to me something along the lines of: You wouldn’t run a lemonade stand without a board. Which I think is pretty unusual for small businesses. I think you’re more the exception than the rule.

Mel Gravely:
Yes, statistically, I’m sure you’re right, but it’s because I don’t want to take ad hoc advice. I don’t want to meet someone occasionally and have them tell me what they think. Because they can’t possibly have the context to answer, to really guide me where I want to go. They were guiding me based on what they think should happen. But as Sarah just said, making her heart dance around certain clients is something that anyone giving her advice, if they don’t get that, then they’re not going to be talking to her in that context. And, you know, why should we listen to those people?

Paul Downs:
Well, I’ve got a thought. I think that if you have an actual formal board, then you have some—I mean, I’m not totally clear on this—but it would be much harder to avoid taking their advice. And I, for many years, was a member of a business group that had that function of getting to know me, getting to know my business, and giving me informed advice. But I was free to take it or not take it. And Melvin, when you get advice from your board, could you tell them to just, “Drop dead, no, I ain’t doing that”? Or what are the constraints there?

Mel Gravely:
Yeah, so there are all kinds of boards. You know, there’s some that are advisory and you wouldn’t tell them to drop dead, because you really want them to come back the next quarter. But you don’t have to follow what they say, for sure. In our situation, we do have a fiduciary board, but I can’t think of one time that the board overruled management. They may have asked more questions. They may have asked for more frequent check-ins on a project that we decided to go on that they thought had higher risk. They may have asked for a delay and a double-back to check your facts and make sure you’re sure.

But I can’t remember a time where they literally said, “Don’t do it.” I guess they technically can do that, Paul. The problem with that is if they do, then me as the primary owner is going to fire them, put other people in their chair, and go do what I want anyway. So, like, I wouldn’t want to do that either. I’ve just never seen it happen, practically, I guess is what I’m saying. They do slow you down sometimes, though, because they have cautions. And then, you know, I want to go check to make sure I’m right.

Loren Feldman:
Mel, do you think what Paul mentioned about having a peer group relationship with an organization like Vistage, do you see that as the rough equivalent of having a board?

Mel Gravely:
I don’t see it as a rough equivalent. I do see it as better contextualized than nothing. But you know, the one example I was going to give you of advice that I should not have taken: I bought a company. You guys have heard me talk about it before. I bought it end of the first quarter last year. And if I had had a board around me, I wouldn’t have bought it. I didn’t buy it with our existing company. I bought it independently. And I just missed some steps.

I was too anxious. I listened to people tell me what it was going to be, and they couldn’t prove it. But I believed them. And my board would have said, “Dude, go back and double-check.” And it would have saved me a lot of grief if I’d done that. I would have probably still bought it, because I wanted it, right? But I would have bought it differently. I would have had my eyes wide open. And so that advice—my people around me were like, “Oh, yeah, this is gonna be great. It’s gonna be”—and it just wasn’t. It’s been a bit of a struggle since then.

Sarah Segal:
I’m curious, what’s been the struggle? What’s gone wrong?

Mel Gravely:
Well, first, the business model was not profitable. So when I dug into it, I thought they just poorly managed. But the business model—literally how they made money—didn’t make money. And I didn’t know that, Sarah, because it didn’t have financial statements. Flag number one, right? My board would have never been okay with me buying a business without financial statements. So, you know, it went from there.

Now, again, it took till—I don’t know, late last year—to get financial statements to figure out that our gross margin was negative, but you can’t run a business with negative gross margin. And so I had to renegotiate contracts. And it’s just been a bigger nightmare. If I’d have known that upfront, I would have started that work last March. I still would have bought it. Please note that: I would have still bought it. But I wouldn’t have dug another, I don’t know, close to a million-dollar hole on my balance sheet because I would have jumped on that problem right away last March.

Loren Feldman:
Mel, are you suggesting that if you had it to do over, you would constitute a board before actually buying a business?

Mel Gravely:
I would. I should have. I should have. And I didn’t. I also probably moved too quickly after stepping down as CEO of our other company. And I should have waited a little longer, Loren, and I don’t want to turn us into a tale of woes, but there’s a bunch of steps that—I’ve not made a mistake like this in a long, long time, because I’ve got a board of directors around me that tells me, “Go double-check, triple-check.” You know, when I fell in love with a market that we were failing in, they kept saying, “What makes you believe you’re going to be successful? You haven’t been in three and a half years.” Which made me finally pull out. It’s just very helpful to have that around. That’s all.

Sarah Segal:
So, I don’t have a board.

Mel Gravely:
Most people don’t.

Sarah Segal:
What constitutes a board or putting one together? What’s the point of entry?

Mel Gravely:
Yeah, for us, we started out with a three-person board. It was two other people I knew and myself to start out with. Now we’re up to seven people, but it’s just people who are committed to your success, who are willing to meet with you on a regular basis, and who you are willing to share all of the data with so that they can be the most helpful—all the data meaning all your plans, all your financials, experiences with customers, blah, blah, blah, all of those things.

And over time, they come to know the business as good as they can. And it’s not gonna be as good as you know it—never is going to be that good. But you’ll find that they really do bring a breadth of experience. So that’s how we got started, though it was just three people at that time, and we’ve grown it to seven at this point.

Sarah Segal:
Do you pay them?

Mel Gravely:
We do pay them, but I will tell you that people will do this for you for little or no money. They’re probably not going to fly in and pay for their flight and stay overnight or anything like that. But I’ve served on people’s boards, especially advisory boards, where I don’t have anything at risk, for no compensation, because I enjoy watching businesses grow. But we do pay our board members. They make roughly around $20,000 a year on our board, which hasn’t been revisited in probably seven years. We probably need to look at that again.

Loren Feldman:
Paul, does this give you any thoughts about whether it might make sense for your business?

Paul Downs:
Um, yeah. I’m still struck by the first thing that Sarah said, which was that she doesn’t like to—well, maybe this is not the right way to put it. But she makes a distinction between advice and informed advice. And I actually don’t discount just plain advice as much as she might, because I think that exposing yourself to common points of view and commonly accepted knowledge is actually worthwhile, even if nothing else, you’re just figuring out why it wouldn’t work for you. Knowing that that’s the ordinary way to think about some situation is valuable to me.

So my problem for most of the time I’ve been in business was no advice whatsoever. And a lot of that had to do with it started back in the 80s. You know, it just wasn’t that easy to get it. And then, I didn’t really have advice coming in from the outside world till after I started writing for The Times, Loren. And that was a revelation. Now, those people who were reading what I wrote in The Times and giving me advice were not at all informed, because the format of trying to digest very complex problems down to a column means you necessarily leave out much of the information. But it’s way better than nothing. So I think that as long as you’re not asking people who are idiots, who know nothing about business, then it’s worth hearing more advice.

And it’s actually not always completely useless to listen to people who know nothing about business, because they’re often giving you the perspective of your customer or your employees. And that is something that is also, I think, worth hearing, even if you can think of 10 million reasons why they’re just dumb and wrong. It helps clarify things in your own mind why what you think is right. You’re challenged a little bit, and there’s always some value to being challenged.

Sarah Segal:
I got some advice last week, and it was not informed advice. But it was more like a strategy, I guess. I was on a trip. I was with a colleague of mine, and we were opening a new location for a business owner. It was her fifth location for a consumer-based industry. And I was just chatting with her. And I said, “You know, I’d love to pick your brain about how you expanded and your strategy and kind of how you did it.” And she looked at me, and she’s like, “It’s all about there’s something about threes, where you replicate yourself times three. And that’s how you grow your team.” Meaning that I would find three versions of myself to hire, and then those three people would find three versions of themselves to hire, and that’s how she grows.

And that’s not informed advice. That’s more of a strategy, I guess. But like, I kind of thought about that and was like, “You know what, that’s really cool.” I like the way that that sounds. I don’t know if it will work with my business, but it’s something that I will certainly mull over and consider because I’ve always kind of struggled with: How do I grow my team where no one person is overwhelmed?

Mel Gravely:
Yeah, that distinction you just made is just perfect. Because what she gave you was kind of a strategic framework to think through. That’s very different than, “Don’t take retainers under $10,000 a month.” That’s hugely different, right? The $10,000-a-month idea is a very specific thing that has everything to do with who you’re serving and how you’re serving them. And she couldn’t have possibly known that. So her advice could be useful because it’s more strategic, high-level.

Paul Downs:
Yeah, there’s a category of advice that is broadly applicable. One that I’ve learned is pretty on the mark is: Every time your revenues double, triple—choose a number—your systems will probably break. And you need to rebuild them all. And I’ve seen that play out in all kinds of different situations, and it’s pretty much true that when you start to push more of whatever you’re doing through your existing pipelines, you might have to get new pipelines. You might need more capacity, and it’s something that you should be aware of.

Loren Feldman:
I’m curious, Paul or Mel, did it give you any pause when you heard Sarah say that she didn’t like the retainer advice, because it pushed her in the direction of taking clients that she wasn’t passionate about? I’m wondering, if you think maybe getting paid more should be enough reason to get passionate?

Mel Gravely:
Well, I don’t think that. When I heard her say that—and I did note it, too, Loren—what I heard was what’s important to her business, and she gets to decide. And my advice should be related to what she’s decided she wants, and nothing more than that. It’s not for me to define where she wants to play. That’s her. That’s why we’re on our own, because we want to define that. So, no, it didn’t strike me at all. Her challenge, then, is to make sure she builds a business that keeps all that in balance, makes enough money, and has the kind of client base she wants to deal with it. That almost always works out better.

Sarah Segal:
It is a challenge, though—I want to jump in—that why I do what I do has never been about the money. And I used to have a business partner, who was a little bit more focused on the money, and I think that that was beneficial to me, because that’s never been something I’ve cared about deeply.

Paul Downs:
I think if I confined myself to jobs I’m passionate about, I’d still be working alone. And so one of the things that you learn after you’ve been in business for a long time—and I think this applies to marriage, too—you learn the difference between the hot initial passion of whatever you’re doing and what you need to do to sustain it. And in my case, we get calls from all kinds of different people. And a lot of those jobs, I’ll be like, “Geez, I’m not particularly interested in this. But it’s revenue, and that allows me to support my team.” And my goal is to build the business and provide a place for more people to come work for me and have a good experience.

And so, the idea of $10,000 a month as the floor, Sarah, that was not the right thing for you. But I think that one should not also necessarily say no to things too quickly. If you’re serving a restaurant, and you learn how to serve a wide variety of people, you’re just going to have a better chance of being in business 15 years from now, because there’s more people you can serve.

Sarah Segal:
I know. But I don’t think that your decision should be based on a number. For example, there was some dumb guy here in San Francisco who decided he was going to rent out his apartment to make some cash. And then he started doing that for other people, and it eventually became a cool company called Airbnb that everybody knows of. But he probably hired a PR agency. He probably didn’t have a lot of money to begin with until they got investors. But it’s a cool idea.

So I think that it’s a delicate balance between finding the revenue so you can do the cooler projects, but also making sure that any client that you take on, you have some people on the team that are excited about it. Because if you don’t have that, you’re just going to lose them, like 100 percent. You have to have somebody who is excited about that gizmo, widget, or food item, or whatever you’re pitching. Because if you don’t have that—and that’s kind of how I judge it: If I know that my team is excited about a client, I know that we’re going to deliver really well. The client is going to be happy, and we’ll maintain that client.

If a client comes to me, and it’s like the most boring client in the world, but they have tons of money, I’m going to step back. I can’t tell you how many times we get approached by AI companies, and I say no, because it’s just a saturated space. Everybody thinks that they’re doing something original, and they’re not. And it’s just not our area or what we’re interested in doing.

Loren Feldman:
Sarah, I think you just made an important distinction. The way you just described it, you’re making this decision based less on whether you’re excited and passionate about the project and more on whether you can do a good job for this potential client. And that certainly makes sense to me.

I want to move on to something else. I want to give you all a chance to offer some advice to someone who wrote about an interesting situation on Reddit, the small business subreddit. There’s a lot going on here. But I think it surfaces a lot of familiar themes and issues. So let me read it to you:

“Hello all,” it begins. “I tried searching for some directions in shutting down a small business, but I’ve come up short. Long story short, my father made a significant investment into an electrical business with a partner who turned out to be a corrupt idiot. My father has since passed away, and the partner has been booted from the business. Now, my mother with minimal business acumen has been attempting to run the business over the past few years—although my advice and the advice of many she’s consulted with was to shut it down as the financials were in a really bad place.

“Fast forward a few years later, my mother has sunk an additional 150K into the business with minimal improvement. Her hope was to get the company lean and relatively stable, so that she could sell it off to a buyer over the next 12 months. Well, that aspiration has hit a hurdle today as one of the employees didn’t pay the past month’s sales tax. And now the government has locked the company’s accounts with a bond. Twenty thousand is owed in taxes. She’s finally come to the realization that it’s time to shut it down before she sinks any more money into the failing business. What’s the best way to proceed?”

And then this person lists some key facts: It’s an electrical company that does $3 million annually in revenue. Its assets include $100,000 in inventory, $400,000 in accounts receivable, and $275,000 in vehicles. Liabilities include the $20,000 in taxes owed, $60,000 in credit card debt, $180,000 owed on a vehicle, and $500,000 in an SBA loan.

“The SBA loan was issued during Covid, and the company has yet to make payments on it, nor has the government reached out about the loan. The company also has a lease for the building through 2025 at $7,000 a month. The company is simply too cash-poor to continue on. Another challenge is the accuracy of the books. There basically are no books. Shocker the business is doing poorly, huh? This naturally makes it difficult to try to sell the business. That said, surely the intangible assets, phone number, customer lists, etc. has some sort of value. What’s the best way to proceed with shutting down the business?” Thoughts?

Sarah Segal:
I want to cry for this person. Like this is so sad, and painful, and just gives me anxiety. Just awful.

Loren Feldman:
Well, let me start, because, Paul, this is kind of the way you and I met. Am I right?

Paul Downs:
It is. I was in a bad position in late 2009, and was pretty sure I was a couple of weeks from shutting the door—although I wasn’t encumbered by anywhere near that amount of debt. And like this person, I started looking for: What do you do? And I found pretty much nothing. And so I reached out to you—and you were writing for The Times at that point—with the thought that whatever happens to me is probably going to be pretty, pretty bad. But since I could not find any advice about it, I thought it might be doing some service to the broader community to at least record what happened. And so, yeah, I was gonna have a bad time, but there at least would be something that comes out of it.

Now what came out of it, I did not anticipate, which was an excellent relationship with you and a chance to write for The Times and turning my business around and all kinds of good things. But this person sounds like, wow, they’ve pretty much screwed up, or somebody has screwed up pretty much in every possible way. It’s really hard for me to see how you survive it.

And I guess that their actual question of, “What do I do next?” My thought would be, because the government’s involved, and you’ve got a landlord, and you’ve got every flavor of trouble landing on your head, I would consult a bankruptcy lawyer, I guess. But I’m not an expert in these situations, thank God. So, I don’t know. What do the rest of you think?

Loren Feldman:
Mel, before you answer, let me mention that I was a little surprised. On Reddit, the responses tended in the direction of, “Hey, wait a second, don’t panic here. It looks bad. But you do have some assets, and you might be able to turn this around enough to sell it.” So what do you think, Mel?

Mel Gravely:
Oh, there’s no way in hell they got anything left to sell. So no, I’d say because of—now, this is assumption. My assumption is, this has taken a toll on the mother emotionally and clearly financially, because she’s put some more money into it. I’d say it’s time to raise the red flag. I have closed a business before. I can’t even express how emotionally devastating it is to go through the process of closing a company that has outstanding liabilities. But the only thing worse is to keep going. That would be worse—to start doing crazy things like putting more money in or taking retirement funds or borrowing money from friends or any of the things that would just make the future harder.

What I would suggest that this family do is to reach out to an attorney, and to look for a liquidation firm. They’re not really attorneys, but the reason I’d call my attorney for direction is because I want a legit company. I want to make sure I’m not going to get taken. Because these companies are going to ask you for money upfront, because they know what you’re about to go through. And there’s not going to be any money on the back.

But Loren, people start doing things from their heart, and I’m not even sure they’re completely legal. For example, they’ll make sure that employees get back pay, instead of paying a bank back for a loan. I’m not sure in all cases that’s legal. And you can end up with clawbacks and personal liability, and you start piercing your corporate veil. And they can come after you more personally for things you haven’t even signed for.

So to me, this gets kind of simple—one, that I wish they would have talked to us last year, because we could have saved them a year of grief. Two, I’d call an attorney and ask them to introduce me to a firm whose business it is winding down companies. And then I’m going to follow their steps, even when it feels horrible to do so.

Loren Feldman:
Can I ask, was that business that you closed down a business that you had started?

Mel Gravely:
Yeah, I started it with some partners. And I’ll tell you, I’ve gotten pretty good at running companies now. But back then, I say this was where I really went to learn. I mean, it was just a bad model in the first place. We executed kind of mediocre. We had great people around us, but we just didn’t have a good business model. And we had a couple of good years, and then we just couldn’t sustain. We separated this company into two pieces, liquidated one of the offices as a separate business, and people lost stuff. So when I say “close it down,” people lost stuff. They didn’t all get paid back. Banks didn’t all get paid back. Landlords did not get paid back. Things did not settle to zero.

And they’re in that situation today. The best they can do is what I like to call “take cover.” And that means take personal cover so that they’re prepared for the future. And there are experts out there who help people walk through that and tell them what they’re really up against and how creditors are going to behave. They’ll talk to the creditors for you. They’ll make the arrangements for you. They’ll prioritize who gets paid first, based on the law and based on the assets that you’ve got.

Paul Downs:
I will say that a lot of people ask me about starting up a business, and one piece of advice I’ve always given that I never had to take myself was: set a line, set some definition of where you’re going to call it, “No.” Like, no failure. I’ve always had the thought that I didn’t want to put myself in a position where someone came and took my house. And I never got there, but I think that contemplating what failure looks like before you start so that you don’t keep shoveling precious resources, time, and attention into a losing proposition is absolutely worth doing—particularly if you are putting your family’s wealth at risk, your relationship at risk. And that’s just something I’ve told people, and I’ve never heard anybody say, “Oh, I ignored that, and everything turned out great.”

And a lot of people don’t ever have to contemplate it. But when you’re starting a business, you’re all optimistic, and you’re excited, and you only see the golden road going out ahead of you. But there are dark clouds coming in. And if you can’t just say to yourself, “Okay, this is what failure looks like to me, and when I reach that point, I’m actually going to do something about it”—as opposed to just continuing to suffer and let it get worse. I mean, the business in this letter is probably a great example of that. I’d be pretty surprised if problems weren’t popping up all the way along. I mean, if you don’t have any books, after how many years you’ve been in business, that’s an enormous problem right there.

And circling back to where Sarah started this episode, if this person had said to any business person, like, “Hey, I’m operating without books, what do you think of that?” You don’t need to know much about their business or their particulars or this, that, the partnership. You don’t need to know anything other than that. That’s just a terrible idea. Don’t do it. And so I just wish people don’t go down a road where it just keeps getting worse, and you can’t extricate yourself. The reality is a lot of businesses fail.

Sarah Segal:
How do you run a business without books?

Paul Downs:
It can be done, apparently, for a while.

Loren Feldman:
Mel, you’ve seen a business do it.

Sarah Segal:
I can’t wrap my head around that.

Mel Gravely:
Yeah, me either. And if I hadn’t seen it for myself, I wouldn’t have believed it. But it’s relatively easy, Sarah. You simply take in what you take in and send out what you send out, and you do the taxes at the end of the year. And you don’t need financial statements to do taxes. I know it sounds crazy, but you don’t. And it’s a little harder when you’ve got plant and equipment like these people do. So I question that, but you can do it. But darn, it’s dangerous.

Paul Downs:
Well, I think that the other thing is that there’s books, and there’s books. So for 16 years, I operated basically without books, because I didn’t know what they were. Now, I bought myself a copy of QuickBooks in like 1993, set it up any old way I felt like, so I had some record of what was going in and out. But actual books? I didn’t have anything like it until my partner’s wife set us up. It was shortly after she got everything in shape with an actual chart of accounts, and some basic cash management systems. That’s when she, unfortunately, passed away.

But you can do it for a long time, as long as there’s money in your bank account. And the other thing is that if you start a little business by yourself, and you don’t do anything that’s just blatantly illegal or dangerous, nobody’s gonna look over your shoulder. You could do it however the hell you want. And you can be as bad at it as you feel like, and as long as you can continue to keep the plates spinning or the balls in the air, nobody’s going to come and shut you down. Now, it sounds like the people in this letter went way beyond that point.

Sarah Segal:
I just don’t see how you can strategically grow, build, if you aren’t watching what you’re doing. Like today, I’m really excited. I have a gentleman coming in who’s a fractional CFO, and he works particularly with PR agencies, because I need somebody who can help me look at the numbers and plot our course for growth. And I don’t know how I would do that without somebody looking at my books and having books that were clean and tidy and accurate. I guess you can grow by default, but you can’t grow strategically, unless you understand your numbers.

Paul Downs:
I disagree. I’ll tell you exactly how I did it for a long time, which was that I produced a product and did fairly effective marketing that brought a greater and greater number of people to my door every year. And we operated in a business where people gave me a deposit. So we were running kind of a Ponzi scheme where the business was actually losing money every day on an accrued basis. Like, my manufacturing was not profitable, but because the client base was growing, the money to keep the balls in the air was arriving in the form of the deposits. And as long as I could keep the sales up and never ran out of money. I mean, I came pretty close.

And now that I actually understand the difference between accrued revenue and just revenue, I haven’t had this problem. But you can do it if your business is growing, and people are giving you enough cash to subsidize today’s operations, even if they’re losing money. Now, in some businesses, it won’t work. The reverse of that as a business is growing but that requires you to purchase a ton of inventory. You could be making a profit and not have the cash to grow, because you’ve got to play out so much upfront.

Now, that was just not my business. So maybe with this electrical contractor, or whatever they did, it may have been a version of the same thing. They started clearly at zero, because that’s where every business starts. They got to $3 million. That’s a substantial amount of money. So that’s probably what was happening. They grew for a good long while. That financed terrible operations, and then it caught up with them.

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Topics: business strategy, board of advisors, outsider advice

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Hosted by Rich Armstrong and Steve Baker the Change the Game podcast highlights true life stories of organizations influencing positive change by doing business differently. They’re teaching people how business works and closing the gap between the haves and have-nots. It’s capitalism at its best. Inside each episode, you’ll discover stories of entrepreneurs who are Changing the Game.

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