The Thin Red Line
Every now and then, I'm reminded that the difference between success and failure in business is often one decision. You make the right one, and you survive. You make the wrong one, and you don't. In the 1980s, for example, I acquired a large, troubled delivery company against the advice of everyone I consulted. As a result of that decision, I wound up in Chapter 11 (see "Groundhog Day," July 2001).
Or consider my friend who made dresses that he sold through high-end department stores. He decided to start selling the dresses at a much lower price to a major discounter, thinking his other customers wouldn't notice or care. They did, and he went out of business. Then there was the couple who placed camera-film vending machines at tourist locations around New York City. I advised them to diversify. They decided not to; the demand for film plummeted; their company failed.
To be sure, it's much easier to identify the decisions that led to failure than it is to pinpoint those that led to success. Good decisions tend to blend in with all the other decisions you've made. Disastrous ones stick out like sore thumbs. Still, I occasionally get to see someone make the right call and save his or her company.
About a year and a half ago, I received an e-mail from a young man who identified himself as George from Texas. (No, not that George from Texas.) He said his mother's clothing company was in trouble, hemorrhaging cash, but she was too proud to ask for help. At the time, she was in New York City on business. "She'd probably kill me if she knew I was doing this," he wrote, "but I was wondering if you would talk to her."
Much as I'd like to help everyone, there isn't enough time in the day to respond to all requests, but I couldn't resist a son's plea for his mother. I called George and arranged to meet his mother, Vickie Giannukos. She turned out to be a lovely woman and a bubbly, exuberant entrepreneur who adored what she was doing. Her company, Victoria Pappas Collection--which she ran with another son, Dimitri--specialized in sportswear for women. Vickie was involved in every aspect of the business. She designed the clothes, bought the fabric, handled the manufacturing, dealt with the sales reps--the works. Although she was always looking for new outlets, she was selling the line exclusively through independent boutiques, which she signed up by doing shows in six cities around the country. Since she was doing as many as five shows a year in some of those cities, she was constantly traveling. And yet, her company was losing $280,000 a year on about $1 million in sales.
I asked Vickie how much her sales were in each market and how much it cost to do each of the shows. It turned out that the shows in two of the markets--Dallas and Atlanta--accounted for about $825,000 of her sales at a cost of about $90,000. The other four markets brought in about $175,000 in sales--and yet those shows also cost about $90,000 combined.
Right away, I could see Vickie was making a classic mistake, spreading herself too thin by going after every sale she could get. "Okay, listen," I said. "I really don't know your business yet, but one thing I know for sure: You have limited funds. With limited funds, you have to get the biggest bang for your dollar. You're better off focusing on the markets where you do well and skipping the others for now."
Vickie said she had to be in Las Vegas. "Would you rather be in Las Vegas or in business?" I asked.
Vickie gave me an incredulous look. "Skip Las Vegas?" she said. "I can't skip Las Vegas! Everyone says I have to be in Las Vegas to establish a presence!"
"Would you rather be in Las Vegas or in business?" I asked.
"You don't understand," she said. "In this business, you have to be in those markets. That's how you build a brand."
"Maybe that's how Tommy Hilfiger or Donna Karan builds a brand," I said, "but you don't have that kind of money."
She didn't want to hear it. Establishing a national presence was a necessity, she insisted. In fact, of course, there's only one necessity for a struggling young company--you have to make sure your capital lasts long enough for the business to become viable. By viable, I mean that it can sustain itself on its own internally generated cash flow. Up to that point, you need outside capital to survive, and that capital is limited by definition. If it runs out before your cash flow turns positive, you're sunk. There's little chance that you'll be able to raise the additional capital you would need to keep the venture going.
So it's important to make the most of your resources. That means, first, protecting what capital you have and, second, using your time wisely. You can't afford to spend it chasing after sales that aren't helping your business reach viability. To me, it was obvious that Vickie was wasting time and money on the low-performing markets. To Vickie, dropping those shows seemed like a step backward. Her sales would fall. How could that be good? So I took her through the numbers.
Yes, I agreed, she might lose the $175,000 in sales she was getting from the four markets. If she had the right reps, she could probably hold on to a portion of those sales by going back to customers who had ordered before, but for now, I said, we could assume she would lose the whole amount. Her overall sales would decline from $1 million to $825,000. On the other hand, her profit before tax would rise. Why? Well, she had an average gross margin of 38%. On the $175,000 in sales, she was taking in gross profit of $66,500. Meanwhile, she was spending $90,000 to do shows in the four markets, and that didn't include other company expenses. Thus her presence in those markets was resulting in a loss of more than $23,500 ($90,000 minus $66,500) that she'd get back by skipping those shows.
But that wouldn't be the only effect of dropping the losers. She would suddenly have a substantial amount of time back, and she could put it into working on more productive activities--improving her results in Dallas and Atlanta, finding good sales reps in other markets, trying to get her clothes into department stores. I figured that just by investing extra time and effort in her successful markets, she could probably increase her sales there by 20%, boosting her total sales by $165,000, from $825,000 to $990,000. At a gross margin of 38%, she'd be earning additional gross profit of $62,700 (38% of $165,000) for virtually the same cost, and so most of that money would flow to the bottom line. Altogether she'd be cutting her losses by more than $86,200 ($23,500 plus $62,700), and her sales would drop by only $10,000.
The light bulb went off. "Oh, oh, oh," Vickie said as she looked at the numbers I'd written down. "That's a lot of money."
I told her she needed to take all the information and think it over. She had a critical decision to make, and it had to be hers, not mine. I could give her my opinion, but I couldn't tell her what to do. She was the one who would be living with the consequences of her decision, and she needed to believe in the path she chose.
A couple of weeks later, Vickie called me back. "You're right," she said. "I've decided to focus on Dallas and Atlanta, and I'm going to look for a new rep in Los Angeles who can build the business there. I'm dropping the other markets for now." I told her that I thought she'd made a good decision for her company. There was no guarantee that it would ultimately be successful, but she was giving herself more time to figure out how to make it work.
Eighteen months later, Vickie is still in business and going strong. Her sales in 2003 were back to about $1 million, and she cut her losses from $280,000 to $60,000. Based on projections from sales reps, she expects to do almost $2 million in sales in 2004 and be solidly in the black.
Vickie has learned a lot since that first meeting. She figured out, for example, that she does best with sales reps who take her clothes to the boutiques--rather than expecting the buyers to come to a central show room. Accordingly, she now looks for reps who travel. She has also come to realize that she was losing a lot of money by carrying too much inventory, and so she's working on improving her forecasts.
Her company isn't out of the woods yet, but it's clearly on the right path, and Vickie still loves what she's doing. She has no trouble making the dozens of decisions that come her way every day. What kind of cloth should she buy? How much should she charge for that blouse? Can she trust this supplier to deliver on time? Is that customer's credit good? And on and on.
No doubt she makes the wrong decision from time to time. We all do. But she wouldn't have had the opportunity to be wrong today if she hadn't made that one good decision a year and a half ago. She deserves credit for that, and so does her son George. He understands a basic rule of business that I learned from my father: You don't ask, you don't get.
Norm Brodsky (firstname.lastname@example.org) is a veteran entrepreneur whose six businesses include a three-time Inc. 500 company. His co-author is editor-at-large Bo Burlingham.
NORM BRODSKY | Columnist
Street Smarts columnist and senior contributing editor Norm Brodsky is a veteran entrepreneur who has founded and expanded six businesses.