LETTERS From CAMP Rehoboth |
CAMPMoney: Starting a Business Not For Faint of Heart |
by Alex Yearley |
Starting a business may be your "American Dream," but it is not for the faint of heart. Sometimes the best decision about starting a new business is not to start one at all. Consider these sobering statistics. Over 600,000 companies with at least one hired employee are started every year, according to the Small Business Administration. Of these, two out of three survive for at least two years, but only four in ten last for six years. A 40% survival rate should wake up any business person.
Despite these odds, there is always a fresh pool of entrepreneurs-to-be, and they come from all walks of life: young professionals with a hot technology idea, middle-aged executives tired of the corporate grind, retirees bored with retirement. Commonly, their approach is, I've got a great idea for a business, now how do I find the money to start it? Stop right there. Certified Financial Planners professionals often say that the first questions should not be how to get the money, but whether to start the business at all. In a recent article from the Journal of Financial Planning, a planner said she had talked more clients out of starting a business than she had talked into starting one. One of the first key factors that should be addressed well before the question of financing, is time. Not timing, just time. Budding entrepreneurs typically do not realize the huge time commitment it often takes to launch a new business. It means having to balance your personal life with the new enterprise and often another full-time job. According to Global Entrepreneurship Monitor, two-thirds of new business owners hold full or part-time jobs during start-up. The idea of not giving up the day job seems to have sunk in. While that is good it complicates the time juggling while getting things going. Are you willing to commit the necessary time and energy? Equally important is the impact on those you love. Are they comfortable with the time commitment? Planners say executives and retirees often bow out when they realize how much time a new business can really take. Another key early question is whether this proposed business would fit your overall family and financial goals. Will the business drain funds from other worthwhile projects such as saving for a child's college education or saving for a new home? What critical family benefits such as health or disability insurance might be lost if you leave your current position? Retirement is often another competing issue. It is common for mid-career workers to start a business not only to provide current income but with the idea of selling it down to road to pay for retirement. That is potentially riding much of their nest egg on a single investment. Worse, many new businesses are financed by raiding existing retirement accounts. This may well result in a later retirement not an earlier one. Are there better ways to save for eventual retirement than starting a new business? The answer to the above questions may be found in a business plan for the new venture. This structural blueprint documents the factors for the business plans as a necessary step to getting financing. But before taking it to the bank, look at it yourself. Do you have what it takes to make it happen in both time and money as well as creativity? If not, scrap it before you get hurt. If you think it is doable then start putting together the financing. Getting adequate funding is certainly a critical step to making a business successful. Undercapitalization of startups is often cited as a major cause of failure. Here at the beach, everyone must plan for the off-season as well as summer. No bank or group of investors is going to fund the whole thing. Business owners must have some cash to put into the venture. The more you have the easier it is to find the rest. Use the business plan to make smart decisions. One of the financial planners interviewed in the Journal of Financial Planning article said that several years ago he was thinking about starting his own equipment rental company. After preparing a formal business plan, he realized he would not turn a profit for at least five years. The idea was dropped. Another planner did a break-even analysis for a client wanting to start an electrolysis school. She discovered the school would have to be continuously 100% enrolled in order to survive. Thus, before racing out to secure financing, choosing a business form, location etc., carefully analyze whether the business is really worth starting in light of the time commitment and financial risk. The nearest U.S. Small Business Administration office can be a good place to start, and don't forget other business people who have already been there. This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by Alexander G. Yearley, CFP, a local member in good standing of the FPA. Mr. Yearley runs Community Pride Financial Advisors at 39 Baltimore Ave. Rehoboth Beach DE 19971 and offers securities through Cambridge Investment Research, Inc. Member NASD & SIPC. |
LETTERS From CAMP Rehoboth, Vol. 13, No. 3, April 4, 2003 |