Why misers are often successful business owners.

We have worked with a lot of successful business owners that were misers.

One might think one has to be a miser to be successful in business.  In this article, we will try to explain why it seems being a miser is a key, why it is a myth and what qualities misers have that make them winners.

Small business owners are chief cook and bottle washers.

Large companies have teams of accountants, purchasing managers and at least one controller. Their job is to maximize cash flow by constantly analyzing billing and expense data and setting calendars.

You have you. (And if you are lucky, a sharp assistant)

Misers get around this by rarely spending money and even then, not spending it unless they already have it in the bank.

We once had a client that casted aluminum. He was as tight as a jock strap. To get a 15 percent discount, he bought a years-worth of aluminum at a time. But that 15% discount turned out to be a 50% discount when he added in a lot of other factors.

The people who bought his company from him did not make anywhere near the profit he made.

Accounting is not natural.

I know, you have an accountant. We have been in the business for 25 years and in that 25 years we have only met ONE business that did margin analysis, and he went bankrupt because he did not know how accounting works.

Accounting was designed to help business owners make decisions, but often, it is really just used to create a TAX RETURN. It is done once a year. If you can run a business making decisions once a year, God bless you, but Henry Ford DIDN’T USE AN ACCOUNTANT.

Henry Ford was a legendary miser.

Misers could certainly use accounting, but they rarely use accountants for anything other than… you guessed it. Their tax returns.

If you cannot calculate margin, you are better off not spending money.

Misers are more investors than business owners. Margin for them is an obsession. But unless your business is simple, it is extremely difficult.

Without margin analysis, investing in your business is voodoo.

We had a client, a highly successful miser that ran an enormously successful collision shop. His margins were massive. But he was also a builder and built the shop himself. He added a new paint bay and paid cash. Most people do not have the expertise to build their own building and typically borrow the money. Taking on debt makes cash flow management challenging. In this, misers rule the world.

When you borrow money, it makes you feel rich. That is, until you must pay it back. Unless you have the steel hearted discipline of my old employee Helmuth, you will spend borrowed money much more liberally than earned money.

I once had a client that went to the bank to borrow $500,000 to upgrade his plant. The bank asked me for his financials and agreed to give him the money.

I called the bank and told them not to. They did, and he defaulted within 6 months. In fact, he used part of the loan to make loan payments.

This loan did nothing to enhance earnings. In fact, being shut down during the upgrade cost him customers. An inherited business, the owner was clueless. In fact, when I did the analysis, I told him this only revenue source was mulch sales to the state. He could close his business, just sell mulch and make the same money.

He threw me out. After a year, he went bankrupt.

Guess what he does now? He sells mulch to the state.

Being a miser is the habit of buying things on sale.

In current marketing, sales are no longer used to sell products because they are not in demand. Sales are used to make the customer feel comfortable about their emotional decision. They have become a weapon of retailers.

 Our miser, above, with the casting plant used to wait until Aluminum prices went down, Aluminum prices are highly cyclical and can often drop 10-20% during any given year.  When you add a, say, 15% discount to an already low price and add the effects of only one shipping charge per year, that is a bushel basket of cash savings.

Most businesses cannot stock product just once a year.

 If you must have inventory, this can be confusing. Inventory build-ups are not deductible. The basic equation is…

•  BI + P – EI = COS
•  B Beginning inventory
• P Purchases
• EI Ending inventory
• Cost of sales.

It is COS that is deductible.

 If you follow the equation, if your BI is $20,000, your P is $100,000 and your EI is $70,000, your deduction for the year is $50,000.

 In other words, you spent $100,000 on the inventory build can only write off $50,000. This means you pay tax on the additional $50,000.

To follow through, in a basic 33% tax bracket, you must earn $75,000, pay $25,000 in taxes, (33% of $75,000) to net $50,000.

Managing inventory is a difficult and lying to the IRS about your inventory build, besides being a felony is a terrible way to run a business. Buying things for tax reasons alone is like throwing your money away.

But, as the old stock market adage goes, “no amount of expertise can save you when you consistently buy stocks at the wrong time.”

I used to have a client that was a scrap dealer. He died at the age of 93. He was a cross between a pit-bull, a Nazi and the principle at a school for child felons. He used to call me at home on Christmas to ask questions.

But he was crazy rich.

He would buy large amounts of metal when nobody would buy. He would haggle to the penny. In the scrap business, in those days, nearly everyone that was selling scrap was a knuckle scraper. They fill engines with sand, lie about what the metal was and half of what came in was stolen.

If you were buying scrap, you carried a baseball bat and a gun. My client would hold certain metals for years. He held several a hundred tons of copper for over a decade. He never, ever borrowed money, but he had a pile of it.

In the small city where his business was, he knew everybody. He knew who to trust and who was a dirt bag, and for all his warts, he himself was an honest as a nun. He would negotiate and negotiate, but when the price was settled, he paid you on the spot.

When he died, he had over $20 million. He never owned a new car, lived at the scrap yard (In a genuinely nice house) and rarely took a vacation.

And every time the Florida real estate market crashed, he went down and bought. When everyone said you must be an idiot to buy, he was that idiot.

Being a miser is a lifestyle choice.

In fact, no single quality can make you richer. Remember, Scrooge was a miser. If he were not rich, you would not have heard of him.

But here is the rub. Scrooge was a fictional character, the most popular that Dickens created and the one he hated the most. Dickens died at the age of 58, but for years went around England as well as the US reading A Christmas Carol to live audiences.

He hated it because he knew the story was bullshit. But it appealed to his listeners. In fact, Dickens left the US in a hurry because he owned taxes on the money he earned there! Let that sink in.

He wrote a story about generosity being a virtue, made a killing on it and skipped town to avoid paying his taxes.

Years ago, I got into what turned out to be a rather heated argument with about 100 geneticists ironically over a charity one of them was running for stressed out PHD’s.

In the end though, I donated $100 to her charity. I did not agree with her, but her charity was a good cause. I sent a challenge via twitter to the 100 people that blasted me day after day to do the same thing I did. Donate.

NOT ONE DID.

These PHD’s would argue until the cows came home but when it came to putting their money where the mouth was, the distance was too great for them to take the leap!

People are always charitable with YOUR money. They just are not with their own.

When somebody comes into your business telling you their “deal” is a win for both of you, throw them out. They are either full of shit or stupid. If you go bankrupt, are they going to advance you their share of the win?

Hell no, they are going to stop taking your calls.  

In the meantime, what can you do to act more like a miser without being one?

 First, communicate with your accountant your intention to become margin obsessed. You are going to match income with expenses and find out what you are making money on and what is not worth your time.

Next, when you make an investment, do a calculation on what this investment will add to your business, how much additional resources it will take and if your company can handle the additional sales.

Finally, you are going to look at everything you buy and decide you are going to become that pain in the ass coupon shopper that is in front of you in the grocery line. You know, the one that is paying $60 for the same basket of groceries you are about to pay $150 for.

Not just price. Add everything in. What does it cost in volume? Can I store it? Where can I buy it cheaper?

Many years ago, I used to belong to the Lions Club. We ran concessions for the local football team. One year, the guy that ran the stand needed a year off, so I ran it.

I made a spread sheet of everything we bought. I went around and priced everything at different places. Doing this I discovered that a local restaurant supplier was the cheapest. (Everyone assumed it would be Walmart. Walmart was 30% more expensive)

 I cut a deal with a pizza shop for half price pizzas in return for his sign on the stand. (We sold 30-40 a game)

I bought the most expensive hot chocolate I could find and cut the price. No little girl goes to a football game to watch football. They are thinking about hot chocolate before their daddy’s car leaves the driveway. We almost always sold out. But every little girl that buys hot chocolate buys pizza and a bag of Skittles. We bought Skittles in 20-pound boxes.  

I doubled the size of nearly everything we sold. Doubled the size and tripled the price. I ran constant tests. We sold meatball sandwiches, (a loser) and suckers. (BY THE HUNDREDS!)

We made a killing and that killing financed our scholarship program.  

My point is that anybody can do this. In the confusion and stress of running a business, it is easy to overlook. But the good news is unlike the scrap dealer who is buying every day, I only had to do pricing at the concession stand once.

After that it was simply a tweak here and there.

Two areas where this is critical are professional services and software.

I use almost exclusively, a very expensive law firm. Why? Because they are the cheapest. Law firms bill by the hour. If a lawyer does not know how to do something, they charge YOU to learn it. Large law firms have people that specialize already KNOW how to do it!

The same is true of accountants. If your accountant is always putting your tax return on extension, that can only mean one thing. His other clients are more important.

Many professional service providers use what I call, “dart board pricing.” I used to use a law firm that was very well known for customer legal agreements. They felt that people would pay a high price for a legal agreement because they would not trust a lawyer that did not overbill.

THEY WERE SO RIGHT!

But switching away from that was easy.

In software there are two things to be aware of. The first is dart board pricing, but the second are companies selling you free services. This is often the case in things like online ads, SEO optimization schemes and various connectivity tools like database managers and email schemes.

As we mentioned in the chapter on Google Ads, there is really no reason to duplicate what Google does, but there are plenty of reasons not to.

The first is that Google is probably the most brilliantly run company in the world. Anyone trying to one up Google is going against hundreds of software engineers. The second is, why pay for something that free?

It is also VERY true with outsources.

We once hired a company to set up appointments. We used to see our clients in December to go over year-end tax issues. (No one else does this) As one of our motto’s is, “yesterday’s weather report is useless,” we saved our clients a lot of money by doing things before the year ended.

Unfortunately, December was madness, so we hired a company out of Chicago at $50 an hour to set up appointments. If I made these calls, I would have set up 20 appointments an hour. They made 2-3.

Not only that, but we used at that time an online program that told us when outsourcers were working and what they were doing! They were averaging a call every NINE MINUTES and the calls lasted 2 minutes.

When I called their manager, I was laughing hysterically. His name was Bert. I still remember him. I said, “Bert, you know we use this program to track outsourcers! What the hell were you thinking?”

He gave me some bullshit about industry averages, and I hung up on him.

I was in one meeting with a client and his lawyer. I remember walking out with the client and asking him,

“What did you think of his idea?”

The client looked at me and said, “What did you think?”

I said, “His plan was that he and I were going to overbill you.”

The client laughed and nodded. “That’s what I thought,” he said.

We have an expression at Landon-Fillmore, “Follow the Feedbag.”

In life, everyone protects their feedbag. Protect yours.