WOW, My Very Own Business!!??
The Synthesis of 45 Years' Experience in Business
By: Jay W. Henderson
Introduction
You've heard and seen the ads: be your own man, do your own thing, beat the government and even make your own hours, work in your own situation - you know, pajamas, at home, via fax or internet, unencumbered by bosses, time limits, reports, meetings and all those terrible, individuality stealing, time interfering things you had to put up with when you worked for "the man."
Guess what? Over 15 million Americans feel just like you do. They are the "self” employed people who have escaped the day-to-day grind up the freeway to someone else's shop/plant/company. They are free.
But they have also learned some things that you might want to keep in mind if you want to make your self employment a success.
Let's not forget, though, that some people are "self employed" because they don't have anything else to do and no one will employ them at a level they believe appropriate to their station in life, whatever it is. We aren't much concerned with these people because they never were and probably never will be very successful.
Here we are concerned with those who have the drive, tenacity and intelligence to make their own company successful.
So, let's discuss some of the lessons you will have to learn, sooner or later, well or poorly, if you want to “make it”.
The first one is to look at the big picture. At the Wharton School of Finance at the University of Pennsylvania they teach that there are three "S"'s, or levels of achievement or stages, if you can pull them off:
1. Survival
2. Success
3. Significance
Let's face facts. Most "self employed" business situations do not survive. Face it now. There is nothing "wrong" with those "failures". They are part of the system and, in a very strange way, keep the system going.
All of those startup and struggling companies buy things. The suppliers price their goods and services to take into account the companies that will fail. The money circulates just as if all those companies had stayed in business.
Another fact is very interesting also. The method of accounting for the businesses that "go out of business" does not differentiate between ones that fail, ones that merge, ones that are sold, and ones that are just shut down because the owner got a better offer. Which means that not all of them are "failures" in the classic sense and you just can't know where you are going to land until you give it a try.
The Lessons
So, let's presume you have decided to try and are willing to put up with the limitations the small business regime imposes. What is important?
LESSON 1. The very first lesson is not to get distracted. It is very easy to forget what you started to do. If you have a good business idea (that is one that makes a profit, otherwise it is just a good hobby idea), then focus on it and lay out the path (PLAN) to the profit. It is called a business plan, and most small businesses don't have one. In fact, most small businesses don't even know what a business plan looks like.
Plan, Plan, Plan - and put a cash flow projection in your business plan.
The plan should include the exact method by which you will make a profit and quantify each element. There is some very good business planning software that is very inexpensive. Use it.
Once you have convinced yourself, and your husband or wife, incidentally, that the business opportunity is a good one, there are some further principles (lessons) to observe.
LESSON 2. All of business is about people. So, as our next preliminary principal, let's take a look at some of the "human" factors that are closest to you, the ones your husband or wife may want to be aware of.
Remember that, while you were employed by the big company, you were "covered" by lots and lots of programs that were available because the large company can use its size to take advantage of the economies of scale. You can't. So, you will not have medical insurance, pension plan, dental coverage for you and your family, glasses paid for by someone else, corporate paid travel, or any of the other things companies pay money for, just to keep employees working. But now you have your own parking place. Make very sure your spouse thinks that what you are doing is worth that parking place.
Now let's move on to Phase 1 of the actual business: SURVIVAL.
LESSON 3. The first issue in survival is staying alive long enough to succeed. In your own business you will certainly make less money than you did working for the big company. You and your husband or wife need to face that fact and one other: cash flow is very uneven in your own business.
Which all goes to the central survival issue in any business, but especially in a SMALL BUSINESS: Without the capital to survive during the down times or the "no cash this week" times, you can't stay in business. Get that capital anywhere you can. Almost all small businesses use their owner's credit cards. That's dangerous, but it's "doable." Another source is family and friends. However, they must be very special people to let the money go, knowing they may never see it again, or you have to face the fact that you won't have many friends left if you don't make a raging success of your new venture. Oh, yes, one other thing. Once you are successful you will have to learn to smile and look at the ground when each of those people who loaned you a few bucks tells the entire world that they alone are responsible for your success.
If you have equity in a piece of real property and your spouse will cooperate, you may be able to get an SBA loan or even a conventional business loan from a bank. That is the subject of another article, but the reality is "don't count on it."
Realize, also, that if you have worked for a large company for a while, you may be able to roll your retirement plan into an IRA, borrow money from that IRA, and get it paid back within the time limits. There are also "emergency" loan possibilities with an IRA that your accountant can tell you about. Be careful, though, because there are strict rules about what you can and can't do.
Once you have some money in your "buffer" account, it's time to start.
But don't quit the big company, just yet.
The first, foremost, biggest, most important rule about starting a business is to start small, not to launch. Here is the difference: launches go off with a huge flourish, lots of media noise and fireworks; startup businesses should wiggle, then crawl, then totter/stagger, then walk, then run, all on capital plus profit.
This means starting at very low overhead to see if the profit mechanism works. Which also means starting part time, since you can't make enough profit starting out to justify quitting a good job. If you are already unemployed, then it doesn't matter, does it?
Another word to the wise: It sure helps to have a spouse with a steady income if you are going to start your own business.
LESSON 4. Without sales you don't have _______. (Fill in your own noun)
So get off your bottom and go GET the sales. If it takes walking up on your customers, do it. If it takes advertising, find a cheap way until you can afford the most effective way. You get a lot more sales if you ask for them than if you just imply that your product or service is better and let the customer make up his own mind. Go ahead, push a little.
Once the sales are on the books, you have some "figurin"' to do.
LESSON 5. The reality of proportions: Now you know you can get the sales, so let's go back and modify the business plan. It looked great the first time, didn't it? Your husband or wife drooled over all that money you are going to make. Now, let's modify the plan with some reality and then we'll go back to work.
Out of each dollar you make, there are expenses to pay. The proportion of those expenses to your sales dollar is what tells you how successful your business is. In simple terms, take each expense item and divide it by your sales dollar.
There are two general categories of expenses: direct expenses having to do with actually buying the raw material your sales item is made of, and the labor to make it, and general expenses, which are the expenses of running the business, like telephone, rent, advertising, taxes, labor that does not directly produce anything (the office help, for instance.)
As a general rule, if you make something to sell, your "cost of goods" figures should not add up to more than thirty percent (30%), and thirty-five percent (35%) is a killer. Almost any small businesswoman (and businessman) will tell you that you make your money buying the raw materials, not selling the finished goods. So, this is the place to hunt down the bargains, buy in bulk, stockpile what you will need in the future and, generally, use your head.
Then comes the general expenses. Here again, you are looking for less than thirty percent, with thirty-five being the drop dead level. Some small businesses try to hold this figure to twenty-four or -five percent, but very few businesses can do that. Remember, this figure includes all the payroll taxes, and other “people” expenses.
Now comes the big one: What are you going to pay yourself? We all know that you will probably "plow back" most of what's left for the first year or two. But if there isn't anything to plow back, you can't grow. So, you have to have between thirty and forty percent left after paying all the expenses.
Can you cut into that somewhat, especially in the beginning? Sure. But not for long. Look at it this way, if you take fifteen percent out for yourself, that leaves ten or fifteen percent real profit. If you go below that, you might as well be putting the money into a good mutual fund. It takes a lot less work and you'll make just a little less than your business is really making.
Maintain those proportions at all costs.
LESSON 6. Pay attention to the formalities, but don't overdo it. All government agencies have licenses you have probably never heard of and you probably need at least one of them to conduct your business. So find out what you need and get it, even if it costs a little money. Don't give some government bureaucrat, who never made a payroll in his life, the power to take your business away from you.
There are also protection issues with regard to structure. You will hear all kinds of rules about whether to be a corporation, sub-S corporation, limited liability company, partnership or proprietorship. The only rule is, don't ever do business as a partnership. When you do, you give your partner the power to ruin you, even if inadvertently. For instance, if your partner's son steals his car, hits and kills someone (which is probably not covered by insurance and is probably not real theft under the usual law that applies) and there is a civil judgment against your partner, that judgment can be executed against his half of your business and you could well have a sheriff show up to take half your company's cash, computer or manufacturing equipment to pay the judgment. Try doing business with half the stuff you need. Just don't do partnerships.
On the other hand, don't go cost yourself a lot of money incorporating or LLCing (that's not exactly a word, but you get the idea) too soon. Unless you are selling something dangerous, you shouldn't even think about a formal business structure until your reportable profit hits about half of your last year's salary. That's just a gauge, but it's well borne out by history.
LESSON 7. Taxes can ruin your whole day, month, year, life. You can take any personal position you want to with regard to the appropriate level of tax and even whether the government should have the power to tax at all. But the reality is that the government has all the firepower on this issue. Business is just a conduit for tax collection in this country, so don't take the tax thing personally. Face the fact that taxes are just a cost of doing business, calculate them into your business plan, and THEN PAY THEM. If you don't, you will spend the rest of the decade paying the government every spare penny you can generate. Remember that those people have the power to levy liens against not only your business, but against you, personally, and, if you live in a community property state, against your spouse's pay, too. Just pay them and vote to change the system.
LESSON 8. Record everything. All business decisions are based on information. There might be some old fashioned, shoot-from-the-hip business guys out there who succeed with only their wits and whatever info they can gather on the run. Those guys are very rare and won't be in business long if an effective competitor comes on the scene. Order entry/purchasing, raw materials ordering/inventory, manufacturing tracking, invoicing, collections, expense payment, accounting (balance sheet and profit and loss statements) should all be computerized. That way, you can look at the numbers and know what is going on. Remember, numbers only lie to fools who don't know where the numbers come from. So, buy Quickbooks and don’t look back.
An ancillary word on record keeping: you will want to keep your own records for quite a long time. It's cheaper that way. Don't let that policy prevent you from hiring a really good, small business CPA to analyze the data, meet with you to give you the benefit of his/her experience and prepare tax returns. Never, never, never sign a tax return yourself without a professional preparer’s (usually a CPA) signature, right alongside yours. If you do, you can almost guarantee an attack by IRS at some future date. The IRS tends to look at CPA-prepared documents less than ones prepared by the TP (TaxPayer, not toilet paper).
LESSON 9. Manage. Some ex-employees see business as putting a mechanism in place and sitting back and leisurely watching the money roll in. Not.
One of the things that business leaders learn, sooner or later, is that, as a manager, you must have a bias for action and take very quick action based on your information system. If you allow poor performance, shoddy response, poor record keeping and other less than sterling business practices, you will not only be seen as mediocre, but you risk being driven out of business.
The P.I.E.R. program is a good model, though only one of many. That stands for Plan, Implement, Evaluate, Revise. Do it over and over and over. But above all, make the decisions and take the action just as soon as you recognize the need.
LESSON 10. Murphy's Law Applies. Timing is important in business. However, triple whatever you originally thought your time line was. For instance, if you thought you could get your first products to market in two months, because you just can't see how it could take any longer. Give yourself a break and realize that if you get it done in less than six months, you did well. The myriad problems are beyond the scope of this piece, but just remember, in business, if it can screw up, it will.
LESSON 11. Step back and re-look at reality, often. Once you get the monster running, it is really hard to back away for more than three minutes at a time, but you just have to do it. One of the most successful company presidents I know spends every Sunday from about 10:30 until 3:00 or 4:00 sitting on his front porch with a pad in his lap, just thinking about the business, his life, how the two fit together, and what to do to make the business better. On Monday morning, his secretary is inundated with ideas to type into the computer, organize and kick to the "Ideas" file on the computer. This is where you revise the business plan, figure out which supplier to use, etc. while you are not faced with the pressure to make the decision RIGHT NOW. Relax. It works a lot better that way.
LESSON 12. Join Associations. I know, who has time to congregate and sit around talking with a bunch of competitors when there is work, work, work to do? Well, you better. These are the places you spot trends, find out what other people in your business are facing, and, hopefully, do so in time to take steps to avoid the same problems, learn who the best or least expensive suppliers are, find out about new software that may be specific to your business, find out which customers are letting their invoice payment practices slide, and so on. If you open your mouth, they might even make you the leader of the group and you will get all the good info first. It really is worth it.
LESSON 13. Do not over insure - you can't afford it. I'm sorry, and I apologize to all my clients and referral sources who are in the insurance business, but you can't afford to over insure. If you let your friendly insurance sales guy(s) sell it to you, you can buy worker's compensation (besides, it's the law), premises (probably a condition of your lease), umbrella liability, rolling stock, life (death), key man, buy-sell, and probably ten other kinds of insurance as well. But when you are just starting out, you have to stretch every dollar as far as you can to get your product or service as far out into the market as you can. Once the cash is flowing, then you can add the insurance you know you should have. But not so soon that it kills your cash flow.
LESSON 14. While we are talking about cash flow, that is what business survives on. Without it, you can make all the sales and ship all the goods you want to, but you won't be able to pay for them and the business will grind to a halt. Upside down. Very uncomfortable. So, make sure you keep your receivable collections within about ten or fifteen days of your credit terms, if you even give terms to your customers. If they lie to you or just refuse to pay, go sit in their waiting room until you get a check. Make them know you are serious and most of your cash flow problems will fade.
LESSON 15. Do not get into a fight with the government over "contractors." When you are starting out it is always tempting to try to make your personnel into "contractors," pay them straight time with no withholdings and save the employer's portion of the payroll taxes. Unfortunately, the standards they have to meet to qualify as contractors are so tough, both on the Federal level and here in California (and probably in your state, too) that you usually can't win those fights. The impact of a lien on your business for back payroll taxes is devastating. Your job is to manage risk. Getting into an argument with IRS or Franchise Tax Board about an issue they own is just not bright.
LESSON 16. Put away part of your profit in a government sanctioned "pension" plan. These are really just tax free (deductible) bank accounts. You will be amazed how fast they grow, but you have to start early. When it is time to quit, you will have a wonderful pile of cash, regardless what else happens.
LESSON 17. Don't ever allow any single person or group of people to get into a position to control your business. This happens with employees, sources of supply and even customers. One of the most famous stories of all time is about one of the world's largest retailers that was big enough to brand its own goods. Its purchasing agents would find a small or medium sized supplier, start ordering branded goods (which are not sellable to anyone else, of course), work the purchasing up to where they represented 60% to 70% of deliveries of the company in any given month, then a company officer would stop by with an offer: sell the company to us for nothing, stay on as manager, or we'll cancel all our orders right now. That company lost millions in those lawsuits. But they also destroyed a whole bunch of small businesses in the process. A key employee who has unique knowledge or a single source of one of the components of your goods, can have the same kind of power. Be sure no single "source" can do you in.
LESSON 18. Growth can kill you. Every experienced business person knows that you can only grow the company as fast as you can plow back profit. Your working capital fund will go away within a few months. Then your growth will depend on how fast you can collect and plow back profit. Maximum sustainable growth. Know what that growth curve looks like and don’t exceed it.
LESSON 19. Don't ever lose your sense of humor. Even if it's warped, you need to have some fun with this thing. Just like “real” life.
LESSON 20. Exit strategy should occupy some of your time. In sports, it’s called keeping your eye on the ball. Think like a buyer – what would you want to see in a company like yours. Then build toward that version of the business and keep it in that condition. When it’s time to exit, you will have a terrific track record and that translates into more money.
Conclusion. American small business is unique. In its depth and breath it is truly breathtaking. So is the risk you take each time you open for business. So, use your head, hire some good advisors, learn the lessons early and enjoy your new money machine.