September 10, 2019 0 Comments Finance

Thinking of Starting a Business?

An engineer asked about starting his own business and asked how to go about it.

” That’s a very broad question. Each industry is different, especially with the amount of risk and how much investment you require.

The General rule of thumb is no risk, no return. The more you want to make, the more risk you take.

Over 2/3 of businesses fail in the first 2 years. By coincidence, about 60% of North Americans’ businesses have only one person. The average business owner brings home 20% less than the average employee doing the same job.

After expenses, most businesses aim for 10-20% return, before taxes. So if you invest $50,000 in an employee over the year, you expect in the long run, for this employee to directly or indirectly bring you $55,000-60,000. Note that on average an employee costs another 20% on top of the salary due to payroll expenses. So, such employee you’re actually paying $41,667 (around the 20/hr Mark).

Most businesses lose money when they first start, and have little to no stability. Most people think they are investors, but they are speculators. Investors are in it for the long-term; years and years. Speculators are people who want to give in and liquidate within one year or less, for example. I had to leave a good opportunity because the partner was uneasy about just 1 month being slow.

Then you ask: how much is your time worth? That is also an opportunity cost. So if you bring in $100,000 of sales in year 1, and you hired somebody costing you $50,000, working alongside such person – you aren’t making any profit on your investment (yet) if you value your year’s worth of work at $50,000.

Why not more? Read about equilibrium economics. Usually there is a sweet spot in each industry and line of business. Be too greedy, and your clients will then not pay, or constantly look for more value elsewhere. Your employees or yourself won’t be happy and won’t perform to produce the most net value. For example – your employee’s work brings in $100,000 of gross margin (sales revenue minus cost of sales) alone. Your overhead is $10,000 involving this worker. If you pay him or her just $60,000, that’s a lot more than 20% earnings – 43% to be precise. This worker likely will start looking for another job or starting his/her own business as he or she sees she can do the work him or herself . Now pay him or her $70,000-80,000 and that will be less likely, as after overhead, there is much less incentive for him or her to take the risk to jump ship.

Overhead varies widely obviously, but nice office space in Edmonton usually will run you at least $30+ per square foot per year, and most landlords want 5 year leases. This before operating costs, which can be just as much as the rent in some places. Example: Epcor tower space was about $6,500/month for 1600 sq. ft., where half was operating expenses. Another new development on Whyte is going for $45/sq for all inclusive, and the smallest space at the time was about 2,000 sq ft. You can get shared office spaces, but looking at still $1000-2000+ for a little room of less than 200 sq. ft. Industrial shop spaces can be much cheaper, but usually are at least a size made to house an entire team of workers, so expect to spend several thousand plus per month. Also, commercial landlords are much tougher on qualification and screening than residential. If you’re just starting out, you’ll likely be sharing or working remotely from home.

Then there’s cash flow issues. Clients often do not pay. I learned this the hard way growing up in a family of business owners and then being one myself. I’m currently in two lawsuits for $67,000 approx. I’m lucky to have legal knowledge and experience, but using a lawyer, I’d spend almost half of that just trying to get it. Many businesses go down because of not being able to pay their bills due to clients not paying. There then comes the issue of aggression and client retention. How nice do you be? Business is a dirty world where if you’re a pushover, you’ll be used up quickly. “