Starting A Business Is Not The Solution To Your Problems

Photo credit: © littleweed1950

What do you do when you need to increase your income to cover the rising costs of living? What about when you lose a job and need to find replacement income to pay the bills? How about divorce or injury and the normal household income decreases significantly? Or if you’re just not satisfied with your current employment situation? Well, if you listen to a lot of people, in particular those on the internet, they will tell you that the best thing to do would be to start a business. They make it sound like it’s something where you just wake up one day and say, “Oh, you know what? I think I’ll start a business today!” and boom, just like that you’re off on the road to riches and financial independence. I’m sorry to say, that’s not how it is at all, and you need to know what you are getting into before trying.

 

It’s never as easy as some people make it out to be to become an entrepreneur, starting and running a successful business from the ground up. There are reasons why half of all small businesses fail within the first five years, and more than two-thirds are gone within ten years of starting. It isn’t a simple matter of choosing a name, building a website, printing business cars, and wait for the phone to ring and the emails to come in. The bottom line is that no matter what the reason, no matter the state of the economy, no matter what age you may be, or what anyone else says…

 

Starting (especially running) a business isn’t easy

Let me start off by asking you all a question. With the proliferation of reality shows centered around failing businesses and people who try to pitch their businesses to investors only to get laughed at, does it really seem like everyone should be an entrepreneur? There are more examples of what you see on Restaurant Impossible, Kitchen Nightmares, and Tabatha Takes Over than there are businesses that succeed right out of the box the first time around. There are more people like those on Shark Tank that have great ideas yet horrible business sense than there are entrepreneurs who have everything aligned property for success.

It doesn’t matter how much passion you have for a particular business, how much experience doing what your future business will entail, or how much time you spend watching television shows leaning what not to do. It really doesn’t. None of those things are important for the successful management of a business, either one you built up or one that you took over. And do you know why? Because running a business is more about the behind the scenes action than what the business does in the first place.

 

In this regard you must understand one key point…

 

What makes a business successful isn’t what you think

Too many people concentrate on the pretty, popularity indicators like customer and media opinions and gross sales figures. Those things have their place, particularly in attracting new customers with positive reviews and showing a certain level of success with sales figures. However, sales figures alone never equate to a successful business. The key to success is the bottom line-net income (or net profits)- which reduces the sales by all of the operating and non-operating expenses that a business incurs. There are several factors that are important in controlling the bottom line, but three in particular carry much more weight and are often the most difficult for inexperienced entrepreneurs to understand
 

  • Keeping costs of good within reason–If you can’t control the costs of the pieces that go into your product, your profit margin on each piece will be lower forcing you to raise prices to turn a profit (which may drive away customers).
     
  • Billing clients timely and regularly–If you can’t maintain a proper billing system, then you won’t be able to collect on the services you offer.
     
  • Pricing goods & services properly–Choosing the wrong price-points will either drive away customers (on the high end) or short-change the business causing the bottom line to suffer unnecessarily (on the low end)

 

These are very difficult tasks for some people to master, even those that have previous experience running a business. There are other expenses such as utilities and office-related items, but those are generally more simple to understand and handle. It doesn’t matter how many social media contacts you have or how high your ratings are on various review sites, if you don’t have a net profit when all is said and done, your business is not successful.

 

Another thing that many people have trouble doing is letting go when it comes to controlling every aspect of a business. Real entrepreneurs, at least the successful ones understand that it’s important to…

 

You can’t do everything yourself 

There a lot of people out there who advocate doing everything yourself, and they could not be more wrong. There simply isn’t enough time to learn how to be proficient at every necessary task, or even enough time to learn or actually do them all. It doesn’t matter if you are thinking about the professional image of your business or the legal and accounting aspects involved, you need to know when to swallow your pride and bring in a business to business expert on that subject matter. Using a professional web designer or graphic artist will lead to a better result than trying to design your own website. Hiring an accountant or bookkeeper will yield better results than you trying to learn a program and doing on your own. Paying a lawyer to draw up contracts will result in more favorable documents that will help you sleep better at night.

If you are the type of personality who cannot give up any control and feels the compulsion to be involved in every single action, then you are going to fail, period. Delegation is important because it leaves you freedom to do what you do best–run your business, not learn about doing things that are totally unnecessary, and potentially damaging if done incorrectly. You should also ask yourself if you have …

 

Time management is difficult

When you start a new business venture, or even if you buy an existing one, the time commitment is huge. So huge in fact that you will need to rearrange practically every aspect of your life. Well, if you want to be able to find time to sleep, that is. Many people find that running, and especially starting a business takes significantly more time than they have planned for, and many times give up because of it. Additionally, there are a large number of people who are perfectly adept at working within the constraints of an employer-employee relationship, but when removed from that dynamic (working independently) they become less efficient and productive

And that is if you’re the type of person who can budget your time well in the first place. How much time do you dedicate to marketing? How much to developing a business plan? If you are producing a product, what about researching and comparing supply chain resources? Website design? Accounting? Legal? It’s a never-ending list of things that require attention, and there are just so many hours in the day to do it all. Then there is the issue of distraction and the ability to concentrate on what needs to be done rather than any other issues going on in one’s life at that time.

 

And then there is the biggest hurdle…

 

Everything costs money

If you want quality, it is going to cost you. It may not necessarily be a ton of money that is needed, but let’s be honest here, do you really want to hand out business cards to potential customers that were printed on a low-quality home printer? Or showcase a website that was built using basic tools by someone with limited skill and knowledge? Will you take a chance that a call on your house phone will be a customer and your kids end up answering? Everything you need to both show a professional and respectful image and costs money. 

Now, you may be able to avoid needing to depend on traditional currency if you decide to go the barter route. You can probably get quite a bit done for you in trade, but you must have something to offer those people in return or else it will never work. You must also remember that there are so many things you can barter for: electric, phone, internet, gas all require cash.

 

It may sound like I’m against people starting or buying small businesses, but the reality is that I am completely for it. The difference is, I am only in favor of it under the right circumstances: the proper motivation, fully thought out and planned, appropriately funded as well as having sufficient savings or other income to offset the time it takes for the business to produce profits, and realistic expectations. A business will not instantly change your life or situation, and in fact, if done improperly can lead to financial ruin and tear a family apart, so please be careful.

 

This article was featured in Carnival Of Personal Finance: Financial Horror Story Edition

About Eric J. Nisall

Former NY'er, accountant & business consultant, founder of GreenBridge Advisors. Blogging about personal financial, small business topics, and other fun topics at DollarVersity. Fan of the NHL and everything hockey! Follow me on Twitter, Facebook, and on Google+

  • http://www.moneylifeandmore.com/ Lance@MoneyLife&More

    I think you laid it out very well. Starting a real business is something you must be fully committed to and isn’t something you can easily back out of most of the time. Those that succeed have worked very hard and likely had a plan to get where they are now.

    • http://www.dollarversity.com Eric J. Nisall – DollarVersity

      You got that right Lance.  And on top of that, the way that credit card contracts are worded, if someone does walk away having business credit card debt, they’re personally liable for it.  Just another reason to think things trough and have a real, solid plan before moving forward.

  • http://twitter.com/Lbeemoneytree Lauren Bee

    I agree, this was a great article. I think may business owners grossly underestimate the amount of time/money involved. I also think having a good amount of capital to get the company on its feet would be important too.

    • http://www.dollarversity.com Eric J. Nisall – DollarVersity

      Money is always going to be an issue.  I would say that it’s probably more important to have enough personal savings to support yourself and/or family while the business is first started, but if you can capitalize a business from the get-go it may be a lot easier to get going.

  • http://www.eyesonthedollar.com/ Kim@Eyeonthedollar

    Very good points. A business really is only as good as the people around you if you have employees. That has been the hardest point for me. You see all the headlines about people out of work, but it is truly hard to find good people for jobs that don’t require a college degree, people who want to actually work and show up without spending the whole day on facebook or texting. A good office manager is truly a gift. On the plus side, when you own a business,  it is nice not to have to an answer to anyone, except your customers, of course!

    • http://www.dollarversity.com Eric J. Nisall – DollarVersity

      It often times works both ways, Kim. There are plenty of jobs that are not paying anywhere near the value the decision makers are looking to get in return.  There has to be some equality in terms of pay vs. performance, and many times I cannot blame people for not accepting a job which is too one sided.

  • http://www.onesmartdollar.com/ Sean @ One Smart Dollar

    Both my wife and I have started our own businesses and it is an incredible amount of work.  The rewards are there but the stress is also high.

    • http://www.dollarversity.com Eric J. Nisall – DollarVersity

      That is something I really didn’t expand on, Sean, simply because it could fill an entire article itself. The stress involved is huge in many instances, and secondary to the money issues, I would say is the biggest reason for failure of families.  Of course, I can’t speak to your personal situation, just from what I have witnessed, but I always take time away from my business ventures in order to calm down and step back for a little bit so I don’t go too nuts.

  • http://www.mymoneydesign.com/ MyMoneyDesign

    Eric, very well laid out!  All too often I see people start LLC’s or their own shops only to fail in a few years.  I think a lot of people underestimate how hard it is to attract buyers of your product / service.  And even if you do, I think the hardest part about running your own business (and why I haven’t yet) is leading other people.  You have to get others to buy in to the success of your business or it will never thrive.

    • http://www.dollarversity.com Eric J. Nisall – DollarVersity

      There are a great many aspects about running a business that people underestimate.  Beside your example, I would say the time/effort component are among the biggest overlooked issues.  I guess people think that the internet will turn them into a Field Of Dreams scenario, where if they build a site or a shop, people will come just like that. 

  • http://www.modestmoney.com/ Modest Money

    It is amazing how so many people assume that running a business is simple.  There is so much that goes into it though.  Even if you have a great idea, you have to be willing to put in the work.  Still you might be held back by your own personality or other circumstances.  Then when you do put in all that time and effort, having the business fail would be very disheartening.  So I agree that you really do need to know what you’re getting into beforehand.

    On the bright side there are some smaller businesses that you can get into where you can avoid a lot of these complications.  For example, something like blogging is pretty tough to outright fail at if you have enough drive and motivation.  It does take a lot of work though.

    • http://www.dollarversity.com Eric J. Nisall – DollarVersity

      To be honest Jeremy, I put a lot of the blame on the people who write such things.  How many articles have you read that tell people to start a business if they need extra income?  Or how many that extol the benefits of running your own business but lack the balance to even mention the possible pitfalls like there was no risk or work involved?

      Even blogging is a difficult task to make into a full-fledged business.  You need to attempt to find your own place among the crowd, and try to find a way to get your voice heard.  Not to mention the fact that there are only so many topics and ways to approach each, as evidenced by the proliferation of repetitive articles spewing the same crap, boring list posts that are so stupid that by the end the author has to stretch to make their points fit the subject matter.  The drive to keep going with something like that may be tough to find. 

      • http://www.modestmoney.com/ Modest Money

        I should have clarified that as a ‘side business’ it is tough to outright fail.  The amount of boring blogs spewing the repetitive crap just attests to that fact.  Of course there is a big difference between a successful blog and one that is just making some side money with few regular visitors.  Getting to the level where it can act as full time income is quite difficult.  The funny part is that once a blog gets successful it often ends up transitioning into one of those boring repetitive blogs.

        • http://www.dollarversity.com Eric J. Nisall – DollarVersity

          That last point is actually true.  Once some sites get to be huge, the end up being bought out and unless the original owners maintain some input, they tend to become just like all the others out there.  

  • http://twitter.com/MarriedWithDebt John | MarriedW/Debt

    Differences also pop up depending on your situation: if you are starting it on the side, or going in full force to make sure you can eat. I’ve been less aggressive with my online endeavours than I would if I lost my job and needed to get some fast cash. Measured and sustainable growth (not too slow, not too fast), are also important.

    • http://www.dollarversity.com Eric J. Nisall – DollarVersity

      In my mind, John, the situational differences are a given. No matter what the conversation is about there are always personal biases and circumstances that people need to be sensitive to.  I hate when people talk in generalities all the time, especially about money and debt, when the situations are so very different that the point of a blanket statement is defeated before the words are ever typed or spoken.

      But, I digress.  To your point about needing money fast, that is a time I would definitely say falls into the traps I spoke of.  That desperation can lead to shortcuts on one extreme, or physical/mental exhaustion if taken to the opposite extreme and neither would be good results.  I wish there was a simple answer for people in those situations, but other than saying “you should have had money saved for just an occasion” (which is the last thing they would need to hear at that point) there really isn’t one.

  • padgettshcom

    You make some good points Eric. You can’t wake up one day and suddenly be an entrepreneur. Well, most people can’t. But I do think you can teach yourself and train yourself and apply yourself into being a successful business owner. There are all sorts of services out there that help small business owners with the aspects of business ownership that they’re bad at or unfamiliar with–cash flow management or payroll services, for instance. So while it’s not as easy as some may think, it’s also not impossible, either. People just need to be willing to learn, then earn.

    • http://www.dollarversity.com Eric J. Nisall – DollarVersity

      I’m not sure that people can “become” an entrepreneur.  Bad habits are hard to break, and some of the necessary traits are simply ingrained in a person or they aren’t.  Things like organization and meeting deadlines aren’t very easy to teach yourself, nor are the drive and level of commitment that are required to succeed.

      I do agree that certain skills can be learned over time with education, and practice.  And, your point about about using outside services for support in areas of need echo my own points.  Unfortunately, there aren’t services that can make up for traits that are fundamentally lacking like the ones I mentioned above.

  • http://tiethemoneyknot.com/ Tie the Money Knot

    People need to have a vision, goals, and a plan when starting a business. Plus, a realization of the scope of time and effort that is required to run a business. Overall, this means being informed and prepared.

    The thing is, so many people flail about from job to job or job to business, etc – without having a true sense of where they’re going and what’s involved at each step.  Running a business isn’t an escape from difficulties. Rather, it can be either a tremendous opportunity or a tremendous disappointment. What it ends up being depends to some degree on external factors, but to some degree it’s based on the preparedness/motivations of the individual as well.

    • http://www.dollarversity.com Eric J. Nisall – DollarVersity

      Outside influences are certainly a major factor, such as the economy.  At the same time, there are still people who manage to adapt and succeed even in times of economic struggle.

      Your mention of preparedness is spot on.  Having a plan, and rational expectations is a very important piece of the puzzle.  Managing expectations-understanding that nothing will happen overnight-and being able to work through the slow/tedious process of starting a business is generally a great indicator of whether a person will make it as a business owner or not.

  • http://www.narrowbridge.net Eric

    I think one of the toughest parts of running a business can be sales. You don’t just have to manage revenue and cost, you have to convince people to give you money for something. That is not always easy.

    • http://www.dollarversity.com Eric J. Nisall – DollarVersity

      Taking that idea one step further, you need to convince people why they should give it to you and not the person down the street or across town.  Many businesses are very competitive when it comes to pricing, so quality, service after-the-fact, and value added are very important components of the sales equation.

  • http://blog.familymoneyvalues.com/ Marie at Family Money Values

    I’m curious what prompted your strong opinion on this subject.

    • http://www.dollarversity.com Eric J. Nisall – DollarVersity

      The biggest reason Marie, is the way that so many bloggers and writers so carelessly toss around the recommendation of starting a business to solve problems or improve one’s situation.  I can’t even count how many times I have read that if you aren’t happy in your current job that you should start a business to get to a happier place.  Or, if you are struggling to make ends meet, how starting a business can create a new income stream to help in that regard.  To me, it’s simply irresponsible and much of the advice ignores the dedication, time, skill, and possible downside of such an undertaking.

      I see it everyday–people who are very good at what they do, or have very viable ideas for a business yet struggle to make the actual business grow and succeed.  Going through their books, seeing their bank statements, and analyzing their financials shows me that many many of the clients I deal with can talk a good game about their plans and ideas but the execution is much more difficult. People need to be educated to the negatives as well as the positives in order to give them a complete view of what starting and running a business takes and most of the writing simply falls flat in that regard, and I really feel that these people are doing their readers an injustice by being so lax in their “advice”

      • http://www.springcoin.com/blog Kevin @ SpringCoin

        I agree Eric.  Starting a business is not for the weak.  No matter how great your business idea is you can still fail.  Starting a business shouldn’t be your solution to make extra money.  It’s a full time job that will eat your life away.  You can forget about your social life from here on out.  

        I’m surprised that you stated that most businesses fail in the first 5 years, I expected that number to be in the first two years.  

        • http://www.dollarversity.com Eric J. Nisall – DollarVersity

          Actually Kevin, the numbers are pretty good in the first two years in terms of success rates.  Only about 30% of new businesses fail within the first two years.  Even at five years, the failure rate is only at 50%.  Here’s a pretty good infographic that sums up most of the research that I also found 
          http://www.creditdonkey.com/image/1/small-business-sink-or-swim.png

  • http://twitter.com/familymoneyblog John Preston

    In my experience; most businesses fail by design and most entrepreneurs would have seen it if they’d thought through their income statement. Most entrepreneurs expect business and demand to come far sooner than it possibly can.

    I’m reminded of a business owner who started a restaurant. I did the math for them and they needed about 20 customers an hour to break even. That was what they averaged on their best day. They never planned to be in the red for longer than two or three months. However, anyone who’d done the math would have known that they needed at least a year to build up a customer base if they were to stay in business.

    It’s about known where you need to be, how long it will take you to get there and having the resources to make it there.

  • http://www.facebook.com/michael.cosentino.165 Michael Cosentino

    Wow, what an example of throwing a situation into stark relief. Interestingly, I’ve recently begun thinking more in terms of finding solutions rather than merely defining problems. Obviously, the former is dependent on the latter. I think there is a way to take your approach and turn it into a personal discipline. I like it — although may not have if I had been one of those execs at the table. ;-)