How to Succeed in Business in 4 Easy Steps

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"Now he's in business for himself, and he's having a bad month. In his business plan, he projected $20,000 in sales for the month. That's his break-even point. He's in the last week, and he's done just $10,000 in sales. He starts getting desperate. He calls up sales reps until he finds one who will buy $10,000 worth of supplies if Bobby will come down on price. They negotiate, and Bobby gives him a good deal. Bobby's happy. He's made his goal. He's moving a ton of product. He comes in and says, 'We did it. We hit our number for the month.'

"So what has he really done?

"One, he didn't break even. The price he negotiated left him with a 10% gross margin on the sale. Breakeven is $20,000 at a 40% gross margin, or $8,000 in gross profit. He has sold $10,000 at 40% and $10,000 at 10%, for a total of $5,000 in gross profit. The margin is 25%, not 40%. That isn't enough to cover their expenses. He's short $3,000, which has to come out of capital. Five more months like this, and they'll run through the entire $15,000 they put in.

"Two, he's wasted his time. He should be using his time to go after high-margin customers, which generally means smaller-volume customers. So we have another rule: spend your time developing relationships with your highest-margin customers. Let the low-margin customers come to you, and then negotiate the price up.

"That leads to a third point, because now Bobby has tied up $10,000 in one customer. What if the customer can't pay or takes too long to pay or will pay only after dozens of threatening phone calls -- on his nickel? It's a risk, and the risk is greater because it's a single customer. Bobby has taken a gamble without knowing it, and it comes straight out of the sales mentality. Commissioned salespeople never worry about getting paid.

"Don't get me wrong. I don't want to crush the sales mentality. I don't want to change Bobby's entire way of thinking. The sales mentality is wonderful -- provided it's balanced. Just because you have it doesn't mean you can't grasp the other parts of the business. You have to grasp them, or you won't survive. You'll make too many costly mistakes -- just to avoid having a bad month. I'm saying it's better to have a bad month, even a series of bad months, than to let your gross margins slide.

"Believe me, I know how hard this can be, especially if you're a salesperson. But it's important. Why? Because of your goal, your real goal, the one you decided on before you did the business plan. Bobby and Helene wanted financial independence. The question was, Would this business get them there? Their real goal was to find out.

"The sales mentality gets in the way of the real goal by substituting a short-term goal, making a sales target, for the long-term one: determining viability. So what if you have a series of bad months? Those results could be telling you something -- that the business isn't viable, or that you're not capable of selling at a high enough gross margin to achieve your goal. If so, you should pay attention.

"The usual alternative is to delude yourself with a series of high-volume, low-margin months. It's easy. You just drop your price below your competitors', and you can make all the sales you want. You'll think you're doing fine. You won't run out of cash as long as your sales keep rising and you can collect before you pay. Trouble is, you also have more payables than you can handle. You're bankrupt, and you don't know it. All of a sudden, you hit a couple of bad months, your cash disappears, and you lose everything. It happens all the time.

"The way to avoid that fate is to stay focused on your real goal, to follow the rules and watch the numbers. If you watch closely enough, a picture begins to emerge. You can actually see what's going on. You can feel it. The picture gets clearer, and the feeling gets stronger, until you realize that you're going to make it -- or that it's time to try something else."

* * *

Helene Stone says her first breakthrough came the day after the couple received Bobby's last severance check, about four months into the business. "I was so terrified," she says. "I was projecting the world would end. Then the check came, and I woke up the next morning and said, 'Bobby, we're still here! It's daytime again! Life is going on!' That was actually a big hurdle for me."

"The truth is, we didn't really know where we stood until the end of the first year," says Bobby. "Because we were subsidized. We had my severance pay. We had some other things coming in. We were going to lose it all, a $30,000 subsidy. We were going to be totally on our own."

"And Norman had warned us," says Helene. "He had told us from day one, 'You'll do fine the first year. The second year will be the hardest.' We had to see if we should even keep going. Were we a real business? Could we earn a living from it when you took out the subsidy? So we sat down with Norman at the end of 1992 and reviewed the whole year. And we figured out we would have been short by about $5,000."

"But he felt strongly we could make it," says Bobby. "He could see we were progressing. We were focused. We were getting the right margin, increasing our customer base. He said, 'If I didn't think you should go on, I'd tell you right now.' But it was scary. The second year was definitely the hardest."

"It was, but it wasn't," says Helene. "I was better by then. We were still eating, still paying the bills. I started to relax a little."

"You also realized I was here to stay," says Bobby. "It took a good year for her to accept I wasn't leaving."

"We really had just one big crisis in the second year, when we had two very bad months, back-to-back," says Helene. "For me, it was like impending doom. I thought, 'Omigod, we're out of business.' Norman had warned us that something like this might happen, that we might run out of cash. I called him. I said, 'Norman, it's here. What do we do?"

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Bo Burlingham

Burlingham joined Inc. in 1983. An editor at large, he is the author of Small Giants: Companies That Choose to Be Great Instead of Big. The book was a finalist for the Financial Times/Goldman Sachs Business Book of the Year Award in 2006. Burlingham is also the co-author with Norm Brodsky of The Knack; and the co-author with Jack Stack of The Great Game of Business and A Stake in the Outcome.

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