Going Wrong From the Start
Jun 09, 1997
Why do some firms grow, have happy employees, keep satisfied clients, and make their owners rich, while others start up, muddle along, and then either continue to muddle along or fizzle out completely?
If you had the opportunity that I’ve had to get inside A/E/P and environmental firms of all types and sizes throughout the U.S., and talk with their people, you’d probably agree that many of these “problem” companies made bad decisions from the get-go that plague them as long as they are in business. Here are some examples of what I mean:
Getting outside investors. Too often, people in this business start their companies with borrowed funds. Whether it’s a loan from a sympathetic parent, a rich uncle, or a friend of the family, the bottom line is the same. When you take money from someone, they (the lender) then feel that it’s within their rights to tell you what to do. And they may not have the same ideas about business that you have. My advice is do what you need to so you can avoid outside investors, especially early on.
Bringing in the family. Many, many people who start A/E or environmental firms recruit family members to help. The spouse does the books and answers the phone. The son maintains the survey vehicles. Number one daughter becomes number one engineer. The sister takes over marketing and PR. The idea is that this labor is either free or low-cost, or a family member needs help in the form of a job, so there they are. While many times, you can build a case that a family member cares more about the business than a non-family member, or that they really perform well in their role, having all these family members around often hurts the morale of the non-family members. Right, wrong, or otherwise, everyone expects them to get favorable treatment! And if you ever do have to let one of these people go, it’s not easy! Just ask someone who has been through it.
Not doing a business plan. What is the first thing any management consultant worth his salt will have you do? Put together a business plan, that’s what. And yet, my guess is fewer than half of all firms in our business and even fewer start-ups have any kind of business plan whatsoever. No wonder no one knows what kinds of clients the firm really wants, what the goal is for repeat business, where the company makes money and where it loses it, and so on. Every firm needs a business plan, one that is regularly updated, and known to all in the firm.
Mixing personal and business expenses together. You see this all of the time in small companies (and sometimes large companies that used to be small companies). The 45-foot cruiser in the slip just outside the St. Petersburg office’s door is used only by the president but owned by the company. The ski cabin in Maine that costs $4700 a month to keep up is used by the founder but owned by the company. The principal’s baby sitter is on the company payroll and is now suing the firm for not paying overtime for hours worked over 40. The company office building is owned by the three founders and therefore the firm can’t move to more appropriate space. You get the idea.
Not investing so the firm can grow. Many firms find out that they have mortgaged their future by not investing in years’ past. It’s sort of like trying to build for retirement through a 401(k) plan— you can’t do it all at once. It takes time. I look at computer expenditures, hiring good people, spending money on advertising and PR, and training employees as necessary investments that take away from short-term principals’ compensation but pay off in the long term.
Not worrying about cash flow. It’s amazing how few firms do a cash flow forecast, yet when it comes to survival, cash flow is more important than paper profits any day. I guess the reason firms don’t do it from the start is that too often, they open the doors with money in the bank, money that came from a 401(k) that was cashed in, a rich relative, or a home equity loan, and they really don’t need too much operating capital until their first invoices start to get paid. Over time, as the firm grows, the need for cash is met through a line of credit for receivable financing supplied by the local bank. It’s only after years of sloppy financial management practices (slow billing, weak collection efforts, poorly formatted invoices, bad client selection procedures) and no cash flow forecasting that the firm finds itself in a crisis.
Hiring people that are cheap and then marrying them to the company. This is a common mistake firms make early on that haunts them forever. They make someone who is not qualified to do the job responsible for a particular area, boost their pay to a level that the employee couldn’t get from any other company, then keep these people in the role they are unequipped to do because they don’t have the heart to get rid of them.
Viewing the business as a way to make a living and nothing more. Thanks to the wonderful accountants and attorneys most of us have when we start out (our neighbors, the parents of one of our kid’s friends, a friend from high school, and so on), we get lousy advice. Typical advice is to sell our stock internally for book value; distribute bonuses to all of the principals equally, even though performance and share of equity varies greatly from person to person; suck all the cash out at year end even though the capital expenditure requirements for new computer purchases are going to total twice that amount, and so on. By the time principals of firms follow this advice for 20 years, it takes 10 more years of suffering for them to get any kind of return on that first 20 wasted years.
Can you see what I’m talking about? Every decision you make today impacts what your future will be tomorrow. Too many firms follow the path of least resistance, expedience, and conventional wisdom, and lose out on what could be a great opportunity for their owners and employees to experience real success.
Originally published 6/09/1997
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