Entrepreneur Randy Minchew: listen to what the numbers tell you or else

Entrepreneur Randy Minchew posted on the My Venture Pad blog some lessons he has learned from his own mistakes ("Mistakes From Past Ventures I Won't Be Making Again"). Here's a taste:

Lesson 1: Respect the numbers.

I used to rely on my intuition too much when it came to pulling the trigger on a deal. What I found was that, while my intuition is great for helping me employ the right people, it’s not enough to make financial decisions.

A great example was when I started a restaurant. My wife (and business partner) told me that, based on the startup costs, our new restaurant would have to serve 800 people a day in order to make a profit. I promptly told her to stop being negative and explained that I had a gut feeling that we could make it work. The business went bankrupt in two years. I now have a great respect for the numbers (and others’ input!).

Minchew also offered some advice for others, which I wholeheartedly agree with:

People make mistakes in many of their everyday ventures; it happens. The important part is applying the lessons that you learn from these mistakes and considering them in future initiatives. And while you’re at it, don’t be ashamed to share them with others. You might save them from sharing in the same frustrations.

The act of sharing mistakes with others so they can learn is one of the main points of this site. Thanks, Randy, for sharing yours.

You can read his entire post here.

A consultant grows, and grows deeper into debt

Adrianna Gardella of the New York Times writes a terrific series entitled "She Owns It," featuring stories of women entrepreneurs. In a two-part post, she profiles consultant Carissa Reininger, whose struggles with managing growth and cash flow should be required reading for anyone wanting to scale up a people-based business like consulting. Here are a few nuggets from part 1, where Reininger describes how the situation spun out of control:

“I had no start-up capital, no experience, and no real idea what I was doing.” Still, Ms. Reiniger said the company grew quickly and sales rose from $29,000 in 2005 to $1.1 million in 2007 — when cash flow became an issue. “It was literally, money in, money out,” she said. Silver Lining never had a line of credit. Instead, Ms. Reiniger said, “I had a credit card with a $17,000 limit.” She said Silver Lining’s small-business clients had their own cash flow issues, which didn’t help matters.

By late 2006, Ms. Reiniger said, Silver Lining’s financial woes prompted her to start “calling people and making ridiculous deals.” For example, she would request a loan of, say, $50,000 and promise to pay it back in 60 days — at a 20 percent interest rate....

She said she entered a dangerous cycle — borrowing a sum from one person and paying it back, with interest, with a loan from someone else.

Ms. Reiniger said that from 2006 until 2008 she completely ignored the reality of her situation. “Admitting that I didn’t have a grasp on our finances and that I was going into debt every month was not going to support my image,” she said, adding that the company had a “rock star” reputation. But while Silver Lining’s annual revenues were $1 million, the company was spending more than that.

It got to the point where Ms. Reiniger said she couldn’t bear to look at the company’s QuickBooks records.

And here's a bit of Part 2, which covers Silver Lining's recovery:

After two years of trying to ignore her predicament, Ms. Reiniger was forced to acknowledge it. One wake-up call came, she said, from the husband of a creditor who went to Silver Lining’s offices in Edmonton, Canada, and threatened her and her employees. Some shell-shocked employees began to quit, and Ms. Reiniger was forced to lay off others. She was soon down to two employees from a high of 25. In a misguided attempt to grow her way out of debt, Ms. Reiniger had expanded from Silver Lining’s original Toronto office, adding outposts in Vancouver and Edmonton, Canada, and Las Vegas. In 2008, she decided to close all but the Toronto office.

Silver Lining had made its living coaching other small businesses on how to set and reach financial goals. Now, Ms. Reiniger’s own business was struggling to manage its growth. The irony contributed to her reluctance to face her financial problems head-on. She wasn’t sure what to do: “I needed either slower growth or more money,” she said.

Part 2 also includes a great discussion of pivoting a business model and how to regain the trust of creditors.

UPDATE: Here's Part 3 of the story.

"Accountants, attorneys, and bankers advised me to hire people with lots of experience"

Another business mistake story reported by Marcia Pledger of The Cleveland Plain Dealer. This story is from Ratanjit Sondhe. He emigrated from India to the U.S. in 1968 with $8 in his pocket and two Master’s degrees to pursue post-graduate studies in Advanced Polymer Chemistry at the University of Akron. He soon became an American entrepreneur, founding Poly-Carb, Inc., where he served as CEO and Chairman for 34 years. Poly-Carb was sold to DOW Chemical in 2007.

I came to America in 1968 with several degrees and spent years studying chemical research before I started the former company with two friends.

When I started Poly-Carb, accountants, attorneys and bankers advised me to hire people with lots of experience.

My adviser said that because I didn’t know anything about business I should hire people who were knowledgeable about marketing and sales. It wasn’t bad advice. But it didn’t work for this company.

The people I hired wanted bigger cars, titles, offices and salaries. We had seven secretaries at that time and yet we still couldn’t get a letter typed. Suddenly, there were 55 people working at a company with less than a $1 million in sales.

The rude awakening came when my accountant told me that for all practical purposes I was broke. In that same meeting, my attorney advised me to file bankruptcy. He said, “We can file for Chapter 11, and I can settle your accounts for 10 cents on a dollar. We can do it very quickly without you losing your name or the business or accounts.”

For the fist time in my life I couldn’t sleep. I didn’t want to cheat people. Instead, I took a hard look at my business. I still had good orders, and realized that I was responsible for 90 percent of the company’s sales.

I decided I had to let go of my entire staff. I realized we didn’t need seven secretaries; just energetic, intelligent people who wanted to add value and work together as a team.

But even though I had good orders, I still needed raw material to fulfill them, and I did not have any money. I contacted my largest supplier and said I needed to visit them in New York. I owed them $500 million, and they told me there was no need to visit – just send a check. Somehow, I persuaded the senior vice president of finance to see me.

I told him that I had legitimate orders from contractors backed by the Department of Transportation. He said, “You didn’t make money before. How are you going to make money now?” He was right. But I showed him the cash flow that had been calculated for my company. I said that people were making those large salaries were no longer on my payroll. I have people who will work about one-fourth of what I was paying.

He said,” Your know, either you are the biggest con artist that I have ever met or you are a really honest person.”

I said, “It takes a con to recognize a con. But it also takes an honest person to recognize and honest person. You tell me who I am."

He game me the money, and we were able to pay off all of our debts within a year in 1980. We’ve been profitable every year since then and now have a second facility in Georgia.

Related post: John Bliss: hiring experienced people is riskier than growing your own

"I was so wrapped up that I lost sight of the financials"

This story was presented in the New York Times excellent "You're The Boss" small business blog, and concerns SolTec Electronics and its founder, Dawn Gluskin, who ran into that problem so familiar to startup businesspeople - growing too fast. Here's what happened:

Success came quickly for SolTec Electronics. The company, which Dawn Gluskin founded from her living room and financed with her savings and retirement accounts in 2008, sells hard-to-find electronic circuit board components, such as semi-conductors and integrated circuits to companies operating in the electronic manufacturing and aerospace industries.

By 2009, SolTec had annual revenue of $700,000. In 2010, it moved into office space in Rockledge, Fla., hit $2.7 million in revenue, and secured a $150,000 line of credit. SolTec, according to Ms. Gluskin, helps clients when traditional distributor relationships break down. Given the rapid pace of technological advance, critical components in a supply chain can suddenly become obsolete. Many manufacturers also have trouble keeping up with demand, which can result in long lead times as they wait for parts. In addition, counterfeit parts have flooded the global market, which is why SolTec tests all components in its lab before sending them to customers.

Last year Ms. Gluskin, a first-time entrepreneur, devoted much of her attention to sales, marketing, and business development — her areas of expertise — while simultaneously running her 11-employee company. Her efforts were rewarded with explosive growth, but she learned she couldn’t do it all. “I was so wrapped up in other activities,” she said, “that I lost sight of our financials.”

In the fourth quarter of 2010, SolTec recorded its first quarterly loss. Ms. Gluskin was unaware of the problem until the first quarter of 2011, when the $40,000 loss was revealed at an end-of-quarter management meeting. The loss, Ms Gluskin said, resulted from a “perfect storm” of low sales and high spending. “In 2010,” she said, “we tripled our staff size, moved from the home office, added a lab, and were spending, spending, spending on equipment.”

What happened next? You'll have to read it over at the Times.