3. When your short-term liabilities exceed your short-term assets, you are bankrupt.
The vast majority of people in small business, I suspect, have no idea what a balance sheet is or how it differs from an income statement (also known as a P&L). The balance sheet certainly doesn't figure into their decision making. It didn't figure into mine until I wound up in bankruptcy court with my first company, Perfect Courier. There I learned that a company is bankrupt -- at least technically -- when its current liabilities (that is, the ones that have to be paid within the next 12 months) are greater than its current assets (the ones that will turn into cash within the next 12 months). That information comes straight off the balance sheet. I could have saved myself a lot of grief and pain if I had gotten into the habit of looking at it on a regular basis and keeping track of the most important ratio derived from it -- the current ratio, which measures a company's ability to meet its short-term debt obligations. You calculate it by dividing your current assets by your current liabilities. If the ratio is 1.25 or higher, you are in fairly good shape. If it's less than 1.00, you could be headed for trouble. Yes, you may be able to juggle your payables and other short-term debts for a while, but you should move quickly to restore your liquidity. Otherwise, you are taking a risk of one day finding yourself with no cash to pay your bills -- a potentially fatal condition.
4. Forget about shortcuts. Run a business as if it's forever.
Building a business is a lot of hard work. Everything that a great company needs takes a long time to develop -- a diversified base of loyal customers, experienced managers, a vibrant culture, efficient systems throughout the business, a sales force that works as a team, a great reputation in the industry -- everything. Of course, we all look for shortcuts. That's only natural, especially when you are on your first venture. You constantly search for easier ways to make your company grow faster, and sometimes you find them. Unfortunately, they almost always come back to haunt you.
I speak here as someone who is more impatient than most and who has tried just about every shortcut in the book -- like hiring salespeople from competitors and promoting employees just because they are available. It finally dawned on me that my shortcuts were serving only to prolong the process of building the great company I wanted. Why was I in such a hurry, anyway? A great company is one that can last forever, and I needed to make decisions in that frame of mind -- even though I fully expected to sell the business someday. My records-storage business, CitiStorage, would be worth more if I took my time and did what was best for the company in the long term. Indeed, it was. As you may know, I ultimately sold it and two related businesses for $110 million.
5. Cash is hard to get and easy to spend. Make it before you spend it.
Most people don't understand the value of cash when they go into business. If they did, they wouldn't waste it by purchasing brand-new furniture, paying designers to produce logos, ordering fancy business cards and stationery, or spending money on dozens of other things that they don't really need and that deplete their start-up capital without getting the business any closer to viability -- that is, the point at which the company can sustain itself on its internally generated cash flow. If the cash runs out before you get there, the ball game's over. The business dies.
But it's not just start-up entrepreneurs who waste cash. The corporate landscape is littered with the corpses of companies whose leaders thought the good times would last forever and spent money they hadn't yet made on luxuries they didn't need. I made that mistake myself once and paid the consequences. One of the lessons I learned was: Make the money first. If you are smart, you will put some of it aside for a rainy day. Whatever is left over, you can spend as you please. You can pay big bonuses to your employees. You can make big donations to charity. You can buy a corporate jet. You can run for President. Whatever. But first you must earn it.
6. You have no friends in business, only associates.
Some habits are more difficult to maintain than others, and I constantly struggle with a really important one: Don't do business with friends. I have broken this rule several times and always lived to regret it. In the early days, I didn't hesitate to buy products or services from friends. I couldn't imagine why I shouldn't help someone with whom I had a close, personal relationship. But friends, I learned, inevitably make assumptions that hinder your ability to do what's best for the business. Even though I would tell them up front that they would be treated like any other vendor, they still expected me to make exceptions for them. When I wouldn't, the relationship went sour, and I lost a friend as well as a supplier.
It's even more important to understand that you can't be friends with your employees. I'm not saying you shouldn't treat them with respect and affection. You can laugh with them, cry with them, be happy and sad with them, but neither you nor they should ever forget that it's a business relationship. I had seven employees when I started my first business and became social friends with six of them. All six of those friendships became a problem for the business. And the seventh person? He now runs CitiStorage.
7. Don't focus on the top line. Gross margin is the most important number on the income statement.
In the early days of a business, everybody obsesses about sales. We want to see them increasing every month, every day, and every hour -- the faster, the better. I know that's how I felt. The first thing I would check each morning was the report of the previous day's sales. My investors were the same way. Not once did they ask about the company's profitability. They cared only about sales, and most of them were accountants! But focusing exclusively on sales is very dangerous, especially when you are starting a business with a limited amount of capital. Why? Because sales do not necessarily result in cash flow, and cash is what you need to survive. You run out of cash, you go out of business. End of story.
