Boss Life Page 2
There’s a third way to bring in cash: borrow it. Income, raised by whatever means, counts in cash-flow calculations. The problem with borrowed money is that eventually it needs to be paid back. Or not, if you can find a fool to lend to you. In my own company, that fool would be me. When I covered cash shortfalls from my own savings, as I often did, I was loaning money to the company. I always intended to pay myself back right away, but the bad management that got me into trouble in the first place prevented me from making sufficient profits for a payback. Over the course of twenty-six years, I have loaned Paul Downs Cabinetmakers $508,774 and managed to pay back $121,676. I am still owed $387,098. Am I a rich man who has half a million lying around to keep my company going? No. The money came out of the company to me as salary and went back in as loans, over and over. Not very smart, as every dollar that took this trip was subject to payroll taxes as it went out of the company.
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I AIM TO HAVE positive cash flow at all times. Unfortunately, it doesn’t happen that way. We have a regular rhythm to our expenses: rent at the beginning of the month, payroll every other Tuesday, two credit card due dates, and the ongoing purchases of materials and other items. Income is much more erratic. Some days we get lots of cash; some days we get nothing. This is why I want to have a healthy bank balance: to cover the days or weeks when cash flow is negative. The $137,154 that I start the year with is fifteen days of working capital. I can use it to pay bills and make payroll. If I want to, I can spend some of it on projects that might enhance the business, like more advertising or a new machine. But if we spend $9,000 a day, a conservative estimate, I have three weeks to figure out what to do if the money stops coming in.
I already know what to do: sign new contracts, ship finished product. The magic number for 2012 is $200,000. That’s my monthly target for both incoming orders and outgoing shipments. This will produce a steady cash flow of $200,000 a month. If expenses are at $9,000 per day, and the work year consists of 250 workdays, we will have positive cash flow of $150,000 over the course of the year.
Sell $200,000, ship $200,000. We will have to build a lot of tables. Not a trivial task—far beyond the capabilities of any one person. In small woodshops, a ratio of employees to sales of $120,000 per worker is good, $150,000 per worker is excellent. I have fourteen people to meet a goal of $2,400,000, which means output of $171,428 per worker in the next year. We will need to be very efficient.
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WHAT WILL WE DO to meet that goal? You might picture everyone at a workbench, cutting wood. But building the tables is only one step in our process. A manufacturing business must perform six major functions to stay alive: Design, Marketing, Production, Logistics, Warranty Service, and Administration. Design operates at both the conceptual level, which in my case is the decision to make furniture, and at the individual level, which is the specific design of each table we make. Marketing attracts paying customers to your door by describing to the world the goods that you have available. It includes sales. Production is the actual making of the product, including setup of the factory, acquisition of materials, hiring and management of labor, and design of the work processes that lead to finished goods. Logistics is the process of moving your finished goods to the customer: packaging, shipping, and installation. Warranty Service, which might be considered a form of Marketing or Production, is in my mind a separate function. It consists of responding to customer issues and communicating them back up the function chain to improve the overall performance of the organization. Administration keeps track of all the other functions, and includes bookkeeping, accounting, dealing with government regulations, and human resource duties.
Note that the six functions are all connected, not just in a linear progression but also through feedback loops from one function to each of the others. For instance, Design must respond to the expectations of potential customers (Marketing), to the capabilities of the factory (Production), to the problem of shipping and delivery (Logistics), and to issues encountered in the real world (Warranty). Changing the nature and capacity of one function has implications for the entire operation.
It is entirely possible to break out any of these functions and have them performed by others. This is called “outsourcing,” and it often makes perfect sense. If you are not competent at one of the functions, hire someone who is. Managing that vendor takes money and time and drastically interferes with effective feedback loops. But it allows access to expertise that can be very difficult to develop in-house. Note, also, that in an extremely small company, one person can perform all these functions, and probably will when the company is starting up. In that case, the feedback loops are instant and so continual that their existence might not even be noticed. This can be good or bad, depending on whether the feedback loops lead to changes in behavior.
It is worth mentioning the difference between a hobby and a real business. It is commonly believed that it’s easy to step from one to the other, but that underestimates the difficulty of establishing all six functions. A hobbyist needs to perform only two: Design and Production. Marketing is not required, as the client is the hobbyist. Logistics might be an issue, but usually a trivial one, as the item is produced very close to where it will be used. Warranty issues are easily handled—there is no paying customer, and the hobbyist’s response will depend on how he feels at the moment. Administration is insignificant. Being a hobbyist is much, much simpler than being a business. There are far fewer problems to solve, and almost all the time and effort can be spent on the fun stuff.
My constant challenge has been to perform all six functions competently using the limited resources of a small company. In 1986, I had a desire to make furniture but no experience. Of necessity, I first mastered Design and Production, working alone as I taught myself my trade. Eventually I learned to perform all six functions, some just well enough to stay in business. Production has been the pipeline through which new people enter the company. I hire people to work at the bench, and move some into other jobs.
At the beginning of 2012, we have thirteen full-time employees, a part-time bookkeeper, and one temporary worker. Six of us work in the office: myself; Emma Watson, the admin; Dan Smolen and Nick Rothman, who, along with me, are the sales force; Andy Stahl, the engineer; and Pam Potter, the bookkeeper. Nine work on the shop floor building tables: Steve Maturin, shop foreman, accompanied by Ron Dedrick; Sean Slovinski, Tyler Powell, Will Krieger, and Eduardo Lopez, cabinetmakers; Dave Violi, who does the finishing; Bob Foote, our shipping manager; and Jésus Moreno, the temporary worker.
With the exception of Emma and Jésus, all my workers are craftsmen who have worked in shops for years. Woodworkers have a calm and quietly confident demeanor, grounded in their ability to build things well and quickly. The best ones have what I call “good hands”: they can make things without undue fuss, at high speed, without sacrificing quality. They can visualize how to break a complex project into discrete steps, recover when things go wrong, and always keep moving toward the final goal. In my experience, this talent is very rare. At the same time, it is present in every culture. In any group of humans, some have a special ability to manipulate materials to produce useful things. A few craftsmen have done spectacular work that ends up in museums. But most make ordinary items that serve their purpose and then are discarded. That is the kind of work we produce, the kind of workers we are: not in it for fame and fortune. The opportunity to make good things is a satisfaction in itself.
Building things out of wood is a cumulative process. You need each step to go well before you can move on to the next. Lots of things can go wrong: difficult wood, malfunctioning machines, and mistakes in design or construction. Error, in the form of small deviations from specifications, accumulates as a piece passes through production. At the same time, clients expect us to deliver what the salesman sold them. Bench workers can’t change the design.
Given the need to manage small errors and the occasional d
isaster, my workers place great value in predictability. They are masters of execution. Their special skill is understanding the nature of the material they work with, the exact behavior of the tools they use, and the precise execution of production processes. They want each step to succeed. They understand that we get paid only once for a table, even if things go wrong on the shop floor and we end up remaking it. So they are suspicious of innovation, whether it is a new design, material, machine, or process. “New” often means “unreliable,” so they are inherently conservative.
Unfortunately, new marketing methods, technologies, and competition arrive every day. Buyers will order from the company that offers the coolest products at the lowest price. We need to be creative, to be on constant lookout for better ways to do things, or we will be out of business. So one of my biggest challenges is how to be innovative when my company is composed of non-innovators.
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BEFORE THE MONDAY MEETING became a weekly event, in 2010, I’d never established any formal, regular communication with my employees. For more than twenty-three years, my preferred method of finding out what was happening was to walk around the shop a couple of times a day. Our shop is very large—the main room is more than twenty thousand square feet. It’s noisy, filled with machinery, workbenches, wood, and partially finished projects. The six people out there are often far away from one another, so instructions given to one person don’t necessarily make their way to everyone else. Problems that I thought had been solved kept popping up in another corner of the shop. I finally figured out that it would be a good idea to gather in a quiet place once a week. Hence the Monday meeting.
I always open with new orders we’ve received. Then I review our cash position—how much money came in and out last week, how much we expect this week—and predict the week’s closing cash position relative to our balance at the beginning of the year, a number that I call “Net Cash.” I ask whether anyone has any production issues: broken machines, experimental techniques that either failed or succeeded, and anything else. I’ve made it clear that the point of these discussions is to solve problems, not to punish anyone. If we discuss something, it tends to be very dispassionate and technical. They aren’t a chatty bunch. This fifteen- to twenty-minute meeting is the one fixed point in my week. So what keeps me busy? Making sales.
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SALES IS A SUBSET of Marketing, but it’s critical to the success of the company. It’s the step that connects us to customers, who are a part of all six functions of the business. Design determines what we make for the customer; Marketing tells the customer that we have something for them to buy; Production makes what the customer ordered; Logistics moves the finished goods to the customer; Administration makes sure that the customer’s order is defined and completed correctly; and Warranty Service takes care of any customer complaints. Customer, customer, customer. The people at the other end of every deal we make, their desires and needs, direct every part of the operation.
When I opened my doors, I had never sold anything in my life. It was a struggle just to meet a potential customer, let alone close a deal. Since opportunities were scarce, I formed a strategy that we still use today: listen to the client, identify their needs, and design a product to suit. In this way, I avoided a mismatch between what I was offering and what the client was looking for. Unfortunately, my early customers wanted a very wide range of items, many requiring specialized manufacturing capabilities that I didn’t have. So I modified my strategy: I would design products that I could produce in my own humble shop and customize them to suit buyers’ needs. The subsequent modified design could form the basis for new offerings. I would steadily expand my catalogue, guided by customer requests and financed by them as well.
As it turned out, I had the personality and design skills required to make this work. (Not a given: many fine craftsmen can’t design or sell.) Nowadays we have wonderful tools—digital photography, Web sites, cheap modeling software, and e-mail—that empower small companies like mine to communicate our ideas at very low cost. We can inspire the confidence that is required for customers to write us a large check. Back when I started, though, none of that existed. I’m still amazed that anyone bought from me. But they did, and here I am.
In the early years, I built all the work myself, but after my first hires I concentrated on Design, Marketing, and Sales. In 1992, I abandoned the bench for good. My company was small then, but growing steadily. Fortunately, tools to increase my productivity were appearing. I stopped drawing with pencils and started using a computer in 1997. I discovered e-mail and digital photography in 1999. I put up my first Web site in 2000. In 2003, we started getting clients who found us using Google, and in 2004, started our Google AdWords campaign, which greatly expanded our marketing reach. In 2006, we started using SketchUp, a 3-D modeling program that allowed us to show potential clients exactly what we would build for them. All this made our sales process more efficient and effective, leading to significant sales growth. Until 2007, I was the sole salesperson. In 2007 and 2008, I hired an outside salesman, who concentrated on the New York market. He had a nice run until that business dried up in the fall of 2008. Then he left, and I was alone with the job for the next two years.
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SELLING OUR WORK takes a lot of time: fielding inquiries; writing proposals; closing deals; and managing jobs through the factory to make sure that they are built as promised. Each transaction is highly customized and of significant dollar value. Our average order in 2011 was more than thirteen thousand dollars.
To increase efficiency, I developed a standard work flow. This involves analyzing a client’s situation and then sending a detailed proposal, including plans and elevations of the table, a virtual model of the design, and pricing. This method has worked well and has a satisfying rhythm to it. It’s just like building furniture: a defined process that can be executed as a series of discrete, repeatable steps.
I can turn a simple proposal around in three hours. A complex job might take a couple of days. I believe that a complete proposal, delivered very quickly, is an impressive example of our custom design and engineering capabilities. This seems to work. If what we offer is the client’s best choice, they place the order. If not, then they don’t. I’ve always been too busy with incoming inquiries to spend time following up on sent proposals.
In early 2010, after two slow years, the number of incoming calls picked up considerably. I was desperate to close deals, so every caller, no matter how unpromising, got an absolutely fabulous proposal within twenty-four hours. I worked some very, very long days and ended up with a wicked case of carpal tunnel syndrome. Our order book started to fill up, but the pain in my wrists was so bad that I could no longer respond to every call. In May 2010, I decided that it was time to make a risky move: transfer one of my people from the workbench into the office to help me with sales. I didn’t think that I could find someone outside the company who understood our production methods. I had to promote from within.
This had the potential to go badly wrong. Removing an efficient worker from the shop floor would mean losing some of our production capacity. Our cash flow and profits would take a big hit. I would need to train the new person, so there would be a period when we’d send out fewer proposals and close fewer deals. In the end, the effort might fail. Perfectly good clients might be lost to bad sales technique, and I would have to send a discouraged worker back to the bench. But I could not continue as the lone salesman—it was ruining my health.
I had someone in mind. Nick Rothman had been working for me for eleven years. He has great bench skills and regularly found ways to improve our process. He has a spark to him and is very easy to talk to. This is unusual for a talented woodworker; most are quiet, reflective types. Nick had worked with some of our software, so I knew that he could handle a computer. He had also told me that he would do whatever it took to help the organization succeed and had expressed a desire to move ahead
in the company. In May 2010, I announced to Nick: “You are now a salesman.” I didn’t think about how this might change his view of his work and himself. Being a craftsman is one thing; being a salesman is quite a different job. I now know that he had hoped for an engineering job, and his view of sales was stereotypically negative: salesmen are oily manipulators who trick people into parting with their hard-earned money. He didn’t consider that the sales I made were the source of all the company’s money, and, by extension, every dollar that he had ever earned. Despite his qualms, Nick agreed to make the switch. Next I had to consider how I would teach him our process. At the time, there were just two people in our office—my engineer, Andy Stahl, and me.
The office is quite large: six thousand square feet, with one central space and nine smaller offices up against the windows. It has fourteen-foot ceilings and exposed pipes. But it’s not a sexy, TV-style industrial space. It’s decrepit, messy, blazing hot in the summer and freezing in the winter. The walls are unpainted drywall; the bare concrete floor is still stained with glue left behind when we stripped off the hideous carpet in 2007.
Andy and I had chosen windowed offices at opposite ends of the room. The privacy was nice, but it made for very poor communication between both of us and the rest of the company. The office is at one end of our building. The workbenches on the shop floor are almost three hundred feet away. I had long known that this arrangement was inefficient and led to misunderstandings, but had done nothing about it. Now I rethought the problem. Should I let Nick choose his own office? Much of what he needed to learn was very subtle, like how to talk to a customer and provide instant design feedback. So I decided that the best way for him to learn was to put him right next to me, in my office.