Today, our guest is Mike Konrad, who knows what it takes to create a business that will last and provide benefits to all stakeholders for years. Learn what it takes to create a business that is personally and economically sustainable. You'll find out why leading with values is the only way to create a business that is one you're proud to own.

Mike began his career in the electronic assembly equipment industry in 1985. Mike founded Aqueous Technologies in 1992 in response to the Montreal Protocol and the resulting international treaty banning most popular cleaning/defluxing solvents.

Mike was recently elected to the SMTA Global Board of Directors where he chairs the SMTA Training Committee and is also a member of the SMTA Strategic Development Committee. Mike is also Vice President of Technical Programs for the Los Angeles / Orange County SMTA Chapter.

Transcript

Narrator:        Welcome to Cracking the Cash Flow Code where you'll learn what it takes to create enough cash to fill the four buckets of profit. You'll learn what it takes to have enough cash for a great lifestyle, have enough cash for when emergency strikes, fully fund a growth program, and fund your retirement program. When you do this, you will have a sale‑ready company that will allow you to keep or sell your business. This allows you to do what you want with your business, when you want, in the way you want.

In Cracking the Cash Flow Code, we focus on the four areas of business that let you take your successful business and make it economically and personally sustainable. Your host, Josh Patrick, is going to help us through finding great thought leaders as well as providing insights he's learned through his 40 years of owning, running, planning, and thinking about what it takes to make a successful business sustainable and allow you to be free of cash flow worries.

Josh Patrick:   Hey, how are you today? This is Josh Patrick and you're at Cracking the Cash Flow Code. And my guest today is Mike Konrad. Mike, you can find him at mikekonrad.com and that's Konrad with a K and not a C like I put in when I sent him an email last night. And I apologize for that. Mike is a really interesting guy. And I want to bring him on one second. I’ve just got to say it's rare that I have a business owner - a private business owner come on the show who has apparently done everything right, but I'll guarantee he didn't do everything right. He made lots of mistakes along the way.

But here's where we're going to start this conversation, the skills it takes to start a business are different than the skills it takes to run a business. And Mike has some learning about that. And that's where we'll start. So, I'll bring him on.

Hey, Mike. How are you today?

Mike:               I'm well. Thanks for inviting me on the show. I really appreciate it.

Josh:                My pleasure.

So, let's start there. And I think that's kind of an interesting thing to do is you started your business from scratch. You had zero employees. Today, you have 30 employees. You used to have 60 employees but, at 30 employees, you're a much more successful company. So, what kind of transitions did you have to go through to start the company to make the company into one that you can do become operationally irrelevant at?

Mike:               Yeah. I never thought my ego would allow me to want to be irrelevant but that's a big win.

You know, when I started the company, I didn't have a desire to start a company. I was not one of these people born to run a company. I'm not a natural entrepreneur. I started the company because I really had this vision and this passion for a particular technology that I tried to get my current employer to back and they weren't interested. So, I figured I've got to do it. If it's a really good idea, it's up to me, right?

So, I was filled with just arrogance, and ego, and passion, and a poor assessment of risk as it turns out. And that's pretty much-- but I really had a lot of passion for the product. I didn't know how to run a business. I worked at a company that wasn't doing well so I kind of knew how not to run a business. I learned a little bit of negative from them, but I really didn't know how to do it right. But that didn't matter. I didn't think it mattered.

So, I just kind of dove in thinking, you know, borrow money from a bank. And, you know, I wrote a business plan. Of course, you know, all the banks turned me down because it turns out if you need money, you can't get money. And if you have money, they want to loan you more, right? I figured that out the hard way. Anyway, scrapped together through credit cards and family money. Thank God they didn't have caller ID back then because if people saw my name on the phone, they'd probably not answer because they knew what I was after.

I built a product in my garage. And then, eventually, a small building. And then, eventually, I would hire one or two people. Basically, anyone with a pulse, and a willingness to work for what I what I could pay. And then, started surrounding myself with people - this is going to sound bad, but kind of less talented than myself, because I thought I was the, you know, the big King. You know, I thought I was the smartest guy in the universe or, at least, in my little building. And I would hire people less talented than me. Then, I would spend my time watching them.

And, basically, you know, it was a catch‑22. I just ran out of bandwidth. I couldn't do any more than I could do or I could manage other people doing. And, you know, eventually, you start to grow and you get a little bit of success. But then, growth is really a seduction most small businesses can't afford. So, we started running out of money because to grow, it turns out, it takes cash to grow, right? You have to buy more inventory. You have to buy more people. You might need a larger building. You have to scale. And that scale is very expensive.

But I thought growth was the key. Everyone I knew was like, “How fast are you growing? Where are you at today? You know, what was your revenue like last month?” So, I was under a great amount of pressure to grow thinking that we would grow ourselves out of any problem. And, of course, we grew into every problem just trying to grow.

So, you know, you learn. You learn it over the years or you fail, one of the two. And I liken business to like a video game. I'm not a gamer but I know a lot of people who are. And you know, back in the early days, when I was a teenager, I’d play Nintendo, or Atari, or whatever. And what I do remember from video gaming is every level is harder than the level before. So, you've escaped level one with a few lives left. And then, you go to level two and you'd lose another couple lives. And there's new monsters, new trap doors. And it seems like every year in business is like another level of a video game, more challenges. The business gods are throwing more challenges your way. And you either acquire new skills because arrogance, and ego, and naivety, and passion, and poor assessment of risks got you started but they will not sustain you. They will kill your business if you don't shed those attributes.

Josh:                So, Mike, I've got to stop you here just because I have a burning question. And my burning question is, what was the thing that happened in your life that made you learn that you had to do things differently as the business was growing than when you first started?

Mike:               It was the realization that I'm working 18 hours a day. Sometimes I would go in on Monday and not come home till Wednesday night. And we were running out of money. And the business was to the point where I was, quite literally, going through the garbage can in the office looking for envelopes with stamps that weren't properly cancelled - didn't have the cancel on it, so I could cut them out and tape them onto an envelope to mail a brochure out to a customer. That's how desperate I got where our home finances were maxed out. Our credit cards were maxed out. Our bank account was at near zero. And there was no way out of that or at least that I could see. So, I worked with a business consultant. And she told me some things that I thought at first were crazy, absolutely nuts. But when your back is up against the wall, nuts make sense.

Josh:                So, what did she say you thought were nuts that you actually ended up using?

Mike:               When we were trying to get more orders, if we needed more orders than we had before, what do you do? You discount. Put things on sale. And when you put things on sale, you get orders. And then, you lose money. So, ultimately, it didn't do you much good. It's like an energy drink. You know, it'll keep you up a couple more hours but you can't live on energy drinks, right? It’ll kill you.

So, the other thing was that our customers were pulling out these crazy payment terms. You know, net 180, you know, and net 90 and net 45. And even beyond 180 in some cases. And they were big Fortune 50 companies, big aerospace firms, and they were definitely feathers in our cap. And we would accept those orders because we're not going to say no to, you know, a giant in our industry. And we certainly don't want to see that giant go to our competitor if we don't agree to their terms.

So, you know, we made a lot of fear‑based decisions. You know, each decision we made we were afraid of what would happen if we didn't go along with it, if we didn't give the discount, if we didn't extend--

Josh:                So, how did you turn that around because I think a lot of folks in business make a lot of decisions based on fear? I mean, I'm a niche-a-holic and I always tell people to narrow down who they're speaking with. And what I usually hear is, “Well, I can't do that. I'll lose sales.” I mean, to tell you the truth, it takes a lot of courage to say “This is who I serve and everybody else, please stay away.” So, how--

Mike:               I learned--

Josh:                --how did you make those sort of decisions because they're really hard decisions to make?

Mike:               Well, at first, it wasn't comfortable. But we had no choice. Again, back up against the wall. So, you know, the only path out was, “Well, let's try it. It seems crazy but let's-- what do we have to lose? There's nothing left to lose.”

We found out what the most profitable word in sales was, to be candid, and that was no. We started making money saying “no.” And that just is counterintuitive to sales guys, to entrepreneurs because the whole world is a sea of yes’s. You know, at least the possibility of saying yes. And we had to start saying no.

So, we raised our prices. When our sales were low, we raised our prices - counterintuitive. When big Fortune 50 companies would approach us with orders with net 180 terms, we said, “No. These are our terms.” And we started requiring deposits, 50% deposits, which nobody in our industry did at the time. So, we raised our prices. We narrowed up our payment terms. We became very unattractive to customers who would have been wrong for us.

You know, one thing that I'm sure some psychologists could explain this, to me. I don't understand the reasoning but it does make sense. When something's harder to get, it's perceived to be more valuable. So, you know, a $100,000‑product is assumed to be a higher quality product than a $50,000‑product. So, we raised our prices which we did to, you know, improve our bottom line. But what it also did is it raised our prestige. It raised the perceived value of our product. And when we started requiring down payments, cash flow took care of itself.

Josh:                Can I cut in for one second here because you just hit on something that is incredibly important about pricing? It’s that if your prices are too low and you have a great product, I don't care what you do, you're perceived as having a crummy product.

Mike:               That's true.

Josh:                You have to know what your competitors are pricing at. And if the quality of what you do is as good or better than your best competitor, you should be at least as expensive as they are. If not, more expensive. It's a really hard lesson to learn.

You know, before we started, we were talking about why businesses fail. And I said, “Well, they run out of cash.” And the reason they ran out of cash is too many private businesses underprice like you did. And you corrected that which is a really hard decision to make because it is counterintuitive.

So, if you're listening, raise your prices. If you're not hearing no 10% or 15% of the time, raise your prices 5% a month until you start hearing, “No.” That's my free advice for the day.

Mike:               And that is valuable advice. That is extremely valuable advice that I wish I knew earlier. However, I think there's a time, I think, your listeners, other entrepreneurs, other business owners kind of need to cut themselves some slack because there's a sequence where one needs to learn things.

If I knew that 75% of all businesses failed in the first 10 years, statistically, I wouldn't have started a business. So, there's a little bit of ignorance is bliss. And there's a sequence where we need to learn things.

And, you know, if we start off too conservative, we may not make it. If we stay too aggressive, we will not make it. I liken it to the shifting of a manual transmission. And, you know, you can start in first gear. You should start in first gear. That gets you going. Highly leveraged. If things are working really hard, your transmission is running very quickly, your motor is turning a lot of RPMs but you're not going very fast. But that's okay.

And then, eventually, you shift in the second all the way up to fifth or sixth, whatever. You know, you can't start in fifth gear. So, if you knew everything required to start a business, you're kind of starting in fifth gear. You kind of need that no guts, no glory, no pressure, no diamonds kind of mentality to start a business which is not the right mentality to have once your business is running. It'd be like trying to go on the freeway in first gear. Everything will break. So, I think your advice is excellent. And there's a sequence for, you know, implementing that.

Josh:                There is. And the thing that one of my stay--

I had very similar things happen in my foodservice and vending company when I was going through my big growth stage. And my big problem was I didn’t know how to read a cash flow statement. In fact, I don't know many business owners even know what a cash flow statement is much less read it. Usually, when I have a new client, we spend a couple of sessions learning how to read a cash flow statement. If you don't know how to read it, you're going to run out of cash because your profit and loss statement doesn't tell you what's happening to your cash because inventory costs money, employees costs money, receivables costs money, and none of that shows up on your P&L except for employees. Equipment costs money. And my problem was we grew the business at 50% a year for three years. And I had to buy $1.2 million of vending machines. Well, that purchase never showed up in my profit and loss statement and we flat ran out of cash.

Mike:               Yeah. I think the P&L can be kind of a little bit of a seduction because-- I used to look at the P&L. I was, you know, very-- I didn't understand cash flow. You're exactly right. I didn't understand cash flow statements or even balance statements-- or balance sheets.

I looked at the P&L. I looked at two numbers. I looked at revenue and I looked at net. You know, I looked at that. And a P&L will give you a false sense of security. We're making money. There was a point where we were making money when we kind of started correcting some of the sins of the past. But that didn't mean we had any cash. You know, our money was in receivables. Our money was an inventory. And it is an asset. Receivables is an asset that you could borrow against. You know, inventory is an asset that gives your company value but you can't pay the rent and you can't cover payroll with parts and promises that someone will pay, you know. You need actual cash for that.

So, yeah, that was-- you know, when we were running deficits, I was just-- main goal was to show a black number at the bottom rather than a red number at the bottom. You know, that was the main goal. What I didn't realize the importance of cash. And then, once I realized the importance of cash, I started chasing cash the wrong way, you know, toxic cash, basically.

Josh:                So, do you have a banking relationship today for lending?

Mike:               Oh, yeah. Yeah. Yeah. Yeah.

Josh:                So, can you talk about how you learned about how to deal with a bank? Because it’s-- this is another big deal thing that I know almost zero private business owners who have any idea how to do this.

Mike:               Yeah. They are not always your friend. They are kind of a-- not in every case. We have a good relationship with our bank right now. But history has told me that they are sometimes a necessary evil and a little bit of a seduction as well. So, you know, when I first started the business, as I mentioned earlier, I went to several banks. They all turned me down, which they should’ve in hindsight because I had no assets and I had no business experience.

Then, eventually, we got a loan with a major bank and, you know, a small line of credit. Oh, probably, we were in the middle of a big recession. Oh, it was the 2008, the great recession of 2008. I'm standing in a pool in Cabo on vacation, Cabo San Lucas, Mexico. I literally have a cigar in one hand and a cocktail on the other, holding my phone, you know, to my ear. It’s my banker, “Mr. Konrad, we're not renewing your line of credit. We're going to close your line of credit.” “How come?” “Well, you lost money in 2008.” First year ever, we lost money, ever. Even our first year, we made money. At least, on paper. I said, “Well, so did you.”

Anyway, so, I yelled out some expletive about bankers which made everyone in the pool a bit nervous. There’s a crazy guy on the phone swearing at bankers. And I swore I'd never use a bank again. And, of course, you know, that wore off. But I did swear that we would never need a bank again. And that's when we radically changed our terms. That was the epiphany moment, when we radically changed our payment terms. We radically changed our prices. And we radically changed who we wanted to do business with.

And any customer that led with price, if the first question on the phone was, “How much does your stuff cost?” we would not really try hard to get that sale. Let ‘em go to our competitor. It's a Trojan horse. They'll eat them up from the inside.

So, eventually, once we got plenty of cash, we started requiring down payments. So, the more orders we got, it funded the inventory required and the scaling required to build those. It was just self‑funding at that point.

And, you know, at the end of the day, we didn't lose any orders due to the price. And we didn't lose any orders due to payment terms. We got a lot of resistance, but we didn't lose any. We held our ground which was scary.

And that allowed us to eventually go to another big bank. And now we have a line of credit. A nice line of credit which is zero. You know, we pay a fee every year to have that line of credit because they're not making money on us on interest. So, we don't mind paying the fee. But it's there as a safety net because who knows?

Josh:                So, are you using a money [inaudible 00:17:14] bank or a community bank?

Mike:               No. We're using a big bank. We're using Citi. CitiBank is our bank.

Josh:                Okay. Pretty good.

Mike:               Wells Fargo is the one that said bye bye to us and we went to Citi. But at the time we were coming out of a recession, Citi was looking for relationships with small business-- small to medium sized businesses and that's what we were at that time. So, they kind of sought us out which was unusual. I don't know if they're still looking for those types of businesses today. They keep changing their perfect demographic. So, who knows? But--

Josh:                Yeah. I actually recommend that businesses of your size use a community bank--

Mike:               I agree with that.

Josh:                --and the reason is community banks are-- they bank more like banking was 30 years ago. They actually look at the quality of the business and not the quality of the credit score. You know, how much is what the money centers generally do with smaller businesses.

The other thing, which I think is really important, is that when you choose a bank, you need to understand their decision process for how they go about making loans. Every bank is a little bit different. And if you don't know that decision process, there’s a very good chance, what's going to happen to Mike will happen to you, is the bank will call you up and say, “Your line’s going. Goodbye. You have 30 days to find another bank.”

Mike:               Yeah. That's exactly what happened with Wells Fargo. They decided, from a corporate level, nothing personal, I didn't realize that at the time, to cut a certain line - a certain segment of their business portfolio out. And we fell into that segment. And we were probably you know, a riskier segment than some of the others. So, you know, many of businesses our size did not survive the recession. So, I understand, from hindsight. And I do agree. I think, if I were to do it all again, from scratch, I would have stuck with the local banks and community banks. I get calls, probably once a week or an email, at least, you know, soliciting business.

And if we had to make that change again-- you know, right now, we're happy with where we are because we don't need them and they leave us alone because we don't need ‘em. So, that part's okay. But if I were to do it again, I would definitely look for a community bank and a relationship like that.

Josh:                In my position, we got red lined by the Comptroller of the Currency because our bank, their senior officers were doing illegal things. So, I was going through a workout and got thrown out with a 14:1 debt to equity ratio and I needed to re‑place a $1.5‑million loan, so. This was 1983 or ‘84. It was an interesting experience to learning, to say the least.

But, at any rate, Mike, you are doing all the right things that I've ever, you know, recommended that folks do. I'm assuming your business is highly profitable, you have tons of cash, and you try to figure out what you're going to do every day.

Mike:               Well, I found plenty of things to do. My team is running the company way better, from a logistical standpoint, way better than I ever did. They’ve come up with procedures and processes way beyond me. They're way more organized than me.

And I get to do the fun stuff. I get to do stuff like this and other podcasts. And I get to be the cheerleader for the company. And I get to be the visionary. And I get to do what I get to do.

But one of the things-- let me just throw one last parting bit of advice out to your audience, work with somebody smarter than yourself, whether it be Josh or somebody. Really, seek out the counsel of people who’ve been there before - this gentleman right here, because you're going to learn it the hard way or you can learn it the less hard way. I don't think anything's easy.

So, you're either going to, you know, work with someone and pay someone to get that type of advice or you're going to pay for it through all your mistakes. And doing it the way-- doing it the latter, paying for it through your mistakes and learning by mistakes, it's definitely a solid way to learn but your business may not survive. You may learn and it's too late.

And I've seen so many businesses fail because the owner can't get past themselves. And that's where you need someone that has no interest in your company other than, you know, to give you good sound advice. You need someone to kind of bang you over the head with a 2x4 because, otherwise, the world will bang you over the head with a 2x4 and you may not survive that. So, that that's something that helped me. The person that I worked with, really gave me a new mindset. And that's all I needed. I just needed to kind of shift two feet to the left. I was so close and so far.

That, I think, is advice I would give anyone. Surround yourself with people smarter than you. Be sure you're the stupidest person in your conference room.

Josh:                I call really good advisors, thinking partners. And I bill myself as a thinking partner because I want to be on the same side of the table as you, experiencing what you're going through and helping you think through the options that you have. And we always have options. We just don't think we do often.

At any rate, unfortunately, Mike, we're out of time. And I'm really hoping some folks decided to contact you because you've learned it the hard way and your lessons are really, really good. So, how do they find you if they’re not watching you on YouTube or, you know, seen you on Facebook Live?

Mike:               Mike@mikekonrad.com. I produce several podcasts there and about reliability of circuit assemblies which is probably 99% of your audience will not be interested in that. It's very niche‑y. I also have another podcast about entrepreneurship called Concept to Creation and stuff like that. So, that I get to play in that digital world like you are in the real world through my business. But mike@mikekonrad.com is a good place to find me.

Josh:                Cool.

And I've got two things I would like you to do. One is I'd like you to go, wherever you're seeing this podcast, and please give us an honest rating and review. If you love us, tell us you love us. And if you hate us-- I hope you don't hate us. But if you really think it's lousy podcast, you can say that but just review the podcast and let us know what you think.

And the second thing is my second book is about to come out and join the real world. This one was really fun to write. It's called the Sale Ready Company: What It Takes to Create a Business Somebody Would Want to Own Even if You Have No Intention of Selling which happens when you get a sale‑ready company. Again, it's a parable which means it's a story about my Aardvark family. And the patriarch, John, is getting really close to saying, “It's time for me to move on.” And we have lots of challenges you get to listen to and read. And I'm sure you’ll like it. And if you buy it off our website at www.salereadycompany.com, you get the book free with a $7.95 shipping and along with that comes a whole bunch of bonuses. So, visit us at www.saleready.com And I hope to see you back here really soon at Cracking the Cash Flow Code.

This is Josh Patrick. We're with Mike Konrad. Thanks a lot for stopping by. I hope to see you back here really soon.

 

Narrator:        You've been listening to Cracking the Cash Flow Code where we ask the question, “What would it take for your business to still be around a hundred years from now?”

If you've liked what you've heard and want more information, please contact Josh Patrick at 802-846-1264 extension 102, or visit us on our website at www.sustainablebusiness.co, or you can send Josh an email at jpatrick@stage2solution.com.

Thanks for listening and we hope to see you at Cracking the Cash Flow Code in the near future.

 
 

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