A veteran entrepreneur presents a cautionary tale of what happens if you use your accountant as a business adviser.
Your problems with accountants begin the first time you ask one of them whether your projections make sense
I have nothing against accountants. I was trained as one myself, and I know they serve an important function. But you should never rely on an accountant for business advice, especially when launching your first venture.
Why not? Because accountants are basically historians. That's how they've been educated, and that's how they think. They can do a great job of explaining what has happened in the past. But making things happen in the future? Forget it. They don't even know the right questions to ask, let alone how to get the results you're looking for.
I'll give you a recent example. A young guy named Ken contacted me after reading one of my articles. He had a cash-flow problem: he owed a printer $25,000 for a book he'd produced. The book was an annual trade directory for people who operate restaurants in New York City. It provided information about getting permits, buying kitchen supplies, finding contractors -- that type of thing. Ken made money partly by selling advertising space to vendors, but mainly by selling the books to chefs and restaurateurs. The problem was, he hadn't sold nearly enough. Of the 10,000 copies he'd had printed up, he had some 8,500 left over, and they were about to become out-of-date.
So he was in rough shape. He had no cash, an office full of books he couldn't sell, and an irate printer who was threatening legal action. Meanwhile, Ken had to start work immediately on the next edition of the directory. But how would he get it printed? And what if the first printer took him to court? He had no idea what the consequences might be. He'd never been sued. He'd never dreamed it could happen. To be facing litigation was a total shock. He wasn't panicking yet, but he was very, very upset. I calmed him down and told him I'd help him find a solution.
Now, to anyone with business experience, it's obvious how Ken wound up in this mess. He was a victim of overoptimism, which is quite common. People who start businesses are optimists by definition. What's more, we tend to be enthusiastically optimistic. We get carried away. We become so excited that we often lose touch with reality. Sooner or later, that tendency lands most of us in trouble. I myself went through a very painful bankruptcy in the late 1980s because of an acquisition I made out of overoptimism, and I was a pretty seasoned entrepreneur at the time.
The numbers can save you from overoptimism by bringing you back to reality, but only if you ask the right questions, and to do that, you usually need help from someone who is not emotionally involved and who knows the right questions to ask. Ken, for example, had gotten the idea that he could sell 10,000 of these directories. It turns out there are only 12,000 restaurants in New York City, which should have immediately raised a red flag. I asked him how long the selling season was in this business. "About four months," he said. In other words, he had 120 days to make all his sales, provided he worked 7 days a week. That averages out to 83 per day. How could he do it? OK, he thought he could sell some by direct mail. If he got a terrific response rate -- say, 5% -- it would still amount to only 600 directories. Maybe he could sell a few more through specialty stores. But the vast majority of sales he'd have to make in person. We're talking about hitting 12,000 restaurants in 120 days, or 100 sales calls a day, with a success rate of something like 78% (assuming he sells those 600 by direct mail). Working 10-hour days, he'd have to average 10 sales calls an hour, or one every six minutes. Impossible. Superman couldn't pull it off.
So why hadn't somebody pointed all that out to him? I asked him if he'd gone to anyone for advice before starting the business. "Just my accountant," he said. "I gave him the information, and he put together a cash-flow statement showing that it would all work out."
To be fair, the accountant was not entirely at fault here. He'd done what accountants do. They're sort of like parrots. You feed them information, and they give it back to you in a different form. Unless you're basing your projections on past performance, they aren't likely to question your assumptions. After all, they're used to dealing with historical data. When you tell them you're planning to sell 10,000 directories to 12,000 restaurants in four months, they treat it as fact.
If you want business advice, you need to go to someone who has run a company over an extended period of time, and by "company," I don't mean an accounting firm or a law practice. You want a person who has had a real operating business. It doesn't have to be in the same industry as yours, or even in a related one, but it should have been around for 10 years or more. Why? Because you mainly learn about business from failures, especially your own. Anyone who has run a company for 10 years has had plenty of failures -- with luck, not terminal ones, but there have undoubtedly been scares, many due to things like overoptimism. The person who has already made the mistake is the one who can warn you about it before you do the same thing.
Unfortunately, most people don't use the resources available to them. Ken, for one, knew about a guy with a related business, selling trade directories for the film industry. They'd never talked. Subsequently, Ken found out that the guy was selling about 7,000 directories a year -- after 10 years in business.
At least Ken's mistake was not fatal. He worked out a deal to repay the printer in full with regular monthly installments of $2,500. The printer was impressed with his honesty and agreed to print the new directory as well. So Ken has survived his first crisis, which is a major step. And now he's getting his business advice from businesspeople. As for the accountant, he does what he's good at: Ken's taxes.
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Norm Brodsky is a veteran entrepreneur whose six businesses include a former Inc . 100 company and a three-time Inc . 500 company. His column, Street Smarts, appears every other month. Readers are encouraged to send him questions care of Inc .
This column was coauthored by Bo Burlingham.