5 Business Fundamentals I Learned the Hard Way

Two days ago I had the pleasure of being interviewed by John Caddell, founder of the Mistake Bank, for a podcast focusing on mistakes. That made me think about some of the things I learned that came from the business mistakes I’ve made. This is over the more than 27 years since I was last an employee, and 22 years of running my (well, our) own business. And despite a fancy business degree.

1. Your employees can’t also be your friends.

Most business owners want to treat employees like friends. We hire people we think we like, we work with them, we share values, so it’s only natural. But I’ve found, I’m afraid, that it doesn’t work.

Sometimes friends become employees, and sometimes former employees become friends, but don’t kid yourself. People you pay aren’t really friends. And business requires management, which means goals and tracking and accountability and feedback, which, ultimately, means you aren’t equal. You can’t be both equal and effective.

As a test, ask yourself: when those people you thought were friends leave the company, are they still friends?

This was really hard on me because I brought my anti-establishment quasi-hippie former ’60s persona with me into my business. I’m not naturally comfortable with hierarchy. But in a real business, it has to be there. I learned this the hard way.

2. Profits aren’t cash.

Profits are just an accounting concept. You get them by adding up the sales you make over a specified time and subtracting the costs and expenses. But having the sale doesn’t mean you have the money; and the cost associated with that sale might be something you paid months earlier. And furthermore, the money you spend to repay debt or buy assets is completely ignored by profits.

So it’s not hard to go broke while still being profitable. I learned that in business school first but then had to relearn it 15 years later when my company suddenly doubled sales and profits, but it nearly killed us. We were selling through channels, so money from sales came five months later, but we were building inventory and spending on marketing months in advance. So we were spending in October for sales made the following March that generated deposits into the bank in the next July. We nearly went under during our first big growth spurt. So I learned about cash flow the hard way.

3. Good liars are rare but dangerous.

Most liars are obvious and easy to spot, but last week I was chatting with an investor whose firm got into trouble for not catching a problem before they invested. He felt bad. It looked like their “due diligence” process failed. But he said:

“If you think about it, we rarely run across a person who can look you straight in the eye and lie through their teeth without showing it. We’re not equipped for that. When people answer straight direct questions with straight direct lies, they can get away with it.”

That made me think. Lots of people tell lies at odd moments, make excuses, try to squeeze out of things; but with normal people, that kind of behavior trips them up on a regular basis. But the power of the person who lies very well is something else altogether. That’s another one I learned the hard way.

4. You have to live with mistakes.

If you can’t stand mistakes, don’t make them, and don’t tolerate them, then you’re not cut out to have your own business. You are going to make mistakes, you can count on it. You have to be quick and flexible about recognizing mistakes, acknowledging them, and taking whatever steps need to follow them.

In Robert Sutton’s 12 Things Good Bosses Believe, posted last Friday at the Harvard Business Review, he says:

One of the best tests of my leadership — and my organization — is “what happens after people make a mistake?”

I agree. I had to learn that the hard way.

5. You can’t do everything, so at least try do the right things.

I call it displacement: everything you do rules out something else that you can’t do. Every entrepreneur wants to build every possible product to please every possible customer. I do an you do too. But we don’t realize, or at least I certainly didn’t for a long time, that trying to do everything doesn’t work. You end up not doing the really important things as well as you should, getting things only half done.

You try to focus. Take a step back out of the chaos, clear your head, and revisit priorities. What really matters? No matter what brilliant ideas you may or may not call your strategy, your real strategy is how you spend your time and your money. I learned that the hard way.


  • Josh Patrick says:

    I find it interesting that many businesses run out of cash while profitable. It was one of my early lessons and one that could have been avoided had I known how to read my financial statements. I find it interesting that the language of business is finance and so few business owners know how to speak that language.

    If you’re going to be in your own business, you must learn how to read your financial statements. This is especially true about the one almost no one knows how to read, the cash flow statement. If you learn how to read and can understand your cash flow statement, you’ll have a lower level of stress than those that never learn.

    Josh Patrick

  • Ibanda John says:

    This is a wonderful article and most people fail to deferrentiate between freindship and employees I exprienced and i learnt the hardway because i lost my business .Profits normally confuse people yet it is not cash.these are great articles.

  • Patrick says:

    This just became required reading over here, thank you!

  • Arun says:

    Hi Tim,
    Your article is very helpful.These “Biz Fundas” that you learned the hardway would certainly give me a head-start when I am off to do one on my own.I did also like to share the fact that one of the challenges in doing a business is identifying our interest and pursuing it without loosing interest.

  • deeredw says:

    i can attest to the full story. i have experienced the exact business situations. i had an extemely successful business. i had mentors that told me to watch out for getting to close to employees and growing too fast. i grew the sales and profits right past my ability to support it with cash flow. i let some of my trusted employees fool me and did not check up on them until it was too late. you to always trust, but verify. it is good to know that i am not alone in my mistakes.

  • Matches Malone says:

    I have to disagree, based on the book I just read. Tony Hsieh, author of Delivering Happiness, tells how he flies in the face of your first two rules.

    • Tim Berry says:

      Thanks Matches, happy for the disagreement, and you’re more than welcome to recommend Tony H.’s book. And if he’s figured out how to do it better, more power to him … he certainly has been successful with Zappos. Tim

  • mark allen roberts says:

    # 5 nailed it….
    The reality is you can’t do everything. the real skill is picking what you will not do.
    I definately want to add your list to my ebook : 50 ugly truths of starting your own business…and why you should do it anyway posted on my blog.

    Mark Allen Roberts

  • April Olsen says:

    The liar one is good in business and personal life as well, unfortunately some people know how to play on your emotions and what your passionate about and use that very thing against you. Makes you very insecure about people, however, maybe we all need that little bit of insecurity to keep our heads in the right place. Watch out for people that know how to get you worked up in what your passionate about, those are the ones trying to slip one in on ya.

  • Roohi Moolla says:

    Really good list of business fundamentals, for most business owners just starting out this is a must-read, take-to-heart list. I thought #3 was particularly interesting, because most of the other points are usually included in these kinds of “must-have” lists – but coming across an excellent liar, and what to do about that, is rarely discussed. Thanks for writing about this one as well. It’s important to realize that unfortunately, not everyone has your best interests at heart and to be vigilant at all times.

  • Dibyendu Bagchi says:

    Good article.Appreciate!But business is all about developing a framework that grows with successive plan .Everything should be in built to this framework including reactive responses for the bad market,no cash flow etc.In short, the same framework, driven by the mission statement of the organisation will talk about and take care off anything and everything .People with their ideas can make value addition to the overall process and make the core framework oriented
    towards better business success.

    Dibyendu Bagchi

  • Jason says:

    Great article! #1 is a reminder many managers should take to heart. Not only does mixing friendship with leading your employees become difficult in matters of tracking and accountability. But, what about those employees who a manager/owner does not become friends with. It just looks like inequity and favoritism, which can lead to low morale and frustration.

    Living with mistakes, also an important rule. If you can’t live with mistakes, you’ll be less likely to try new and risky things. And it’s in the courage of trying these things, that great ideas are born.

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