When I was young, I had no aspirations to be a business owner or entrepreneur. I was a baseball card collector investing way too much money in Jose Canseco baseball cards. That probably ranks as one of the worst investments I've ever made, but, hey, I was just a kid.
Going into college, I still didn't know what I wanted to do. I studied finance because my dad thought it would be a good major, and I kind of liked numbers. After graduation, I was attracted to the financial services industry, because I felt that the income potential was unlimited. I put in my time doing cold-calling seminars -- and anything else I needed to do to get clients. All went well for the first five years -- or so it seemed. Along the way, I had two revelations:
- Robert Kiyosaki's "Rich Dad Poor Dad" changed my whole outlook, and got me to thinking seriously about becoming an entrepreneur.
- Even though my earnings potential was high, I was still a W-2 employee. That didn't exactly fit with the message of "Rich Dad Poor Dad," but it had certain advantages. After all, I didn't have to worry about who was paying the rent, how much the phone bill was or what happened if my computer became outdated. My employer took care of all that. It felt safe and cozy.
But that arrangement wasn't as safe as it seemed. My brokerage firm was bought out, creating one of those moments that almost forces you to change direction, and that's what I did. Three co-workers and I took a leap of faith and started our own financial services firm.
It was exciting and scary. I knew how to make cold calls, get clients and schmooze with the best of them. But I had never been taught about running a business, and had no experience at it.
It's been six years since I made that move, and things have worked out like you wouldn't believe -- well enough that the only question in my mind about the choice I made is "Why didn't I start my own business sooner?" Here's what I've learned along the way. Maybe these lessons will help you to start your own venture.
1. Running a Small Business Means You Wear a Lot of Hats
I think I first became aware of this from Michael Gerber's "The E-Myth." Gerber talks about how running a business goes way beyond just being good at what you do. For example, let's say that you're a great plumber. What do you know about marketing your business, pricing your services, ordering equipment and managing employees? That's where most business owners fail.
When we started our business, we had to find a suitable place to rent, buy office equipment at affordable prices and hire and train staff. We had to learn to market ourselves -- no small feat for a new company. And we had to do all of this while serving our existing clients in a way that would make the transition smooth and painless.
Every business is different, including the initial roll-out. But the point is that self-employment requires wearing a lot of hats and taking on a lot of tasks that you don't need to concern yourself with when you're on someone else's payroll. To succeed, you need to conquer all of them.
2. Overhead Can Kill You
My old brokerage firm had impressive infrastructure, like premium office space, high-end furniture, expensive pictures on the walls and a streaming live quote system that could show what 100-plus stocks were doing at any time of the day. All that stuff costs money, and when you start a new business, money's in short supply, which makes frugality a virtue. You have to find less expensive ways to do everything -- and sometimes do without. Your basic business service matters most. Clients and potential clients may not even notice other stuff. Let me exemplify.
That streaming stock quote system cost $300 a month. But the same information was free on Yahoo (YHOO) Finance. We didn't sign up for the system.
We needed a sign for our building. We found a perfect one with flashing LED lights -- for $30,000. That was not gonna happen. We settled on a less flashy $3,400 sign. In the end, it didn't matter all that much. People aren't buying your sign -- they're buying your service.
The lack of a positive cash flow kills more businesses than anything else. The sooner your business starts generating that positive cash flow, the greater your chance of business success. You can give yourself a big, fat advantage by determining from the get-go that you won't spend money on stuff you don't absolutely need.
3. Select Your Partners Carefully
We went into our business as a partnership, and that presents challenges. My partners were three financial advisers who all knew each another on a professional basis. We agreed on how the partnership would be run in advance, including that any major business decisions would require a unanimous voting process.
These weren't necessarily people I would hang out with after work, but I could trust them all on a professional level. It is, after all, a business, so the reasons for having these people as partners was more about business concerns than social factors.
We committed our partnership agreement to writing. Partnerships don't always work out, so you have to have written procedures on how to run the business, settle disputes and -- if necessary -- handle the departure of one of the partners.
If you're a sole proprietor, the partnership issue won't apply directly. But anytime you start a business, you will be involved in all kinds of informal partnerships with people you rely on. They can be suppliers, vendors, contractors or even major clients. Choose them all wisely, understanding that a bad relationship has the potential to sabotage your business.
4. Become Efficient by Streamlining Processes
The biggest key to running virtually any business successfully is your ability to concentrate most of your time and effort on activities that will bring in the most money. That means that you have to minimize the time spent on routine functions.
This is especially true for any service-related industry. We had to come up with processes in our office that would minimize paperwork and streamline repetitious tasks.
Personally, I hate doing that kind of work, so we had to create a flow that would make these as simple as possible. Some functions include accepting client checks, making bank deposits, opening new accounts and conducting annual reviews with existing clients.
Identifying and streamlining repetitious functions is particularly important when starting your business, because building a cash flow has to be your top priority. You have to create a workflow that maximizes your efficiency.
5. Make Sure You Have Some Paying Customers First
I get dozens of emails from financial advisers across the country who want to start their own practice, probably from reading my posts on how I started my own financial planning practice. But many of these advisers might not realize that I was in the business for five years before I decided to go out on my own.
Could I have accomplished it sooner? Perhaps -- but having an established client base was huge. Before you start a business, you might want to treat it like a side hustle. Keep your day job and see if your business idea has roots. Test a home-based business with your network, family and friends. Find out if you have something that people are going to pay money for on an ongoing basis.
If you can do that, then at least 51 percent of the risk will be removed from your business. Not only will you have a cash flow going in, but you'll also have the benefit of having the confidence that comes from knowing you have it. That may be the single best piece of advice I can give.
Are you considering starting a business but scared it's not the right business for you? This free worksheet will save you hours of frustration from chasing the wrong business.
Jeff Rose is a certified financial planner professional, founder of Alliance Wealth Management and GoodFinancialCents.com and editor of LifeInsurancebyJeff.com.