Creating WealthThere are many articles available online about the making of Richard Branson, Donald Trump or Elon Musk (to name a few) or books even portraying their journeys to wealth they are today through entrepreneurship. So, in line with my previous articles “habits of the wealthy” and “Financial Planning”, this piece will convey pragmatic ways of navigating the hurdles of entrepreneurship in order to become financially independent and build up on that.
According to the business dictionary, entrepreneurship is defined as “the capacity and willingness to develop, organize and manage a business venture along with any of its risks in order to make a profit.” The most obvious example of entrepreneurship is the starting of new businesses.
In economics, entrepreneurship combined with land, labour, natural resources and capital can produce profit. Entrepreneurial spirit is characterized by innovation and risk-taking, and is an essential part of a nation’s ability to succeed in an ever changing and increasingly competitive global marketplace.
Becoming financially independent through entrepreneurship requires a great deal of risk taking as it often requires sacrificing a steady income flow (salaried job) to work 24/7 to get the business off the ground. Sometimes it requires combining full time employment with working as self-employed over the weekend in order to meet all financial obligations.
In both cases relationships (family and friends) can suffer as self-employment is a life style and can often be time consuming especially at the beginning where one has to wear so many hats i.e. be the director, the accountant, the secretary, the receptionist and focus on the actual trade of the business. As such, it is crucial to have an understanding with family and friends and also their support in order to manage certain challenges such as clients who refuse to pay you within 90 days and you’ve got to pay your tax bill for instance.
Self-employment requires a certain mind-set, an enduring mind-set as it is not a “get rich quick” journey. Like most rewarding things in life it requires time, sweat and thus patience (very ironic writing this as I am not known for my patience). It has long been believed that only 50% of new start-ups survive their first year of trading but a recent survey shows a statistic of 78% of start-ups not surviving the first year and it’s probably because many become self-employed with the wrong mind-set.
As such, I recommend to stay away from entrepreneurship if you are risk averse and the purpose is to get rich very quickly.
Here are a couple of lessons I learnt from running a book-keeping business during my maternity leave from my living room.
Do you really need a bank overdraft to start trading?
Most start-ups will, but I would say it is certainly wiser to look for financial help from schemes such as Princes’ Trust where entrepreneurship is encouraged and interest on loans is the lowest one could possibly bargain for.
Princes’ Trust will also coach a budding entrepreneur to become financially aware in order to mitigate certain controllable financial issues new businesses might run into. They help you put the business plan together along with your financial forecast for monitoring. So if you do end up opting for an overdraft, its advisable to only go for a reasonable amount and also think of the bank charges payable after the first year and how to pay it back.
Do not become self-employed if you have personal debts
It is not uncommon to buy a car on finance or to go on holidays even using your credit cards. Now, if you have done this like most of us and are yet to bring your balance to zero, it would also be wise not to embark on that self-employment journey by letting your full time job go. In such scenario, I would start compiling the forecast and start advertising (word of mouth) while I financially plan to clear those personal debts then jump ship to fully dedicate my attention to the start-up.
Again, quitting your full time job for self-employment is not for everyone so you may consider part time employment to hedge the risks of self-employment and also for your health because having a full time job and running a business over the weekend is no small feat.
Do not think of quantity of clients think quality?
If you resorted to self-employment out of desperation, you may be inclined to think about how to quickly accumulate a client base, but from my experience you really only need a couple of clients. Once you’ve provided them with an impeccable service the spider web starts building itself without you having to spend a lot on advertising.
As such, I advise you not to sell yourself cheap; price your product or service competitively and work smart. I once knew a window cleaner who charged £20/hour while the market rate was £8/hour.
Checklists are your best friends, but let me tell you even with checklists you can miss tasks out but at least when problems arise they serve as a tracker/reference.
For me it was the lack of sleep as a new mum, the nursing and the pressure of self-employment was testing me and that’s partly because I struggle to ask for help. If you can for instance get friends and family to spread the word for you then you won’t have to do the advertising yourself, which frees up time to perhaps do some credit control and sleep perhaps.
It is ok to realise you can’t handle all the tasks like I did and another solution if you are too proud like me to ask is to trade skills with friends and family. This is achievable because businesses tend to have peaks and quiet periods and if your partner helps you code the business invoices for instance, during busy times you may return the favour by perhaps painting the fence when business is quiet (random example).
This again ties back to “the habits of the wealth” and “financial planning” articles. It will be pointless to go through so much sacrifice and waste all of the business profit on luxury items. I recognise that hard working may warrant the finest rewards at times but remember the luxury items makers and sellers are not out there to help you become financially independent and build your empire; they exist to make profit and sustain their own wealth.
Therefore, it is paramount to reinvest in the business once it starts becoming profitable. This will substantially reduce your tax liability as there is a capital allowance available to use up annually for business equipment.
An example of this would be: a book-keeper who makes a profit of a £3000 a year and does not have a fully functional PC, instead of reporting the 3k as profit he/she might decide to purchase that asset which is to be used exclusively and wholly for the bookkeeping business. This will substantially reduce the tax bill for that period.
Overall, an entrepreneur who simply abides by the point highlighted in the “habits of the wealthy” and the “financial planning” articles and who thrives on sweat equity as well as seeks for help will usually achieve financial independence as long as becoming rich is not the top reason why they have launched the business.