Avoid the Consequences of Incompetence and Soar: Practice personal willpower and gain competence.
February 7, 2023
7 min read
I like to go out and talk to people who have dreams and aspirations related to business. One of my top goals is to inspire and create inflection points in people’s lives that move them closer to living their ideal lives. As part of that, I do workshops on entrepreneurship and building startups. I did one last week, and it got me thinking.
A question I regularly get is how to raise money. Many would-be entrepreneurs see raising money as the main obstacle to realizing their vision.
Being entrusted with other people’s money is a big responsibility. Deploying other people’s money isn’t the time to learn money management skills. The time to practice, learn, and develop healthy money management habits is before raising outside investment dollars for your startup vision.
“Winging it” is not a responsible strategy. Like General Mattis said about the importance of reading and preparation for military leaders,
“Winging it” and filling body bags as we sort out what works reminds us of the moral dictates and the cost of incompetence in our profession.”
There are moral dictates and costs of incompetence in business too.
Think about it. If you have poor habits surrounding credit card debt, car loans, and impulse purchases in your personal life, how are you going to manage the more critical budgetary concerns of a business?
Getting our financial house in order before taking on the responsibility of handling OPM, other people’s money, is a crucial initial step in putting the odds of startup success in your favor.
Ilearned this lesson the hard way with a business venture. I had grown a successful business, and I had a great partner. We got in a pinch and ended up selling the company. Looking back, we got in trouble because of poor money management skills.
My partner and I had a thriving commercial real estate business. We were tenant reps. We only represented the buy-side in purchase and leasing transactions. It was a beautiful niche business model that was novel at the time.
Our boutique firm would share the transaction commission with the broker representing the landlord and put that fee to work serving the tenant. It didn’t cost the prospective tenant anything — the money embedded in the deal.
We were good at it. We had employees who were all experienced, real-estate brokers. We paid them a draw against transaction fees. This arrangement helped smooth out their pay so they could plan their lives better. It was a competitive advantage in recruiting.
The way we did this was with a line of credit from the bank. A line of credit acts like a credit card. We would draw on the line of credit to meet payroll when we didn’t have enough cash to cover it. When a deal would close, we would pay down the line.
Real estate brokerage is transactional business. You only get paid when a deal closes. It a risky business because it is challenging to plan when revenue will come in. The benefit of this type of business is that it doesn’t take a significant capital investment to start the business. Its all about creating a portfolio of clients and deals moving through the pipeline.
We would have enough deals in the pipeline that some would close. Transaction based business is by its nature up and down. Some deals close quickly, some take longer than anticipated, and some never come to fruition.
When revenues are so volatile, it is challenging to plan for a smooth, consistent schedule of payables. Salaries were the biggest payable and expense. In most real estate firms, the individual brokers bear the risk of closing their deals. If they don’t close, they don’t get paid. It’s Glengarry Glen Ross.
We could recruit the best brokers because we, as a firm, would bear that risk and give them a draw on their future transaction earnings. This system was a competitive advantage for us getting the best people in a people-oriented business.
It worked well for several years. Until it didn’t. We got caught with the balance of our line of credit too high and no immediate revenues to pay it down.
We ended up selling our company to a large national firm. It was painful. The work building a business and being boss disappeared. The rug of my business identity was pulled out from under me. It was sobering and depressing.
I felt bad for my partner. He was twenty years my senior, and his identity was our company.
Myold partner has since passed on. I think about him often and all he taught me. He had an uncanny ability to read people and situations. Those skills made him a masterful negotiator, and I learned how to negotiate from him.
He was not an academically educated person. He was an expert in hard styles of martial arts. He was physical and mystical, fair, honest, and very straightforward. Even though he was a great negotiator, he was sincere, innocent, and open.
People took to him, and he had long-time friends who would gladly do him favors. I witnessed it all the time.
He was also a talented gambler. We went to Las Vegas once, and he staked me on a craps table as he played. We both walked away with a pile of chips. It was impressive. He was great at doing math in his head and could calculate table odds while playing.
I loved him, and it was hard to see him lose the company he had worked so hard to create. My predicament pained me, but it hurt me more to see my partner lose what he worked to build.
To use business jargon: it sucked.
Business loss can be very emotional. In retrospect, failure teaches humility or it can make one resentful. It is better to experience failure that teaches humility than success that engenders arrogance. And there is no percentage in being resentful.
Building character can hurt. I wonder if the caterpillar is uncomfortable in the chrysalis becoming a butterfly.
We had an arrangement where we stayed on as employees for the big company. There were some advantages to being with a large enterprise for deal flow and negotiation leverage, but it was just not the same as running the show. I couldn’t muster the same level of energy, focus, and commitment to creative deal-making.
I moved on to greener pastures. To fresh woods, and pastures new.
It stung deeply. Talk about the school of hard knocks.
The after-action report. My post mortem.
Looking back, I can see that my money management skills were not all they should have been. I didn’t have the discipline to reign in the expenses promptly. I didn’t read the signs that we were getting into risky territory. It had always worked, and I trusted that we would pull a rabbit out the hat this time too.
That kind of hope is not a solid strategy for running a business or one’s life. I lacked the personal willpower to make hard professional decisions.
Now I know to never use a line of credit, LOC, unless there are predictable revenues due in the very foreseeable future. Only use a LOC against secure accounts receivable. A LOC is a tool that can become a crutch. Reliance on a line of credit can become addictive.
As a leader and manager, it is critical to make hard and painful decisions as soon as possible. It was easier to not disrupt our employees, smooth things out in the short run by drawing on the LOC, and trust to our survival skills to bridge the gap.
Discipline and addressing the shortfall head-on would have been a better approach.
With the benefit of distance and hindsight, I can see that my personal money management mirrored my lack of business acumen.
In my personal life, I would rely on credit cards to fund expenses I couldn’t afford and trust that I would make more money and pay them off in some vague successful future. Credit card debt and interest and penalty expenses were a significant drain on my personal finances.
It took me the emotional distance of time to see the connection.
If I couldn’t even manage my finances, how could I expect I would lead a business any better? I didn’t take my responsibilities seriously enough and was always mortgaging the future to chase costly impulses in the present.
Money is of little use if you don’t know how to use it properly. If you are unfamiliar with proper money management techniques like staying out of debt, saving, and investing, you won’t magically become a good money manager for the business.
To be a better manager, leader, and entrepreneur, start by getting your personal financial house and habits in better shape. Get out of debt. Never carry a credit card balance more than the month. Create a cash reserve to use to smooth out expenses instead of relying on credit cards or a LOC.
More generally, whenever I set a professional goal to accomplish something meaningful, I have come to realize that if I look hard enough, there is something within my life that I have control over and can change. That change has a mirror consequence in the business affair I want to achieve.
It starts with a change of thinking and building habits off those revised thoughts.
We are a product of our thoughts; what we think, we become.
Start now, where you are, with what you have. Money management skills and discipline start at home. You can measure when you are ready to take on investment dollars by examining your personal situation.
Ditch the credit card debt. In business, build up a cash reserve and wean yourself off the LOC. Soar with your new acquired strength.
We can practice competence in our personal lives and apply those habits we form to avoiding the consequences of incompetence and soar with success as a result.
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