You can learn on the job after failing, but if you want to beat the odds?
Part 6 of our special series on Essential Leadership, Ray Zinn discusses the long odds of entrepreneurial success, and the for pillars that can building a strong foundations for beating the odds.
Rob Artigo: Welcome to everyone listening to this podcast. It’s great to have Ray with me again to chat a little bit about Essential Leadership. Ray, you’ve written that trying to start a company is like playing Russian roulette with five of six chambers loaded. I don’t like the odds there. And so statistics, you’ve said show that nine out of 10 startups fail within the first three years. Why is that?
Ray Zinn: Well, because they lack the training and the understanding of what it takes to run a company. So it’s kind of like somebody who wants to go into medicine or into surgery and hasn’t studied how to do it or practice even how to be a good surgeon.
Rob Artigo: Yeah, you can’t just say that, I slept at a Holiday Inn last night and that was enough. And I think that some people get into businesses and basically that’s all they’ve done. Your philosophy though, of course, is that, to beat those odds, which are so bad, that you really need to start with your education and take four college classes. You say everyone needs to take Basic Accounting, Financial and Managerial Accounting, Business Law and Basic Economics. Why do you think those are the four?
Ray Zinn: Well, because that’s the essentials of understanding how to run a company. There’s a thing called the income statement and a balance sheet that every company has to understand. And so Basic Accounting and Financial Managerial Accounting, those are two separate classes, help teach you how to learn and how to interpret an income statement and a balance sheet. An income statement of course is the statement that talks about your earnings, what your revenues were, what your expenses are and what income you received from that particular effort. So, that’s the income statement then that flows into the balance sheet. Balance sheet talks about your assets and liabilities and your net worth and they flow together. And so in understanding how they work, how they flow together, how to do a cash flow statement is all part of Basic Accounting and Financial Managerial Accounting.
Ray Zinn: And so, if you don’t know how to do cash flow the [inaudible] and the [inaudible], as they say, you’re just not going to be able to read and interpret how your business is doing. That’s the purpose of taking the classes, Basic Accounting and Financial and Managerial Accounting. And then the third one was Business Law. We live in a very litigious society, and there’s no doubt in my mind that sometime during your running the company, you’re going to run into some legal problems. Contract law, just certain other aspects of how to run a business from a legal point of view are all part of being successful in running your company. And then Basic Economics is understanding supply and demand. I mean, right now the country is going through a severe inflation, demand is far out stripping supply.
Ray Zinn: And we got ahead of ourselves. We actually increased the demand before we increased the supply, and that causes severe inflation problems. And the converse is true if your supply is excessive your demand then prices fall and you have deflation. And so just understanding basic economics as they say, supply and demand theory, then that helps you also understand how to look forward in running your company and running Micrel for the 37 years that I ran it, I went through eight downturns. Just being able to forecast those downturns, which really helped us out tremendously, allowed us to get ready, prepared for that down cycle. And that’s key to, again, like we talked about, playing Russian roulette with five out six chambers loaded, you are going to have a downturn.
Ray Zinn: We’re potentially facing a downturn in our country right now, just because inflation is now so rampant. And demand is out stripping supply. The last thing we want to do is increase more demand because all you’re going to do is just keep hammering the supply side. And we have delivery problems and other things that are plaguing us because shortages are more the rule than having excess supply.
Rob Artigo: Well, I think that we can go back to each one of these subjects, college subjects individually and break them down a little bit more. It might seem a little bit repetitive, but we’ll just underscore how important those things are. But let’s go back for a second, just so I could look at, I see examples of young people who want to be entrepreneurs, and they have lots of examples of successful business owners out there who boast either, that they dropped out of college or didn’t attend college at all. Does that make you cringe when you see that? You see people skipping this step, which is just these basic four classes.
Ray Zinn: Well, remember we talked about nine out of 10 companies fail in the first three years and that’s because they just lack that understanding. Now it doesn’t mean that you can’t beat the odds, but why play with that Russian roulette with five of the chambers loaded? Sure. You could end up on that one cycle on that chamber that was not loaded. Tell that to Alex Baldwin. Accidents do happen. And so if you want to play the game of running a company and you’re just going to say, I’m going to bet the farm I’m going chance it, well fine. Sure. There are people who are able to succeed without having the basic understanding of those principles. Some people of course, hire their team and some members of their team understand it. But again, when you start your company, you don’t have all that talent. You don’t have the economist, the lawyer and the accountant and so forth. And even if you did, if you don’t understand what they’re saying or how they’re saying it, then of course you, as a leader are going to falter. And that’s the challenge. That’s the problem.
Rob Artigo: Financial and Managerial Accounting will end up being perhaps two separate classes. And now some of those people out there might roll their eyes and go, oh my God, I don’t want to do Financial and Managerial Accounting, but you hit on a very important point. Understanding the language of accounting is important. It’s as important as any other aspects of accounting.
Ray Zinn: Right. Well, Basic Accounting and Financial and Managerial Accounting are two separate classes. So Financial Managerial Accounting are the study of balance sheet, income statements. Course studies of companies, then how they run their company. And so, it’s more of a case study type class, where Basic Accounting is debits and credits. And just doing transactional accounting. Because you really can’t do well with Financial Managerial Accounting until you have Basic Accounting. So you take it first, then you take Financial and Managerial Accounting. And it’s just like, if you don’t understand it, looking at it, it won’t make any sense. And then you won’t be able to do cash flow, having an understanding and the ability to do a funds flow statement or cash flow is extremely important in running your company.
Rob Artigo: Business Law, you mentioned the fact that just the simple act of doing business has pitfalls when it comes to potential legal ramifications. And you said, contract law, and there’s all kinds of disputes that can come up here. What kinds of things are we expected to learn in a Business Law class?
Ray Zinn: When you think of Tort law or just Constitutional Law, there are fundamental points of law that you learn in Business Law that help you understand when you do run into a legal problem and of course you want to avoid them. And that’s one advantage you have if you take the class of business law. That basic understanding will help you stay out of trouble, because that’s the cheapest thing. Any time you ever get into a legal battle it’s just astronomically expensive. And so, you want to avoid at all costs, you want to avoid a legal dispute or legal problems. And generally this comes up in contract law. Either, you didn’t understand the contract, you didn’t administer the contract successfully. Even though you’ve created a contract and it’s written, and it’s in your file folder, when you operate your company if you have a basic understanding of contract law, you won’t make the mistakes without having to constantly drag out that document and keep reading through it.
Ray Zinn: And okay, now what about this? What about that? I just talked to a friend yesterday who signed an agreement to go in business with a company on a golf course and he didn’t read the fine print because the contract in so many words said that the primary shareholder could ask you to leave at any time for any reason. And so, he was so excited about getting into that business that he didn’t read the fine print, as they say. And once helped out, got the business running, then the primary shareholder said, I don’t want you around anymore. And he lost a lot of money on that one. And you’ve probably ran into those experiences yourself where, if you don’t understand what you’re doing, understand contract law you can lose a lot of money.
Rob Artigo: Yeah. And, like you said, it can come down to just one line. Everything could be perfect through there. And even an experienced contract lawyer could miss one line if they’re going about their business haphazardly. But you go in through that contract and you read it and there’s that one little thing in there that you missed. And that one little thing in there is what undos you later on, because you just didn’t treat the contract seriously. And I think that you take this class, and one of the things you walk away from is a little tinge of fear that should be there. Because you should fear doing things haphazardly, particularly when it comes to contract law.
Ray Zinn: And that’s the key here. If you understand basic law, they flow together. They make sense. They’re logical. And so understanding how law works, you can apply it, even though you may not know every detail, if you see a lawyer’s back bookcase, it’s like hundreds and hundreds of books stacked up there. And there’s no way you’re going to be able to study that much. But if you understand the basic principles of law, that will help you then, when you formulate your contract or you operate your business, you’ll stay clean.
Rob Artigo: Yeah. And like I said, sometimes you just find that one thing and your example of the guy with the golf course, by now, there’s just that one stipulation in there that says, you could have your ties severed any day without course. And then you don’t have any way to, are you going to try to Sue them? You agreed to it. And that’s the biggest problem, understanding that when you put something on paper and you sign it, and even verbal contracts can go that direction, if you’re not careful about what you’re agreeing to.
Ray Zinn: I asked him if he saw it and he said, yeah, he saw it, but it didn’t make any sense to him that the guy would be able to just say, hey, don’t want you around anymore. And he just keeps your money and tells you to leave. So you got to read the fine print. If you don’t, you’re going to end up in trouble.
Rob Artigo: Yeah. And the ramifications of that fine print, whatever those ramifications are. And in the past on these leadership podcasts, we talked about being able to look at the various outcomes and come up with, okay, what are the things that could go wrong? And if you are asking those kinds of questions for a line like that, you ask the right questions to the right person, the contract lawyer, hopefully, and the contract lawyer can just tell you, these are the possible ramifications of this. And if you’re not comfortable with it, have them change it. Because you can change contracts and people will say they either like it or they don’t like the change, but you can’t walk into a situation with potentially losing millions, and that properly vetting the contract.
Ray Zinn: I had a situation come up where I was buying a large asset and my lawyer was looking over the contract and said, you don’t want to be dealing with this, as the contract falters, you don’t want to be dealing with California law. You want to deal it with Montana law. And so because it is more difficult for you if you have to go to California and take care of that legal matter in California versus in your own state. So he said, here, let’s move it to Montana. And he did that and that worked out great.
Rob Artigo: And it goes to where people, you get advice and where to incorporate to where is your corporation? Where’s your corporation based and that sort of thing. We’ve been discussing Essential Leadership in this Tough Things First series, Essential Leadership. As always, you can reach out to Ray Zinn with your questions at toughthingsfirst.com. Continue your education and this conversation with all of the podcast, blogs and links to information about the book, Tough Things First and Ray’s other books, the Zen of Zinn and the new Zen of Zinn 2. These are collections of writings on interrelated topics of entrepreneurship, leadership, management, discipline and we’ve discussed some of those here in this series. So join us next time for episode seven in this series, essential Leadership. Thanks again, Ray.
Ray Zinn: Hey Rob, we have now Zen of Zinn 3, it’ll come out about probably mid summer. And so we actually have the third book of Zen of Zinn coming out. So again, we’ll keep it rolling and hopefully our listeners will pick up our books. So again, thanks Rob.
Rob Artigo: Yeah. Awesome. Congratulations too.