At the end of an Origami on-boarding session, two entrepreneurs who had recently incorporated their service business asked if I had any advice.
For context, they didn’t need startup capital; they had already booked a few projects; they planned on keeping their expenses low; and they had enough in personal reserves that they could, if needed, forgo a salary during their first year. This was all pointing to a good start.
I told them the first things that came to mind. When I later asked Darren, my business partner, what he would have said, he echoed my main points and added some of his own.
We went through the startup stage a while back, and we have the lessons, scars, and perspectives of those years and the years since. Those perspectives have been broadened by countless conversations with other small business owners—and with each other.
In this age of LLMs confidently answering more and more of all the world’s questions, I can't but think our stories and what we draw from them will be the stuff that sets our own all too human answers apart from those of our unnervingly but artificially intelligent machines.
Don’t hire until it hurts.
You wouldn’t walk into Best Buy and drop $60K on a laptop. You’re basically doing just that when you hire an employee. You’re making a big commitment. And with employees, the commitment isn’t just financial. For many small business owners, it’s emotional. During the Covid lockdowns, our clients told us their main worry, with little or no money coming in, was how they were going to pay their employees. That’s deep.
When you hire early, say in anticipation (rather than the reality) of more work, you’re going to immediately face the pressure of making payroll. Yes, that’s going to force you to hustle, and that’s a good thing. But it’s also going to force you to make choices that favor the short term over the long term. If the growth isn’t there or isn’t what you expected it to be, then, unless you’re ruthless enough to quickly cut employees loose, you’re going to be stuck chasing whatever work you can, simply to pay them. You’re effectively working for your employees at that point.
The thing to do is wait until you feel you’re working all the time, and you still can’t keep up. That’s the signal that you have enough work (and hopefully enough money) that you won’t need to immediately go get more projects to pay for your new hires. When there’s enough demand for what you have to offer, and the demand is growing, your new hires will help you from Day 1, either by increasing your personal capacity, if they take on support functions, or by increasing your company’s total billable hours, if they can deliver your service.
Avoid stepping away from the core work of your business before you’ve figured out how to deliver at a consistently high level.
It takes time and reps to hone your process. You have to pay attention to every little thing. And you have to have high standards. High standards are how you want to win customers with a service business. Selling common things at low prices works for Walmart. You’re not Walmart; you’re not selling things. You’re in the service business. Services are promises to do something. So do something unique or do something uncommonly well. Then find customers who value what you do. (More on this later.)
Jumping into sales before you know you can deliver a service worth selling is risky. While you may get the sales you think you need to lift off, your broken service model will keep dragging you back down (think excess costs and/or unhappy customer experiences). This was a lesson we learned in the early years at Origami. We focused on growth before we locked down service delivery. We struggled with our cost structure and our workload (our office was crammed with the envelopes that customers used to send in their bookkeeping work), and so did our team.
Which brings us to…
Make sure you’re ready to manage employees before you hire them.
If you’ve managed people before, you’ll know what it’s like to design and direct someone else’s work. But if you don’t have managerial experience or training (and you don’t commit yourself to learning), your new role is going to surprise and potentially frustrate you.
Your employees need training, tools, well-structured roles, oversight, feedback, and much more. Your job as a manager is to make sure they can do their job as employees. Without this shift in mindset, from the skilled worker who started the business to the manager who now runs it, you won’t be able to give your employees what they need, and they won’t be able to give you what you need.
I can’t emphasize enough how important a deliberate shift to a managerial mindset is for predicting whether you build a successful service business or you get tethered to a mediocre, chronically underperforming one.Make sure the people you hire make you money.
Small service businesses operate on high profit margins. Expenses basically come down to the wages paid to employees. You should keep a close eye on the productivity of your labor dollars. Every dollar you pay in wages has to generate multiple dollars in sales. If that’s not happening, you have two choices: stay at the same level of sales and decrease your payroll, or stay at the same level of payroll and increase your sales.
Some business owners hire because they have this notion that a growing headcount is what it means to be in business. Some I’ve met get a thrill from hiring and collecting “talent” or “potential”. Ask yourself if that’s part of your motivation before posting on a job board. Your business exists to make money for you. But you could easily put yourself in a situation where it makes money for everyone else but you.
Try to charge a little more.
If you’re short come month end, you’re not charging enough. If you’re racking up credit card debt, you’re not charging enough. If your bank balance isn’t growing each month, you’re not charging enough. If your take home doesn’t give you the lifestyle you want, you’re not charging enough. You see the pattern?
It’s scary to turn down work when that work wants a discount, or a sample, or extras, or whatever way more can be negotiated for less. Remember the part about finding customers that value what you do and doing it well. Clients sense the lack of confidence that you give off when you’re not sure that you can do something valuable for them—it’s written all over your lowball fees. And even if you’re confident, clients, being bigger and having been around longer, are better at negotiating than you are. They’ll make you compete for their business, and the competition is always charging less.
It’ll feel that way when you’re worried about losing the lead, that it’s all about price. But good businesses (and good consumers) want to work with good suppliers. Good suppliers skillfully solve their problems; they add value. Good clients want and need these good suppliers to be around and do well. The market has too many unreliable players. So if you really are a good supplier, you’ll be able to show it to these good clients, the ones who are just better put together than the ones that prioritize price.
What’s left to do then is to capture more of the value that you’re delivering to your clients. If you can’t take the big leap, then take a small step. Try charging a little more. As a little experiment to see what happens. Chances are the client won’t notice, because they’re not in your head where all the doubt and worry is. If you offer them a price that fits into their universe of what’s reasonable, then they’re likely to focus on the actual problem you’re solving for them. These little experiments will give you practice, and negotiation won’t be as scary when you start to make bigger moves.
Get paid early, upfront if possible.
Accounts receivable (AR), aka waiting for clients to pay for services delivered, has killed many a service business. As your service business grows, your AR will grow alongside. Financing that growth in AR and managing the cash flow issues that come with growth is a high wire act, especially when you don’t have ready access to financing. Government work is particularly horrible for this. The money will take forever and no one knows why. Avoid and limit AR, however and wherever you can.
For comparison, here’s the advice that ChatGPT gave when I described the situation of my onboarding entrepreneurs:
- Focus on revenue first, not perfection
- Keep your overhead low and your cash flow positive
- Build relationships, not just a client list.
If I adjusted my prompt, I’d get a different mix of advice as ChatGPT tried to find a suitable stretch of words among all the paths through everything that has been said by anyone, ever. What I’ve offered above are views gathered by two people traveling together along two near but separate paths. Take from them what you will.