Latest / Brick by Brick - Wealth Building Conversations / From 4 to 200 Employees: Cash, Culture & the "$8 Million Problem" with Brad Poulos

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From 4 to 200 Employees: Cash, Culture & the "$8 Million Problem" with Brad Poulos · Brick by Brick - Wealth Building Conversations

• Brad Poulos - The Small Business Prof.: And that is that good people want autonomy. Good people don't want to be told what to do. They want you to give them a set of rules, give them some policies, give them some objectives, and they want to figure out how to achieve those objectives. They want to make the decisions around exactly how they go about doing their job. And if you want a bunch of people that want to be told what to do, you're gonna have a company full of B players. If you give people autonomy, you're gonna have A players. And that's the real benefit, I think. Not so much getting your time back, but which is great, but it's more that. It's that and and s and and you can use those people, you can springboard off them, to really grow your company. It's hard to grow your company off a bunch of B players who are sitting around being told what to do by the boss. Loren Wernette: Welcome to another episode of Brick by Brick. Today, our guest is Brad Poolis. Brad has taught entrepreneurship and small business finance at Toronto's Metropolitan University for 15 years. He spent 30 plus years building and running companies before that, including taking one public. He's written three books on operating small businesses. So, Brad, I'm really excited to have you here and talk all about business ownership and business running a business. Brad Poulos - The Small Business Prof.: Yeah, me too. Loren Wernette: So as we as we get into this, I want to kind of set the stage a little bit. You work with some very large companies, you know, $20 million plus. And our audience tends to be more like operators that are running six to 10 employees, either in real estate or some other other facet of business. So can you kind of tell us what lessons you have that will directly translate to that group of people that, you know. that don't maybe directly c that come from the twenty million dollar space because those are very different areas. Brad Poulos - The Small Business Prof.: Sure, I guess the the main message would be you can do it. So I've seen lots of seen lots of founders make the it's not really a jump, it's more of an evolution from you know, a couple hundred thousand dollars and one or two employees all the way up to the many tens of millions. it's not easy. I that's you know, it's a tough thing to do. And not every founder does make it from the point of view of managing to stay in charge. It's some of the smartest founders I've ever met that were courageous enough, I guess, to bring in outside management and ultimately even possibly subordinate themselves, to to a hired gun CEO or some other a president, that that that kind of thing. but absolutely, you know, almost anybody could do it. If you're smart enough to get to a couple million, you could probably get to fifty. Loren Wernette: Hmm. Lots of questions on that before we jump into that. so can you give me the two minute version? You got you went from telesat to teaching entrepreneurship over your career. Walk me through that evolution. Brad Poulos - The Small Business Prof.: Yeah, so I went to tech school. So I started out at Telesat, which is one of the world's largest satellite operators. They're based in in Canada, although they have satellites all around the world. And I started out on the technical side, and then about halfway through my career there, I I flipped over to sales and marketing and got an MBA along the way. when I left I was running a business that was about forty five people, about seventy-five million bucks. We had a very high Average revenue per employee, but that's because we had, these massive capital investments out in space. So we we need we had to have that, of course. Right. And so when I when I left, I was I was running that about that size of business. And I jumped into a little company that my brother had actually started a couple of years prior. And he wasn't even working in it, it was four people, all salespeople. And on the you know, in his spare time, he was kind of doing all the administration and everything. And they were selling primarily components to the microwave communication manufacturing space, which was a fairly robust industry at the time here in Canada, and since has really kind of disappeared. But I saw the opportunity to take his little company and morph it into a wireless company because at the time we were making the move from analog to digital cell phones. So over the course of about 10 years, we grew it from four people to about well about fifty or so, and then we went public. And while we were public, we got a massive contract with Nokia and we ultimately grew to about 200 people before I left. we were doing a bunch of things in the wireless space, so primarily selling infrastructure equipment to the carriers, you know. Bell here in Canada, Bell Rogers Tell us in the United States. We had Verizon Sprint, you know, ATT, all of those folks. And I realized though, so when when we went public, we did it by a reverse takeover. So I ended up in charge of the company that obviously I sold to the public company, but also three other divisions. My job became primarily dealing with the investment community, and I really didn't like it that much. So I really I figured out I I really like dealing with customers, with employees, with suppliers, even the local municipal government and all the things that somebody who's running a couple of tens of millions of dollar business has to do. But I really did not enjoy raising money on Wall Street or dealing with the investment community on a day-to-day basis. It's just not my jam. so ultimately I I left that and I started doing what I do today, which is a combination of consulting to small startups and small businesses. I do a fair bit of work in the startup space because I'm in the entrepreneurship department and I teach at Toronto Metropolitan University in what is arguably one of the top y entrepreneurship programs literally on the planet. Loren Wernette: Hmm. So four employees up to 200. Now obviously there was going public in there. what was the the biggest jump that you guys made as far as either mindset or business shift that allowed that scaling to happen? Brad Poulos - The Small Business Prof.: I think probably bringing in professional management, really people who had done it before at a fairly large scale, that was foreign to it. Well, I had I had worked in a reasonably large company. So I had certainly worked with people of of that caliber, but but bringing them into our smaller company, that was probably the biggest jump. And and some of them were some not all of them made it there was really like two interesting things that happened along the way. So one is not all of those people really were appropriate in our company. We we brought in folks that had worked in really large companies and they didn't they just didn't translate that well even to what was arguably maybe by then a medium sized company. They're used to too much support and you know want to create probably even more structure than what we needed. And then the other thing was we had people that were part of our beginning that that didn't make the transition into being a a larger company and A few times, I found that to be quite sad because it was tough saying goodbye to those people and we certainly gave them many chances to, to make the shift, but they couldn't do it. Loren Wernette: What do you say to entrepreneurs that they are in that growth phase, right? But they are scared to take that next leap and hire those professional people because they don't want to lose the spark that made them to what they are and got them to where they are and don't want to become super corporate, but they still want to grow. Brad Poulos - The Small Business Prof.: Well, courage is acting in the face of fear, right? Courage Loren Wernette: Ha ha. Brad Poulos - The Small Business Prof.: is not a lack of fear. So it's okay to be afraid, but you still have to do it. And I think my my advice would be you know, be very, very careful about the hiring process. Hire as much for culture as you do for skills. You know, certainly at lower levels. I'm a firm believer that you should hire primarily for culture, actually. 'Cause you if in lower Loren Wernette: Mm-hmm. Brad Poulos - The Small Business Prof.: level jobs you can teach the skills, right? I don't I don't want to teach a a COO how to do their job, but I don't mind teaching somebody an accounts r receivable person who is fresh out of, you know, accounting school. I don't mind teaching them the ins and outs of how to do their job, especially if they're a great cultural fit. So one of the things I used to do as we were why once I had kind of created the first level of management structure, so I'm known I'm now no longer the primary person who's doing hiring. We have people, we have managers or even VPs at that point who are making hiring decisions. I still insisted on meeting until we got to until like up to about sixty people or so. I insisted on interviewing every single hire. And it wasn't always a long interview. It was never about skill set, obviously. In fact, I would ask them, you know, why do you think you're here talking to me? Sometimes I would get the answer along the lines of, well, to to see if I I could do the job. And I'm like, no, absolutely not. first of all, you can probably do the job we're hiring you to do better than me. and why would I second guess my my management team that way? So I would explain to them, no, my job is to is to check for cultural fit. And you know, that's so that's something Loren Wernette: Yeah. Yeah. Brad Poulos - The Small Business Prof.: I pr protected like my firstborn child. Loren Wernette: Screen screen re resumes for skill and high interview for culture fit, right? Brad Poulos - The Small Business Prof.: Culture eats strategy for breakfast, right? So Loren Wernette: Makes makes a lot of sense. So take me to two thousand and three. Your bank manager calls you to congratulate you. Walk me through that call and what actually was said and what did you a do after he hung up? Brad Poulos - The Small Business Prof.: So I'm not I I have a couple of bank manager stories in my books, so I'm not a hundred percent sure I know which one you're talking about. So can you give me a little more context? Loren Wernette: Yeah, so this had to do with he was using some terminology that you weren't familiar with. Yes. Brad Poulos - The Small Business Prof.: Yes, the term overtrading. Right. Yeah. I had an MBA and I I had never heard that term. But yeah, I got a call from the bank manager, and we were we were trying to get an increase in our bank line. And so he said, You know, Brad, you know you're over trading, right? I'm like, I quickly, we had Google by then, so I quickly Googled it and figured out what the heck he was talking about. And what he was what he was driving at was that we didn't have enough owner money in the company. And there's a couple of couple of lessons there. So but probably the most instructive was that he kind of insisted at the time, and I'm not sure this actually came through heavily in the book, but he kind of insisted at the time that we put more of our our money in the company and we were already pouring pretty much all of the prof profits back in the firm. It's not like we were sucking out massive amounts of dividends. We were taking a nice salary, certainly more than I had ever made in my corporate career. But But not obscene by any means, And so he said, you know, you guys are w we'll we we can probably get you the bank, you know, the increase in the bank line, but you guys are gonna have to put more money in the company. And I'm like, Okay, you know, I sort of like kind agreed, but didn't make a hard firm commitment. And you know, he never asked me again. And we didn't. And so that kind of taught me that, you know, that was the one of the very first examples of One of the one of the topic or sorry, one of the titles of one of my books is most problems solved themselves. And, you know, that was a problem that just kind of went away. And I think a lot of people might have just jumped on that and moved heaven and earth to put more money in the company when when you know, the bank wasn't obviously they weren't that serious about it because I never heard about it again. Loren Wernette: Yeah, did you end up getting that line with that bank? Brad Poulos - The Small Business Prof.: We did. Yeah, he processed the increase and never called to ask me when we were putting our money in. So yeah. Now, that's Loren Wernette: Yeah, two two Brad Poulos - The Small Business Prof.: a Canadian bank. I don't know if things might be a little bit different to the United States if bankers are a little tougher to deal with, but Loren Wernette: It also was twenty one years ago and things have changed a lot in the financial industry in twenty one years. Brad Poulos - The Small Business Prof.: Right. Yeah, that was pre two thousand and seven. So yeah, that's right. Loren Wernette: What is it so as a teacher, what does it say about an MBA that you didn't know what that term meant? Brad Poulos - The Small Business Prof.: it's interesting. I I have that view about all kinds of all kinds of education. So, you know, when I when I got my first job out of tech school at at Telesat, I got interviewed by by the fellow who that ultimately ended up becoming my boss. And prior to the interview, I had a friend who was he was ahead of me in school, and he had gotten a job at a company called Comdev, which is still around. It's in can it's in Canada. They're a world leader in creating parts that go on satellites. And here I was getting an a getting an interview at a satellite company. So I actually drove an hour and a half to where he lived and took him out for dinner and he loaned me his training manual. And I studied that thing inside and out before that that interview. And do you know that? Every single question that I got asked by my prospective boss, I got the answer from that training manual, not from my two years in school. Now, the two years in school probably made it a little easier for me to understand what I was reading in the training manual. But, you know, I education is a it's a it get it's kind of like it prepares you to learn the important stuff once you get into the working world. But For the most and I kid my stud my students about this, I I cajole them about it. Yeah, you're useless by the day you walk into the to your very first job. And, don't feel bad about it. and they know it and they're they're they understand that we've given you some raw materials, but by no means have we made you ready to go walk into a job and just excel at it. You're going to learn a lot in your first job about how to do whatever it is that you're being hired to do. Loren Wernette: I 100% believe that. I th I think the best best thing you can learn from education is how to learn, which I think a lot of people Brad Poulos - The Small Business Prof.: Yeah. Loren Wernette: miss that boat. I personally I work in real estate, I work in finance, I've worked in digital. My background is I have a bachelor's in crops and soil science and a master's in entomology. And so I did a research project on a microscop microscopic worm in the soil, Brad Poulos - The Small Business Prof.: well. Loren Wernette: vectoring a virus into potatoes. Absolutely. nothing to do with what I do now, but it gave me the knowledge on how to learn. It taught me how to research things and it put me in contact with people that helped me stair step up my career. Brad Poulos - The Small Business Prof.: Yeah. And that's a concern of mine now because of all of the tools available to students. I think they focus too much on rather than on the process of learning, they focus too much on how do I get in my head some set of facts that I can then spew back on an exam or in an assignment. And quite frankly, that's not like that's not the value of a university education. It's the ability to it's the learning how to think critically, how to analyze a situation, all of that. And I think, things like AI and even earlier than that, a lot of the tools on the internet, they they take the focus away from those things. And I have great concern about young people and and what these tools are doing to their minds, and I I warn them about that, that look, use AI as a tool. Of course, you'd be silly not to, but don't Do not subordinate your thinking to a computer. It's too early in your life to do that. at my age, I can I can maybe lean on AI a little harder because I don't have as much to prove and I'm I'm quite comfortable in my ability to cr think critically and analyze the Loren Wernette: Mm-hmm. Brad Poulos - The Small Business Prof.: situation. But until twenty five, you know, your brain's still developing. And so Loren Wernette: Mm-hmm. Brad Poulos - The Small Business Prof.: you I I think you do yourself a real disservice if you lean too heavily on On these tools. Loren Wernette: Yeah, you understand how to think critically. You intelligence isn't being able to memorize facts. Intelligence is being able to connect point A, point B, and point C together and cur pull out, some sort of of thought from it. And if you can't do that and you don't know what questions to ask, which is really the the better questions you ask, the better your life will get, then you're really AI is of no use to you because you're just kind of wandering around in the dark. So a hundred percent agree with all of that. So so I wanna go back to the to the banker. So he never call Brad Poulos - The Small Business Prof.: Okay. Loren Wernette: he never called you back and asked you for more money, you know, more equity in the company. Why do you think he called you and asked you for that initially? What was going on on the banking side that he was looking for that specific thing? Brad Poulos - The Small Business Prof.: So well, probably he looked they you know, they a lot of their job is automated, right? So they're looking at a set of numbers on a screen probably, and there's probably ideal ratio sitting beside the actual number, and we were not sitting at the ideal ratio, you know, of debt to total net worth or some other, you know, some other measure probably along those lines, something that speaks to how much debt does the company have versus how much equity. And you know, kind of probably depends on what industry they're looking at as to which Loren Wernette: Sure. Brad Poulos - The Small Business Prof.: one they would they would care about the most. But but that was probably what drove it. And then what saved us, I guess if you want to call it being being saved, was he he told me one day he has 200 accounts to look after. So if you Loren Wernette: Mm. Brad Poulos - The Small Business Prof.: think about, you know, roughly 220 working days a year, he's got not that he dedicates a day to an account, but He has no Loren Wernette: Sure. Brad Poulos - The Small Business Prof.: more than one day, eight hours to think about a particular customer on any given day. And, you know, I'm not sure. I think it was prior to that. So this is this is if this would be instructive. We we were off on our numbers and I knew it. We so we had to report every month. We had to report our financials, but also send a list of our inventory and our receivables. Because that was the primary base upon which they were lending. It was short term lending, right? So that's what Loren Wernette: Sure. Brad Poulos - The Small Business Prof.: they're landing against. And I knew we were off. And so I thought, well, I don't want him to discover that when I send them numbers in and some clerk enters them and he gets a report. So I set up a meeting with them and I took a, you know, seven page PowerPoint printout. And I sat down with him and I said, you know, I just wanted you to let you know you're gonna see the numbers pretty soon and we're We're tripping a couple of our covenants. And he says, Okay, well, tell me more, right? So I explained what what was going on. And then I showed him our plan to get out of it, to fix it. And so at the end, I I'll never forget this. I I and this is darn close to a quote. I said, So his name was Bent. I said, So Bent, like what do you think? And he goes, You know, I think you should get the hell out of my office and go back to work. Loren Wernette: All right. Brad Poulos - The Small Business Prof.: And and right, and and that was hugely instructive because it it one, it taught me like be proactive with the bank, right? Loren Wernette: Mm-hmm. Brad Poulos - The Small Business Prof.: But also I I knew then I had his confidence. And so I think you know, he had 200 accounts to look after. For sure, not all of them were in good shape. Some of them were probably in less good shape, they would get more of his attention. So I would probably get, less than my day a year of attention because he's putting some of that effort toward the accounts that, you know, that were in trouble. So I think that that's part of what was going on there. Loren Wernette: As somebody that has 60 plus loans on their book, I very rarely pay attention to the ones that are in good standing. I only pay attention to the problem problem shelding, right? And I Brad Poulos - The Small Business Prof.: Right. Right. Loren Wernette: and my gut tells me also, just as I understand that's that space, there's a risk piece, right? Some underwriter was like, the loan's good, but it'd be better if they had a little bit more money in there. And so he's just throughout, hey, maybe if I ask them, they'll put some more money in. The underwriter will get off my back. We're still going to do the loan. That happens all the time, right? Brad Poulos - The Small Business Prof.: Right. Yeah, I think that's exactly what happened. Yep. Loren Wernette: So so is that about the time you guys started the thirteen week rolling cash forecast, or was it a bit later? Brad Poulos - The Small Business Prof.: no, much earlier. So no, I've Loren Wernette: Much earlier. Brad Poulos - The Small Business Prof.: I've always been a firm believer in cash as primary the primary thing that small business has to kind of keep their eye on on a regular daily or weekly basis for sure. And I had a prof when I when I did my MBA. He was my second the second finance course that I took during my MBA. And I have s I so I teach finance a fair bit too. I teach the entrepreneurial finance course and One of my books is actually called From Pitch to Payoff, and it's actually aimed at entrepreneurial finance, startup finance. And he had this saying, and I've taken it to heart, and I've used it so many times when I have taught finance. If it doesn't jingle, it doesn't count. what it means Loren Wernette: Ha ha ha. Brad Poulos - The Small Business Prof.: is right, it's it's all about cash. And I tell my students, like, go to the cigar, go to the store and try to buy a pack of cigarettes with your net income. Right. Loren Wernette: Yeah. Brad Poulos - The Small Business Prof.: you know, it's it's gotta ultimately find its way to around to cash. And that's why I love teaching finance because it's about the cash perspective. And so no, I've always I've always been a firm believer in have a good idea of the cash that you have, where it's going and and what's coming in. And it doesn't take a complicated tool. You know, it's a simple spreadsheet, simple Excel spreadsheet. I have a model you can download from my website. But you can throw one together yourself. It's it's just not that hard, right? It's what's what do you have today? What what do you know is coming in? And then what's going out? And then of course you make adjustments along the way as the things that you think are gonna happen do or don't. you know, like like I say, you make like let's say you're expecting a big a big payment next Thursday. Well, w another one of my fundamental beliefs is you you manage your accounts receivable really carefully, especially the bigger ones. you don't care if a two hundred dollar receivable is coming in early later on time. But the two hundred thousand dollar one, you call first you make sure they have the invoice after you send it, and then a week, ten days before. You just call courtesy call. Just want to make sure we're in line for payment. And and and the great thing about that is that especially if you have good relationships with your customers. Sometimes you're not going to get paid on time. And the the best ones of those, they tell you. They say, nah, Loren Wernette: Mm-hmm. Brad Poulos - The Small Business Prof.: I think I think we're going to need an extra week or whatever. And usually we're talking about good repeat customers. You work with them, of course, but then you factor that in. And then you might be able now be in a position to call your supplier and let them know, I need an extra week here because somebody, a big one's going to be late. So yeah, you manage that very carefully and very, very hands on. Loren Wernette: The importance of communication, proactive communication, I do not think can be understated, whether it's dealing with bankers or, AR or anything, right? People people get uncomfortable when money is missing, and they will be much more comfortable if it's late, but they know it was gonna be late. Nobody likes to surprise. So so i in Brad Poulos - The Small Business Prof.: That's right. That's absolutely right. Yeah. Yeah. And one of the things I teach when I teach small business, we talk we have a a module on the working capital management, right? So Loren Wernette: Mm. Brad Poulos - The Small Business Prof.: big part big part of that is managing receivables. And one of the little tricks I learned a long time ago is well, one you have to have a log, right? And back in quote my day, it was like a book, you know, like one of these One of these little notebooks, Loren Wernette: Right, a ledger. Brad Poulos - The Small Business Prof.: right? Yeah. Nowadays it's probably more like an Excel spreadsheet or something. But and I would I would always say, hang on, hang on, Lauren. Just just a sec. I I'm I'm I'm writing this down. And I would say that I'm writing it down because that signals to the person, like, I'm not gonna forget this. And if you're lying to me, you know, I'm writing it down. And I'm you're only gonna get away with that a couple of times, and then all of a sudden, you know, your your credit starts getting choked off. So Loren Wernette: Yeah, you lose trust. You lose trust. So in the in the thirteen week cash forecast, tactically, what are the lines that are in there that you have and how often are you touching that? Brad Poulos - The Small Business Prof.: Yeah, so it's not me, first of all, it's your it's your c somebody in the controllers department typically. Loren Wernette: Sure. Remember our audience is like six to ten employees, so they may or may not have a controller. Yeah. Brad Poulos - The Small Business Prof.: Right. So it might be the owner. Yeah, it might be the owner, or might be your if you have a bookkeeper, it'd be be that person. But yeah, it's fairly straightforward. you have an opening cash balance. You should probably be doing it by the week. So you have at the very top you have an opening cash balance, then you have the expected receipts for for like an operational type business. That's going to be primarily accounts receivable. Loren Wernette: Mm-hmm. Brad Poulos - The Small Business Prof.: other types of business, there may be other forms of receipts. your business is quite different. You don't really have receivables, but you have loans that you advance and then you have loan payments that come in. So whatever the it's the gazintas and the gazotas, right? So whatever those Loren Wernette: Yeah. Brad Poulos - The Small Business Prof.: are. So what are you expecting to come in? Primarily probably from customer payments. Or if you're a retailer, it's gonna be based on your your because those there's no receivables, you know, your cash is your daily receipts. Then what are you expecting to sell in the next week? And that you should probably be estimating based on hopefully you have some couple of years of track record. in retail, I'm a firm believer in that you do your forecast by the week, not by the month, Loren Wernette: Mm. Brad Poulos - The Small Business Prof.: you know, because like the week before Thanksgiving. That means a lot more than or Easter's maybe a better one because it moves around so much, right? Loren Wernette: Sure. Brad Poulos - The Small Business Prof.: Thanksgiving doesn't move as much, but but but anyway. so whatever you're expecting to come in, and you can either put the detail on the cash forecast. I'm not really a firm believer in that. I'm f believer in how the detail should come from somewhere else. So it's just one line of what are the expected customer payments this week, then what are the big payments that we have that are due, and then the closing balance for the week. It's literally four lines. Loren Wernette: One thing, so I I don't do that specifically, my CFO does that, but for our incoming and outgoing loans, so loans were originating versus loans that are coming back, right? We track those, have eight hundred thousand going out this week, and we've got three hundred thousand coming back. One thing that I have fa yet to figure out how to do successfully is the confidence score. What's my confidence that this loan is going to go out this week? And what's my confidence that this loan is going to come back? And if those both don't happen, That really can mess up the cash flow of, hey, do I have enough money? Do I need to raise more money? That kind of thing on the operations side. How how is that generally handled or or is it not is it handled? Brad Poulos - The Small Business Prof.: So it's on the outs, the outs are are a function of the ins. If we don't have the money, we don't have the money. Now, for most of the time that I've operated my own small businesses, we've had a bank line and a buffer. We weren't sitting Loren Wernette: Mm. Brad Poulos - The Small Business Prof.: at the max of the line. So we could make a payment when we didn't didn't have the money, right? We were in a pretty lucky situation, I think, there. As far as the confidence goes, though, that's that's where the art comes in. And that's where the the that's why you want to have the same person doing collections all the time. So they see here's a great example. We had a customer, his first name was Ilya. I won't say his company name, and Ilya was a great guy. he had a small business, you know, about probably about eight or ten million Canadian dollars, making really, really high precision parts for the primarily the Canadian military. And Ilya was notorious for paying late. And our our sales to him were typically reasonably good size, you know, 50k and up, sometimes maybe two or three hundred. And the reason he was late is because his guy, his customer was the government. And we knew it. And you're getting paid when you're getting paid, and that's that. And so in fact, I had I had a new controller join the company, and one of her one of the ways that we Bonused her was based on days receivable. And she came to me one time and wanted to cut Ilya off. Loren Wernette: Mm. Brad Poulos - The Small Business Prof.: And the reason was because he was always paying late. And I so I sat down, I sat her down and I said, do you have any idea what he does? No. Right? So I went through what I just went through with you. And what we decided to do is we just excluded his payments from her bonus calculation. But please don't Loren Wernette: Mm. Brad Poulos - The Small Business Prof.: cut off his credit, he's a good customer. He's never failed to pay late. Guess whatever he guess what else? He's never failed to do. He's never failed to pay. Loren Wernette: Yeah. Brad Poulos - The Small Business Prof.: Right? So, so that's where the art comes in. And that's why I think you have to have the same person doing this job all the time. So that they know, okay, this customer, they always pay, but they're they're they're probably going to be a week later. And you build that right Loren Wernette: Yeah. Brad Poulos - The Small Business Prof.: into your forecast. Loren Wernette: I've got three of those and loans due on the first. They always pay religiously on the sixteenth. And the reason is their rent comes in on the eighth. You know, and Brad Poulos - The Small Business Prof.: Right. Loren Wernette: that just that's just how how it is. And you just build it in and I just change my expectations and change their due date so we don't have to have red flags throw up in our system. So Brad Poulos - The Small Business Prof.: Right. Yeah. Smart. Loren Wernette: as long as they keep paying, I'm fine with it. So so where does the forecast lie to you? Meaning where where are people very optimistic in the forecast and how it and then how does that burn them? Brad Poulos - The Small Business Prof.: The cash flow forecast or the sales forecast? Loren Wernette: Hm. Cash flow forecast. Brad Poulos - The Small Business Prof.: So the cash flow pro well, one of the ways would be with new customers where you're not Loren Wernette: Mm. Brad Poulos - The Small Business Prof.: you're not really aware yet. And it's one of the reasons why I believe with new customers, you have to really manage that quite tightly. So you Loren Wernette: Mm. Brad Poulos - The Small Business Prof.: you make sure that you you know, that you're making those pre the the calls that week or ten days prior to prior to payment. that's one of the ways that that's probably the biggest place where it lies to you. sales forecast. Well, they lie all over the place, but that's an entirely different subject. So yeah. Loren Wernette: Hundred per hundred percent. so you I wanna I wanna shift a little bit here. You've talked about the eight million dollar problem. And Brad Poulos - The Small Business Prof.: Yeah. Loren Wernette: I I think that that will resonate with our audience. So can you explain that to our audience in a way that think five to ten million dollars of revenue company? Brad Poulos - The Small Business Prof.: Right. Yeah, because well that eight is a few years old. So with inflation it probably becomes ten. So yeah. Loren Wernette: Rusure. Brad Poulos - The Small Business Prof.: So where it comes from, it's a it's a call, it's a kind of like a little just a silly little thing that my brother and I came up with when we were running our business together. We had a lot of suppliers that were small businesses, small manufacturers primarily. They might have had a few more employees than what you're talking about. You know, they might have had like twenty. but they're in the single digit millions of sales. And the owner made every single decision. And what Loren Wernette: Mm. Brad Poulos - The Small Business Prof.: we found was that those companies are self-limiting. So if the owner is insisting on making every single decision, and yeah, they have a guy, and his name is VP of or his titles VP of whatever, but whenever you talk to him, he has to talk to the boss to get the actual approval. Well, so it's obvious then that that. that employ that individual, he's not really pushing decision making down in his organization and or hers. primarily ours were men, but and and and that's gonna limit you. Like it's it's I it comes down to if you want to make every single decision, that's fine. Then every decision will be in your mind perfect. But the downside is you have to touch everything and that is obviously self limiting. If you have the courage to create a management structure where you truly push decision making down and you absolutely do give people autonomy, there are a number of benefits that come from that. So the first is you get back some of your time. So now you can work on the business, you know, not in the business. You're not making these individual, you know, s little tiny decisions that that you used to. But there's a second order impact, which I think is actually stronger. And that is that good people want autonomy. Good people don't want to be told what to do. They want you to give them a set of rules, give them some policies, give them some objectives, and they want to figure out how to achieve those objectives. They want to make the decisions around exactly how they go about doing their job. And if you want a bunch of people that want to be told what to do, you're gonna have a company full of B players. If you give people autonomy, you're gonna have A players. And that's the real benefit, I think. Not so much getting your time back, but which is great, but it's more that. It's that and and s and and you can use those people, you can springboard off them, to really grow your company. It's hard to grow your company off a bunch of B players who are sitting around being told what to do by the boss. Loren Wernette: So let me give you an example and you tell me how to handle this. So I'm a I'm a business owner. I've got, I don't know, let's say I've got five or seven million dollars worth of revenue and I want to start handing off responsibilities to somebody. So I go and hire some what I think are A players. I you know, I utilize your build judgment and then leave them alone philosophy. I let it go for a week or two. I come back and all the outputs that are happening are now not as good as what I think they were when I was doing it. Brad Poulos - The Small Business Prof.: Okay, so that I'm I left that part out. I meant to mention that. So my question to you, Lauren, would be, does every decision have to be optimized? Loren Wernette: No. Brad Poulos - The Small Business Prof.: Some do, of course, right? And that's the art. Those are the those are the areas where you want to make sure with your new VP or director or manager, whoever you've hired, these are the kind of things I want you to bring to me. and yeah, like my attitude, I've run into this a few times with clients, right? They'll tell me exactly that. And my answer is always kind of like, so what? So what? They don't make as good of a decision as you. You know, not every decision so And and sometimes it's not that it's not as good, it's just that it's different. And that's even more okay. You know, as good but different from you, so really so what? Not as good. Well, that might be a so what? It might not matter. Not everything in life has to be optimized. And there is a cost, right? Nothing comes in life without a trade-off. So the cost to you of getting your time back, having an A player is yes, sometimes they might make a decision that's not, you know, not as good as the one you would have made. And the art, what makes you a really great leader is knowing look, you can't go through a whole year of them making substandard decisions and you never saying anything. So the art, you what makes you a great leader is knowing when to jump in. What what which ones should you coach them on? hey Bob or Susan, yeah, I I I appreciate well, maybe I'd like to understand why you made the decision the way you did and then coach Loren Wernette: Mm-hmm. Brad Poulos - The Small Business Prof.: around that. Now, if you find yourself doing that too much, then you have to ask yourself a question. Is it me? Am I overmanaging? Or did I make a bad hire? And it's quite possible it's the latter, in which case you've got to make, make adjustments, put them in a different job, or maybe you have to actually, let the person go. But but yeah, so that's that's how I would handle it. Loren Wernette: Makes sense. I'm I'm a firm believer in extreme ownership, right? And so even if you made a bet higher, it's still your fault as the owner. but it it's it's your it's it's your Brad Poulos - The Small Business Prof.: yeah, absolutely. Loren Wernette: responsibility to make sure that they can play at their optimum level and provide them things. Where I struggle and where I know a lot of other people struggle is as an entrepreneur, I've built this from the ground up, right? And it is very challenging to take your hands off the wheel. Very challenging. Brad Poulos - The Small Business Prof.: absolutely. It's that that's why I always use the word when I'm talking about this, courageous. Right? It it does. It takes some courage to let go and and you know, to see what happens. I think it's one of the main reasons why I think it's really great if entrepreneurs have worked at a big company. Because they've seen how structure works. And, you know, how like but when I was at Telesat, you know, a manager could make like a five thousand dollar decision and a director could make a ten thousand dollar one. We had this kind of structured decision making processes and and I so you if you've seen how it works, I think it's a little takes a little less courage than to to let let the reins go and see what happens. but and Loren Wernette: Sure. Brad Poulos - The Small Business Prof.: and the other thing is, d be smart about it. Don't maybe don't do it all at once. Be let like let them build their level of authority over time. Loren Wernette: Yeah, I I think some of that for me and I know other people may it manifest as instead of doing the work for them, they come to you with their problem and instead of asking questions and trying to get them to solve it themselves, you just say, this is what you do, and you just push the answer to them, right? And it's just no different than my kids. If if my kid figures out how to pour a bowl of cereal, I'm not pouring that cereal anymore because I want them to be self sufficient. If I do it forever, they'll never learn how to do it. Brad Poulos - The Small Business Prof.: Right, yeah. So one of the things, so the one of my books is called Most Problems Solve Themselves, and actually the book is not about that. So the Loren Wernette: Ha ha ha. Brad Poulos - The Small Business Prof.: book the book is 52 different articles that are kind of unrelated. They're they're they're divided up into logical groupings, you know, leadership, management, finance, sales, that kind of thing. but I had to pick a title, so I chose one of the more provocative article titles to to use for the book. And so what that article is about is about when when I was when I was running one of my own companies, I traveled a lot and so I ha I used to have this I used to have this like I called it the parade when I would come back on a Monday morning. I had the parade of people bringing me things that they wanted me to h help with or a lot of times decisions they wanted me to make. And so it took a while, of course. You know, I'm not perfect either. I was probably too hands-on for a while, but eventually I figured out, no, I've got to create autonomy in this team. And so I would say, well, you know, gee whiz, like last week I was in Halifax, Nova Scotia, and if it was like last Tuesday and I wasn't around, like what would you do? And so then they would give me an answer and I go, I I would always like very dramatically go, Well, you know what? I think we should do that. Right. And I would say it that way, you know. So I'm really really trying to signal to them, like, no, you, you're smart, you, you, you have the autonomy to make these decisions and I trust you. And and to a large degree, I don't care if you make a different decision than mine. You know, and then so then eventually those problems they solve themselves from the point of view of they never touched me. Obviously they didn't solve themselves. Somebody else fixed it. Right? The other place that came from was when I was actually back when I was at Telesat, I was I I was given a little entrepreneur intrapreneurial job to do. And we were you're probably familiar with direct TV. Loren Wernette: Mm-hmm. Brad Poulos - The Small Business Prof.: So there the the Hughes Network Systems, who are the people behind that technology, they came up with a thing called Direct PC. And it was the very first satellite-based internet. access product. So they came to us and said, we want you to buy this from us. So so you can operate a a business, you know, like around internet access over satellite. So the president asked me to look at it because it was kind of in my area. And I took a quick look and I said, I think there's a business here. And so he said, okay, write a biz plan. So during that time when I was writing the business plan, I still had to do my regular job. And I was super busy, busier than I've probably ever been in my whole life. And so I adopted a philosophy, which a lot of people don't really I've I've been chastised for this, but so what? When people would ask me for something, I would almost never do it on the first time they asked. I would just Loren Wernette: Mm. Brad Poulos - The Small Business Prof.: like ignore it. And especially if like it wasn't my boss, you know? And I like I just got I never told anybody this, but I just said to myself, I'm gonna make people ask at least twice. And you know what I found? A lot of the time you don't get the second ask. So from my point of so either they didn't care enough to actually fix it and they were just trying to push a problem onto me and I'm pushing it back by Loren Wernette: Yep. Brad Poulos - The Small Business Prof.: not answering. or somehow else they solved it and it didn't need me. So from my point of view, that problem solved itself, right? So Loren Wernette: Yeah, it goes goes back to your banker story, right? He asked once, you didn't respond, and the problem solved itself. When we had Brad Poulos - The Small Business Prof.: Right, exactly. Yeah. Loren Wernette: when we had my third child, I took eight weeks of paternity leave, and one of my my mentor at the time's like, put all those emails that come while you're gone for eight weeks into a folder because I was still working corporate at the time. And when you get back, sp set a timer for 15 minutes, skim them, and then control all delete. I'm I'm like, I can't do that. People he's like, If you're gone for eight weeks, the problem will either have been solved, will have been, will not be that big of a deal, or someone else will have solved it for you. Or they'll bring it up to you again. And so that's what I did. And so everybody's like, you Brad Poulos - The Small Business Prof.: Right. Yeah. So did you do it? Loren Wernette: must be, yeah. It was like, it was so nice. It was so cathartic. It was like 5,000 Brad Poulos - The Small Business Prof.: Yeah. Loren Wernette: emails, control all boom, gone. And then and then Brad Poulos - The Small Business Prof.: Wow. Loren Wernette: anybody's like, did you see that email? And I'm like, Nope. If it's important, send it to me again. So Brad Poulos - The Small Business Prof.: That's a really smart leader you had there. Yeah. Loren Wernette: Yeah, it was he was he was a good mentor. So Brad Poulos - The Small Business Prof.: Yeah. Loren Wernette: I wanna go back real quick to what we were talking about a second ago regarding the ceiling. So if I'm an entrepreneur, how do I know that I'm the ceiling in this eight million rule, or if it's a market seal? Brad Poulos - The Small Business Prof.: Well, one of the things I think you would want to do is look at your competitors and and to the extent that you possibly can, not always easy when when they're all private companies, but are they growing and you're not? Right? 'Cause if the market's growing, then everybody in the industry should more or less be growing, maybe not at exactly the same rate because you got different levels of, competence and maybe one company's products fit the market a bit better than others, some variance in there, but But if the if the industry's growing and you're not, then there, there's your answer right there. Loren Wernette: Part of that too is most well if we're talking companies that are doing five to ten million, you're probably not saturating the market. just to be honest. Brad Poulos - The Small Business Prof.: exactly. Yeah. Right. and Loren Wernette: But Brad Poulos - The Small Business Prof.: there's so much nowadays, there's so much industry information available, quite a lot of it for free. You can find out what the growth rate of your industry is. you can get like a pro forma income statement for the average company in your firm and figure out like what should my gross profit margin be and all all you know, all that wonderful Loren Wernette: Right. Brad Poulos - The Small Business Prof.: stuff. There's so much available today that wasn't, you know, twenty five years ago. So Loren Wernette: Yeah. Great. All right. I'm gonna shift gears a little bit. I wanna touch on debt versus equity and your opinion on why debt is better than equity on different size businesses. So I'm just gonna leave it from leave it there with you and let you kind of explain your your opinion and and why you believe Brad Poulos - The Small Business Prof.: Yeah. Loren Wernette: that. Brad Poulos - The Small Business Prof.: Well, debt is your friend, for a bunch of reasons. So one, it's non dilutive. So I the way I describe it to my finance students is if I invite, let's say Lauren, because you actually provide debt financing to people, if I invite Lauren into the room for a while, like eventually I get to say goodbye. Right? Yeah, I gotta share with Lauren for a while. I gotta send him some interest payments, which are gonna come out of our whatever's left over from our operations. we have to make a gross profit, then we got to pay our rent and all that. And hopefully there's something left over. And now I gotta pay some interest to this wonderful person named Lauren. But I eventually get to say goodbye when I pay off the loan, right? So it's not it's not forever money. now some debt is because we keep rolling it over and rolling it over. So you could argue with me there, but that leads us to the second reason why I prefer debt. It's cheaper. The cost of debt is always cheaper than the cost of equity. and plus we get a tax advantage. Dividend payments are not tax deductible. Debt payments are like interest payments are tax deductible. So to a certain point, of course, and actually, this is what Ben my banker was driving at, right? to a certain point. Debt is should always be your preferred method of financing your company when you need additional financing. Now, there comes a point in time though where adding additional debt brings so much risk to the company. you've you've saddled it with so much debt that by adding additional debt, you're actually it's actually riskier money now than equity. And at that point, that's when you you have to either go put some of your own money in if you have it or go seek what. an equity partner, bring on either a, a partner who's going to be active in the business or maybe not, maybe just a financial partner. But but that's the reason why I think you should always default to debt first when you're looking for additional capital. Loren Wernette: Yeah. So argue your own point. What example would equity be a better choice? Brad Poulos - The Small Business Prof.: Well, I th okay. Well one so even when we don't have too much debt, is that what you're saying? Like what you still might want to default to equity? Yeah, I Loren Wernette: Yeah. Mm-hmm. Brad Poulos - The Small Business Prof.: think maybe when the provider of equity brings some other strategic strategic advantage. So let's say I'm bringing you Loren Wernette: Got it. Brad Poulos - The Small Business Prof.: as an individual in and you've got some money, but you're gonna join the management team and you come in with maybe we're going into a new industry and you've got like, you know, you've got all kinds of contacts in that industry and you you pre pre The reason you have money is 'cause you previously grew a firm in that industry, then that would be a perfect reason to bring in to bring in some equity. You know, that that kind of thing. I think there should be a strategic Loren Wernette: So this is a shh Brad Poulos - The Small Business Prof.: advantage. Loren Wernette: shot the shark take tank example where they pick up Mark Cuban because he's already in that space and has all the connections with the distributors and everything and it's gonna jump them up. They're Brad Poulos - The Small Business Prof.: Right. Loren Wernette: it's okay to trade money for equity there because you're you're trading you're doing one plus one is four versus one plus one is two. Brad Poulos - The Small Business Prof.: Yeah, and in that case, the money isn't only financing. It's bringing another benefit that has nothing to do with the actual money itself. So that's probably the it's the only one I can think of right now. It's but probably so it's probably the the best one I could come up with in terms of a reason to default to equity as opposed to defaulting to debt. there's there is another reason too. I it's one of the it's one of the light bulb moments I often have with students. I ask them can a company with no debt go bankrupt? And and then they they do what you're doing, they're like, hmm, well, the answer's no. Like, how can you go bankrupt if you don't have any debt? Like, you go out of business, you could put yourself out of business if you want, but no one's taking you to bankruptcy court if you don't have any debt, because there's no one to take you to bankruptcy court, right? And so, it's one of the ways we I also teach strategy, and one of the ways that we size up a strategy is. is we use this model called the Diamond E. And one of the things in that model is management preferences. The man in a small company, b big priv big public company, you you don't have this option. But in a small company, you can do something just because the management slash owner wants to. And one of the things you could do is decide to grow slower and not take debt. And in fact, if it's a family business, I argue a family business has one a prime directive, don't go out of business. The Loren Wernette: Yeah. Brad Poulos - The Small Business Prof.: family needs that business. It's it it relies on it. So it's your job as a family business maybe to be a little less risky in the way you go about anything. And that would include financing. So in that case, because if you don't if you never take on debt, you're not going to go out of business because you can't make the interest payments. And so so that that might be another reason to not go toward debt. It's just because The management is more comfortable not having it. Loren Wernette: Yeah. That makes a lot of sense. Can you talk to me a little bit how phantom shares work in in this s situation? Brad Poulos - The Small Business Prof.: Sure. So phantom shares do not bring any additional capital. The way the way phantom shares work is they're simply they're phantom shares in the sense that they don't they don't really exist the day that we the the day we make the deal. And and how how that would work is let's say you're an employee that I really want to keep, but we do not wanna have let's say if we're a fairly big company, you know, w like what amount of equity could we give you that to keep you happy, it might be a couple of percent. So we don't want to have min mi minority shareholders that own a couple of percent. It's a pain in the butt for us. like how if you decide to quit your job, it means we gotta buy them back, and how do we value them? And you know, you're you either have to buy the shares or if we gift them to you, now you have a tax bill. so So you so what you do is you peel it back to what would be the reason why Lauren would want shares? And the reason why you would want shares, there's there's several of them. So the one is that to get a dividend. Well, in Canada and small businesses, we often don't pay dividends. We actually just pay salary, we pay a bonus just because the way our tax system works, there's not really a huge benefit to having dividends. we we didn't bother with dividends, we just gave ourselves a nice bonus. Tax wise, it made no difference. Because of our unique way we tax small business dividends in Canada. So there's that, but it's so that's a benefit, but it's not there. another benefit is you get influence because you get a vote, but w so you're gonna get three percent of the company. Great. The other four of us own the other ninety seven, right? Loren Wernette: Right. Brad Poulos - The Small Business Prof.: So and and the argument I made, I think you're probably pulling from one of the things in my book. the argument I made in that case with that individual, I said like. You're a vice president of the company. You have more influence than one of the owners that doesn't work here, right? So you're not Loren Wernette: Right. Brad Poulos - The Small Business Prof.: going to get any more influence. And then the so the third reason why you'd want shares would be for the big payday. When we Loren Wernette: Mm. Brad Poulos - The Small Business Prof.: when we sell the company, we cash out. And we we have no plans to sell, but we could down the road one day. If we create a phantom share plan, what happens is you kind of it's like almost like a promise of shares. And what we would do, we would ultimately issue those shares, but we would issue them the the nanosecond before we sell the company. And so you you'll and you so you'd get whatever the the gain was from selling them. obviously you'd have a cost base, but you'd have some kind of a tax implication, but but hopefully, you know, you're gonna you're gonna net out still with a nice payday. So that's that's how we use them in Canada. not sure how popular that is in the United States, but that's how they're used here. Loren Wernette: Yeah, it it's certainly a conversation, especially when you're talking about what you talk about earlier. I've got an employee and I want to align incentives, right? I want them Brad Poulos - The Small Business Prof.: Yeah. Loren Wernette: to I'm trying to figure out a way to quantify and pay for them pushing the company in the direction that we want it to push, right? Higher profitability, whatever the thing is. And so you give this, you know, these phantom shares as a way to exactly what you said, not have to Give them actual equity, not have to give them a huge say, if they leave, you're not out anything, but align their incentives, which I'm a huge believer of, just in general. Brad Poulos - The Small Business Prof.: For sure. And along the way, we also had a you know a very generous profit sharing program. And at the level of the individual of the that I mentioned in the book, you know, he would have been participating, you know, at a fairly high level because he was a VP. So you know, I'm a firm believer in you got the greatest entrepreneurs are great sharers. Loren Wernette: Mm-hmm. Yeah, I I see that too. I the small businesses tend to pay their people really well. And they know that they couldn't get where they got without the people that are around them, and they they take that into account when they think of compensation. So all right. So if someone's listening to this in their truck, you know, heading to work or whatever, you know, what do they need to do this week to take make any of the stuff we've talked about more? tangible for their business. Brad Poulos - The Small Business Prof.: Well, I I'm a firm believer in, p pl planning as maybe even as more important than the plans itself. But you should always be working to a plan. and that should you should have an annual plan, like a quarterly plan. Then a good I think the best managers, whether in a s they're an owner of a small business or just a corporate manager, they sit down on either Monday morning very early or Sunday night or Friday afternoon or sometime and And plan out the next week. I actually created a system. there's a I've created a website called theconfidentoperator dot com. There's no the, sorry, just confidentoperator dot com. And I have a system called the operators cadence, which actually brings you from a ten year vision down to a daily planner and all the different tools that you need in between. So so that I think that's a that's an important the I think every good entrepreneur is pretty good at that kind of stuff. just do your best not to get dragged into the weeds, right? Work on what's important, not not what's urgent. And I know it's easy to say, but I don't think it's actually that hard to do. You just have to be mindful about it. Loren Wernette: Yeah, I I work on that constantly. one of the things I do, I have a filter in my brain. Is this a revenue generating activity or not? And then revenue generating things float to the top. Now, after some of the stuff we've talked about, you know, maybe I should be pushing even some of those things to someone else. So I'm not blocking the business. But, you know, when you're a small company, revenue is is the the key, right? Brad Poulos - The Small Business Prof.: sure. Yeah, either revenue or profit. So if you can do because you Loren Wernette: Yeah. Brad Poulos - The Small Business Prof.: could do something as well that might be might be going to save the company a pile of money. So it's gonna flow to the bottom line. But yeah, one of those two for sure. And it's you usually revenue is by far and away the the greater lever. Loren Wernette: So so maybe my my filter should be if it jingles, look that way. Brad Poulos - The Small Business Prof.: There you go. If it jingles then it absolutely does count. Yeah. Loren Wernette: That's right. All right. Well, Brad, it's been great talking to you. If anybody's interested in your your confident operator or just talking to you or reaching out, find anything else about what you do, your three books that you've got out, how can they get a hold of Brad Poulos - The Small Business Prof.: The the easiest way to all of that is through my website, just bradpoolis.com, B R A D P O U L O S dot com. That's the easiest way. Loren Wernette: Perfect. So I will make sure that's in the show notes. So if anybody out there got any value out of this and they want to reach out to Brad and get that information, talk to him, you can go down go there. Highly recommend it. Brad, you've been a phenomenal host. I really enjoyed our conversation. and for all the audience out there, if you got value out of this, make sure you think about one or two people that would also get value out of this and share this podcast with them so they can get that value as well. So thank you again, Brad, and to everyone else out there. We will see you next week.