Many people assume that a business venture involves writing a complicated business plan and borrowing a ton of money. This prevailing perception is the mindset of a society that both idolizes ownership but paradoxically is persuaded to pursue every form of credit from college loans, auto loans, mortgages and business loans. Chances are you have a relative who owns a business, and they have told you all about the great risks they’ve taken to get where they are today. With all due respect my retort to that is one can significantly lower the chance of failure in any form of ownership venture simply by developing the habit of reducing your exposure to debt. There are many possible paths to acquiring your dreams which do not require someone to position themselves deeply in debt.
According to data in a recent article from the LA Times nearly two thirds of all homes in the US have a mortgage. Here is a summary from the National Association of Homebuilders:
“European countries with higher rates of homeownership also have greater shares of homeowners without a housing loan or a mortgage. In contrast, countries with lower rates of homeownership tend to have higher rates of homeowners carrying a housing loan or mortgage.” This is not to say that Europeans have it right and Americans have it wrong, but it does help make the case that there is often more than one way to achieve any goal.
Consider the startup of a business. This can more often than not be accomplished on a more manageable scale than what most are led to believe. For those who are trying ownership for the first time, it is often wiser to open a part time business and gradually expand as your experience and skill increases. To do this one might start with first drafting a flexible plan (written with a pencil) and as you test value propositions (begin transacting business) you can then adjust financialcommitments, operations, staffing and marketing (scale upward) to best fit the unveiled opportunities which will inevitably emerge in due time. (Explanations of those business terms are provided in previous PULSE articles).
Similarly one size does not fit all when it comes to investing in a business. Finding an investor for your business startup might be a necessary step depending on the space and geography of your business however I would caution your acceptance of this as a blanket solution to capitalizing your business. Bringing an investor(s) in on the deal involves a cash for equity swop and your investor will typically expect to have a say in the direction you take your company. If the investor is in a position to help your business considerably (Aside from his or her capital) it just might be a great idea to leverage that factor into your business plan, but in any case you must plan carefully to make sure that you negotiate the universal currencies of time, capital and collaboration in way that shares not only common ground but a common vision. In any case do not sign any agreement without having a reputable business attorney examine it and consider also having an experienced agent help to broker that deal (for a flat fee).
Unless you have many years of experience in a specific space and have worked on and at every process of the particular business you will be most likely be starting at a disadvantage relative to existing companies. No worries, to become a strong link in the supply and demand chain first draft a model (Research the adopted best practices for your industry) and then improve that model so that it is increasingly capable of withstanding the forces which can potentially pull your venture apart (Known and Unknowable) and separate you from your investment. This process might seem complicated and you should certainly seek input from trusted advisers and experts in the field. But the due diligence is essential, akin to the parachute packer double checking the stitching before strapping the apparatus on and jumping from the plane. Qualify your sources and seek lots and lots of feedback for your ideas.
It becomes increasingly difficult over time to get up every morning and face the day with a mediocre attitude so it is also crucial that you begin your undertaking with the conviction to learn to master the space which you entering. Many so called lifestyle companies fail to set goals which serve them best into the horizon, that is throughout the lifespan of the business, including the grand exit, sale of the business and retirement of the owner.
Like homeownership a business ownership is a major long term commitment. Avoid the common mistake of complacency, thinking that you have somehow arrived simply because you now own something.. Too often people entertain unrealistic expectations of their own willingness to do all that it will take to launch a business on a shoestring budget, Know your abilities and talk to those who have done it so that you can find the right pace that suite you and will allow you to finish the race a winner! The challenge is consistency at incrementally improving your assets from day one to and every day going forward.
It is nice to be able to draft a thirty page document to support your assertions. But minus actual experience that won’t mean all that much to those who understand how business works in the real world. You might instead begin with writing a brief mission and vision for your new endeavor than just a few paragraphs ofguiding principles for each function of your new business. For example: The guiding structure for your Financial Process might look something like this:
The Financial Objective of fictitious ABC Incorporated is to capture sufficient revenue and profit within (your sales and delivery cycle) to ensure that continuing in this endeavor is not only possible for you but also monetarily worthwhile. Moreover, (insert number) percent of profit will be set aside on account as retained earnings to be used solely only for emergencies and future growth of the business. Furthermore I will maintain an equivalent sum of six months revenues as a safety net to mitigate known and unknowable risks to the financial health of the company.
Financial Controls for ABC Incorporated will involve the disciplinedreconciliation of revenues and expenses on a daily basis. The sponsoring objective will be to properly record and monitor the revenue streams, to identify patterns, indicate where we ought to increase focus and best leverage our resources. Similarly, through the process of daily reconciliation of expenses is our due diligence in reflecting on how much we are spending, on what exactly, and how best to adjust operations, finance and staffing functions for better overallefficiencies.
The same kind of concise summary, (an elevator pitch but one you repeat to yourself) for each function of the startup will ensure that you are really prepared to get started. This becomes a living document that you will refer to often to keep your ship on its proper course.
This approach of self-funding your career works for many ventures but not for those requiring huge upfront capitalization. For example unless you happen to be fabulously wealthy and can afford high expenses and likely losses for a period, you are not going to be able to finance your own manufacturing facilities without some outside investment source. Of course you should consider outsourcing manufacturing and every other possible type of value proposition. (See my article ten types of value) that can bring your product to market with sufficient revenue and profit. Perform a SWOT Analysis for each possible alternative path you might take. Consider the opportunity loss for every decision.
If a large regional or national venture becomes your goal you will need to learn to collaborate with investors. Still there are dozens of different businesses that one might pursue which if done properly, with a solid guiding structure, have the potential to fulfill the dream and ultimate stability of ownership on a “Main Street scale". There is no reason on this earth that anyone should tell you that to do that you will need to close the door on future growth and expansion. Quite the contrary, experience opens doors. With a few years of positive growth on yourbalance sheet, cash flow and income statements many options are available for expansion.
Key to avoiding the debt trap is to learn the difference between acceptable andunacceptable debt. I like to capitalize companies and purchase assets using my own savings whenever possible. I do not own a credit card, house payment or even a car payment. This approach has lowered my monthly overhead, exposure to liability and helped to increase retained earnings over the years. I have never been in a position where I could not fulfill an order or finance a project because I didn’t have enough money. (In the companies I have bootstrapped to become number one in their markets) That isn’t because I started rich, it is because I saved and planned sufficiently along the way. Don't get me wrong, I would most certainly share equity for the right investment and opportunity, but only for a sufficiently large project and only if the terms are favorable. I will never accept a loan.
This bootstrapping approach is not popular with business schools and close associates of angel investors, but it is not as risky as some might lead you to believe. This approach has given me the freedom to pursue much more with my life than I ever could have having a bunch of common monthly payments in addition to COGS and other overhead.
There is nothing in this world which is beyond the reach of someone who has taken the time to prepare. If you are unwilling to risk your own money on an expansion or a business venture how can you feel comfortable asking someone else to risk their money? If you have properly tested your idea for an existing market, prepared yourself by learning the basic building blocks of business, andhave saved sufficient funds to launch, advertise and operate for six months or so the risk of failure is minimal.
In buying a home, if you have the cash on hand to buy a home from an auction (typically at less than fifty percent of wholesale costs) and are able and willing to make some repairs yourself, you can have a home without a mortgage, saving yourself on average more than a hundred thousand dollars in accumulated interest payments to a bank. How far you might go actually has less to do with where you begin and much more to do with your actions once you have started. The best time to start (saving) is right now.
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