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Don’t Be Dumb, Build Your Business the Smart Way

by Derek

Have you ever thought about starting your own business? What are some of your ideas? Are they big or small; simple or unrealistic; innovative or a mild tweak of the already-existent? What are the chances that your business idea will take off? What if your business tanks?

These are the questions I often ask myself before moving forward with a business venture and they are definitely important, but if I don’t have the correct answers for the questions below, I absolutely do not move forward with my business idea.

  • How much is the initial investment?
  • How much is the potential return?

My Experience

Just over a year ago, I started brainstorming business ideas. I knew that I wanted to earn some additional income (besides my day-job), but I had no idea where to start. I had always had dreams of opening a golf store (I actually developed a business plan for it in my college marketing class), but then I started asking myself the 2 important questions.

How much is the initial investment?

For a golf store? Well, I would need to purchase a building, order some inventory, hire some employees, and set up insurance. All in all, the initial investment could easily be $250,000, if not more.

What is the potential return?

I had to be honest with myself here. The mark-up on a golf club may be large, but after all of the monthly expenses of my store, I may not even make a profit in the first couple of years!

Why would I possibly pay out such a huge initial investment to maybe, possibly, make a little bit of money? That is one HUGE risk!!

The Smart Business Venture

When we live in a world that is so driven by the Internet, I certainly consider the “brick-and-mortar” approach (that I described above) to be the dumb way to go into business. The necessary investment is high, the potential return is low, and the risk is astronomical!

Lesson 1: Start Small

Instead of opening a store, I decided to begin a financial blog. The investment was unbelievably low, the potential return was moderate-to-high, and the risk was nearly zero! To set up my website and get it hosted for 1 year, it cost me a whopping $44. In that 1 year time-frame, I made over $5,000. Compared to that $44 investment, that was a pretty huge return!

If you had aspirations to open a store like me, perhaps you should take your aspirations online! Cut back on your desired inventory, come up with a good domain name, and see what happens!

Lesson 2: Grow Slowly and Avoid Financing

I have learned a lot by running my financial blog. Mainly, I have learned that there is a ton of room for growth and expansion. In addition to my regular writing, I could publish an eBook, begin a speaker series, or build niche websites! There really is an endless list to how I could expand my business to earn additional revenue. Rather than dive into every growth opportunity, I often have to step back and make sure the funds are available.

There is no reason to finance the growth of your company. If you can’t afford the next stage of your business with cash, then I would suggest that it’s not time to expand.

Think about it. You have an idea that the direction you’re heading is the right one, but what if it’s not? What if you take on debt to implement this idea and your business goes south? Now you not only have the business fundamentals to worry about, but you also need to worry about paying the bank for your loan.

If you would have used cash, you would have tacked it up as a mistake and gotten on with your life. There would have been no fears about paying the bank, and you could have concentrated all of your efforts toward your business. It’s just a better scenario for the long-term. Let’s face it, not all of your ideas are going to be genius. Some of them WILL fail. Expect success but plan for failure.

Are you being smart about your next business move?

 

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{ 11 comments… read them below or add one }

Kris @ Everyday Tips October 12, 2011 at 6:05 am

These are some great points. Quite often, I will walk by a store and wonder how in the world they stay in business given the rent/overhead costs. I figure they must do a great online business too or something. (Or, they do indeed go out of business.)

Another thing I read once was to be careful if opening a business in a location that previously went out of business. For instance, be careful opening a dry cleaning business where a previous dry cleaner went out of business. Location may be a huge issue, so really evaluate why the company did not succeed.

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Derek October 12, 2011 at 1:57 pm

Some people think there are huge profits in those big box stores, and there may be, but for the first few years, those businesses are not making a ton of money! It’s best to start small.

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Hunter @ Financially Consumed October 12, 2011 at 1:46 pm

This is a great message Ky Lynn, and truly smart. There are so many ways to start small without borrowing money. This reduces the risk significantly and should remove a lot of the fear of taking the leap into launching a business.

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Derek October 12, 2011 at 1:59 pm

Yep. One should learn to build their way up to larger ventures, but only once you understand how to run a small one. Not only will this save you from making big mistakes, but it will also allow you to save up for the big project with money from the little ones!

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YFS @ YourFinancesSimplified October 12, 2011 at 10:43 pm

I believe it depends on what type of business you’re starting that determines if you should seek seek financing. For my rental property business the debt service on financing is significantly less than the amount of guaranteed rent I bring in (government assisted). So, it makes since that I use financing to maximize my returns. But I do see your point. What i take from this post is you need to be careful and understand the consequences of not starting small are seeking financing before just jumping in the deep end.

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Derek October 13, 2011 at 4:27 am

I do understand you’re point. It’s almost impossible to jump into real estate without taking on some debt. Personally, I’m trying to do it by starting a few online ventures first and saving up the dough. It’ll take another year I bet, but if I work at it, I’ll have the money for sure. Plus, once I get there, I’ll certainly be cautious about my investment, because I know how hard I had to work for that money.

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20's Finances October 13, 2011 at 6:17 am

You seem to be the investment guru. I absolutely agree. Why put yourself at that much financial risk if there is no promise of a huge return. Online business ventures seem to offer a great compromise with lots of potential. I look forward to watching your ‘empire’ grow. :)

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Derek October 13, 2011 at 6:33 am

I’ll do my best not to dissapoint you! With each passing day, I get more and more excited about the potential ‘empire’ in front of me! :)

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Bret @ Hope to Prosper October 17, 2011 at 11:55 am

Great post Derek.

One of the things that led me to choose an online business instead of a traditional business was the hours. The last thing I would want is to spend 60+ hours and every weekend in a retail store. I worked in the supermarkets when I was young and never want to return to that lifestyle. I want my weekends off to enjoy my life.

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Derek October 17, 2011 at 12:19 pm

That is certainly another great reason! We all need some down time once in a while.

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Heather October 28, 2011 at 8:25 am

These are great points! Sometimes I wonder if I’m not doing enough to grow my online venture, but then I realize I’m putting in a significant amount of work and letting it grow at its own pace. Glad to hear slow growth is the norm!

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