America Was Built by Entrepreneurs

Do You Have What It Takes?

Nearly 17 million Americans – 10% of the workforce – are self-employed. Few paths match entrepreneurship’s upside (income, wealth, prestige, self-esteem), but operating a successful business takes time, money and skill. This combination seems to be elusive, because half of startups fail within four years.

That’s not a reason to give up on the dream. It’s a reason to prepare yourself before you start.

A good idea isn’t a business plan.                                 

A business plan is a written document that explains the goals, strategy, target market and financial projections of your idea. It includes funding and staffing needs and a timeline for execution. Lenders and investors won’t give you money without a business plan (although family and friends foolishly might). At a minimum, your business plan must include:

• What your business will be selling. Describe your product or service, the problem it solves.
• The competition. Explain what else is out there and why your solution is better.
• Who your business will sell its product or service to. Identify in detail the customers you are targeting, including both demographic and psychographic data. Ideally, include survey results showing that your target is ready and willing to buy from you.
• How your business will reach them. Explain your branding, marketing and sales approach.
• How your business will make money. Show what it costs to run, and when you will stop losing money and start making it. Explain how it will capture market share, and how much of the market it will get.
• How you will fund your business. Detail the cash you need to get started and where that money will come from.
• Who will operate your business. Provide bios of all key personnel and how they will contribute to the business’ success.
• How you’ll handle challenges. Explain the strategy if it takes longer or costs more to get to profitability.

The Entrepreneurship Skills Nobody Tells You About

Say you’re a graphic designer who wants to go out on your own. Knowing Photoshop won’t be enough. You’ll also need to be an expert in these entrepreneurship skills:

• Legal and compliance: contracts, business structure, licensing.
• Finance and accounting: cash flow, invoicing, taxes.
• Marketing: branding, social media, content creation.
• Sales and negotiation: closing deals, retaining customers.
• Customer service and relationship management: Building relationships, dealing with difficult customers.
• Technology: accounting software, website development, cybersecurity.
• Productivity and time management: staying focused, work-life balance.
• Self-motivation and resilience: self discipline, overcoming setbacks, staying motivated.

You want to start your business because you have a passion for something, but instead, you’ll find yourself engaged in all the activities listed above. Considering all these obligations, when exactly is the baker supposed to find the time to bake — and will you enjoy doing all the tasks required for the business to succeed, none of which actually involve baking?

Work-Life Balance? Fuhgeddaboudit

There’s no such thing as work-life balance for the entrepreneur; successful ones work double-time, not part-time.

Expect to work 60 to 80 hours per week. Sure, you can work part-time, like an Uber driver, but that’s a gig and an entirely different conversation. If you think working so many hours is dumb (or merely undesirable) then entrepreneurship isn’t for you.

The Financial Reality

Entrepreneurship is a financial risk before it’s a financial reward.

Expect this from your venture:

• Immediate and ongoing business expenses. You start spending money the day you start your business, long before you start generating any income. Where will the money come from?
• Income instability. Unlike a job with a steady paycheck, it could be months before you land a client or make a sale, and a couple more months before you get paid for the work you’ve done. How will you pay your bills in the meantime?
• No employee benefits. Employers give their workers generous benefits. You get none of those. Get sick and can’t work? You not only lose the ability to generate income, you have to keep paying the business’ bills. So, forget about vacations; new business owners can’t let their businesses go on pause.

Will you be able to handle all this financial stress? Even if so, ask your spouse or kids if they can. Managing this uncertainty is an entrepreneurship skill nobody teaches in school.

Don’t Use Your Retirement Account to Fund the Business

It may be tempting to turn to your 401(k) or IRA as a source of startup capital. Resist that idea. The IRS calls this a Rollover as Business Start-Up, or ROBS, and most people who try it violate the rules. You could lose both your business and your retirement savings in the process.

Once the business is up and running, PFI’s guide to retirement plans for the self-employed can help you choose between a SEP-IRA, SIMPLE IRA and Solo 401(k).

Check Your Credit Before You Need It

A weak credit score won’t stop you from starting a business — but it will make everything more expensive.

Business loans, credit lines and vendor terms always start with a look at your personal credit report, especially when your business has no credit history of its own.

To strengthen your credit, get current on any overdue accounts, pay every bill on time for years, pay down outstanding balances, and don’t borrow more than 25% of your available credit.

Protect Yourself

Get the right insurance — and don’t consider it an avoidable luxury.

Buy disability insurance before you quit your job to start your enterprise. That’s because insurers often refuse to issue these policies to self-employed people who don’t have two years of income history. By getting a non-cancelable policy before you quit your job to start your business, you’ll have the coverage you need.

You also need to consider Business Overhead and Key Man coverage. Learn about protecting the income you’re about to put at risk in PFI’s guide. It’s worth a read once you have staff or overhead to protect.

Should You Get a Degree First?

For future entrepreneurs, it’s not an easy call.

Five reasons to get a college degree first:

• You’ll gain vital business and financial knowledge. You’ve seen the skill set needed to succeed at operating a business; college courses give you that content.
• Networking opportunities. College connects you with professors, peers and alumni who could become your future business partners, mentors and customers. The relationships you’ll build will be invaluable to your efforts to start and operate a successful business.
• Promoting your degree can add credibility when meeting with potential investors, lenders, customers and employees.
• Discipline, time management and organizational skills. College teaches you the skills that are essential in operating your business.
• If your enterprise fails, having a degree can improve your ability to get a good job.

Reasons to skip college:

• No degree required. Depending on your field, real-world experience could be more practical and valuable than the time and money you’d spend getting a college degree. Plus, you get to start now, instead of maybe six years from now. You’ll learn from trial and error — and your failures along the way will provide priceless practical experience. And even though you’re not going to college, you can still get much of the education through books and online platforms like Udemy, Coursera and YouTube. Successful business owners read lots of business books, surf the web and attend business conferences that offer seminars and continuing education programs. No degree required.
• Spend the money on your business instead of college. You’ve seen how hard it is to get a college degree, and how often people fail in their attempt to graduate. If you plan to be self-employed, investing that time and money into building your business may be the smarter financial move.

If you choose the college route, take courses that will directly benefit your self-employed career such as business administration, marketing, accounting, finance, communication and psychology. Every one builds entrepreneurship skills that get used on day one.

Even better, choose a school that offers a degree in entrepreneurship with classes taught by professors who are former business owners and entrepreneurs themselves. (Don’t be overly impressed by retired corporate executives — that career path is very different from that of would-be business start-ups like you.)

For a deeper look at how to weigh the decision, read Ric Edelman’s book, The Truth About College.

The Bottom Line

Entrepreneurship isn’t for everyone, because it takes a specific mix of skill, sacrifice and stomach. For more on starting, running and protecting a business, visit PFI’s Entrepreneurship page.