Creating your own business is a little like baking a cake. The outcome of your efforts will look very different to the sum of the individual parts you put in. It is this alchemy that is at the heart of starting a business and although it can be a very exciting time it can also hold many traps for the unprepared.
Creating your own business is a little like baking a cake. The outcome of your efforts will look very different to the sum of the individual parts you put in. It is this alchemy that is at the heart of starting a business and although it can be a very exciting time it can also hold many traps for the unprepared.
Entering the world of business by creating your own is different to purchasing a business that is already established. There is no past success to be a guide to future success and how much you should pay for it.
Here are some traps you should be wary of when starting a business.
Overcapitalising
An odd thing happens quite often when the decision is made to set up a business.
People who would normally analyse to the point of paralysis the value behind the purchase of an appliance for their home are the same people who would then enter into a frenzy of spending in order to fitout a business. Little thought is given to the return that is required to justify the expenditure and only the best of everything will do.
The business is overengineered and surplus capacity sits idle in what turns out to be an outlay of capital that will never see a realistic economic return.
When setting up a new business, don’t lose your head. Just because you have organised the funds does not mean they need to be spent. You are building a business, not a dream home.
Thinking you can get back what you spend if it doesn’t work
So often as a broker I am forced to provide the harsh realisation to business owners that just because they are no longer interested in running a business they established does not mean that the funds they have sunk into it can be retrieved by selling it. So many of those funds are irredeemable.
They have baked the cake so the ingredients which were originally purchased to make it are no longer for sale. They are second hand and have changed to lower valued items. The expense of the labour that was paid to install them cannot be recovered.
When you are selling a business that is established you are selling the income and profit. Not ingredients.
A Lease is Like a Bank Loan
When you enter into a lease for a property where you will operate your business you have taken on a contingent liability for which you are responsible. You are liable to make the monthly repayments on the lease for its life until it is taken over by another entity or it expires.
Many cunning ploys are used to entice tenants to enter a lease.
• Assistance with fitouts
• Rent free periods
These can be useful for genuine start-ups that benefit from the relief provided but they are also a trap in the same way that ‘guaranteed rent for a year’ can be in an apartment sale or ‘reduced interest rates for the first year’ can be on a credit card. They entice you and then you are in over your head when the initial time is up. Suddenly, you are a revolver. Simply paying the interest on your maxed out credit card every month or working in your business because you can’t afford to get out of the lease.
On top of that is the concept of ‘making good’. You may have to bring the property back to the its original state prior to your fitout in order to satisfy the requirements of the lease. This can be an expensive exercise.
Investing takes time to pay off
Investing is an activity that has the notion of delay built into it. Investing is what you are essentially doing when you establish a business.
The idea is that you make an outlay today that will provide you a return in the future. If you are establishing a business you have to outlay a large cost well before the first dollar comes back to you.
The greater the fixed costs as a part of your overall cost structure the longer it will take to make a positive return. On the flip side of that, the longer the positive returns will last when you reach them.
Establishing a business is the ultimate investment. Whereas some investments are passive, establishing a business is an active bet on your participation in the future.
Insufficient reserves
Reserves are critical to establishing a business. They provide the means to undertake the any pivots you may have to make as you adjust your business strategy. More importantly, they buy you time while the word gets around about your business and the customers start coming in.
Business can be characterised by the inherent volatility of the income they produce. Just compare the income of a business owner to the income of an employee. It is essential that there are reserves in place to cushion the blows of an uneven income. Enjoying a higher income is the main benefit of owning a business but with it comes the need to manage volatility.
Risk vs Volatility
This can be very confusing when assessing the viability of a new business. While volatility is ok and can be addressed with sufficient reserves. Risk should be removed. If there is a risk that something can occur that will destroy the business then it is only a matter of time until it occurs. Remember, businesses have a relatively long life and will have to endure many things.
Of course, it is very difficult to remove all risks but at least the business should be able to exist long enough to meet the return on investment targets that were set for it, even if not set formally.
Not tackling the right problems
The idea you initially started on might be ok but there are so many pitfalls in the implementation. Many good ideas are simple only in hindsight. During implementation, there are many negotiations you have to get through. Internal and external.
Undertaking this implementation and negotiations is often a dangerous time when the business owner becomes distracted with the new shiny thing they would like to do now that the business has entered the drudge phase where multitudes of little decisions have to be made.
Toss out passion as your byword for business and lean on focus. Passion will return when you enter the best phase of establishing a business. Success.
