Today we continue Rich’s discussion of trusting the numbers and learn the three rules Rich uses in his guidebook.

In the next chapter I’ll talk about making and living with rules. Include rules in your personal guidebook for dealing with numbers scenarios. Rules do not smother your creativity or stall your drive. You create them to guide you past the cliffs and landslides along the entrepreneurial path. For me, then, the answer—which has come the hard way—is threefold.

The first rule I have added to my guidebook is: don’t tweak the numbers to fit your emotional needs. Some people call that discipline. Believe what the numbers say and act accordingly.

Second, articulate the rules to your partner. If you don’t have a partner, then share your rules with your significant other, attorney, accountant, advisor, or somebody. This emphasizes the need not for a friend or a yes-man, but a partner! Articulate the rules to a person who will be up-front, frank, and direct, who will maintain a clear perspective when you start to chase rats down holes. Rehearse the rules with him or her. Your “rules partner” must be unafraid to ask the tough questions at the critical moment. And he or she must be willing to point out your departures from the established rules.

In a moment of cloudy temptation, you must be able to say, “Hey, didn’t we agree to not…?” and then stick with it. You made the rules when the temptation didn’t exist. Your partner will remind you that you made the rules when your heads were clear. You made the rules by considering situations just like the one that now tempts you. These exchanges with your partner are vital sanity checks.

With all of those hard-nosed rules, remember this third point: sometimes, things change. You may need to change the guidebook. If things do change, rework the rules based on fact, not emotion. Do it only when absolutely necessary. This is the tricky one of the three. You cannot change the rules to accommodate your emotional needs. No whims are allowed if you want the rules to guide you to the summit. Take time when changing any rules; there can be nothing haphazard here—and always, always remember, some rules should never be changed. Don’t ignore reality. The numbers may be telling you to look into other opportunities.

Porter’s Points: Numbers Don’t Lie

• An honest pro forma is as much of a crystal ball as you will get. Make the effort to build it on accurate data. If the numbers don’t add up to a viable venture, it’s time to do the math: go after something else.
• Set rules that specifically tie back to numbers. Make sure you and your partner hold each other accountable. Don’t let pride get in the way.
• Set rules to govern your rules. If you have to, set rules to talk about your rules. This may seem tedious at first, but touching base in the beginning helps train your bootstrapping attitude for the end.

Tomorrow we begin a discussion of the various options for funding your small business.

In addition to letting logic manage emotions, Rich cautions entrepreneurs to pay attention to the numbers, because the numbers don’t lie.

At the end of 2006, my successful mortgage company was reaching the end of its wave. My partner and I were extremely fond of the team we had assembled, and we wanted to keep it together. In a desperate attempt to hang onto this talented, rag-tag team, we created a company named Everest Web Design.

We built a sophisticated pro forma model around the new business. As we reviewed the numbers, it became evident that this business was going to be a long shot, but we just couldn’t accept that. Because we were so emotionally tied to this little team, we ignored what the analysis told us. The team set about tweaking the numbers until the model showed us what we wanted to see. We began testing the business idea, knowing full well the numbers did not support success. The numbers were right: the tests failed. So did we shut down the business? No. We threw more money down the rat’s hole and tweaked the numbers some more.

The initial numbers told me the venture would not work unless we cut expense and reduced the size of the team or infused capital into the project to get it off the ground with the entire team’s weight. After a substantial financial loss, we ended up shutting down the entire project and letting the team go. We had become too emotionally invested in the team to accept the reality of the numbers. When the numbers tell you your bright idea won’t work, trust the numbers. Remember: logic has to manage emotion. If you have that mindset, your first step is to get used to the fact that the numbers don’t lie.

You may be considering how this reconciles with my mantra to “damn the torpedoes!” or “burn the bridges!” The answer is that you have to find the balance between persistence and reality. In the example above, I could have let half the team go, burned the bridges behind us, and perhaps made a run at success. I didn’t. I stuck with my emotions and persisted through insurmountable odds, but that wasn’t enough.

I love persistent, determined people. However, persistent, determined people who chase down rat holes amuse me—and, yes, I have amused myself more than once. So how do you avoid rat holes? How do you strike the balance between persistence and reality?

To be honest, this is an area I’ve failed at from time to time, and the cost has been more than financial. Usually, my failures came because we broke with our original intentions.

In order to strike a balance between persistence and reality, Rich uses three basic rules, which we’ll learn tomorrow.