A Random Small Business Story
She asked the stranger she’d met ten minutes before: What do you think I should do?
Back in the mid 2010’s, when I was handling sales for Origami, I’d occasionally make house calls to local businesses. Not for sales; these businesses had already agreed to sign up for Origami’s monthly bookkeeping and accounting service. But they were behind on their bookkeeping and tax filings so we had to deal with that first. To move things along, I would drive to their location to pick up their records (bank and credit card statements, invoices, bills, receipts, etc.) and transport them back to our office so our staff could get started on their catch up work. While I was there, I’d take time to chat with our new clients. Small business owners like to talk about their businesses, but they don’t always have someone in their lives who’s interested enough to listen.
Some of these new clients would try to work out why they fell behind, not because I asked (I never asked), but because they were trying to figure it out themselves. These folks would often be contrite and a little embarrassed: “I know I should’ve done this sooner. I’m not sure why I didn’t. I just kept putting it off and putting it off… and then I was so far behind, I couldn’t even think about it. Well, thank God you guys are going to get me back on track. The CRA has me on a deadline…”
Some in this group would have more than a few years of catch up work. As they handed over boxes and bags of disorganized paperwork, they’d guiltily ask if I’d ever seen such a mess — worried, I suppose, that I could see, everybody could see, that they were not just a sinner but the very worst of sinners. I’d reassure them that their situation wasn’t unusual, that people fall behind more often than they might think, and that people fall behind for all sorts of reasons, not all of which are in their control — running a small business isn’t easy. Not to worry. Our team had been through this hundreds of times before. We’d sort things out and get them through it.
And we almost always did. The rare exceptions being when the unpaid tax reckoning was deemed so severe by the client that he, she, or they, rather than deal with it, closed shop, ghosted us, and disappeared. They’d go missing in action, as we took to calling it, leaving us with memories, boxes of old records, a trail of unanswered emails, text messages, and voicemails — and, at times, unpaid bills. We would’ve been happy to return the boxes at that stage but, despite persistent effort on our end, we never heard from them, not even a postcard from Aruba. Which would’ve been a thrill — knowing they’d escaped the confines of an old life and emerged free into a new, sunnier one — in a Shawshank Redemption (or Body Heat) kind of way.
On one such visit, the client I was seeing — he owned a small pub — told me that he’d been talking about us, Origami, with his next door neighbor. Hearing the good things he had to say, she’d asked if I could drop by and see her when I was done — if I had the time that is. I thanked him for the introduction. Customer referrals are the best, highest converting leads. When I finished loading our client’s boxes into the company car, I came back to the strip mall with a light, confident spring in my step. I glanced up at the sign above the entrance and entered the neighbor’s shop.
The door opened into a non-specific retail store. I say non-specific because, looking around, I couldn’t specifically tell who the target customer was. There was no one in the store browsing to provide hints. The merchandise (clothing and accessories with a generous dash of knickknacks) didn’t fit a thought through plan to appeal to an identifiable demographic or customer segment. And everything had a forlorn, passed over look. The pieces seemed to have arrived from all over — converging like the spirits when the first night falls in Spirited Away — and, having arrived, they determined to never leave.
I sat with the owner, a not young, not old woman, quirkily dressed, polite and shy. There wasn’t much small talk. She was thinking of changing her accountant. I asked if there was any particular reason. She felt he never made her a priority; she was the permanent last item on his list. She spoke to him only at her year end. His firm did the bookkeeping, they asked some questions, and then he did and filed her taxes. He was no help when it came to understanding her business.
I told her about our service and our flat fee monthly model. She liked the idea. She asked what the service would cost a business like hers. I quoted our usual (at the time) retailer fee but added that we adjust for sales volume. She told me her sales and asked what the adjustment would be. I asked if she was just starting out. No, she’d been in business for the past four years. That didn’t seem right. I asked if I’d heard her sales correctly. I had. The number she gave me was untenably low.
I asked if she had employees. No, it was just her. Would you mind telling me your rent? A number that practically soaked up the trickle of sales coming in. Are you paying yourself? Yes. Below the poverty line. For the full four years? Around that, less recently. How is that possible?
She showed me her most recent financial statements. The only reason the business wasn’t running at a loss was because she was paying herself next to nothing. There was money invested in the business, showing as a shareholder loan, but it was almost all tied up in inventory — inventory that, as noted, had been on the racks for a long while. She was the sole shareholder. She had come into an inheritance. She’d used that money to start the store. The start was OK, but the store never took off. She tried her best. The inheritance money was gone. She didn’t really have anything else, she said.
She looked past me, out the store window, at the familiar street, the passing late afternoon traffic, the early dimming light of our northern winter. I imagined her tracing out her whole life, every step from there to here. Then she asked me what she should do. She asked, just like that, this not young, not old, quirkily dressed woman; she asked the stranger she’d met ten minutes before: What do you think I should do?
David Byrne sings/raps a famous line from Once In a Lifetime: And you may ask yourself, "Well, how did I get here?" A couple of possibilities. First, life fits a narrative: this happened and, because of it, later this happened. The past steps you’ve taken form a clear path leading up to now and you. Second, life is a random walk: with no plan or purpose, by some lucky or unlucky influence, you end up here, at the end of one sample path among many the fates could have led you down. The truth for most of us is somewhere in between these two extremes: some things we intended and other things, good or bad, just happened.
In probability textbooks, a traditional example of a random walk involves a gambler playing the following simple game in a casino. He arrives with a bankroll y. In each turn of the game, he wins one unit with probability p and loses one unit otherwise. He wins the game (or the casino calls it quits) if he can grow his bankroll to z, a number greater than y, and he loses the game if his bankroll drops to 0.
What affects the gambler’s odds of winning this game? Well, p, his probability of winning a turn, obviously. With equal payouts for wins and losses, he needs a run with more wins than losses, and he’s more likely to see that run with better odds of winning an individual turn. Also his starting bankroll: the closer he starts to the goal, the more likely he is to win, and the closer he starts to 0, the more likely he is to lose.
With some adjustments, I can see the game of business in terms of this simple casino game. To start, both games involve the element of chance. Many would object that the casino game doesn’t allow for any skill at all whereas business surely does. Winners and losers aren’t drawn from a hat. The cynical would respond that the skill in business is mainly picking the right game to play, that is, one with a high probability of success for each turn. I quote Warren Buffett: “I've said many times that when a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.”1 But, yes, of course, business, even small business, isn’t entirely a game of chance; skill in any of the main areas (sales, marketing, operations, finance, research & development, etc.) will coax the probability of success with any given move in the player’s favor, just as lack of skill will push the probability the other way. Luck plays a big role, but you also make your own luck.
The second analogy is where the gambler starts the game with an initial bankroll, entrepreneurs start businesses with a set of resources. A gambler with a larger bankroll can absorb unlucky early losses, stay in the game, and still come out with a win. Similarly, entrepreneurs with more resources (social, human, and financial capital) have obvious advantages. In addition to being more able to absorb bad breaks and bad decisions, they’re not as limited by the rules of the game; they can explore a wider range of moves and find the ones that shift the odds in their favor, essentially changing the game they’re playing as they play it. Early in Google’s history, when they were searching for some organizing principle to manage work in the company, John Doerr dropped by to teach the team about OKR’s. According to a quote in Probability and Random Processes, John Maynard Keynes went so far as to say: “Millionaires should always gamble, poor men never.” You can see his logic. Let’s say a small business has a low probability of success but, when it succeeds, it offers a very high payout. This is a tough game to play if you have limited resources, because you’re effectively risking it all in that one play, and, if you lose, you lose everything. The entrepreneur with abundant resources can survive setbacks or complete failure in any one venture as long as he sizes his bets reasonably. This gives him more chances to find winners in this low probability of success, high payout game.
Finally, each game plays out in multiple moves, each of which affects the player’s position and prospects for winning. In the casino game, the moves are independent, the stakes are constant, and the probability of a positive outcome in an individual move stays the same throughout. In business, the game tends to evolve as it’s being played, at least for small business owners who stay alert and think through what’s happening. These owners make moves in search of profit. If they don’t find it, they’ll change their strategy. They’ll wager less on moves with inadequate returns. They’ll give up on moves that don’t work. And when they do find profitable moves that increase their resources, they’ll bring more of those resources to play to fully exploit these opportunities. Effectively beating the casino. The nice thing when this happens, when odds shift heavily in the player’s favor, is that there is no upper limit to the business game. The casino can’t call game over. Winning in business can increase the player’s resources indefinitely.
So business is and isn’t a game of chance. It’s less so for those with the skill and resources to play it. On the whole, they choose better opportunities, and they’re more able to exploit the opportunities that they choose. It’s more so for those who lack the skill and resources to play it. For this group, the game isn’t just random, it offers terrible, terrible odds.
I don’t remember what exactly I told the retailer. It was something about what I would do if I were in her situation. I took that approach maybe to help her see her situation from the outside, to see that, like falling years behind on filing your taxes, these things happen, it’s not that unusual, let’s just deal with it. I’d like to think I was calm and reasonable as I laid it out. “I would first acknowledge that the current situation can’t continue. Things have to change. I mean if you go into business, you want to get something out of it, right? And we’re not close to that happening here, right? So I’d ask myself: What have I learned? What does success look like? What is my fair market compensation? What amount of profit allows me to pay myself that compensation and reinvest in the business? How much in sales does that translate to? Do I have a viable plan for turning things around and do I have the resources and energy to carry out that plan? And, if I don’t have a plan or the resources or the energy to carry it out, I’d close the business. Because this can’t continue. It just can’t. I’m getting nowhere and I’m falling too far behind.” Something like that, but less wordy.
But I really should have told her “I think you should close the shop. It’s been long enough. You tried it. You gave it your best. It didn’t work out. It’s one chapter in your life.” And, borrowing a line from that song, the rest is still unwritten. Objectively, she made a mistake. She had limited resources and she staked them on a low probability of success venture. And she ended up worse off for it. The outcome was predictable, only somewhat bad luck, if at all. That sounds unkind. But it was a losing game. As per Keynes, with much to lose, she never should have played. Particularly if she wasn’t confident in her business skills.
It’s hard to end on such a final note though. We’re punished for mistakes — yes and especially if we don’t have the resources to bear the costs — but we also learn from them. Or, at least, like most of our way behind on their taxes clients, we survive them. And then we take the next step. A lucky one maybe that takes us in a better direction; or maybe we make our own luck. The game doesn’t have to end. I think so. I have to. My sample path isn’t finished yet.
Cunningham, Lawrence A.; Buffett, Warren E.. The Essays of Warren Buffett: Lessons for Corporate America, Fifth Edition (p. 120). Carolina Academic Press. Kindle Edition.