I quit my job in March 1991, moved to Los Angeles (for a short period), and researched different industries and businesses in search of my next entrepreneurial venture. I knew I wanted to start my own business. It wasn’t a question of “if” but of “when and what.”
I knew then, in 1991, what I know now.
Entrepreneurship was my destiny. It still is. I’m an entrepreneur at heart. I’m a risk-taker.
I knew the longer I waited to start my own business, and the older and more settled I got, the more challenging it would be to break from the security of a paycheck.
In 1991, I had very little to lose. I was young, nearly broke, and had lots of energy, passion, and enthusiasm. What I lacked in wisdom I had in energy and a willingness to do whatever it took to succeed.
With the above in mind, I recently received the following email from a reader, which I am sharing with permission:
“I’ve been wanting to start my own business for the last few years. I’m still relatively young, 25, and have been researching a specific industry for a while. I’ve been saving a good portion of my salary since I graduated from college three years ago, so I have enough to get started and to support my living expenses for a few months…
“I have the business plan created, a couple of potential paying clients and the design for the website has been done. My concern is, what happens if I get started with my own business and it doesn’t work out? How do I know when I’m ready to go?”
The following is my response.
Hello, Bob (not his real name):
I can’t advise whether now’s the time to jump into business, and I’m not in a position to assess how prepared you are or how sound your business idea is, but I can provide you with some words of business wisdom so that you can mitigate the risks associated with starting a new business.
6 Must-Know Tips For Starting Your Own Business
1. Understand Your Numbers
What kind of margins will you be able to get? If you buy a product for $100 and sell it for $200, then your gross margin is $100 per unit.
If you understand your gross margin, how many widgets do you need to sell in order to cover your fixed costs? Things like rent, salaries, marketing, and so on.
What is the competitive nature of your industry? What are your competitors selling their widgets for? You need to know your numbers and KPIs before you start a business, not after the business is started.
2. Be Careful, Excel Will Lie to You
When evaluating your numbers, you need to be careful because Excel will lie to you.
In fact, more businesses have died almost from the day they were born because of Excel.
Here’s what happens:
When you’re building your business forecast, you need to make some assumptions. You add those assumptions to your Excel document. Things like:
- The purchase price per widget
- Number of widgets sold per month/year
- The growth rate of widgets sold, month over month
- The sale price of your widgets
- The fixed cost expenses
Now, you start populating the fields. You put the number 1,000 into the field “number of widgets sold per month,” and you make some adjustments to the gross margin of your product. You continue adjusting the cells until the business plan makes sense.
Voila. If you can sell 5,000 widgets a month with a gross margin of 70%, then you’ll be a millionaire in two years. But just because Excel says you can do it doesn’t mean the plan and business itself is sound.
I’m not suggesting you shouldn’t use Excel. It’s probably one of the best business tools around, but just because you have a hammer doesn’t mean everything is a nail. Excel is a tool and only as good as the inputted data. If you fail the tool, the tool will fail you.
So, be careful with relying too heavily on Excel as a basis for business worthiness, and using Excel as a benchmark as to whether the business idea is sound, and if you should start your own business.
3. The Power of Compounding Can Make You Rich
There’s an expression, “Compound interest is the eighth wonder of the world,” and just as it holds true for investments, it also holds true for business expansion and growth.
Once your business grows, it will produce a profit. You now need to decide how you’re going to invest the profit.
You could, of course, spend the money on a five-star vacation to Hawaii or buy a new Benz.
Alternatively, the capitalist will consider the return on invested capital. In other words, how efficiently can you reallocate your profits towards other profit-generating investments? And next, and more importantly, you need to understand the rate of return you will achieve from your reinvested profits.
If you know that reinvesting your profits will produce a 30% return on your invested capital as profits, then every $100 you put back into your business(potentially by way of new machinery or marketing) will produce $30 in additional profits.
That $30 gets compounded over time. Next year, you will have $39, the year after $51, then $65, $85, and$111.All the while, you’re still working on the initial $100 of profits that are also growing, being reinvested, and compounded. Continue at this pace, and in five years, you will have $1,000 and many, many millions in 20 years.
4. Find a Business That Has Recurring Revenue
I would much rather sell a product and start my own business in a firm that has recurring revenue rather than one that doesn’t.
For example, give the razor away for free knowing your customer needs to buy a new blade every month. You make one sale and then count on the recurring revenue over and over again from the initial sale.
If you’re considering an evergreen opportunity, then err on the side of a business that needs a recurring subscription rather than one that doesn’t. There are many risks associated with starting a new business, and knowing that you have the security of a guaranteed revenue flow will help mitigate those risks.
Again, the power of time compounding comes into play. You can more quickly scale your sales efforts by deploying your salespeople into opportunities knowing you have a customer for many years rather than having to constantly sell a new product. Sell the monthly lawn-mowing service rather than the one-time deck-building.
5. Understand the Power of Leverage
You need to understand the power of debt, which is leverage. But in the context of this discussion, I am speaking about leverage in two areas specifically:
- Leverage as it relates to hiring and growing a team
- Leverage as it relates to your time
The two above points are somewhat related, but let me address both:
Your business’s revenue and income will eventually reach its maximum potential, after which(unless you have outside help), your business growth will stop and likely decline.
You need staff in order to scale a business. The staff doesn’t necessarily need to be permanent, full-time employees. They could be contractors. Either way, you need to earn more revenue and net margin from each employee than the employee costs.
And you need to leverage your time. Place a price on your time and then assess whether the work you are doing can be done more productively and cost-efficiently by someone else, either through less expensive labor or better skills. Either way, you need to understand that you alone can’t build an empire—you need help.
Once you have the formulas right for the above leverage, increase your income by investing your money and not your time. Acquire assets that produce income without requiring your direct involvement. Keep doing that repeatedly.
And last but definitely not least:
6. Your Business Will Live and Die on Marketing
Your business’s success will depend on how well you understand the various levers required to build a marketing machine. That includes SEO, SEM, landing page optimization, social media, content, marketing automation, and lead generation, inbound and outbound.
Don’t start your business until you understand marketing. Figure this out before, not after, you start your business. Otherwise, it might be too late.
Mitigate the Risks Associated with Starting a New Business
Whether you start your business now or wait is something you will have to assess. If you understand the mechanics of marketing, leverage, and the power of compounding, and you pick the right business in the right industry, then don’t let fear be the reason you don’t start your business.
All great businesses were started with an idea and by someone who was willing to take a risk. Had these people not started their business, then they would never have made any money. Your success will begin the moment you start.
Good luck with your wealth-creating journey.
If you liked this post, you might also like this one: How Do You Know When It’s Time to Sell Your Business? It’s Not All About the Money.
You should also consider subscribing to my blog. I publish one article a week on small business and wealth creation. You can subscribe here.
Also, I published a book during the summer of 2018, “The Kickass Entrepreneur’s Guide to Investing, Three Simple Steps to Create Massive Wealth with Your Business’s Profits.” It was number 1 on Amazon in both the business and non-fiction sections. You can get a free copy here.