Be Careful When Starting A New Business!

"You don't know until you know how much you don't know.” ~Anonymous

Starting a business is hard, but many people believe that if you have the passion and energy, you can be successful. This however, is just not the case. Before you step up to run a business, you must have experience and knowledge.

A wonderful lady was referred to us for help with her new restaurant venture. She had worked as a nurse for over 20 years and was just worn out. Her hardworking son, who was a good cook and currently unemployed, would join her in the business. She really felt that this restaurant would provide the income she and her son needed.

After months of searching, she found a location she could afford. Though the rent was a perfect fit, there was no parking, the location was poor, the equipment was in need of repair and three other restaurants had already failed in that very same location. The owner of the property was aware of its shortcomings, which probably explains why he was willing to offer a year lease. A one-year lease is completely unheard of in the restaurant business.

My colleague, Barbara Lay, and I met with the hopeful restaurateur one morning over coffee. She was three days away from signing the lease on the property, and she was so excited about what she had convinced herself was the perfect location. You could just feel it as she told us about the building.

This woman was completely convinced that starting her own restaurant would solve so many of her problems. However, as we talked, we discovered that she had absolutely no experience with accounting, marketing or even setting up a menu.

She did not consider her lack of experience a problem. She thought she would pick things up quickly once she put in the requisite effort. She also said that, like her son, she loved to cook, and she had waited tables in college.

Though her can-do attitude was admirable, we had to caution her against moving forward without experience. Being inexperienced in the business you are trying to start will frequently result in very expensive mistakes.

In response to these warnings, she kept insisting that she would learn as she went along. To prove my point, I asked her if she would let an untrained person perform nursing procedures. Of course the answer was no. This example seemed to resonate, and she understood my point.

Many of this woman’s friends had encouraged her to move forward with the venture. However, we advised her not to completely trust her friends’ opinions. Because they are her friends and they want to see her succeed, it would be very difficult for them to be completely honest with her. They were acting out of their desire to be supportive.

As we continued to gently prod her about her concept, some tears were shed, and we knew she felt that we were destroying her dream. However, we continually reassured her that we were not suggesting she abandon the restaurant idea altogether, merely that she postpone it long enough to acquire the necessary experience and knowledge. Once she had the tools she needed to succeed, she could move forward. We suggested that she take QuickBooks classes, a marketing course and start working in the industry.

This potential start-up turned out fine, but many other start-ups fail because the owner lacks the tools to successfully manage their new business.

Now go out and make sure you have the training you need to be successful before you start or buy a business.

You can do this!

Economics of Green Alternatives

"Civilization and profits go hand in hand." ~Calvin Coolidge

Lately, I have seen more and more businesses adopting new technologies to save energy and garner applicable tax incentives. While saving energy and other natural resources is critical to our earth, these decisions must be made within an economic framework.

Before my inbox is flooded with emails from environmentalists, let me just tell you that I have been driving a Prius for the last four years, and I am a staunch believer in the responsible stewardship of our natural resources. However, in business, green technologies must always be evaluated within the economics of reality. The question entrepreneurs must ask is not how many natural resources will be saved, but whether or not saving these resources is economically viable.

From geo-thermal to solar, new green technologies are very expensive right now, and the amount a business can end up spending on them is unlimited. The technology is also changing rapidly, which normally means falling prices. Additionally, over time, existing technology will need repairs, and those repairs could become very expensive as new technologies emerge.

As with any investment, you must look at the rate of return. I frequently hear people talking about a 10-year or longer payback, which refers to the number of years required to recover the initial project cost out of the annual savings. For example, if a new technology costs $100,000, and the additional annual savings are $10,000, the payback is 10 years.

The problem with payback is that it ignores the time value or opportunity cost of money. A better way to evaluate these green investments is by the project’s real rate of return.

Going back to the example of the $100,000 investment, we see that they recover enough through savings to pay back the cost of the project in 10 years. While this sounds okay, it does not consider rate of return, which most businesses should be using. In this case, when we take the time value of money into account, we see that the annual return on this investment is only eight percent.

After establishing the ROI, every entrepreneur should determine their opportunity cost. That is, if a firm could earn a higher rate of return by investing elsewhere, from an economic point of view, this would not be a sound decision. However, if a higher rate of return was not available, the firm should feel confident in this investment.

While investing in new environmental technologies feels great, this is not an adequate basis for making prudent business decisions.

Now go out and make sure you have processes and procedures in place to help you make rational decisions when evaluating green – or any other – technologies.

You can do this!