Being Your Own Boss
"There is certainly freedom in being one’s own boss, but freedom isn’t free. New business owners will pay for that freedom in long hours, learning new skills, and spending lots of money on initial expenses."
There is something alluring about being your own boss. At one point or another, most of us toy with the idea of starting and running our own business. The benefits are obvious. As your own boss, you control your own destiny. To some degree, you can choose your customers and teammates, control your work schedule so you never have to miss a school play or Little League game, and take pride in producing a good or service your customers value. As a business owner, you can try out those crazy ideas everyone else thinks are silly—and you’re compensated for the risks you take and the sweat equity you invest. I’ve owned and operated several businesses in my career, and I’ve been an employee. Being my own boss was better.
As exciting as being your own boss can be, it’s not for everyone. Every year, about 600,000 new businesses start—but 80% of them never reach profitability. While it’s true that most new wealth in America is created by small businesses, a great deal of wealth is also lost there. Over the years, I’ve seen families wipe out their life savings in pursuit of the dream of owning a business—something especially tragic when it happens near the end of a working life.
I’m a big fan of entrepreneurs, and when people are determined to strike out on their own, I offer as much support as I can. With that said, I’ve observed too many businesses fail because people didn’t truly comprehend how much time, money, and effort launching a new business requires. It’s a rare business that, in the beginning, produces a living wage when the owner works a mere 40 hours a week—and unlike a paycheck, new business income starts at zero on day one.
Before anyone decides to quit their day job to launch their own business, I encourage them to determine three things: (1) how many hours per week they are willing to work; (2) how much money must be earned, net after taxes and expenses, to meet the owner’s income needs; and (3) the profit-making multiplier of the new business.
When I ask people the reason why they want to start their own business, the number one reason for many folks is that they don’t want to work as hard as they are working right now. The odds of a new business becoming profitable enough in the first few years to replace the income of the old job are low. While new business owners might be masters of their craft, they probably lack experience in bookkeeping, business regulations, working with wholesalers and vendors, dealing with regulators and government agents, hiring, training, and supervising employees, or researching, purchasing, installing, and learning new equipment. I remember my first year as a business owner and how much time I spent designing new business cards, assembling office furniture, setting up fax machines, and learning new software.
New businesses consume huge amounts of time, and while the task of offering goods and services to the marketplace is conducted during business hours, running the business often includes 2–3 hours before business hours and 2–3 hours after business hours—at least until a business owner learns how to run the business profitably. I have a good friend who once owned a very lucrative business tell me: “I broke even during normal business hours, but my profit was made during the two hours before we opened and the two hours after we closed.”
It is extremely important that new business owners have reasonable expectations for the time commitment of a new business start-up. If a person can’t invest 60 hours a week or more in their new business for at least the first five years, they may need to reconsider giving up their 40-hour-a-week job.
Many times, when new business owners quit their day jobs, they are running away from their old job rather than running toward their new business. When this happens, the new business owner often fails to take into consideration how much money they need to make in the new business to replace the income lost from the old job.
I once counseled a woman who was excited about leaving a job earning $60,000 a year with benefits to start her own business making candles from beeswax. Before she started, I asked her how much money she needed to pay her rent, buy groceries, and put gas in her car. She said she didn’t know—but her goal was to make $100,000 a year. So I asked her if that was net after expenses or gross. When she said she didn’t know the difference, I cautioned her not to quit her day job until she knew exactly how much money she needed to survive, and how many candles she needed to sell to earn enough—after paying business expenses—to replace her current income.
Another question I ask is: “Are you good at finding, training, retaining, and taking care of employees?” Even candidates who are highly trained and experienced won’t know how your company operates, and you can’t assume they know how you do things. Only in fantasies are employees a net gain in the first several months after being hired—they will eat up a huge amount of a business owner’s time in the beginning with training, guiding, and supervising. New business owners should prepare to go home exhausted for several months after hiring a new employee, as that person will need to be taught everything from how to sign up for the company’s retirement plan to how to use the company’s unique software.
The final question I ask prospective new business owners before quitting their day job is: “What is your profit-making multiplier?” The profit-making multiplier is the percentage of time you will be engaged in your new business doing profit-making activities. A higher PMM is better than a job with lots of hours spent on non–profit-making activities.
For example, if you intend to build cabinets, what percentage of your week will be spent building, selling, and installing cabinets—relative to non–profit-making activities like bookkeeping, maintaining equipment, answering phones, talking to suppliers, and all other demands of the business? Additionally, you will have other expenses for things like workspace, employees, equipment, supplies, licensing, etc. Assuming you intend to charge $100/hour from customers in your new business, the following quick income formula is crucial to determining the actual income received:
(Hours Worked Weekly × Profit-Making Multiplier) × ($$ Earned per Hour – Hourly Expenses) = Income
Example:
(60 HWW × 50% PMM) × ($100/Earned per hour – $40/hour HE) = $1,800/week or $30/hour
In this example, where the business owner spends only half his time doing profit-making work and his expenses are rather high, the prospective entrepreneur may want to postpone giving up their current job if it pays more than the $30.00/hour they will receive in their new business.
In short, successful new business owners do three things: they work a lot of hours, they have high profit-making multipliers (more profitable work, less non-profitable work), and they earn lots of money per hour after expenses. It is extremely important that a prospective new business owner not quit their current job—or borrow lots of money to launch their new business—before they “know their numbers.”
Every year, I see a handful of people eager to launch their own businesses. Many of them go on to become quite successful, but I strongly encourage some to rethink their business plan before giving up their secure paychecks. There is certainly freedom in being one’s own boss, but freedom isn’t free. New business owners will pay for that freedom in long hours, learning new skills, and spending lots of money on initial expenses.
There’s an old saying: “Measure twice, cut once.” Know what you’re getting into before you borrow a bunch of money or tell your boss where he can shove your job.