Small Business Matters: Risk Taking 101

The most immediate risk in starting a small business is a financial one.

The most immediate risk in starting a small business is a financial one.

Obviously, the primary consideration for most businesses is where the money is going to come from to open their doors. Every business needs cash to start up. If you are planning a service business those needs can be relatively modest. You’ll need business cards, marketing materials, office equipment, a website, and liability insurance. These are the bare bones minimums.

If you’re adding employees the costs go up. You’ll need to pay to recruit, have funds for salaries and payroll taxes, and provide the mandatory benefits required in Hawaii: temporary disability, unemployment, and for greater than part time employees, health insurance. You’ll also need a system to pay employees that could either include a payroll service, the time to do it yourself, or a paid subscription to an in-house payroll system like Quickbooks.

Many businesses start out of the owner’s home, but if you don’t want a home-based business or if your business is one that just doesn’t work with that set up, you need a location. So now rent comes into the picture (I’m assuming you’re not buying a physical establishment right off the bat). Signage and common area maintenance costs for your building then factor in.

The discussion so far is based on a business that doesn’t need an inventory or special equipment. When those things get involved, startup costs are industry specific. You can’t get into some businesses without buying or leasing special equipment, and the gamut of potential equipment costs here is wide open.

If you sell a product that you buy in its entirety wholesale, or purchase as components from someone else, you need to keep inventory on hand, the costs of which include shipping and tax. The amount that you purchase has to take into account how much you anticipate selling or how much material you use in making your product. If you can store these things on your premises, that’s great, but some industries involve special storage configurations like temperature control or an outside yard, and there again, these cost money.

So you’ve got a place to do your business, the tools you need to sell or produce your product, and the employees you need to help you achieve your goal. What about you? We haven’t included any costs for you so far, and that’s the reason you are going into business, isn’t it? To make money for you and your family.

If you are very fortunate, you’ll make money right out of the gate, so your salary or profit is readily at hand. That’s a best of all possible worlds scenario that really doesn’t happen all that frequently. More usually, even if you have a great business model or sell a great product, it takes some time for your business to become known, to gain some traction. That means the money will dribble in at first before becoming an established flow. But you need to support yourself and your family while that dribble grows, so you need to build in a source of funds for that.

Many business owners tell me they plan on plowing all the proceeds they make back into their businesses for the first year, eighteen months, whatever. I think that is a mistake. I get back to Motivation 101: you are in this to make some money for yourself. Operating on that subsistence model where you eat crackers for a year while investing everything back into the business doesn’t really achieve that goal. It may very well do so in the long term, but day to day we live in the short term.

Also, not only is that model extremely stressful for you and difficult for your family, it lays the groundwork for some very bad, even desperate, business decisions. It establishes a false framework for your business, an artificial environment, and doesn’t give you the practice in running the reality based model that you need to get intimately familiar with in the coming years as your business grows or fluctuates with business cycles. You may not be able to pay yourself what you hope to eventually, but some financial recompense needs to be included in your plans.

That’s Risk 101. It underlies Risk 102, 103, and so on, and those things have to do with whether there are enough customers for your business, the quality of what you provide, your customer service, and so on. But having the competence and the belief in yourself to put your financial wellbeing on the line is really the foundation of entrepreneurship. It’s taking a chance on yourself. The risks may be there, but so are the rewards.

Join us for our next workshop, Five Steps to Increasing Customer Loyalty, on Saturday, 8/26. Register at www.hisbdc.org.

Hawaii SBDC Network is funded in part through Cooperative Agreement No # SBAHQ-13-B-0048/0001 with the U.S. Small Business Administration and the University of Hawai‘i at Hilo. All opinions, conclusions or recommendations expressed are those of the author and do not necessarily reflect the views of the SBA.