Own your Own Financial Capital
- 6/2/2010
This month begins a series of eight short articles, each one based on a chapter from my book, Advice from the Lemonade Stand, a Back to Basics Book for Business, first published in 1990. I am currently working on a second edition, especially updating the chapter on marketing because marketing has changed so much with the rising effectiveness of internet marketing and social media marketing. As amazing as it might seem, Facebook™ did not exist in 1990. Now it represents a universe of contacts, and a search engine as powerful as Google. ™
Eight rules for business success. My book sets out 8 rules that I think separate the successful from the unsuccessful business. The first rule is “Own your Own Financial Capital.” I believe it is critically important to be in control of your business capital. This is best accomplished by accumulating your own capital the old fashioned way, by working and saving until you have enough to start your business. I believe that most service businesses should have not only enough capital to cover their initial start-up costs, but also enough to cover 6-8 months of living expenses for the owners. In these days of tight credit, this is a practical necessity because most banks will not lend to start-up businesses unless the owner is prepared to invest his or her own cash. You may be able to cover living expenses through the earnings of a spouse or partner, but you should be able to start your business in confidence that you can cover your overhead for several months without withdrawing any money from the business.
But, shouldn’t I borrow other people’s money? I know that this goes against the common wisdom that a business should use OPM (other people’s money); but I do not believe that the OPM notion applies to start-ups. First of all, other people, neither banks nor private investor/lenders are unlikely to give money to a start-up business. If they do decide to invest, they will certainly require that the owner have a substantial investment (usually 20-30%), be able to show sustainability, and have sufficient knowledge of the industry to demonstrate a likelihood of success. This requires that you own your own financial capital, at least to the extent necessary to attract funding partners. It is naïve to think that you can start on a shoestring and succeed. It may happen once in a while, but it is not the best plan for success. The second reason I favor owning your own capital is that you are less likely to become bankrupt using your own capital. You will be more conservative and budget conscious when spending your own money than when spending “other people’s money.” The worst that will happen is that you will run out of money and have to close your doors. But you will not be in debt, and if you have your living expenses covered, you should be able to go back to work with no lasting harm done to your credit rating. Remember, a loan is not capital. It does not increase your wealth; indeed, it increases your liability and therefore, your risk.
But, what if I don’t have cash to invest? Frankly, if you have not managed your life in such a way that you have savings, you probably lack the self discipline that it takes to succeed in business. Savings, in our personal lives, are the equivalent of “profits” and “retained earnings” in the business world. If you have not managed your personal life to show a profit, how do you expect to manage a business to show a profit? Cash is the life blood of business. Without it, your business will starve. The cash necessary to sustain operations for the first several months after opening will have to come from you, the owner. If you do not have it, you will need to get it. Get it through working and saving, perhaps taking a second job and saving the earnings from the job or tightening the budget and banking the difference; or get it by freeing up the equity in your home; or get it by growing it through sound investments; or raise it through convincing others to share the financial risk with you. Any of these methods will work to allow you to own your own capital. Entrepreneurship necessarily involves risk, risk of capital being the first and primary risk. When you own your own capital, you are in charge of evaluating the risk and making decisions about whether to invest in a business or continue in savings mode.
There is no better investment that a well calculated investment in your own business, a business that you are able to manage in an industry that you know well through your own experience. It is the single most likely route to increasing your wealth. But an unsuccessful business venture can also result in financial ruin. At the Small Business Development Center, we are focused on improving your chances for building your wealth, while reducing the odds of financial failure.
Next month we will discuss Rule 2-Own your Own Intellectual Capital
