Do You Know the Real Cost of Doing Business?
There are some basic attributes of small business owners and entrepreneurs that I really admire and they make me enjoy being around them. These include traits such as:
- Enthusiasm,
- Personal sacrifice, and
- Optimism.
In their best form, these traits can help propel a small business to great success. However, if they aren’t tempered with realism, they can also take us down a dark alley that leads to potential failure. Let me give you a couple of examples.
When I was first growing my Internet business, I remember a conversation I had with a friend. I was about a year and a half into my project and I proudly told her that we were already profitable. With one simple question, she cut to the quick:
“Are you paying yourself a salary at fair market value?”
She continued, “If you aren’t paying yourself a salary, you aren’t really profitable because you’re still funding the business.”
Sacrifices are costs
She was right. It is very easy for enthusiastic and optimistic entrepreneurs to overlook the personal sacrifices they are making and misjudge the actual status of their startups. You might label not taking a fair salary “sweat equity,” but holding sweat equity in a business that can’t show a profit is not an enviable position.
Here’s another example of failing to face the real cost of doing business. An acquaintance of mine had been in the mail order catalog sales business for many years. When e-commerce started to bloom, he decided it was the future and that it would be easy for him to start selling on the Internet.
After all, with the catalog business, most of the infrastructure was already in place. He had a warehouse, shipping, customer service, writers, a graphic artist and everything else required to get products to customers.
Out with the old!
He developed great enthusiasm for the e-commerce side of the business and waning enthusiasm for the mail-order side of the business. He allowed his web sales to essentially “piggyback” on the existing business. For some time he kept charging overhead to the mail order business, giving his new pet project a “free ride.”
Even though this guy is a very savvy accountant, he let his optimism for the eventual success of his new venture blind him to the true cost of running an e-commerce division. The mail-order business soon died. Could it have survived if the owner hadn’t abandoned it for a younger, prettier business model? I don’t know. The e-commerce business never worked out either.
Moral of the stories: Don’t rush into an exciting new business venture with your eyes wide shut. Be optimistic, enthusiastic and willing to sacrifice—but also be a realist.
