Michael Phillips -
GOOD BUSINESS AND OPEN BOOKS
Over the past twenty years many people have asked me to identify 'good
businesses'. They usually mean 'good' in terms of socially responsible
behavior. During this same twenty years I have seen a number of
businesses promote themselves as New Age, Progressive and Socially
Responsible. A large proportion of the self-promoted businesses turned
out to be deceitful, litigious and in a few cases fraudulent.
I never made the mistake of recommending one of the companies that turned
out to be a bad apple because I applied a very simple criteria: does the
company have open books? If they don't, be careful. If they do, you're
safe. The reasons become clear in the following material exerpted from
Honest Business by myself and Salli Rasberry.
WHAT ARE OPEN BOOKS?
No single element defines the distinction between a simple honest
business and one that is not than the issue of open books. Somebody who
is new to business and enthusiastic about it will usually bring out
whatever pieces of paper pass for their books to show a curious visitor
without hesitation. Yet 99 percent of the people in the general business
world will have a reaction of total terror at the possibility of some
outsider seeing their financial records. (Corporations that sell stock to
the public have to publish their financial information regularly).
Having open books means letting anyone look at your business records,
especially your financial statements and the details necessary to
understand them. "Anyone" includes part time employees, customers,
suppliers and curious bystanders.
Emergency Services, a group of professionals in Washington, D.C. who help
people in social action projects, keep their current financial statements
on their office wall. At the Yardley Frame Shop in western England you will
find the books in a folder hanging by a string near the cash register.
Several hundred businesses that I've dealt with have open books. In many
cases you may have to ask to see them, because there is no obvious place
to put or post them. The fact of the matter is that so few people can
meaningfully read books that the public seldom looks at the material.
However, suppliers and friends do read them. The issue of openness and
willingness of businesses to show their books does not depend on how many
people look at them.
WHY SHOULD A BUSINESS HAVE ITS BOOKS OPEN?
There are several good reasons for open books that directly benefit the
business. It feels good, and openness generates openness.
Howard's openness helped him raise money. He publishes the finest (and
only) bicycle repair manual for the six thousand bicycle repair shops in
the United States. Howard was ready to print his second edition and ran
into several problems. The first was that he had borrowed to the limit of
his personal credit to keep his business going, and the second was that
the printer still had an outstanding bill from the first edition. Howard
had presold some of the new editions at less than $12, and that was the
break-even point by later calculations. What was he to do?
Howard considered taking advertising, which would have bailed him out of
his credit problems at the expense of credibility among his readers. (Do
you feel comfortable patronizing a Triple A motel when its so-called
impartial rating appears on the same page as a paid ad?) What he did,
instead, was announce his problem and then described honestly the state
of his business to some bicycle product manufacturers at a trade show and
asked their opinion about his taking ads. The universal feedback was "No
ads!" After his announcement, two people came to him and offered to
personally co-sign on a loan for him. Openness allows people to trust you
and your motives, which are revealed explicitly in your books.
Openness works in dealing with debts as well. Dr. Jimmy had put on a big
conference on nutrition that was a complete financial bust. He lost over
$15,000, which made it impossible to pay the speakers and helpers at the
conference. He didn't have the cash to pay the publishers whose books he
had sold at the conference when their bills came due thirty days later.
I met with Jimmy about eight months after the debacle. His business was
just getting going again as a result of offering small classes on
nutrition. His concern was that after he had exhausted his resources
trying to pay the conference debts as best he could, the people he still
owed money to were hounding him. Dr. Jimmy had sent out several letters
explaining his financial problems and still he was being dunned.
I looked over the sheets of paper that listed his creditors with the
amounts owed to each and how much each had been paid. It was detailed and
complete, and he had been very fair and persistent in his repayment. I
suggested that he send a complete copy of these payment sheets to each of
his creditors, which he did. Without exception they took the pressure off
him. His open books were far more convincing than the standard letters he
was sending out because the letters were typical of what creditors get
all the time from deadbeats as well as from sincere debtors.
Open books work in many ways. The father of open books, for me, is
Stewart Brand (although he gives the credit to Steve Baer) who created
the Whole Earth Catalogs and printed the complete financial data in every
issue. More recently Stewart published the Whole Earth Review in which he
printed the complete financial statement, with a number of wonderful consequences.
Stewart had an abundance of contributors who send in articles, book
reviews and suggestions about new issues, because the readers felt they
were a part of the community of the magazine. In addition, Stewart was
regularly offered financial advice by readers, often unsolicited, and
usually very good. Publishing his financial statement in each issue kept
Stewart very aware of the financial issues involved in the magazine.
Interestingly, in the early days, when subscriber growth rate was low and
several quarters looked very bleak, an unsolicited gift of $20,000 came
in the mail. Did that ever happen to Look or Life magazines? The readers
of those two magazines never even had a hint that the magazines were
having financial trouble, even though the death throes lasted several years.
Not only do communities grow out of open books, as in the case of the
Whole Earth Review, but they also thrive on the openness, especially when
help is needed. You recall the story of the boy who cried "Wolf, wolf,"
too many times and the townspeople finally stopped coming to help him
when they found out he had lied. The converse of this story is
particularly important. The more often you are open and honest, the more
you can count on other people to come to your aid.
The San Francisco Zen Center had a horrendous fire at their mountain
monastery and the mountains and hills around it were all burned. The
monastery, used as a guest retreat in the summer, was saved but the costs
in saving it were high. Zen Center sent an extraordinary letter four
pages long, with color photos of the fire, to all its direct community
and to the previous guests of the mountain retreat. In the letter was a
complete list of all the expenses incurred ranging from bulldozer charges
to the cost of replacing the telephone lines. Their costs had come to
over $60,000; the donations sent in, in response to the letter, totaled
more than $120,000. The material was presented in the letter, not in a
pleading, poor-mouth way, but in the straightforward manner the Zen
Center always uses to discuss its costs and finances; it was a natural
thing for them to do and it was accepted, as such, by the community.
SOME BUSINESS PEOPLE WHO ARE CONSIDERING OPEN BOOKS ASK ABOUT THE IRS.
It has been common in traditional small businesses for the owners to take
a percentage of the cash transactions, and not to report it on their
income taxes. The percentage the owners take varies with the type of
business; some bar owners take 25 percent off the top in cash, some small
clothing stores take 10 percent, while a bakery might take 5 percent of
their sales without reporting it.
The question in these situations is, "How do I have open books if someone
is going to tell the IRS on me for taking unreported income?" The answer
is simple. Be honest and report all your income. Get the best tax advice
you can, pay the least tax you can, argue, lobby and protest the tax, but
be honest. The business and community benefits of honesty and openness
and the absence of paranoia completely offset any reasons to cheat.
Michael Phillips, April 1995