4 Traps That Destroy Entrepreneurs (Part 1)
From a glance at early responses to our poll on entrepreneurship (see bottom of this page and VOTE if you haven’t already) it seems like everyone wants to be an entrepreneur. It’s sexy. Startups. IPOs. Be your own boss. Right?
Well sometimes it downright sucks. And if you don’t know what you’re taking on, you’re likely tackling much more work and risk than you believe. In fact, in my conversations with other entrepreneurs (man, that’s a big word and it sounds funny) I’ve come across four things that will absolutely destroy your business. We’ve already covered the concept of how entrepreneurs need to bootstrap to win. The traps I’ll cover now go beyond that. They’re so important that I don’t want to give them short shrift so I’ll cover two of them in this post and two in the next.
First, let’s look at why being an entrepreneur seems so sexy and glamorous:
– you get to be your own boss and no one can tell you what to do
– you set your own hours
– you get to make all the decisions
– you can make gobs of cash and you keep all of it
– you get to write a blog with Bozo the Clown pictures without having to run it by corporate communications
Sounds awesome, right? It is. I’ve been running entrepreneurial ventures my whole life dating back to selling hand-painted pencils and comic books in 6th grade (they were two separate business units of course). I’ve been a full-time entrepreneur for over two years now (translation – 100% of my income has come from my ventures at thoughtLEADERS, weBuild, and TiXiT). Yes, it’s awesome. I love it. But I’ve seen 4 things that can wipe you out in the blink of an eye and send you scurrying back to the cubicle farm.
Gobs of Cash
Being an entrepreneur means all the income your business generates goes directly to you (and yes, some of that goes to your employees if you have any). The trap is you never have enough cash to run your business the way you want to and there are more drains on that cash than you can imagine. Unfortunately for entrepreneurs, running out of cash will flame you out faster than you can say “bankrupt.”
Before hanging out your shingle, you must understand where all that cash goes and the tricks of managing it. Here are a few eye-poppers that should give you pause:
– You have to pay Social Security TWICE. Right now your employer picks up the tab for half of it. That’s $6500 extra out of your pocket basically on day 1.
– You have to pay your taxes quarterly. It’s not “extra” cash you have to lay out but rather a gigantic wrench in your cash flow. Writing that gigantic check every three months is painful. What’s worse is many entrepreneurs never think about setting up a “tax reserve” savings account where they set money aside as they go so when the tax man cometh they can pull it from there instead of having to head to the pawn shop to come up with some hock.
– Your customers take a loooooong time to pay you sometimes. You’d think selling to Fortune 500 companies would mean you’d get paid promptly. Um, no. Those guys and gals know how to manage cash. Part of that means stretching payables as long as possible (normal terms are net 45-60). Even worse, sometimes bureaucracy kicks in (“Bureaucracy at a big company? Say it ain’t so Mike!”). This means your invoice gets lost, routed to the wrong department, has the wrong PO, etc. The result, it takes you even longer to get that cash.
– Have you thought about insurance? Vacation? Paid holidays? Your own utilization (billable hours/total hours)? I can’t tell you how many prospective entrepreneurs I’ve spoken to who simply take their current compensation and calculate an equivalent hourly billing rate. Guess what? If you don’t account for the above items (like paying your FULL insurance cost vs. the company-subsidized rate) you will be woefully underpaid. You have to charge enough for the hours you’re working to pay for “unpaid” time like vacation, time spent selling your services, holidays, etc. The rule of thumb? Take your current cash compensation (base + bonus) hourly rate and triple it. Yes, triple it. THAT’S your target billing rate.
No One Tells You What To Do
It’s awesome. No boss chewing your butt telling you a bunch of menial things he wants done by close of business. Not having anyone tell you what to do is perfect, right?
Wrong. First, you have to be comfortable laying out your business’ strategy and driving that to a level of tasks that will make your head spin. You then need to prioritize those tasks and tackle every one of them if you want to keep your business humming. Coming up with a strategy on your own without a full-blown corporate planning group is hard enough. Playing project manager on every project is even more difficult.
On top of that, there are really two people who tell you what to do: your customers/clients and the bank/government. Your clients and customers have needs. You need to meet them (or not have any revenue – your choice). Sometimes you won’t like or agree with their needs. Tough. Adapt or die. As far as the bank and the government, they’ll tell you exactly how much money you need to make so you can pay them for that lovely little McMansion of yours and for you to cover all the taxes you owe.
Sure you don’t have someone telling you what to do every minute of every day but recognize that point cuts both ways.
Coming up in our next post are 2 more traps that threaten every entrepreneur.
Being a serial entrepreneur, I can't tell you how true your post is. Adapt or die! Right on Mike.
We have big corp & entrepreneur under one roof. I plod for a predictable paycheck, she toils tirelessly, creating her own tomorrow (6+ years now). This qualifies me to say this: Sexy or not, with freedom of being your own boss and running your own ship comes pressure and responsibility you never imagined if you've been a cube-weevil in corp-land most of your working life–heavy indeed is the crown my friend!
Our plan is working, but it's a 10 year slog, not a 3-4 year plan as we naively, optimistically hoped!
Spot on about needing gobs of cash and needing to answer to higher authorities – government & customers.
Mike: Its sooooooo true. Cash Flow is difficult, especially with all of the fingers in the pie. You mention Insurance, its the Insurance Companies that kill us. The monopolistic advantage they have with "setting prices" [premiums and WHAT THEY PAY US] and we are helpless [due to FTC regs]. Yes, clients are demanding, but the way to use that are to satisfy their demands WITH SERVICE!!!Its the competitive edge of the small entrepreneur, the BIG GUYS cannot match it. Just my thoughts. Uncle Ken
So far so good….now I am hanging on to see the next pitfall. Well done! We tweebs sometime get caught up in the "eating of the steak" instead of the anticipation of the "sizzle".
Signed,
anxious for next posting
The uncle sam reserve was the first thing I had planned and set aside. You are so negative about all the stuff. I love being project manager on all of my stuff, it is a challenge and it is fun. I've always been an idea generator and artistic in my own right, so that is why entrepreneur works so well for me!
@April – thanks for your thoughts. I'm not negative about being an entrepreneur at all. I LOVE it too. I'm simply trying to caution folks who are setting out on the entrepreneurial path not to do things that will derail their dream. I know I do so with some doom/gloom/scary words and that's to get people to pay attention. Nothing worse than a brilliant business idea and fantastic entrepreneur who trips themselves up because they weren't aware of something. Good luck in your ventures and thanks for being a reader and sharing your thoughts!