You Need to Accept That You’re the Boss
Introduction:
This week, Sarah Segal takes Paul Downs and Jay Goltz through her recent QuickBooks nightmare. Right before tax season, Sarah ran her P&L, and it showed a profit of $250,000—but she knew right away that that couldn’t be right. It then took a bookkeeping SWAT team to figure out what exactly had gone wrong. “I was literally on the verge of tears,” Sarah tells us. “How am I going to do this and not be late on filing my taxes? And credit to this woman, who, I swear to God, was like my therapist and my bookkeeper. She was like, ‘Don’t worry, Sarah. We’re going to figure it out.’” Which they did—and which brings an important reminder: Not every dollar that comes in the door should be counted as revenue. Plus: What do you do when a new employee isn’t working out? When is the right time to intervene? Do performance improvement plans actually work? Are grace periods a good idea? Also: Jay emphasizes a little understood reason why it can be important to fire fast. And Paul explains what he likes about the AI search engine Perplexity.
— Loren Feldman
Guests:
Paul Downs is CEO of Paul Downs Cabinetmakers.
Jay Goltz is CEO of The Goltz Group.
Sarah Segal is CEO of Segal Communications.
Producer:
Jess Thoubboron is founder of Blank Word.
Full Episode Transcript:
Loren Feldman:
Welcome Paul, Jay, and Sarah. It’s great to have you here. I want to talk today about taxes. We recently had a conversation on this podcast about what business owners should expect from their accountants. We talked about how some owners think they’re getting strategic advice when they’re really just getting tax prep.
In that conversation, we talked more about the strategic side of the equation. Today, I’d like to talk about the tax prep side. We just passed April 15th. Sarah, we exchanged some emails. I gather you’ve had an especially stressful time. What’s been going on with you?
Sarah Segal:
Well, as you know, I restarted my company at the beginning of 2023 after having been part of a larger entity for a couple of years. So I had to restart everything. I had to reestablish my LLC. I had to open new bank accounts. I had to get new health care, all that kind of good stuff. And I was like, “You know what? I’ve used QuickBooks in the past when I first ran my company” I’m like, “I can do it, and I’ll just get my friend to help me out here, just in terms of the data entry. And I can figure it out. I’m fine.”
So instead of finding somebody, like I should have, who is skilled and understanding of how agencies run, how a pass-through LLC works, I did most of it myself with a little bit of help from a friend. And I really—profanity here—myself over completely. So I ran my P&L right at the end, right before tax season, and it said that I had a quarter million dollars in profit. I did not have a quarter million dollars in profit.
The way that all of the details were put in was incorrect. And apparently I had been adding all this stuff, all of my transactions, not on an accrual system. Meaning that as soon as I invoiced somebody, the QuickBooks thought that that was money coming in—as opposed to the way it works for us, where we invoice somebody, we don’t get the money for 30 to 45 days. Sometimes even later, if there are any problems with the transaction. So it thought that we earned more money than we did.
Long story short, I was introduced to another agency owner. He loved his bookkeeper. I had met her casually, and I basically onboarded her and her team really quickly. And they spent the last three or four days literally doing surgery on my QuickBooks. And I’m sure that the bill for that is going to be 10 times the amount, had I just done it the right way the first time. And I’m kicking myself.
Jay Goltz:
Wait, there’s a lot to unpack there.
Sarah Segal:
Yeah.
Jay Goltz:
I’ve gotta ask, because I have an accounting degree. I never practiced, but I gotta get some clarity. You said that you booked it as a sale, but then it really wasn’t. So the question is: Are you operating on the accrual basis or on the cash basis? Which one?
Sarah Segal:
You’re smarter than I am, in terms of this stuff.
Paul Downs:
Yeah, clearly she doesn’t know the difference.
Sarah Segal:
I didn’t know that there was a button to click!
Jay Goltz:
I know nothing about the whole button-to-click thing. I just know that maybe you did make the money. Just because you haven’t collected the receivable yet doesn’t mean that you didn’t make—I’m not so sure you didn’t make the $250k. You just don’t have the cash yet because it’s in receivables.
Sarah Segal:
No.
Paul Downs:
Okay, wait a minute. Can we just step back here and talk about, there are three different ways you could have screwed this up. And I think you got all three of them.
Sarah Segal:
I’m sure I did.
Paul Downs:
One is not understanding the difference between cash and accrual. One is not understanding QuickBooks. And the third one is not understanding taxes. So that if you venture out on your own as a business owner into this field, you’re entering a landmine. And it’s really critical right when you start to get professional advice. And then once it’s up and running, yeah, you could probably do QuickBooks yourself, if it’s a small business. But it’s critical that you don’t try to do either of those three things yourself, because you will never get it right.
Sarah Segal:
No, I totally agree with you. And I have to say that I was reading an article the other day that talked about the two professions that a small business owner will never question the authority of, or the value of, are legal and bookkeeping. I try to sell our services. People will question us like, “Really, am I going to get value out of it?” People do not question lawyers or bookkeepers. And there’s a reason for that.
Jay Goltz:
I’ve talked about this before, and I don’t blame you. You just assume, “Oh, they’re an accountant. They know what they’re doing.” And they probably know what they’re doing with taxes, but some are great at helping small business owners, and some will watch you hang yourself, and then they’ll tell you later, “Oh, well here’s your problem.” And I understand why people get into that trip. You just assume, “They’re a professional accounting firm. They’re going to help me with this.” And sometimes they do, and sometimes they don’t.
Loren Feldman:
So let’s go over this a little bit. I want to walk through and make sure we understand your situation.
Sarah Segal:
Sure.
Loren Feldman:
Before I do that, Paul, the difference between cash and accrual accounting is?
Paul Downs:
All right, here’s my understanding. I am not an expert. I’m not your bookkeeper. I’m not your accountant. So cash means that you book, as income, payments you receive for work you completed. In other words, you did a job, you get paid for it. Not based on invoicing, just on what comes in the door—but only for stuff that you’ve actually completed. So in my business, we get a lot of deposits for work that’s not completed. You might think that that’s cash income. It isn’t. It’s just a loan the client makes to me until we deliver a table.
Jay Goltz:
It’s actually a liability.
Paul Downs:
Right, it’s a loan. It’s a liability. And at the point where we’ve completed the job, then whatever cash they’ve given me converts from a liability to income. And if we deliver a table and they still owe me money, the amount of income we book is based on when they pay us.
Accrual: different. The accrual is looking at the value of the work you completed. That’s it. And so you can book as accrued income anything that you’ve completed, whether you’ve been paid for it or not. Now, just like with cash, the liability of the deposit becomes income after you accrue. You know, like, “Okay, we completed this.” In our case, it’s when we ship it, we book it as done. And then we have income based on the cash that’s there.
You can be looking in QuickBooks at either or both, anytime you feel like it. When you run a P&L, there’s a little button on the upper left side that says “cash or accrual.” The critical thing is which you’re paying taxes on. And again, this is my understanding. Could be wrong. Accountants, correct us. My understanding is, this is a designation you’re going to make when you set up and file your company originally. You’re going to make an election to take either cash or an accrual in accounting. I believe that cash is way more common for S corporations, particularly for someone in Sarah’s situation.
Jay Goltz:
Maybe. Maybe.
Paul Downs:
All right.
Jay Goltz:
She doesn’t have inventory. That’s a critical thing. Somebody with inventory would never do that.
Paul Downs:
Right. Now, I have pretended for the last 38 years that I have no inventory at any time. So I don’t know anything about accounting for that, because it’s just way simpler for me to not have inventory. Yes, we have materials. We have work in progress, but it’s really difficult to value it. So we just don’t. And my accountant has never complained about it.
But if you were in QuickBooks making a note, “Hey, I sent an invoice to this person,” it’s almost like an accrued thing, then, that you book that you completed the job. I’m sending the invoice, and that’s accrued revenue. And if you were running the P&L, and it was saying, “Okay, that’s revenue, that’s your income,” then you probably have QuickBooks set up wrong. It shouldn’t be that hard to have the new bookkeeper—as long as you’ve entered everything—all they have to do is go back and recategorize it.
Sarah Segal:
Yes.
Jay Goltz:
Just to be clear, you left out half of it, which is, you’re totally right with the first half. The second half is your expenses are also accrued, meaning if you get a $10,000 insurance bill for the entire year in cash, you would write the 10 grand off. But in accrual, you’d separate it by 12 months and do prepaid and it would be amortized. So it works with both the incoming and the outgoing expenses.
Paul Downs:
Right. I didn’t even think about that. The other thing would be depreciation. Let’s leave that for a different discussion.
Loren Feldman:
Yes.
Paul Downs:
Because the whole thing is: Don’t try to do this yourself. Just don’t.
Sarah Segal:
No, no!
Loren Feldman:
So, Sarah, I want to go back to exactly what happened. You said that you took your P&L, and it showed a profit of $250,000. You didn’t actually make it, you said, but it sounds like maybe you did. What triggered your sense that you didn’t actually make it? What went wrong that you realized you had a problem?
Sarah Segal:
Well, my bank account’s not that full.
Jay Goltz:
I knew you were going to say that. Isn’t it possible that that income is just sitting in receivables?
Sarah Segal:
No, it’s not. We were income in, income out last year. It was our first year back up and running. Like, there was no profitability. It was nominal. It wasn’t my goal of 20 to 30 percent. But I knew that that number was wrong, just immediately. And because we’re a pass-through, all of a sudden, the tax bill that I owed to the government was absurd.
We realized that it’s so important to find an accountant or a bookkeeper who understands agency. Because unlike what most people do, we do things where we have expenses that we incur on behalf of the client and then bill back to the client. And unless you categorize things correctly, it can show as income, right?
So for example, Jay, you’re like, “You know what, Sarah, I’m going to do a big partnership with the city of Chicago. We need to put out a press release.” I say, “Okay, great, Jay. I’m going to write the press release.” That’s my service. I’m going to put it on the wire. So Business Wire, PR Newswire, it’s a news distribution service that goes to every newsroom in the country. That costs me $1,500 to $2,000. I’m going to front that cost. I’m going to put it on the wires. I’m going to bill you back for it, but my books, the way it was set up, saw that money coming in as income and not as a reimbursement. And so that all had to be redone.
Jay Goltz:
Wait, wait. So does that mean you didn’t show the expense for that? That’s what would have countered it. You took the money in from the client, but then they didn’t show the payable. Is that the problem?
Sarah Segal:
That was the problem. And because there are so many specific nuances to PR—for example, paying an influencer. Some of these influencers you have to pay through Venmo or PayPal, like if you’re doing a paid relationship. It’s really messy. You’re not just sending people checks, at this point.
So, finally, things are worked out now. The number is much more on par, but I have to say that I realize I learned from my mistakes that, you know what? There are certain things that you should just not do as a business owner. And honestly, I wish there was a boot camp. Everybody I’ve ever talked to who went to like business school was like, “Oh, no, they just teach you theories and case studies and this and that.” Why can’t they have a class or just like a one-year program where they’re like, “This is how to manage your P&L. This is how to deal with expenses. This is the difference between accrual and cash.” Like, where does that exist?
Jay Goltz:
I have a business degree. They didn’t teach any of this stuff. But you just brought up something very important, though, which has made this way worse. It’s about the fact it used to be, in the old days, you got invoices in the mail, and there’d be a pile of papers on your desk from whatever you fronted the money for. You’d have an invoice and the bookkeeper would say, “Oh, we’ve gotta put this in.”
Now, to your point with that, maybe they didn’t even send out an invoice. You might not have an invoice, or maybe they sent an email, and it didn’t get to the right place. So I have that problem now. Everybody’s not sending invoices like they used to and like, “Oh, you sent me an email? I didn’t get it.” Or, “Oh, you sent it there?” Or maybe your person quit, and they didn’t forward the thing. At least when you got the mail, and it was on paper, there was a pile of invoices sitting on the desk. And that is no longer the case. That’s a huge problem.
Sarah Segal:
But now imagine this: you have 15 clients that you’re doing this for. I was literally on the verge of tears. How am I going to do this and not be late on filing my taxes? And credit to this woman, who, I swear to God, was like my therapist and my bookkeeper. She was like, “Don’t worry, Sarah. We’re going to figure it out. It’s going to be all okay.”
Loren Feldman:
Sarah, how were you doing it the previous year when you were still part of a larger business?
Sarah Segal:
They had somebody qualified doing it.
Loren Feldman:
So you were just sending all your information. I mean, were you on QuickBooks? How did they get the information?
Sarah Segal:
A lot of emails and Dropbox folders full of receipts. I mean, it wasn’t as systemized as I would like it to be. We are pretty good about putting all of our receipts and stuff like that into folders.
Loren Feldman:
Okay.
Sarah Segal:
So the new bookkeeper has access to everything and is able to see everything and go through it pretty easily to review it. But, yeah, somebody else did it, and I don’t know how they work their magic, but it’s magic. It’s a magic job.
Paul Downs:
It’s not a magic job. It’s just a job. It’s just something you have to get your head around. Like, you don’t want to deal with it? Fine, you’re gonna pay a billion taxes. But this is just part of being in business, which is dealing with transactions, money. And yeah, Jay, I’d love to go back with you to 1976 or 1810 when we could get messenger boys to go around town.
That’s not the world we live in. It’s not an option. And so you simply have to do the things that you need to do to administer a business. That’s part of your job as an owner: making sure the administration happens in some kind of orderly way. There’s really no way around it.
Jay Goltz:
It’s called having control, and until you’re out of control, you don’t know what you’re supposed to be watching. So we brought up several things I’d like to highlight. One is, this deposit thing, it is very dangerous when you’re in a business that takes deposits that you don’t put the money somewhere, and you start spending it, thinking it’s your money.
I know nothing about QuickBooks, but there are lots of places to get into trouble. Deposits, and in my case, inventory. You don’t have inventory. Very easy to get in trouble with inventory. Very easy to get in trouble with: You didn’t get all your payables in. Somebody didn’t send them to you. You didn’t have them. And good bookkeeping people know to keep an eye on that stuff, is the point.
Loren Feldman:
While you’re mentioning inventory, I’ve got to go back to Paul. I’ve never heard the notion that you could just pretend you don’t have inventory. I’m not sure what to make of that. Could you explain how that works? Because you must have a ton of money sitting in wood and other types of materials, don’t you?
Paul Downs:
No. [Laughter]
Jay Goltz:
I understand that—
Paul Downs:
No, we don’t have a ton of money. We run a very lean operation where, basically, we get a pile of wood delivered on Tuesday. It’s pretty much all put into a product or in the trash by a week later. So in a world of just-in-time inventory management, if you’ve got reliable vendors, I don’t need to carry inventory. As a matter of fact, this is something that always blows the mind of all the people who work for me, which is: I don’t want to see piles of wood around the shop. And I don’t want anything that we’re not going to immediately put into a product.
Now, in reality, there’s probably 10 days worth of inventory of various things sitting around on the shop floor. And in reality, you could probably, if you decided to sniff around, make a case that we should be doing it differently. But the other reality is that it’s not something which is likely, as far as I understand, to trigger an audit. Because I make money, I pay taxes. We just don’t carry a ton of stuff lying around. I don’t have a warehouse full of stuff like Jay does.
Loren Feldman:
Well, are you missing an opportunity to buy in bulk or to stock up on wood that’s hard to get, or to avoid supply-chain problems? Are you paying a price for this in any way?
Paul Downs:
No. The only time we ever really were tempted to buy in bulk was right at the beginning of 2020 when Covid was shutting down a lot of the plywood and other sheet good manufacturers in Canada. And so, without that particular material, we’re out of business. So I went to my distributor who we normally buy from and I say, “Guys, what do I need to do?” You know, “I don’t care what it costs. We make a premium product. I don’t really give a shit about a nickel per sheet or whatever. I just need to make sure I have this.”
And they said, “Yeah, we’ve been doing business with you for 30 years. We got you. And here’s what we’d like you to do. We’d like you to buy a couple of skids.” Which is more than we normally do. Maybe 500 sheets. So we bought it and we stored it for a year, but we used it all up. And now we’re back to our normal practice. Inventory is really expensive. It’s just money sitting on the floor. Like, why do that?
Jay Goltz:
In my case, that’s how I make money—by having inventory. I bring it in from all over the world. It takes months to get it. So I’ve got no choice. Now, I should have put some parameters on it, which I didn’t, which I’ve got it under control now and we’re working it down where it needs to be.
Sarah Segal:
Can I ask you two, how do you look at your books? How do you review that? Do you do it like every day you’re looking at it? Do you do it weekly? You sit down with your bookkeeper? Do you do it quarterly? What is your process?
Jay Goltz:
I’m now doing it every week. And I had a CFO for years who was doing it. And I’m now doing it, and I’m keeping an eye on the key performance indicators. What are the inventory levels? What’s the payables? What’s the receivables? How much cash is in the account? It’s very easy for it to get out of control.
Loren Feldman:
How about you, Paul?
Paul Downs:
I manage cash extremely carefully. And we have a system set up where I can predict my cash position any day in the future for as long as I feel like it, which is generally about eight weeks. So I’m looking at that multiple times a day, but also, for me, what’s really important is: Are we making a profit on accrued revenues? In other words, is the factory making money by what it’s doing? And if we’re doing that, all other problems are solvable. My clients generally pay me. We don’t really have an issue getting paid. And we’re very clear on the difference between liability and an asset when taking deposits, but we need those deposits for cash flow.
So, if I’m taking deposits and sitting on half a million dollars of cash, and let’s say $200,000 of that is deposit and $300,000 of that is working capital or whatever, as long as the factory is making money on an accrued basis—in other words, the value of the output that we’re producing in a given period of time is greater than the expense to make it—then eventually our cash position will be improving, as long as I don’t go and spend it on something crazy like inventory. So, you see what I’m saying is: You need to understand what you need to be looking at in your business. In my case, it’s pretty simple. We need cash coming in the door through sales. We need stuff going out the door through revenues. And I just keep an eye on both of those constantly.
Jay Goltz:
Sarah, in your case, your issue is you’ve got to have one foot on the gas and one foot on the brake at all times, because you’re hiring people to do the jobs. If you’ve got enough jobs, great. But then if you have too many jobs and you don’t have the people, that’s a problem. And it would be very easy to lose a couple of clients and then not make a quick—I mean, unfortunately, you can’t carry people that long if you don’t have the business coming in.
And like I said, there’s one foot on the gas, one foot on the brake. And in my case, I can absorb it a little bit easier, because it’s a bigger business and I’ve got inventory to live off of. But in your case, if you have a couple months in a row where you’ve lost some business and you’ve kept the people too long, it wouldn’t be hard to see where you’re going to get into a big cash crunch and a problem.
Paul Downs:
This points out a critical thing that I’ve learned over the years, which is that business owners need to understand what normal looks like. [Laughter] You could set up any number of KPIs that would help you understand what normal looks like, but you need to know what that is. You need to know: What is normal for me?
Jay Goltz:
Let’s say normal and healthy. Because you could be normal and be screwed up.
Paul Downs:
If you understood normal, and you understood why it was unhealthy, you’d be on your way to fixing it, right? But it’s really important that you have an understanding of how your business works. If I know that if I get X number of people initially calling us, I have a pretty predictable yield path. How many of those people are going to be worth talking to? How many are we going to sell? When we sell this amount, how many people should I have on staff? What should my monthly revenues be? How are we getting there? You know, we monitor that with the company, talk with them about revenues. Like, “Here’s what we need to get done this month. This is why.”
Sarah Segal:
Your sales pipeline is much different than mine, though.
Paul Downs:
Well, that’s what I’m saying. It doesn’t help you to understand what my business does. It helps you to understand what your business does. And you just need to know what normal looks like. And normal may be: I have to hire and fire people constantly, because I never know exactly how much business I need to do in one day. And so you need to normalize, then, the hiring and firing of people. That’s just your task.
Sarah Segal:
I have a luxury of I can hire independent contractors and freelancers who are perfectly skilled at it. And since I did that round of layoffs last year, I actually haven’t hired anybody on staff since then. We have grown, but all the people who are in those are full-time freelancers and contractors. And they are fine with that role. We’d like to bring some on staff who we really, really like a lot, but I’ve said this publicly to my team. I was like, “I’m just gunshy, because I don’t want to hire somebody on staff only to have ebbs and flows.”
I think that we’re out of the bad economy scene—the bottom of the bottom. Right now, we’re out of that, but people are slow to hand over contracts. I can’t tell you how many people have been like, “Oh yeah, send me a contract.” And then you never hear from them again, because they get anxious about spending money—on marketing, in particular. Marketing is the first to come, first to go.
Paul Downs:
It sounds to me like the only staff person you actually need is a bookkeeper. Because that’s constant, right? I have a bookkeeper. I know exactly how many hours she should be doing a week. She’s comfortable with it, but I’m never going to get rid of her, because no matter what we do, we’re going to have transactions that need to be accounted for correctly.
So, yeah, everybody is going to develop their business model based on what business they’re in, what makes them money, what resources are available to do work. You happen to be in a world where there are a lot of freelancers. When you hire them, you have a pretty good idea of what they’re going to cost. That’s a pretty common business model. And it’s a pretty good one, because it doesn’t force you to carry people when you don’t have business.
Now, in my world, it’s completely different. The people I have to hire are so specialized—and it takes years to train them—that I’ll do anything to avoid laying them off. And the way we manage that is through backlog. In other words, we always try to maintain enough of a backlog that, if we go through kind of a slow period, we have some work to do while I figure out what to do about it. But I also am so used to understanding what the backlog should look like, based on whatever other indicators are coming, that if trouble is starting to happen on the horizon, I can see it, because I’ve seen it before. And then I can make an adjustment if I need to. Like, “You know what? If someone quits, it’s not a big deal right now. Let them go. We won’t replace them.”
So it’s mostly about just understanding what you’re doing. And it takes a while when you start up to get that knowledge. It took me 20-some years to know the difference between accrued and cash revenue. I just didn’t understand what we were doing for the longest time. So, no knock on you.
Jay Goltz:
Here’s the good news: You learned your lesson. You’ll fix it, you’ll move on, and it’s all fine because that’s what we do. We fix things. So you’re going to fix this, and it’s all going to be good. And you won’t go through this again. And you’ll continue to learn these things until you’re a fine-oiled machine.
Sarah Segal:
Oh no, and that’s how I approach it—and with my team as well. Like, you’re going to make mistakes. You’re going to learn from those mistakes, and you’re not going to do it again. And I do the same thing for myself. It doesn’t mean my whole weekend wasn’t ruined because I was sitting there going line by line on my QuickBooks to see what the problem was.
Jay Goltz:
A weekend ruined is fine. Just don’t let it go for more than a week or so.
Sarah Segal:
No, I’m not.
Jay Goltz:
And I have a saying: There’s no team in losing money. That’s the one place that the team—at the end of the day, when we lose money, it’s our money and, yeah, the team can feel bad about it, but it’s more stressful for the one who lost the money.
Loren Feldman:
I want to hit another topic. This is another one of those questions I saw posted on the small business subreddit, and it deals with how you handle employees who aren’t meeting expectations. Let me read some of what this business owner posted:
“I run a fast paced warehouse business where a set number of customer orders need to be made and dispatched per day. I have just hired a new starter, and they are horrendously slow. I’ve already set my expectations as I do with all new employees, that they need to be able to make X number of orders after one week, Y after one month, Z as an aim to always be hitting for the remainder of their employment. However, as it’s during their first week, I have said that I have no expectations for them other than to just learn where everything is and work toward hitting the X orders per day by their sixth shift.
This new staff member is the slowest I have ever seen by quite a long margin. As an example, the slowest staff member we have ever had was able to make 30 orders on their second day. Our new starter managed to only make 13. I’m concerned that they will not be able to hit their minimum quota in a few shifts’ time. So when would it be appropriate to step in and give them a hand and show them how to be more efficient as it is blatantly obvious to me—and it should be to them—that they won’t meet the upcoming quota. Ultimately, they are still getting to grips with everything and learning where everything is and all the processes, so I don’t want to overwhelm them or make them feel like they aren’t doing a good job. But going too slow is extremely concerning. The minimum quotas are extremely achievable. Almost all staff members we have ever had are able to hit 50 percent to 100 percent over the minimum every day. Any advice for dealing with a new employee?”
Paul Downs:
Okay, so the answer to his question, “Should I intervene?” Absolutely. He should intervene right now, and he should say, “Listen, we have a minimum standard. Day six, you’ve got to do 30. I’m going to sit here and watch what you’re doing, and I’m going to give you some tips. And if you can’t make that on day six, see you later.”
I mean, you could be nicer about it, but that’s basically it. When you have experience, when you’ve seen X number of iterations of something, and the next one you see is an outlier, it’s real. There are slow people on this Earth. And it’s his duty as the boss to just give them the feedback, set the expectation, and be ready to get rid of them.
Jay Goltz:
I laughed out loud at the part that he said, “Well, I don’t want him to think they’re doing a bad job.” They’re doing a bad job! I mean, you don’t have to make them feel bad. My line would simply be, “Listen, this job isn’t for everyone. We’ve had lots of people. I’m not sure I could do this job. There’s lots of people who just aren’t suited to do this.” You don’t have to make him feel bad. You can just say, “I’m concerned this isn’t the right job for you.” And that’s an accurate statement. And they, in fact, might be a great employee doing something else somewhere else, but they just aren’t suited to do whatever he’s doing.
Paul Downs:
Slow is usually a problem, I will say.
Sarah Segal:
If you run into this problem again, you can hire with a grace period, right? Okay, “We’ll test you out for a week, see whether or not you can make the numbers”—
Paul Downs:
Don’t do that.
Sarah Segal:
No, you wouldn’t do that?
Paul Downs:
No, because if you actually have a written grace-period policy, it becomes much harder to legally get rid of someone for any reason afterwards.
Sarah Segal:
Oh, okay.
Loren Feldman:
Wait, wait, wait, explain that to me.
Paul Downs:
If you say, “Hey, you’re on 90-day probation,” and they get to day 91, then all of a sudden, they’ve got a defense in a firing that they didn’t have before.
Jay Goltz:
Or, the fact of the matter is, there are times where you hire someone, and on the second day, you realize: I made a mistake. I mean, they sit at lunch and they tell people stories that you think, “Oh my God, seriously? You just told them that you killed someone last week?” And I mean, people tell stuff at lunch.
Paul Downs:
Yeah, I hired a guy who tried to persuade my whole logistics crew to go down on the loading dock and get high with him at lunch. [Laughter] They came and told me about it, and I didn’t give him a 90-day grace period. I said, “Get out of here.”
Jay Goltz:
Yes, absolutely. So there are times where on the first, second, third day, you realize, “Yeah, this wasn’t a good hire.” We don’t owe it to anyone to give anybody any grace. They can walk out of the job after the second day. Are they giving us a grace period? That’s the way it works. They come in, and you see if it works out. If it works out, great. If not—
Sarah Segal:
You have to do it, because otherwise, you’re giving your time to something that you shouldn’t be giving your time to.
Jay Goltz:
I also heard the word—and Paul, you used both words—I don’t use “expectations,” because everybody is different. I use “standards.” “Here’s the standard. We believe that you should be able to do so-and-so.” You know, everybody can have different expectations. I think the word expectations has replaced standards a lot of times. And I think, in many cases, standards is a better word.
Paul Downs:
I don’t disagree with that. And actually, when you’re talking to employees, if you’ve made up a bunch of rules for the company that are whatever you felt like doing, always talk about them as if they were descended from God on golden tablets. Just like, “Hey, these are the rules, man.”
Okay, I wrote them. You don’t have to emphasize that part. Just say, “These are the rules. You’ve got to do it.” Leave it there. People are much easier to take that. If the rules seem like they’re completely immutable, that’s a much easier conversation.
Sarah Segal:
Do you guys use, I think they’re called PIPs? [Laughter]
Paul Downs:
I do.
Loren Feldman:
Performance improvement—
Sarah Segal:
Plans. Or whatever they are.
Paul Downs:
Yes, if it’s someone who’s worth salvaging. Now, this is a brand new—
Sarah Segal:
My personal opinion is once you’re on one of those, there’s no swimming upstream. Like it’s done. You’re DOA.
Jay Goltz:
Unlikely. I agree with you. Unlikely. Maybe once in a while that might work, but I did a speech to a big company one time, and at the end, they asked me about them. And I said, “You know what? In my world, I’ve learned either fix or fire. Either I can fix it, or I have to fire them. But putting them on that when they’re probably not going to work out? That’s like torturing someone.” And that’s like a big company thing.
Sarah Segal:
Oh, total torture.
Loren Feldman:
Paul, you seem to think it’s more likely that it can work.
Paul Downs:
Yes, because what I’ve had is, I have employees who have been with me for decades. And so, you get someone who’s a good employee, and they work great for 15 years, and then the marriage falls apart. Or, you know, like, whatever, and they go through a bad patch. And that’s when a performance improvement plan will work, which is: You sit them down, you say, “Here’s the problem. I need you to fix this. I don’t want to fire you, but I will. But here’s what needs to be fixed.” And I’ve had success with that with people who had demonstrated that they could do the job first.
Now, a new hire that’s three days in and can’t do the job? Different situation. But if you’ve got valuable employees, and they’re starting to go off the rails, I think that at least informing them that they’re off the rails: “We need to get you back on. Here’s what we’re going to do. Here’s what you’re going to do.” That’s worked for me on multiple occasions.
Sarah Segal:
I worked for an agency, and I remember that there was this one woman who had been promoted to a manager role. And she just wasn’t commanding the respect or delegating like she should. And I was told that I had to put her on one of these performance plans, and it was quite obvious that she wasn’t going to be able to do the job. It just wasn’t in her nature. And it was just like six weeks of torture for this poor person before she was let go.
Jay Goltz:
For everybody.
Sarah Segal:
Oh, it was awful.
Jay Goltz:
Now I’ve never worked for anybody, so I don’t have that perspective. So, I did a speech to a big company talking about the whole entrepreneurial view. And some guy walks up to me afterward and he said—and this is a major company, you’d all know who it is—“You know what? At blankety-blank, you pretty much have to kill someone to get fired.” I realized, at that moment, that is one of the secret weapons of small business. We can take responsibility and make sure the people we have working for us are doing the job. And in many large corporations, they don’t fire people. They just move them to another department and roll their eyes.
Loren Feldman:
That said, Jay, I have spoken with a lot of business owners—and I think the one who wrote this thing for the small business subreddit is probably one of them—who struggle, especially early on, with having those tough conversations. They’re squeamish about it. They’re reluctant to say what needs to be said. I’m curious, did all of you go through that period? Did you have to learn?
Jay Goltz:
Absolutely.
Loren Feldman:
And what got you over the hump? What got you to the point where you realized what language to use?
Sarah Segal:
Well, it wasn’t tough conversations with people—staff and employees—because I’ve never had trouble with that. As a reporter, a local reporter in a small market, I was often told by my news director or my assignment desk, “This person just got killed. Go to the house of the people who’ve just lost somebody and ask them for an interview.”
And to me, that was the worst experience of my life. The first time I did that, I had to go knock, “Hey, your teenager just got killed in a car accident. Do you want to talk about them on camera for my news station?” Ever since then, someone’s like, “Oh yeah, they have cancer.” I’ll be like, “Oh, what kind of cancer do you have?” [Laughter] I have no trouble having those difficult conversations with anybody.
Jay Goltz:
You become a warrior. I mean, that’s the reality.
Paul Downs:
Okay. I don’t have that experience, but I learned to be tough when I had an employee who was screwing up, and I was afraid to fire him for a lot of reasons. And then one of my other employees came to me and said, “If you don’t fire that guy, I’m quitting.” I was like, “Okay, well, I know which one’s more valuable.” So I sucked it up and had the conversation.
Since then, I’ve developed a whole written format for these so that it’s easy to have the conversation, because I’m basically following a template every time. And it’s something that is true of so many situations in small business that you’re going to run into intermittently, but not always. But you’re going to do it more than once. If you can just come up with an approach that can be deployed whenever that thing comes up, your life will be a million times easier.
Jay Goltz:
I can tell you, just saying to the person, “Bob, you know, I’m talking to you about the same thing now for the second time. I have to tell you, I’m getting concerned. This just might not be the right job for you.” And then sometimes they leave on their own, but I will tell you that optimism is the gift of the entrepreneur and also the occupational hazard.
And the problem is, I would hire somebody and then the other managers, we’d talk, “How are they doing?” “I’m not sure they’re going to work out. What do you think?” “Fifty-fifty.” So we had this conversation 30 times. “What do you think?” “Well, I’m down to 20.” “Oh, it’s been a good day. I’m up to 80.” So we’d have this conversation, and I finally realized after doing this for a couple of years, do you know how many times they worked out? Zero! Zero. When I started playing the odds game with people, “What do you think?” not one of those people ended up working out. So now I realize when you’re starting to think about it, yeah, they’re not going to work out.
Sarah Segal:
No. Well, it’s the question of looking at your team and your staff and being like, “Would I be bummed out if they left on their own?” And if the answer is “no,” then probably that’s not somebody who’s having any real added value to your overall company.
Jay Goltz:
How about relieved? How about they quit? Would you be relieved? Yeah.
Sarah Segal:
Another way to have those hard conversations, if you’re not able to have them, is that you start the conversation and then you have somebody else finish it, right? Where you’re like, “I don’t think this is going to work out. I’m joined on the call with our general counsel. They’re going to take you through the next steps.” Where you’re like, you only have to deal with that first couple of sentences, if that makes you uncomfortable.
Jay Goltz:
Or get comfortable. Like, get out of your comfort zone.Get comfortable with it. I mean, that’s the reality. You know what? Accept the fact you’re the boss. You’re going to have to have uncomfortable conversations with people. That’s your job. I mean, Paul, am I wrong?
Paul Downs:
No, you’re absolutely right. But one of the things that you guys asked about, whether you would be horrified if someone left, there are two aspects of that answer to me. One is, is there anybody else who can do what they’re doing? Which is really important. You could be horrified if someone decides to leave—even if you hate them, and they smell bad, and they insult everybody else all day—if they’re doing something you don’t have anybody else to do. That is on your plate, as a business owner, to make sure that there’s always a backup ready to go for every single critical role. And that way, you can enter those conversations with an easy heart, because if you do need to get rid of the person, you’re not screwed.
Loren Feldman:
How realistic is that Paul? Do you have somebody who’s a backup for every critical role in your business?
Paul Downs:
For everybody but me. It becomes easier as you get past about 10 employees. It’s a numbers game, because by the time you get to, say—I have 26 right now—it’s pretty feasible to have multiple people doing all the things, because there’s already multiple people doing all the things.
Loren Feldman:
Jay, do you have a backup for everybody in a critical role?
Jay Goltz:
I can’t tell you that I do for every job, because the fact of the matter is, I’ve got people doing a lot of stuff and making really solid money, and to have someone backing them up would be extremely expensive. So, no, I can’t tell you that there aren’t some people that, if they left tomorrow, that wouldn’t be extremely upsetting.
Though, here’s the good news: It has almost never happened to me, meaning I keep people around for years. My key people are with me for 20-30 years. So if one of the key people quit, or God forbid something happened, yeah, that could be very stressful, but I can’t afford the luxury of having a backup in every job. I certainly agree mostly with what Paul’s saying—if you can. I certainly do have plenty of jobs where there’s someone else that can step in.
Paul Downs:
Well, it’s a goal. It may not be easily achievable.
Jay Goltz:
No, for sure. For sure.
Sarah Segal:
We set it up where everybody has a partner in crime, and that’s less about people leaving but more, if someone wants to take a day of PTO, there’s somebody else who’s looped into everything that you’re doing. So if something comes in while you’re off, you’re not having to worry about it. You can take a day off without stress.
Loren Feldman:
Jay, you had a situation that you talked about here on the podcast where you had to fire someone for misbehaving. And it was someone in a critical role, and you were concerned you didn’t have somebody to step in and take over. How did you handle it? What happened?
Jay Goltz:
It worked out great. We had a woman who was in the department for years, and you know what? We gave her the opportunity, and we backed her up, and it’s working out very nicely. So I would say this: Here’s kind of a good test I’ve learned. I have a large organization from top to bottom. There’s a big spread. I know I’ve got a problem if the payscale is more than 20 percent between layers. Like, you’re paying someone $100,000 a year, and the only people reporting to them make $45,000. Boy, if they leave, that $45,000 person is absolutely not going to be able to step up to the $100,000. Whereas, if you’ve got somebody at $75,000-$80,000, they probably can do it.
Loren Feldman:
Before we go, I want to go back to one issue raised by the person who wrote the question on Reddit. We all agreed here that a grace period or a probationary period is a bad idea. But Jay, you’ve told us here a number of times through the years that it is important to keep track of how much time has elapsed since somebody started because of unemployment issues.
Jay Goltz:
Absolutely.
Loren Feldman:
Remind us again why that matters.
Jay Goltz:
This is Illinois. In Illinois, if you have someone work for you for 25 days and you end up firing them—they weren’t working out—you have zero exposure. If they’re there 30 days, you have bought the farm. They could have worked at U.S. Steel for 30 years, but you’re picking up all of the unemployment exposure. And in my case, I did the math. If I fire someone on the 35th day and they don’t go looking for a job, and they take it out full tilt, that’s going to cost about $30,000.
And the problem in business is, you don’t get a bill from Illinois saying, “Hey, here’s the $30,000 bill.” It goes into your unemployment rate a year later, and you don’t notice it. So I’m suggesting to everybody, you should know what the unemployment rules are in your state. In some states it’s 60 days and some states it’s 30. In some states it’s 90. You should make sure that before you hit that period—if they’re not working out—you get rid of them before. Because if you just wait a few days later, you’re paying out $25,000, $30,000, $40,000. And like I said, most people don’t even see it, because it just gets buried in their unemployment rate. So their unemployment rate goes from 3.2 to 3.6. Most people are not paying attention to it.
Loren Feldman:
Jay, I’m sure some people aren’t paying attention to it, because they don’t even realize that they’re on the hook for it.
Jay Goltz:
30 years ago, my unemployment rate went to the maximum: 7.2. Now, it’s pretty much at the minimum, because we very seldom are paying unemployment. Because we’re way more careful who we hire. We’ve got the 28-day rule. At 28 days, we make an assessment: Do we think this person is going to make it?
Sarah Segal:
What do you search for on Google? I’m curious, because I don’t know this.
Jay Goltz:
In your case, you’re in California. You should search for “eligibility for unemployment in California,” and see what comes up. And like I said, I think in Florida, you’ve got 90 days, which would be much better. You can give people a longer period, but 30 days is not a long time. But I will also say, even with 30 working days, I think you should have a pretty good idea at the end of the 30 days.
Paul Downs:
I asked two questions about Pennsylvania using Perplexity.ai, which is a pretty good AI search engine. They’ve given me an answer, which I believe is true, because it jives with my experience that Illinois and Pennsylvania are just different. You hire someone in Pennsylvania, like, it doesn’t matter. There’s no grace period during which you can chuck them, and then there’s no liability. It’s just not that way.
Using an AI search engine is going to help you, because it’s really difficult to just wade through state unemployment sites and actually tease out what you want. Now, you could get the answer in a digestible form from an AI search engine and then send it to your lawyer and say, “Hey, is this true?” Just to make sure that the thing didn’t just make the answer up.
I’ve found that this platform called Perplexity is actually the best one for that kind of thing, because it not only gives you an answer, but actually gives you the links that it looked at. You can then go and check—unlike ChatGPT, which is just like somebody who’s spouting stuff at you, and you have no idea.
Loren Feldman:
It’s like listening to us! All right, my thanks to Paul Downs, Jay Goltz, and Sarah Segal—and to our sponsor, The Great Game of Business, which helps businesses use an open-book management system to build healthier companies. You can learn more at greatgame.com. Thanks, everybody.
