Business Owners Back Ourselves By Starting Out,
But very few of us ever check if we are winning….
Anyone who leaves their job to go into business is taking a gamble – betting on being better off – better off because of more money, happiness, power, profit etc.
Every new SME owner is taking a risk that their SME returns will be greater than a salary would have been.
In actual fact the bet isn’t quite as simple as an equivalent ‘lost salary’. At the very beginning the new business owner will also add to the wager by contributing time, and also often savings, into setting-up the business – so with each day spent and dollar invested the wager grows. New owners do this happily trusting this short-term speculation will pay-off in the long-term.
So in principle, to win this business gamble every entrepreneur needs to recover three components:
- Earnings higher than the old job
- Pay-back of the investments of time and money
- Interest as a return on taking this risk. If the savings are being used to invest in the new business the return should at least be equal to any interest earned if the savings were kept in the bank.
Most business owners don’t ever stop to consider this reality, they are caught up in “living their dream” – BUT if they did stop and work out exactly was at stake I feel sure many of them would make different, and more profitable, decisions. I would even go so far as it helping reduce the very high rates of new SME failure currently being experienced.
To work out if you are winning your own gamble – start by considering the two sorts of bottom lines that exist because there are two sorts of profits:
Trading Profit : from the day-to day activities of the business as it goes about selling goods and services (after expenses of course). This is the “bottom line” referred to for annual business planning.
Capital Gains : from finally selling the business. This is the ultimate “bottom line” we get when we finally step away forever.
These are effectively your short and long term profits and it may be appropriate to sacrifice one for the other, so long as the whole profit overall improves. This trading-off short term gains for longer term capital gains may be a very good reason to “underpay yourself” when considering your annual budget e.g. “I’ll take less this year so I have enough cash to buy that new machine; do that shop re-fit; purchase that extra stock…” each of these decisions puts less money in your pocket now, with the view to improving sales and therefore the overall business value. Critically, this is additional gambling and so these trade-offs also need to be measured and monitored to ensure they remain worthwhile year-in and year-out.
When you have clarity around how much you have actually gambled for owning your business, you understand the true opportunity costs, and can start to tip the odds in your own favour.