4/27/2009

A Tale of Two Businesses


The other day, I was reading (and commenting on) a post by Ashley at Wide Open Wallet. Apparently, 2 months of self-employment has her convinced that business credit is a 'necessary evil'.

I'm convinced otherwise.

Once upon a time, I too started my own business. And while our two ventures vary greatly, I know that with proper planning, a business can be started and operated debt-free. All of this got me thinking about two of my previous employs - both of which were small businesses, started from scratch.

But the two were operated very differently.

The first, let's call it One + One, was operated by let's call him Gordon. This was actually my first job out of school. And since I didn't know any different and certainly didn't have our financial act together, it was difficult to see the err of Gordon's ways at the time.

Now I wish I could tell you than Gordon was kindly enough to give me frequent peeks at our P&L, giving me an inside knowledge of our assets and liabilities. Not the case, but also not the focus here. What was plainly visible was the way the business was run. I can recall one summer when business had slowed a tad and we were just into May. Now these were consulting businesses, and peaks and valleys were to be expected. The weird thing was that during that valley, we hired someone. She was pleasant and skilled, but why was she here? I can remember the looks from my co-workers as if to say, "but there isn't enough work for us, let alone another". The valley continued and a month later, she was gone. Another month and one of our senior staff was cut. It was a rough summer.

A year or so later, business was much better and much steadier. We had acquired a few more staff and had moved into a fancy office that Gordon had sunk big, big money into. As the work continued, so did Gordon and his business plans of the week. Soon it was announced that our goal was to become "the premier such and such in the region" and to have a staff of 10. OK, but why 10? Gordon seemed convinced that bigger numbers would impress clients and bring in more and better work. It didn't. I can remember later at an open house when we were told that if anyone asked, we were to say we had a staff of ten. We couldn't quite figure out who the ten were unless his parents and wife were on the payroll. When folks started counting desks, we'd try and change the subject.

Inevitably, another valley came, but this time I was the one swallowed up. After that, One + One had true staff of five - three of which were in administrative roles. Things made less and less sense at that point. Money seemed to flow like a river, though usually out the door. Was it debt? It almost had to be. Everything was for show, even us employees, and we seemed to come and go with the wind.

The second, let's call it Hot House, was previously a one man show, operated by let's call him Kurt. I actually met Kurt while employed by Gordon. Our biggest client had actually lined us up to work for Kurt. We were jealous immediately. Here he was, one guy, and he had the big project from the big client - the type we'd dream about at One + One. What was so special about him? We'd worked hard, built our company up, with six or more employees at the time. This was when I first began to see that Gordon was running at 100 mph, but in the wrong direction.

After leaving One + One, I started my own venture - a story for another day - and through a mutual friend, caught up with Kurt again. To my delight, He wanted me to do a bit of work for him. I worked on-site at his office, which at the time was an apartment. Technically not allowed by the lease, but the staff approved it at the time, and it was far cheaper than a commercial space. On top of that, he was sharing the space with friend who had a similar, but non-competing business. He was also named Kurt (same spelling) and with the same last initial - the Mrs. was confused for weeks. The other Kurt also had a guy doing part time work for him and the four of us ran two businesses out of a single one-bedroom apartment with make-shift desks and hodge-podge computers. It felt like we were running a speakeasy.

Now keep in mind, I'd spent the last 3 years keeping up appearances for Gordon, and here working with Kurt, appearance was last on the list. Even better, we were getting the good work at Hot House. While we had many of the same clients at One + One, we didn't get near as good of projects - mostly it was the work no one else would take. But Gordon was always taking those jobs, always promising they would lead to better work. I can't say that ever panned out.

A few months later, the lease was up at the apartment and the new management was having none of our little business venture in Apt. 12B. The Kurts, still friends, chose to part ways. Kurt decided to make a real business out of his hobby, offered me a full-time job, and got a real office.

As we were discussing his plans for the business one day, he shared with me that the way he had it figured, if we each billed 20 hrs per week to clients, then we'd break even. ...................... I was floored.

Floored, not only that he shared that with me, but that our business was actually that lean. He also told me how when he mentioned to clients that he was moving into a real office that they could actually visit, that while encouraging and enthusiastic, he could also tell that they didn't care. It didn't matter to them. "Yeah, what's that", he joked, recounting the phone call, "You're moving into a tent on our front lawn? Great, great, I'll bring you a coffee tomorrow. Good for you, Kurt. How's that project coming?"

Another time, we were discussing our work load, and he must have been kicking around the idea of hiring a third person. We still had peaks and valleys at Hot House, but they were more like 'crazy' vs 'manageable' than 'busy' vs. 'bored' at One + One. I can recall Kurt, thoughtfully discussing why someone might hire more help. "Is it to do more work? Just more volume? To be greedy and make more money? Or is it to do better work? I don't want to grow for the sake of growing or take more work just to try to make more money." That very moment was the most secure I ever felt in a job. This guy got it, and I didn't have to worry my job might be the victim of some megalomaniacal scheme. The type of scheme he had clearly been burned by before as well.

The best, was day when a man from the County came to our office. To this day, I have no idea if he was genuine or just casing the joint. But he claimed to be assessing business taxes for the County, and would need to assess our office. Kurt was out to visit a client, so it was on me. As he was talking about the sort of things he was looking for, I though about what we did have there. So what if he was a crook? We had jack squat as far as he could see. Our desks were very nice designer office tables, second hand - they could have been from Wal-Mart for all he knew. Besides that was three computers and some so-so office chairs. Our data was our real value and that went home with Kurt each night. So I let him see the back office and I smirked as he said that we had nothing really of value. Computers weren't even a big deal as, "they go down in value pretty fast". It was yet further confirmation to the way Kurt was running the business.

Looking back on these two companies, Kurt could have easily been sucked into the same trap as Gordon - hiring as fast as the work was coming in. Anyone could. The difference was the intent - the plan. Gordon, I would later find out, tried to sell One + One. Then all the window dressing made sense. It was all about padding the books - "We have X number of employees, handled over a hundred projects last year each lasting an average of 11 days, and not to mention the year over year increases in revenue...." It was fluff, just to net him a big payday. Kurt on the other hand, wanted quality over quantity. Slow and steady, we churned out work, the two of us handling more note-worthy projects at once than I ever saw at One + One. The difference was intent.

Ashley - and I'm not pickin' on you here - seems to need a line of credit to cover payroll as the profits don't come in as fast as the pay goes out. This is cash-flow insolvency in business. In personal finance terms, this is a matter of not living within one's means. Either way it leads to debt. If you can be debt-free in your personal life, then you can do it in your business. In both cases, you need a plan based on a set of core values. If one of those values is "free from debt", then there is no reason you need business debt.

If Gordon could make his business work the way he wanted with 4 employees, then how is the "more cowbell" approach going to help? We certainly weren't doing better work and adding capabilities with each new hire. Meanwhile, Kurt's business was absolutely killin' it. With two people and a shoestring budget.

If you're still unconvinced, then I'll offer this one parting shot - I know that it's anecdotal, but all of these companies complaining about access to credit in the recent financial crisis are the ones with massive lay-offs, closing their doors for good, or begging for a bailout form the Fed. If I were opening a business, I'd do the opposite those guys. Debt doesn't seem to be such a blessing there, maybe you should avoid it at all costs, even if it means politely turning away work.



3 comments:

sam said...

ok

DogAteMyFinances said...

Eh, there's business credit, and then there's BUSINESS CREDIT.

We took out a few thousand to buy equipment to start a business, but paid it off very soon. I don't see any problem with credit for some starting costs, assuming you have some work, which is what I thought she meant.

Mr. (not) the Jet Set said...

Dog-

Clearly, we're against debt here at nothtejetset. That aside, the core problem is the plan, or lack there of.

Payment terms were stated in the contract. Employees, while only being paid when working, likely have a payment schedule as well (every 2 weeks? monthly?). With a 45-da payment term, it's not tough to see the potential gap.

With a little planning, saving, and retraint, there is no reason this couldn't have been cash-flowed.

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