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.

Planning Fundamentals 4: Its About Accountability

(This is the fourth in a series of posts reviewing the fundamentals of planning, with an eye for how they’re changing over time. Part one was Form Follows Function. Part 2 was All Business Plans are Wrong. Part 3 was Cash Not Profits.)

I predict accountability is going to be an increasingly important issue as we head into this new decade. The old-fashioned tools of accountability, mainly physical presence, as in hours in the office, or days on the road, are fading. If for no other reasons, it’s because the world can’t continue to support needless commuting, an average of 51 minutes per day in the United States, and way worse in some of the larger cities in the developing world.

So what’s going to happen? We’re going to look increasingly for accountability as part of our real-world business planning process. The plan establishes the metric, and the regular plan review and tracking establish progress towards the metric.

It’s not just sales, costs, and expenses. It’s more metrics for more people, including lines of code, calls, blog posts, tweets, unique visitors, page views, minutes per call, presentations, proposals, emails processed, and so on.

Our tools will give us ever increasing metrics to use. I’m very biased about Outpost, I admit, but if you’re curious you should look into the wealth of metrics it provides on team-managed emails and email addresses, like the sales@example.com or info@example.com. And everybody knows about Google and Web analytics, paid search, etc. And telephones and miles are completely trackable.

All of this becomes the concrete specific portion of the business plan, and it is then managed as part of the business planning process. That means that the plan lasts barely a month before results are reviewed. Managing the metrics is a multiple win when there’s regular review, because all the members of the team can easily look on together and see where things have to change. And why.

And that’s the future of planning: management.

Planning Fundamentals 2: All Business Plans are Wrong, But Vital

(I posted most of this in 2007, but it’s even more important now)

Business plans are always wrong. That’s because we’re human. Business plans predict the future. We humans are dismally inaccurate when predicting the future.

Paradox: nonetheless, planning is vital. Planning means starting with the plan and then tracking, reviewing progress, watching plan vs. actual results, correcting the course without losing sight of the long-term destination. Planning is a process, like walking or steering, that involves constant corrections.

The plan sets a marker. Without it we can’t track how we were wrong, in what direction, and when, and with what assumptions.
Use this marker to manage the constant conflict between short-term problems and long-term goals. You don’t just implement a plan, no matter what. You work that plan. Use it to maintain your vision of progress towards the horizon, while dealing with the everyday problems, putting out fires.
So the plan may be wrong, but the planning process is vital.

The truth is that forecasting is hard. Nobody likes forecasting. But one thing harder than forecasting is trying to run a business without a forecast. A business plan is normally full of holes, but you fill them, after the fact, with the management that follows. That’s what turns planning into management.

Good planning is nine parts implementation for every one part strategy.

(Photo credits: istockphoto.com)

Planning Fundamentals 1: Form Follows Function

(Author note: I’ve been asked to go over some business planning fundamentals, and maybe collect those into a series. Consider this a first installment.)

Your business plan isn’t necessarily a document; it’s what you want to do in your business or organization, what’s supposed to happen, and why. It’s a combination of goals, directions, long-term strategy, and, more important, dates, deadlines, steps, tasks, responsibilities, and basic numbers.

Don’t confuse output with plan. That business plan document is just output. So too are the elevator speech, the summary presentation, the pitch, and the summary memo. They’re just the latest output.

So how long is a business plan? Long enough to serve your business needs. How well edited, formatted, and presented? Enough to serve your business’ needs.

Think about the difference between the business plan document requested by a potential investor and the business plan document requested by a banker, and the business plan you create because you want to manage your company better. Who’s the audience? What’s the business purpose?

I like this (and you can quote me on this, because if I heard it from somebody else, or read it somewhere, I’m sorry; I’ve forgotten. I think it’s original) because it is important:

You don’t measure a business plan in pages. You measure it in business results.

I don’t believe in the business plan in your head, or the one-page business plan, because neither of these serves the management purpose of setting things down as specifics which you can then track and follow up with course corrections.

Keeping it in your head won’t work as soon as you have someone else you need to share it with. And it won’t work for management purposes because you won’t be able to track results and manage the difference between what you planned and what actually happened. You lose the value.

So forget your preconceived notions about a business plan. Think of it as a first step in a process. Ask yourself what you need, in your unique situation, to be able to organize and prioritize and look at the steps and the metrics, and follow up on a regular basis. Is your strategy clear? Can you set it down so others can join it? Are dates and deadlines and steps along the way set down clearly? Have you done basic numbers, like sales, costs of sales, and expense budgets? Can you track those regularly and manage for course corrections? That then, is the right business plan for you.

10 Business Fundamentals

10 business fundamentals I believe, but I can’t necessarily prove.

Long-term business success is rooted in value. Businesses that offer value to customers and respect value for employees are more likely to survive. Business ethics are good business; they are like a long-term insurance policy.
Strategy is focus. A great quote: “I don’t know the secret to success, but I do know that the secret to failure is trying to please everybody.”
One of the most dangerous confusions in business is about business planning. Every company, large, small, and not-yet-started, can benefit from business planning. Way too many people confuse business planning with a big formal business plan document. You can have planning without the formal plan and you can have the formal plan without the planning. A great quote: “The plan is useless, but planning is essential.” –Dwight D. Eisenhower
The more priorities in a plan, the less likelihood of implementing that plan.
Passion and persistence don’t guarantee business success. There are a lot of other factors.
Bootstrapping is underrated. A great quote: “God bless the child that’s got its own.” –lyrics by Billie Holiday/Arthur Herzog, Jr.
Cash flow is vital but not intuitive. Profits don’t guarantee cash flow. Many profitable companies die for lack of cash.
Investors don’t invest in business plans. They invest in businesses they believe will make them money. They invest in the people and the market. But people without business plans are far less likely to get investment than people who plan. It’s about getting your story straight, and reducing uncertainty.
There are very few good reasons to spend more than you bring in for more than a very short time. A long-term company-building effort is one of them.
Everything you do in a business rules out something else that you can’t do. That’s the principal of displacement. It’s really important.

Back to the Fundamentals

In order to participate in Global Entrepreneurship Week (November 17-21) I’m teaming up with Palo Alto Software to offer a free webinar on business planning, starting at 9 a.m. Pacific Time, Monday, November 17, 2008. Capacity is limited, so please register now to assure your place.

Also known as: Plan-As-You-Go Planning; Going, not gone.

Whether it is recession, depression, or just a dip in the road, one of the best things you can do for your new business, existing business, or growing business is to strengthen your fundamentals. Dig into your planning process to make sure you’re managing cash flow, costs and expenses, but without losing focus on fundamentals. Keep your sights on the horizon — the long-term goals, your ultimate success — without losing basics like following up, accountability, and prioritizing.

Now is the time to make sure your fundamentals are sound.

Remembering Fundamentals: Who Owns What

I was talking with somebody yesterday, a man I respect, who was disappointed with his management (not my company, by the way) because he’d been told he was taking "too much ownership."

I laughed. I thought that was a joke. How can too much ownership be bad?

"No, really," he said. "I make decisions on my own. I give people freebies." His upper management doesn’t like that. I don’t get it. In seminars I talk about how good planning process generates ownership. To me, having managers "own" their areas is the only way to grow a company.

What?! Do you want to have every micromanaged manager in the company coming to you all the time, asking you to validate every decision? That’s just plain crazy.

My experience was that Palo Alto Software grew by having other people take over and own parts of the business that I had done originally. Product development, documentation, and (what a relief!) marketing, and accounting, tech support; one by one we found people to own these areas.

I assume as you read this you’re thinking something like "well yes, of course, and everybody knows that … why waste my time with it?" However, this story I heard yesterday was a reminder. People forget those fundamentals that "everybody knows." Do they get jealous of good managers.

The person accused of "too much ownership" had more than doubled his group’s revenue in two years. But, apparently, he wasn’t checking in often enough with his superiors. What ever happened to "just do it?" I also liked the image of a bunch of mice, each finding a place to eat on the cheese.

Am I wrong on this? Is it possible for a manager to have "too much ownership?"

Some Posts on Managing During a Crisis

If you’ve noticed a three-month pause on this blog, it’s not because I haven’t been writing. I’ve been focusing on managing during a crisis and posting on the main bplans blog instead of here. These are very tough times, and planning and good management are needed more than ever. Here are some of my related posts of the last three months.

Estimating Realistic Startup Costs, earlier this month. What will it cost to start your business? It’s hard to know for sure. And harder in a crisis. Learn how to accurately estimate startup costs and get your business off the ground.
The Difference Between Cash and Profits, last month. Profits are not the same as cash, and understanding the difference between them is a vital part of running a successful business. Your cash management has to tighten during a crisis.
Should You Start a Business? Test Your Idea First. May 21. Have a business idea you’re sure is a winner? You’ll want to test it first, especially during a crisis. Find out how to test if your idea is viable and if you should start a business.
How To Forecast Cash Flow. May 19. Your business may be profitable, but it can still fail if you run out of cash. Learn how to forecast cash flow to avoid unforeseen cash flow problems.
How to Conduct a Market Analysis in a Crisis. May 13. Even in a crisis the fundamentals still apply. But you have to adjust some estimates.
Turn What-if to What-Now: The Importance of Scenario Analysis. In April. Scenario analysis is looking at what might happen and developing a plan for how to act. Find out why this is so vital and how you can do it your business. It’s especially important during a crisis.

Most of those focus and highlight managing during a crisis. I hope you find them helpful.

Startup Founder Compatibility is Vital

Please don’t ever estimate the importance of startup founder compatibility. It’s vital. And it may not be what you think.

3d objects balancing

The relationship among founders of a healthy business is like a marriage. Compatible goals, thinking, values, and decision-making styles is really important. Even if a well-run and successful business, there will be a lot of times when disagreements come up and compromise is necessary.

To start at the beginning with people who don’t agree on the very fundamentals of the business is a bad idea. It’s a recipe for a painful failure.

On the other hand, don’t confuse compatibility with sameness. It takes a mix of different skills and backgrounds to build a business right. Somebody has to mind the money and administration, and somebody has to create the product, somebody has to build it (or deliver the service), somebody has to get the work out, and somebody has to close the sales. You want complementary skill sets and backgrounds and expertise, not everybody all alike. And that, by the way, does support diversity. In genders, backgrounds, ethnicity, and other factors.

5 Most Important Illusions About Startups

Q: What some illusions about start-ups? A: here’s my list of the five most important illusions about startups

The illusion of the idea. Few businesses have truly new ideas. Apple didn’t; Facebook didn’t; Google didn’t. They took an existing idea and did it better, or differently. Quite often the second or third entrant into a market wins. Furthermore, business ideas have no value. Execution gives them value. At the idea stage, they are just vapor, with no way to tell if they will even work.
The illusion about funding. You’d think that all startups go from business plan to pitching to funding to launch. But no. That’s the exception. Out in the real world, the early stages are usually a lot of struggle, work without money, doing things on your own time and after hours. Only a small minority, the best of the best, get other people’s money to spend. And that usually happens after a period of struggle, not at the beginning. Investors fund businesses, not plans; and even less so, ideas.
The illusion about being your own boss. Nope. Your customers are your boss. Your employees are your boss. Start a business and you answer to a lot more people than you did as an employee.
The illusion about persistence. Persistence only matters if the fundamentals are sound. Otherwise, it’s just digging deeper holes. Successful entrepreneurs often tell crowds of hopefuls how they have to stick to it, but that’s not really fair. Yes, their persistence won in the end, but for every success there are several failures who should have seen the signs sooner, and should have given up sooner.
The illusion about passion. Passion is necessary but not sufficient. Yes, being committed, believing in the goals, is a good thing, for sure. You almost have to have it. But passion doesn’t make a bad business good. It doesn’t fix cash flow, overspending, low demand. Lots of failed businesses were fueled by passion. When startup founders emphasize their passion, potential investors are usually rolling their eyes and waiting for them to get to the real content of their pitch.

(This was published first as an answer on Quora)

Planning, Startups, Stories

Tim Berry on business planning, starting and growing your business, and having a life in the meantime.

5 Business Fundamentals I Learned the Hard Way