25th August 2015
Timing Critical in Starting a Business
We often hear the daunting statistic that 9 out of 10 small businesses fail in their first 12 months of trading. Just reading that would be enough for most people to stick with the safety net of employment and not chase the dream of one day being their own boss
Whenever we read these articles we always get the typical list and statistics of reasons why businesses commonly fail such as poor financial control, lack of industry knowledge and experience, poor location, etc. No matter what the factor or combination of factors, all roads lead to poor cash flow and ultimately insolvency.
What we don’t often read however is how timing of the business owner entering into a life of self-employment plays a critical factor in a business either successfully growing or becoming a statistic. The fact is, aside from economic conditions, the people that can put the most pressure on a business are those that seek to have their lifestyle funded by it. Let’s consider two scenarios:
In the first scenario take Malcolm and Cindy. They met in their late 20’s, both work full-time, do quite a bit of travelling together but also save enough money for a deposit on a home. In their early 30’s they decide to tie the knot and start to grow their family. Cindy decides she rather spend her time nurturing their new born child and soon after that they will likely try for a second. Malcolm has decided he’ll use the equity in his home to borrow so he can pursue his dream of starting an e-commerce business he has been wanting to start for some time. From this point there is going to be instant pressure on the business to distribute enough of a salary to Malcolm to cover his home loan repayments and all living costs as well as service the additional business debt. Ultimately as cash flow gets tight he might decide to wind down the business and go back to the safety net of a wage and thus his business has just become one of those statistics we so often read about.
Now let’s consider a different scenario. Tony and Karen got married in their early 20’s, had 3 children by their early 30’s and by this time Karen had also returned to fulltime employment forging a strong career. They have a good amount of equity in their home with a small amount of debt remaining which Karen can service comfortably as well as living costs with her own income. Tony decides to leave his job and start a business and given the comfort of knowing the groceries will be on the table each week puts himself on a conservative wage (if any at all) from the business for the first couple of years. By allowing the business to reinvest that money into capital expenditure and marketing rather than draining the funds to support his lifestyle costs he is giving the business every opportunity to grow and expand.
Given the two scenarios above you cannot necessarily assume that Tony is a better business operator than Malcolm, but what he did do better was timing his entrance into a life of self-employment.