How a $100,000 ATO tax bill and sneaky employees made me rethink my ‘busyness’
Kobi Simmat in his book How to Build a Business Others Want to Buy shares why entrepreneurs shouldn’t confuse being busy with being productive.
By 2014, my accreditation business had 14 staff, 100 clients and $2 million in revenue. Our core products at the time were writing operations manuals, conducting audits, and delivering occupational health and safety training. All the metrics I valued were ticking up, the clients were satisfied and my staff enjoyed the culture we had created. I was as busy as a one-armed brick layer, but I was happy. The business was going great guns.
To celebrate landing a new contract, I went out to a nice restaurant with my wife and three other couples. There was a bit of one-upmanship going on with the men in the group, each of whom owned a small business.
‘We just took on a new hire,’ said one. ‘A fabulous guy. We poached him from an international investment bank. He’s expensive, but worth it.’
‘We just moved to a new office,’ said another. ‘Twice the size of what we had to accommodate all our new staff. We’ll probably have to move again now we’ve won this monster contract.’
I’d had a few wines under my belt so when my turn came to spruik my achievements, I was well primed.
‘I’ve just bought a new boat. A Halvorsen 40’ Flybridge Cruiser. It’s too big for what we need, but we’ll get used to it. Ha ha.’
I was glad to get home that night. The constant one-upmanship was draining. I gave as good as I got but I was exhausted. On the other hand, I did feel quietly proud that I was able to match them dollar for dollar for what I had achieved, and then some. I had worked really hard and I was pleased with where I was at.
I went to work the next day. My CFO came into my office and sat down. She was on the brink of tears.
‘Kobi, the ATO sent us a bill,’ she said.
‘Okay. For how much?’
‘$100,000.’
My head spun.
‘Whaaat? I thought it was going to be for around $30,000.’
‘So did I, but they reassessed our tax obligations and readjusted the figure. We have seven days to pay it.’
‘Well, pay it.’
‘I can’t.’
Source: Supplied
‘Why not?’
‘We don’t have enough money in the account.’
‘How much do we have?’
‘Nothing.’
‘What do you mean nothing?’
‘We have enough for salaries, rent and the car leases, but once those obligations are paid, there’s nothing left. We can’t pay this tax bill. We’ll be trading while insolvent if we do.’
I felt my father’s shadow loom over me and I felt physically sick at the situation facing me. Could history repeat itself? Would I have my house taken off me just as my father had? It was entirely possible. The reality was we had sales, revenue, users, cash flow and all the other metrics that made us look successful, but we didn’t have any profit.
I had been so dedicated to reinvesting in the business, training up the team, buying equipment, upgrading our offices and leasing vehicles, that I had overlooked setting aside some funds as profit. It sounds so ridiculous now, but in the heat of battle when I was trying to scale quickly, putting aside funds as profit just seemed pointless. Surely the money would be better used elsewhere where it could be working harder?
As it turns out, the answer is ‘no’.
That boozy performative display of ‘look how successful I am’ at dinner the night before, coupled with the sobering reality of a tearful CFO worried sick we didn’t have the funds to pay our tax bill, gave me pause for thought. If this was ‘success’, I needed to reassess my goals.
A startling betrayal
This tax issue and lack of profitability were not the only issues I was facing.
Unbeknown to me, two of my ‘trusted’ staff members had set up a competitive company, while still working for me, and had been poaching my clients. Their modus operandi was to submit a quote from my company, and then minutes later, submit a cheaper quote for the same job under their company banner and win the tender. They took dozens of clients. No wonder we were struggling.
When I confronted them they denied it, but I found the paper trail that documented their subterfuge. They quit before I could sack them. I was happy to see them go, but the experience was heartbreaking. I had given these guys their first break, trained them up and taught them everything I knew. They were on six-figure salaries, far more than what I earned, and I had given them everything they had ever asked for. I couldn’t believe the betrayal.
I needed to do things differently.
Effort vs results
Up until then, being busy had been my badge of honour.
Busy meeting with prospects who didn’t get it, didn’t want it or didn’t have the capacity to pay.
Busy presenting at industry events to people I didn’t like or respect trying to bolster my brand and gain their imprimatur.
Busy with unimportant and non-urgent items that did not make a difference or move the dial in any way.
No more.
From now on, I would only focus on what made a difference to the bottom line. From now on, I would be ruthless in my pursuit of efficiency but most importantly, my pursuit of profitability.
I went through every expense, line by line, and deleted or cancelled anything (or anyone) that did not increase our profitability. I had been too lax in the past, trusting others to do the right thing. I had taken my finger off the pulse and could see that we’d become bloated, slow-moving and lethargic.
I still had the tax issue, but something remarkable happened once those two traitors had gone. Overnight, the salaries I had been paying them (a total of $250,000) just disappeared off the slate. And when I looked at the clients they had taken, most of them were price-sensitive minnows that delivered next to nothing in profit. While the experience of having clients poached from under my nose was an emotional hit, the financial hit wasn’t as bad as I thought. It was a bonus in some way. It left me with loyal clients who wanted the full, five-star service we offered and were happy to pay full price to get it.
I paid the tax bill and resolved to only focus on clients who appreciated what we had and to be more diligent with my hiring processes to avoid betrayal in the future.
The impact these new systems had on the business was incredible. For the first time since I went into business, I was now profitable. I had KPIs in place that made everyone accountable. I had systems that flagged when things were going off track. I knew where every dollar was going, what delivered a result, and what was wasted effort. It felt good. I decided from then on, profit would be what I focused on; profit would be my goal; profit would be my yardstick of success.
Profit is the goal
I discovered two important lessons during this time. First, I learned that being busy should not be confused with being productive, and certainly not with being profitable.
The other lesson was that profit is the only thing that matters. It’s the only thing. I know that runs counter to the prevailing wisdom of the startup community where revenue is the flavour of the day, but that’s not the world I operate in. I run a real business, with real people, who make something that others want to buy, who pay us in real money, and then we do it all over again.
Sure, we’d all love to be the next Atlassian or Canva where we don’t have to worry about making a profit every quarter, but what most novice business owners who idolise this investor model don’t realise is this: once a startup business owner takes capital from investors, they have a sizable gun at their head and that founder is running on borrowed time to deliver a substantial result to those investors.
We don’t read about these stories in the Entrepreneur section of The Sydney Morning Herald because making a solid (but not stratospheric) profit is not sexy or sensational. It doesn’t make for great clickbait. But running a profitable business takes effort, stamina and self-belief, so we should be celebrating those who make a profit every year, not just those who seal a deal to get a cash injection of $50 million off the back of a high valuation.
If a story that celebrated profit was written, it would read something like:
In breaking news, a man worked 80 hours a week for five years straight to generate a profit, and gave up all semblance of a normal life to do so. He was so worried about keeping the business afloat he could only sleep four to five hours a night. What did he think about in those dark nights of the soul? The usual things. Generating leads. Making payroll. Protecting data. Paying his tax. He worked his guts out, and paid his people a respectful wage so they could pay their mortgage and feed their family, even when it meant he couldn’t.
But he did make a profit and that is a story worth telling.
This article is an extract from the book How to Build a Business Others Want to Buy by Kobi Simmat.
