While successfully turning around a family business and relying on a COO for operations I was asked many times, “How was I able to tell if the COO was doing a good job?” It may seem like a simple question but, for entrepreneurs that have started their businesses and led the charge ahead largely by intuition, it is hard to imagine holding someone else responsible for the day to day well-being of the business. The answer I gave them, of course, had several dimensions. Yet, there were always a few top things that came to mind and this story is about one of those.
For many years I was a member of TEC (The Executive Committee) which has since changed its name to Vistage Worldwide, Inc. One of the many monthly speakers we had the honor to hear was a person by the name of Kraig Kramers. He passed away on October 5th, 2014 and his legend lives on at ceotools.com. There was one tool he had in his kit that I relied on heavily — literally ever since first hearing him talk about it — and that tool is the concept of always looking at the business in a trailing 12 month analysis.
What does a trailing 12 month analysis mean? It means for every month that passes look at it as a year end. It means adding up the previous 12 months of data and taking that result as the point in time to graph trends and comparisons from. The result of this is taking all annual seasonality out of the equation (remember, every single data point has the full 12 months of history in it now) and it throws out the window of needing to compare this month to the same month of the previous year or this quarter to the same quarter of the previous year. Month to month data is usually too volatile to be meaningful and waiting for an actual year end to celebrate or, worse yet, plan corrective action, is insanity.
Once you have a trailing 12 month financial package up and running you can, of course, look at whatever you wish for those numbers — such as current ratio, debt to equity, quick ratio, days to pay suppliers, inventory turnover, return on equity, %SG&A, Altman Z-score, etc.
The above chart is actual data from a business I used to be responsible for. The income before tax line looks troublesome in the late summer of 2004 but taken with the known changes in the business at that time it was something still to be monitored yet easily explained as “normal”. Imagine trying to compare that data just looking back a year for each individual month? There would be a complete disconnect and no rational way to relate it to the larger picture.
In summary, why wait for a year to end to understand, and react, to macro changes in your business? Implement the mindset of trailing 12 month analysis to see those results every month. For some, reading this story might be all that is needed to be off and running. For those who are interested and still confused you can refer back to the book or the website for further clarity and more ideas, plus sample spreadsheets, to make the success of running a business more measurable.
I receive no benefit in pointing you to Kraig’s website. I am simply glad to see his ideas live on past the life of the man himself. He greatly helped me understand the heartbeat of a business from turnaround to a success far greater than it ever saw in its entire history. Whether you rely on a COO, or if you are playing both the COO/CEO roles at once, this simple tool might just make the understanding of where you business is going a lot deeper than it ever was before.
There are a number of common sayings when it comes to the wealthy.
The Rich Get Richer
The Rich Get Richer is sometimes followed by the phrase “and the Poor Get Prison.” I am sure you are familiar with:
It Takes Money to Make Money
I am sure there are others but somehow these are the ones that have been burned into our minds as seemingly accepted fact for the world we live in. However, there is the old joke:
Q: What is the easiest way to become a millionaire?
A: Start with a billion dollars.
There are many stories of lottery winners who proven themselves extremely efficient reverting back to their personal mean over an incredibly short period of time. There are also the stories you sometimes hear of sports heroes or other celebrities facing bankruptcies after earning incredible amounts of money during the highlight of their careers. Past this single life time feat we have the sayings across many cultures that wealth does not survive multiple generations.
English: Shirtsleeves to shirtsleeves in three generations
Britain: Clogs to clogs in three generations
Chinese: 富不过三代 (fu bu guo san dai) — Wealth does not pass three generations
Italian: Dalle stalle alle stelle alle stalle — From stables to stars to stables
Spanish: Quien no lo tiene, lo hace; y quien lo tiene, lo deshace — He who doesn’t have it, makes it and he who has it, wastes it
Japanese: 三`代目が家を潰す’ — The third generation ruins the house
So which is it? The rich always get richer or the rich eventually lose their fortune? Perhaps it is not as simple as that but it is something to think about no matter which side of the wealth fence you are currently resting on. Also, when looking from the less wealthy side of the fence it is important to remember the people on the wealthy side most likely started on the poor side. Wealth, to some degree, has become a badge of dishonor that ironically most people dream of. It has bcome totally acceptable for the many to pump countless dollars into a lottery system hoping to give it to one. Yet, it is somehow unacceptable when someone builds a business from nothing and in the process becoming wealthy. They are instead chastised for not giving it to the many in the form of taxation or other forced distribution.
The President made this somewhat controversial comment some time ago:
There are a lot of wealthy, successful Americans who agree with me — because they want to give something back. They know they didn’t — look, if you’ve been successful, you didn’t get there on your own. You didn’t get there on your own. I’m always struck by people who think, well, it must be because I was just so smart. There are a lot of smart people out there. It must be because I worked harder than everybody else. Let me tell you something — there are a whole bunch of hardworking people out there.
The problem for me is that it seems to presuppose a couple of things:
That wealthy people somehow stop other people from becoming wealthy. That there is somehow a limit to how many wealthy people there can be.
That wealthy, successful Americans somehow were always that way from birth.
That getting help is bad, or otherwise needs to be flattened out where everyone is rewarded equally.
That wealthy people cannot find a way to give back.
Giving back is what wealthy people do. Chuck Feeney (The Billionaire Who Wasn’t: How Chuck Feeney Secretly Made and Gave Away a Fortune) took tax savings to extremes just so he could die broke by leaving countless anonymous landmarks across the world for future generations to build on. Bill Gates has used the The Giving Pledge to ensure a better use of funds than just finding a way back to shirtsleeves. Then, if all else fails, many, many, many people will be employed getting that third generation reluctantly back into their shirtsleeves.
Of course this does not count the vast majority of the would be rich that end up in the graveyard of business when they are not successful. Yes, there are a “whole bunch of hardworking people out there.” When that hardwork and savings goes into executing ideas and turning them into reality it is not uncommon to literally have everything at risk. Unlike the lottery ticket you purchase at the local 7-Eleven, that produce winnings without controversy, the entrepreneurial lottery needs to have an all in bet. Amazingly the result usually rests on an inordinate amount of luck in addition to the hardwork as well.
Steve Jobs put almost everything he gained from his first run at Apple into Pixar before there was even a hint of it being in the feature animation business never mind producing a block buster film. If you read “The Snowball: Warren Buffett and the Business of Life” you will get to know the moments in time where luck decided the future of his investment career. When Elon Musk was asked, “What is the secret to being a great entrepreneur?” His answer was, “A high tolerance for pain,” as he thought about the 2008 time frame when both SpaceX and Tesla were about to miss payroll on top of going through a personal divorce process. In the early 1990s my own family’s business was on the fast track to bankruptcy.
My examples focus on people that have built businesses and thus do not rely solely on ‘realized income.’ Not that you cannot get rich on realized income alone but the challenges are far different in nature and lie outside of the scope I am looking to dig into here.
Which lottery ticket you want to buy is a personal choice. Let’s keep it that way, including the choice to not enter the lottery at all.
I personally think not. Yes, it makes good news. The occupy Wall St. thing was indeed a thing. The bad 1% of the so called “rich” 1% (for those doing real math ‘1%’ is actually 0.01%) make up 99% of that news — for the 80/20 rule on that one. To make matters a little more ironic the people in the United States who actively complain about being in the 99% are, in all factual terms, really already in the 1% if you look at it from a world wide perspective. For the most part, however, the money is a side effect of what I refer to in my mind as “being plugged in.” It is a concept that works for both the local and global levels. First, let’s talk about the global concept…
My father passed away a little more than 20 years ago and if my some miracle he were to be resurrected today he would be walking around in dumbfounded amazement for probably months just trying to take in all of the science fiction around him. Flat TVs (where did that tube go?), GPS (something can really tell you where you are on the planet?), seeing just about anything you want on “TV” without an antenna — or even a subscription to cable, looking up just about anything on any subject or anyone right from your phone, oh, and that phone…they too have changed a bit over that time period as well. The list would go on far further than I would be able to create for, as that frog being killed in the water being brought to a slow boil, I lived through that change on an incremental basis.
That change, however, is the opportunity and it is coming far faster and stronger than it has over the 20 years that have past. As Peter Diamandis says “Want to be a Billionaire? Solve a Billion-Person problem.” Peter even went as far to co-found an institution that centers around the idea of accessing this opportunity. Singularity University’s mission is to educate, inspire and empower leaders to apply exponential technologies to address humanity’s grand challenges.
I have to laugh at some of the people around me who say they don’t do Facebook, Twitter, etc, because to me what they are really saying is they want to stay where they are and let the world change around them. Not that you must have a Facebook account but rather you need to know the context of what those services are providing and what is possible going forward. You need to be plugged in. Trying to sell something to a target range of people and don’t know what a Facebook “dark post” is? Then you already lost the game.
Is being unplugged an option? Of course it is. For some people it is the option that will make them the happiest. The real equation that every person needs to solve is:
Q: Am I complaining about my personal situation and my ability to provide, or otherwise deliver fulfillment, to myself and those who rely on me?
If the answer is “Yes”, then you need to get plugged in. If the answer is “No”, then don’t worry, be happy. Fortunately, for any answering “Yes” to this question it takes very little money to get plugged in. It does, however, take time, and most likely a shift on what you believe is possible. As with any problem based on personal psychology this could indeed be far more difficult to acquire than the money you believe is the missing piece.
More recently I saw this question asked on Quora: “What kind of mentality differentiates billionaires from millionaires, and “ordinary people”?”
The answer Alex Moore gave resonates, at least to some degree, with my thoughts above:
I live and work in Tech/SF/Silicon Valley. I know a few billionaires, a TON of millionaires and even more ordinary folks.
The main thing I see, at least in the tech community is that millionaires tend to be really good at understanding systems of value creation (AKA successful startups) and placing themselves into those systems effectively. They smartly interview for and get great jobs in these companies. They not only do that, but they are smart enough to understand the culture being put into place and they take on the values of that culture and expand those values. They go out and recruit their smart friends and add to the cult. Over laced on this mindset is the idea that the world is a semi-set place. It’s changing, but they view basically their role as something where they can take part in it all. The difference here then between millionaires and billionaires is quit vast.
Billionaires (AKA the founders of these few companies) tend to view the world as a tangibly fungible place. Billionaires see the world and want to move the puzzle pieces entirely around. They look for the faults in the ecosystem and identify massive holes and what could be added to take that value. Then they spend about 10 years maniacally attacking the gap, organizing people, recruiting and generally creating a cult. They create a bible so to speak of values and ideas that bundle together in an appealing way to attract other smart people (aka the future millionaires). The billionaires I know don’t look forward to the weekend. They don’t drink. They work from 5am to midnight everyday including weekends. They don’t socialize with friends, they mix friends and work. It’s all one big chain that supports their vision of the future and tying up the value. This is a different internal programming. It’s admirable. Most folks actually rely on these billionaire groups to get their own jobs.
I think then the last group of “ordinary” folks are simply disconnected from these valuable new parts of the economy. What do you do if you live in Trent, Michigan today? The auto plants around you are closing. It’s tough to be a billionaire potential person in that environment, but 100 years ago in 1912 it was actually possible. Ask the Ford family about this.
So overall, location, timing, industry and proximity can come into play. Tech is what’s happening now, but other industries happened before. 1950s Texas oil well drilling, 1910s autos Michigan, 2010s Silicon Valley. There is much to discuss, but the mindset pieces are the key and may be universal.
Now let’s talk about the local concept that is about money… There is a story that many people do not want to talk about — especially in the United States. That is, how much we spend on things we have either justified ‘needing’ or otherwise spend simply because the money is somehow available. The book The Millionaire Next Door: The Surprising Secrets of America’s Wealthy is a recommended read and defines an Under Accumulator of Wealth (UAW) as an individual who has a low net wealth compared to their income. A person is an “Under Accumulator of Wealth” if their net worth is less than the product of their age and one tenth of their realized pretax income. Take for example a 50-year-old earning $50,000, according to the formula they should have (50*50,000*10%) or about $250,000 in net worth. If their net worth is lower, they are an “Under Accumulator.”
An answer that came back from Angel Sanchez was as follows:
Look, I’m not going to tell you I’m extremely successful, and many will probably think that what I’m going to describe comes with age.
I began to work at 13 years old (in an official 40 hour job during the summer) and held various other jobs in weekends. After receiving my paychecks I would go straight to the mall and waste all of my money on clothes, the latest gadgets, shoes, sunglasses, and things I basically did not need. I had Abercrombie and Fitch jackets, jeans and shirts bought retail at the mall. I had a couple of pairs of Lacoste shoes, and pretty much everything I thought would make me look cool.
What did wasting all of my money on pointless materialistic things do for me? Absolutely nothing.
My success story, after reading “Rich Dad Poor Dad”, was to pay close attention on what I was spending my money on. People look at me today and say I’m “cheap” because I don’t have the latest iPhone, tablet or computer; wear simple clothes (I apply what Steve Jobs did and wear 1 style shirt always to keep my life simple); don’t like to go out to movies, or eat out a lot.
Yes, I’m no longer “cool”, but I’m no longer broke either. I read somewhere that 50% of Americans couldn’t come up with $2,000 in case of an emergency. Now, I don’t know if that figure is true or not, but I’m glad to say that I’m not part of that group. I’m also glad to say that, even though I’m only 21, I have a decent savings account, retirement account, life insurance plan, investment accounts and diversified investments in gold, silver and palladium.
Like I said, I’m not rich but I consider the knowledge I gained after reading “Rich Dad Poor Dad” a success because wasting hard earned money was not going to lead me anywhere anytime soon.
Be it being plugged in, controlling spending, or more likely some combination of the two, the bottom line is they are not degrees you suddenly graduate to and can then relax within. They are not special clubs you need to pass tests to join or otherwise have accumulated status to become a part of. No, instead, like maintaining health, they are life styles you either have or do not. It is a personal choice no one can ever stop you from making and at the same time it isn’t easy.
“It’s supposed to be hard. If it were easy, everyone would do it.”
― Tom Hanks in A League of Their Own
Perhaps another separating factor at the local level is personal integrity. Let’s leave the philosophical right and wrong out and focus, instead, on congruency. The simple act of actually doing what you say you are going to do places one in the 1%. Think of the elation you have when someone actually calls you back on an important issue within a specified time frame. That thrill is there because it has become a rare quality that has value — a lot of value. The ability to execute is everything…and perhaps even more.
I touched on the subject of the value of execution as opposed to simply ideas in the story “Stupid Human Tricks!” However, recently I had another add on thought to this already strong belief when I was listening to Chris Sacca being interviewed by Tim Ferriss: “Chris Sacca on Being Different and Making Billions”
I don’t having any fear in disclosing my secrets to B teamers because they are not going to end up completing with me. — Chris Sacca
What does this mean? Forget C players — they are not even in the game. B players are not important because even if you lay the playbook on them they cannot fake being A players.
Fine, but it actually goes beyond that…which is the point I never really thought about before. If I teach you my secrets you are naturally going to be an ally of mine going forward. We will end up doing deals together and you will actually enhance my own ability to execute.
The troublesome fact of life, however, is I am not sure there is a road to upgrade to the next level. You might be an A player stuck in a B place (most likely not a C place) and need a nudge to get out but I wonder if there is really a way to otherwise upgrade.
I think the closest memory of formal education doing a good job for myself was at MIT. Organic chemistry, which I thankfully never had the misfortune to experience, was notorious for memorization. Whereas, for nearly every other course, when exam time came around you could bring your notes, books, and calculators because that was not what you were going to be graded on. What you were graded on was how well you can apply the material to new problems. You had no choice but to be an A player or be selected out of the college itself.
With the pace of the world today is it has become almost impossible for formal education to keep up with current needs. Acquiring the ability to learn on your own is no longer an option. Thinking you can do anything entirely by yourself is becoming less of an option as well. Being an A player is a moving target and the only way to stay there is being surrounded by other A players.
Another powerful force in the world that keeps growing and tries to wrap its long tendrils around your neck is distraction. Some times it can be confused with a lack of attention to detail…for example: I send an email to someone saying all I need to get this done for you is a, b, and c. The reply I get back is the answer to ‘a’ but no mention or action on b and c. Did you read it? Did you not care? Did you not have the time? No, it was not some long ass email I sent you that I do not expect anyone to read but a rather “to the point” attempt at making your job easier and all I get back is a brain itch. A players work at the edge of their limits but never allow themselves to fall off the cliff into mediocrity.
The Most Important Word
If you find yourself lost to those around you who seem to be moving too fast and have no desire to catch up… If you find yourself being asked more than once for things that are key in getting the goals in front of you done… If you hold your ideas and methods close in fear of others stealing from you…and you want to be part of the “A Team,” then my advice to you is to find a way to be happy as a B or C player because it simply is not going to happen.
I made an interesting observation the other day when talking to someone who was looking at sending their first child to a private, “independent,” school. They said they only really have two options in their local area and if one, in particular, proves out on a financial stability check then that would be their choice.
Having gone through the process before I highly recommended visiting other schools that are outside of their implied commuting radius of comfort. It was a valuable experience to my that I still remember quite well even some 15 years plus later. Having never been in the private school system before it gave me a wonderful view of the landscape to a ecosystem I would be committing almost two decades to going forward.
I specifically said to them that I did not expect it to change their perspective of only having ‘two choices’ but it would expand their understanding, as it did for me, as to where their decision fit into the larger options the world around them has to offer.
Well… they looked at me like I had nine heads. If they only had two choices why would they ever look elsewhere?
Thinking about this conversation in the weeks that followed I realized it is how my brain works on nearly all matters. I want to know what is outside my reach. I want to know the options that I perceive to be below my standards as well. I want to know the spectrum of possibilities to be better connected, informed, and able to expand to the ‘next level’ if life ever opens its doors of opportunity to allow me to do so. On top of this I always get a further appreciation of the abilities and connections I have today.
The brain is an expert filtering machine. Train it to filter things into importance. Do not cheat yourself out opportunities that come your way because preconceived misconceptions of what you think is important. You just might find that some of those things you marked as out of reach with your brain, but took into your heart with complete and glorious ignorance, become closer over time. Closer to the point where, if you still chose to do so, you can make them real for your brain as well.
