Boss Life Page 8
Dan is working on his own big order, worth more than thirty-five thousand dollars: three tables for Cali Heavy Industries, a large engineering firm in California. Along with the designs, we have provided the buyer with a complete plan of our tables and offered to help him lay out the floor drillings for all the power and data wiring.
I’ve been communicating with the facilities manager at a local bank. They are renovating their headquarters and trying to decide whether to repair their existing table or replace it. Of course I have an opinion about which of these would be the wisest choice, but I can’t even get the guy to respond to my e-mails.
I do have one potential buyer ready to get started. A good friend of mine wants me to make him a bedroom suite. I am not eager to accept this order. I have built a fair number of beds and dressers over the years, and they are surprisingly complicated. I’ve warned him that I will have to charge a high price—about as much as a new car—just to cover costs, but he’s persisted. I didn’t tell him that I really, really hate working for friends. I have done it on a few occasions, without any problems, but I don’t like the exchange of money tainting what should be a purely social relationship.
He’s been after me for almost a year, and I recently sent him the designs for review, but I haven’t given him numbers yet. He’s asking for a lot of work—a large sleigh bed with matching nightstands, two large dressers, and a bookshelf, all built of solid cherry with details in anegre, an exotic veneer from Africa. Aside from the materials, this is a job that only my foreman, Steve Maturin, can complete in a reasonable time, so my labor costs are going to be very high. I ran the pricing and, even cutting him the best possible deal, I’ve come up with a shocking number: $28,797. I’m worried that my friend will be horrified by the price, but also too embarrassed to back out.
Signing any of these jobs would bring us back to where we need to be for the year, and signing two or more would put us ahead. And these aren’t the only prospects. My gut tells me that something is bound to come in. Eventually.
I hope that orders arrive sooner rather than later, and not just for the cash injection. I’m also starting to worry about our backlog. That is the amount of work that we have lined up to produce. We don’t start building a job the day it’s ordered. It would be very bad to rush ahead and build a table before the client has stopped making design changes. So we have a procedure: we send a final set of drawings and images to the client with the warning that these documents show exactly what we intend to build. We accompany this with finish samples: pieces of wood of the species and color that the client had discussed. Then we wait for them to either confirm that everything is correct or suggest alterations. Sometimes it takes weeks while their company goes through whatever internal decision making is required. It always takes at least two weeks after order placement before anything hits the shop floor. And if the client is slow, it can take a month or more.
At the beginning of April, our backlog is just over five weeks. That’s a rough calculation—my formula, which I run each Monday, doesn’t make any compensation for jobs that are burning more or fewer hours than we estimated. It’s an approximate view of reality at best. But I’ve found that flawed measurements, if performed consistently, can be helpful—it isn’t the result itself that matters, but rather the change from week to week.
At the start of the year, our calculated backlog was a little under four weeks. We sold enough in January and February that we now have more work than we started the year with. But the trend is down—we had maxed out at seven weeks at the beginning of March. Our sales slowed down and the shop started working faster.
At least I think it did. I can easily see the total value of the jobs shipped each month, but not how much of that amount was labor, as opposed to materials. It looks as though we’re building at a $40,000-a-week pace. If we have a week where we sell less than that number, we are eating backlog. With a little more than five weeks of work queued up, and assuming the shop runs at the current rate, we will run out of work in early May.
A shrinking backlog also means that incoming cash is drying up. We aren’t getting any deposit payments. The total amount of cash we can expect in the future is dropping as well. At the end of the first week of April, the cash we will collect by completing our entire order book is just $107,410. It will take us five weeks to fulfill our commitments, and that will generate only three weeks of funds. In the other weeks, we’ll need to pay for materials, rent, advertising, and electricity just as we always do. How can I cut our spending?
My biggest expense is payroll. Payday is every second Tuesday. The amount varies depending on the exact number of hours worked, but it has been averaging $36,000. This covers hourly wage, pension contribution, and payroll taxes for fifteen people, including me. It doesn’t include the cost of health insurance, which is $10,140 a month (to cover nine of the fifteen workers and their families, including me). The pay rate for each worker ranges from thirteen dollars an hour to thirty-six dollars an hour. Add them up and the cost to employ all those people for one hour is $317. (That number excludes my own salary.) That’s before payroll taxes, workmen’s comp insurance, and unemployment insurance, which vary in complicated ways but add another 18 percent or so to the cost.
Payroll is a very difficult number to reduce, unless I get rid of some employees. I can’t simply have everyone work fewer hours—not at this point. We lost a lot of time with Company S, and we are behind on our other work. And if we don’t complete jobs, we won’t get the preship or final payments, which is the only cash I am sure to receive.
I cannot ask people to work more hours without pay. That is illegal for unsalaried workers. And a reduction in pay rates is a drastic and morale-crippling move. In the fall of 2008, I cut my workers’ pay by 15 percent, and it was not popular. I got away with it because it was obvious to everyone that we were in serious trouble, and they had no place better to go. In 2012, the woodworking economy is still rocky, but it’s a lot better than it was. If I cut everyone’s pay again, some of them will leave—most likely, my best guys. We still have work to do, and I’m hoping that we will turn this thing around, so I don’t want to risk defections.
Fortunately, there’s one worker who will never quit. He’s getting a good-size paycheck, too, so stopping his income will have an effect. I know from long experience that this guy will put up with anything I give him—work longer hours, do multiple jobs, reorder his personal finances, even loan money back to the company if necessary. Who is this patsy? You already guessed: the boss.
Over the years I have raised and lowered my pay countless times, using it as a throttle to increase or decrease our cash burn rate. Do I have enormous piles of gold coins in my basement, a vast store of personal wealth that I can tap when needed to fund my business? Not at all.
I’m not broke, but my business has not generated much wealth for me. Manufacturing custom furniture is not known as a lucrative profession, because it isn’t. For example, take a look at how my company performed from 2003 to 2011. Sales for that period totaled $16,352,367. The profits? The total for those years is negative. The vast majority of those losses happened before the crash in 2008, when The Partner and I were doing a very bad job of trying to grow the company. From 2003 to 2008, our losses totaled $1,086,648. The Partner ate much of that when he left. My father, my brother, and I—the remaining shareholders—made emergency loans in those years just to keep the doors open. Since 2009, I have managed to stop the bleeding, and the company has made profits totaling $210,114. That still leaves an accumulated loss of $872,084.
I have managed, during some very rocky years, to pay my bills. First and foremost, all the employees who have worked for me got paid, on time and in full. All the taxes were paid, on time and in full. All the vendors and my landlord were paid in full (not necessarily on time, but I used most of the post-2009 profits to gradually eliminate the debt). While the company owes my partners and me a pretty good pile of
cheddar, it owes nobody else.
Between 2003 and 2010, my annual salary averaged $78,484. That number includes the amount I had to pay for health insurance—taxable compensation for a company owner. My cash wage was lower. Each year I loaned, on average, $29,363 of that back to the company (after I had paid taxes on it). That left me an average of $49,121 a year. I’m hardly one of those predatory CEOs making millions while my workers starve.
I have a lifestyle to match my income. My wife and I live very modestly. We don’t travel much. Even if we wanted to, Henry’s unpredictable behavior keeps us from anything but family visits. I own two crappy cars: a 1992 Toyota Camry and a 1999 Honda Odyssey. Nancy is very frugal and gets most of our clothes at the thrift shop. And we don’t eat out. Nancy is a very good cook, so we eat at home every night.
I’m not destitute, though. Leaving aside whatever the business might be worth, because it’s not in any shape to sell, my net worth is a little less than $400,000. The equity in my house is worth about $165,000. My cars are worth nothing. I have $92,356 in a retirement account that I have been contributing to since 1998. I have $48,525 in emergency cash in a Vanguard account. And I have $78,525 in my checking account, as a result of my success in 2011.
That windfall came right on time. My oldest son starts college in September, and my wife, in preparation for the empty-nest experience, is getting a master’s degree so she can teach. Her schedule will match Henry’s so that she can be at home when he is, and I can continue to work myself. Tuition bills for both of them will start in September. The first year will eat through all my savings.
I’m not complaining. I am doing better than the vast majority of people in the world. But I do not feel secure. I have pledged my personal wealth to cover debts that the company has incurred. Aside from the $387,098 that the company owes me, the lease on our shop space requires payment in full, even if we fail. I currently have twenty-six months left to go before I renew. At $9,250 a month, I am committed to shell out $240,500. The business has two credit cards with a $65,000 line of credit—we generally have about $30,000 a month in outstanding charges. If I get behind, they will come after my personal assets. And, realistically, there is a minimum level of spending just to keep some employees on staff and the lights on. If I have to lay everyone off, and there’s nobody to do the work, I am done. I have too much overhead to start as a single-man operation again. I need to spend $5,000 a day to be in business. If I have to reach into my pocket to do it, after sixty days I will have lost all my cash, and my house will be heading into foreclosure.
So owning a business, even one with millions in revenue, has not made me rich. I feel a great deal of shame at my lack of success. I can’t tell you how many times I have attended parties and felt humiliated when doctors and lawyers describe fancy trips to Africa, rounds of golf, and nice cars. If I had joined my contemporaries who went to law or business school, and stepped onto the corporate treadmill, I would at least have a high salary to show for my efforts. Sure, you can live that life and fail in any number of ways, but you also don’t have to invent the profession as you go.
Do you know any wealthy woodworkers? I didn’t think so. If they exist, nobody is talking about them. I’d really like to know how to convert my business into one that does great work, and pays its people well, and makes its owners rich. I haven’t figured out how to do this on my own. I need to look elsewhere for guidance.
Where can I get good advice? This has been a problem for me from the start. I opened my doors when I was fresh out of college, back in 1986. I didn’t even know anyone in the business. And there was no Internet back then, no magic universal library that answered every question. My nature is to try to figure things out on my own, which, in retrospect, has been bad for me. I stumbled on the most basic business problems: Where do I buy materials? How do I keep records? How do I pay taxes for my employees? How do I advertise? It was very hard to find answers. There were books about running a business, but none about my business. I never imagined that anyone would be interested in helping me, so I never asked for help. And I was always so strapped for time that I would implement the first idea I found, even if it was bad practice. I just muddled along for years and years.
When you get right down to it, nobody cares how I run my business, or whether I am competent or not. As long as I pay my taxes, my workers, and my bills, I am free to be as good or bad at business as I wish. This is the main reason that I took the risk of entering a partnership in 2002. I was desperate for some guidance. I presumed that The Partner, since he had money, knew a lot about business. It didn’t turn out that way. He had been successful with previous companies, but we found out the hard way that what had worked for him previously would not necessarily work for my business.
The Partner was my sole source of advice for many years. He taught me a lot, and also led me astray. Not because he was malicious, or dumb, but because his experience didn’t match the problems we were having. He was not good at identifying situations where the old ways wouldn’t work. And we never found a way to identify the issues he had overlooked entirely—if he didn’t focus on a problem, I would not do anything about it. This caused a lot of cash flow issues and management problems on the shop floor.
Fortunately, The Partner is an honorable and reasonable man, so our relationship did not descend into personal animosity. But our ideas as to how to proceed diverged, particularly in the fall of 2008. He wanted to shut us down, take his losses, and move on. Without telling me, he used most of our operating cash to pay down a line of credit in order to limit his liability. The company owed him a lot of money, and from his point of view it made sense. But I was counting on those funds to keep the doors open. Without my company, what would I do? We came to an irreconcilable difference in opinion. After that, I stopped listening to him.
During the years that I was getting advice from The Partner, the world was changing. With the arrival of the Internet, barriers to finding basic information disappeared. Now we are drowning in content. Unfortunately, quantity does not imply quality or relevance. I have found the business press to be useless. Pick up a magazine or paper, or read a blog, and you see one story repeated ad nauseam. Success! How this guy got it, how that gal got it, how this huge corporation got it, how you can get it. These stories are long on results and short on techniques, and almost always omit the really interesting details. There’s an overemphasis on software start-ups and way too much emphasis on outliers, like Steve Jobs or Mark Zuckerberg. I’ve read a lot about those two, but never anything that stated the obvious: they were really, really lucky.
I have never seen a thorough, detailed account of a small business like mine. I’m looking for specific techniques for dealing with my particular problems. Many of those are complicated and technical and revolve around the personalities of the people involved. Given the format limitations that confront business reporters, and their own lack of technical knowledge, it’s not surprising that everything we get is brief and vague. Nobody wants to write about the multitude of challenges that a boss faces every day, in a way that captures the difficulty of dealing with everything at once.
My biggest problem is finding numbers. I have to make most of my financial decisions without a good idea of what’s normal. My competitors, like me, are all small, privately held companies. There is no single place where I can find any information on the size of my market, who the largest players are, or even what my competitors charge. We produce roughly $140,000 per employee each year. Is that good or bad? Is my second-best bench cabinetmaker worth $18 an hour or $21 an hour? What would this person be worth to another shop? The difference is substantial, both for me and for the employee. My AdWords campaign costs me $10,000 or more a month. Is that too much or too little? I’m paying a 2 percent sales commission to Dan and Nick, on top of a decent salary. I decided on that arrangement because it seemed reasonable. Was I wise or not? Would a different split be better? The cumulative cost of this
uncertainty is hundreds of thousands of dollars each year—far more than I have ever taken out of the business. I’d love to know whether my spending decisions are high, low, or on target. For most of these issues, no information is available. For some, like the AdWords question, I can get vague answers from sources of questionable objectivity (Google itself, or consultants whose answer is always self-serving).
I miss The Partner because he was always willing to listen, and he knew the people who I was talking about, and his advice, even though flawed, was intended to help. It’s been lonely since he left. Sure, my employees and I discuss the technical issues that arise every hour in a small factory—materials, jobs, broken machines, whatever. But on the larger issues, particularly the thorny intersection between the particular personalities of my workers and money, I have nobody within the company who would understand my perspective.
There are certainly small business owners out there whom I would enjoy knowing, but I haven’t made their acquaintance in social settings. My wife arranges our social life. We go out regularly, but Nancy is an artist, so the vast majority of people we meet are in the art world. And from a business and manufacturing perspective, nothing they do makes sense.
At the end of 2011, I found a possible solution to my problem. It came in the mail: an invitation to join a group of business peers, organized by Vistage. They arrange regular meetings for groups of small company owners. Each group is vetted so that there is a similarity in company size but some disparity in business type—manufacturers, retailers, professionals like architects and accountants, software guys—enough variety to bring a broad viewpoint and avoid direct competitors in the group. Some of the members of each group are start-ups, some are multi-generational family firms, and some are like me—in business a long time, but stuck. A minimum yearly revenue requirement ensures that every member is a viable business. Each group is led by a trained leader. There’s a group meeting and an individual session each month. I could bring up my own plans and problems for analysis by the leader and the other members, and I would hear about their companies in return.