The important business about Your Own Business (Part 1).

If done right, one of the most rewarding personal and financial decisions you could ever make is to start your own business.

The feeling that you get in fulfilling their dream of starting a business, and growing it to the point of generating income and profit for yourself, as well as getting to the point of employing others and knowing you have created something that not only supports you and your family, but other families as well, is extremely satisfying.

Of course, a business doesn't just happen, nor does it just automatically become profitable. In fact, that extreme satisfaction that I described above, is because it is extremely challenging to

1. Start a business

2. Keep a business going

3. Make a business profitable

4. Grow the business

5. Survive past the 5-6 year mark (20% of businesses fail in the first year, 60% fail within 3 years, and over 80% have failed within 5 years)

Imagine using your entrepreneurial talent to not only beat the odds above, but also create a business that generates enough income and profit for you, as well as employ others - how good do you think you would feel about yourself?

Now, I know many business people that have been in business for over 10 years, 20 years and even over 30 years. I also know others that have started a business and failed.

In fact, in my opinion, when it comes to small to medium sized enterprises (SMEs), I lump them into five categories.

1. Many small businesses start with no plan, no edge, no thinking, no funding and end up failing - usually within the first year or two. Often, these business owners are in denial or ignorant of their imminent failure. The enjoy telling others that they own a business - and revel in their false hopes that they will achieve success. I have seen many such businesses come and go.

2. There are small businesses that start with a basic plan, no real edge, not much thinking, little funding but plenty of determination. Such businesses end up creating an average income for their owners. Basically, the business owners have created a job for themselves. They manage to draw a salary, but there is little to no profit per se. They are employees on an average salary (or less), that lack the typical employee benefits such as 4 weeks paid annual leave, sick leave etc. They cannot afford to stop working because if they do not work, they do not earn. I have known businesses like this, they can go on for years, but are often not much more than a "job" - without the benefits.

3. Small businesses that start with a plan, an edge, a reasonable amount of thought, adequate funding and a huge heap of determination - where failure is not an option. Such businesses have a person driving it to be profitable. The owner looks for an edge by targeting niche markets with niche products/services. The business owners are profit driven, and as such will know the detailed "numbers" of the business (fixed costs, variable costs, income, profit margins on every product/service segment) and will have a "break-even" analysis and a "projected cashflow and profit analysis" for the business. They will make decisions based upon the "numbers". They will work within budgets. These businesses can be small enterprises of just two people and go up to say ten people. These are the small businesses that usually have longevity - which comes from their profitability, their planning, and ability to shift with the markets. These are often $1.5M to $5.0M revenue per year type of companies.

4. The next level of business up becomes a cross between 2. and 3. above. These businesses had become successful (to a degree) with 8-10 employees, are turning over $3M - $5M per year in revenues, and then decide to expand to the next level by taking on more employees, bigger premises, more expenses, but with no effective plan to grow their revenues and profitability accordingly. The business grows in size, but the revenues fail to keep up. As such, they soon become cash strapped, struggle to make ends meet, and live in a false illusion of their capabilities and size. They are what is called a "zombie company" - basically dead but unaware of it! Such businesses survive on government grants and by constant cost cutting. I have known companies like this, where the owners continually battle on the edge of oblivion for decades, surviving on overdrafts, loans and grants. Never a profit to be seen.

5. Then there is the small business that is unstoppable. This is an extension of 3. above. These enterprises have great management, that are profit oriented. The small business keeps growing it's revenues montha after month, year after year. It keeps expanding the business year after year. More emplyees are taken on and eventually the small business transitions to a medim sized enterprise. Such businesses grow to have revenues of $20M to $100M per year. I know such businesses and their owners.

Now, please understand that the above are my observations of businesses that I personally know, or know of. The "categories" I describe above are what I use to categorise what I have observed. Of course, there is much more to consider, however, the simplified descriptions above would generally cover the vast majority of SMEs.

If you want to create wealth without having to deal with the prospect of working for the rest of your life, then having a business is the best way to do it as far as I am concerned.

If you choose to create, run and manitain a business, the only real options (in my opinion) and Options 3 and Option 5 (above). These are the only ones that will allow you to generate the income stream and profits required for investing in order to give you the future financial freedom you seek.

The sole purpose of a business is to make a profit.

If you think the line above is incorrect, then I have a question for you... if you had to invest $100,000 of your hard earned savings into ONE already existing company, and this is your only investment for the next 10 years, then would you buy shares in....

Option 1: A company that has been around for (say) 20 years or more, has a good management team, provides a product/service that is used by many people, continues to grow in size over time, Continually grows it's revenues, makes a good profit each and every year, and pays you a reasonable 7% dividend every year - because as a shareholder you are also a part owner....

OR would you invest in

Option 2: A company that has been around for (say) 20 years or more, has had no real growth for the last decade, appears to have an intersting product/service but has not stirred the interest of it's target market, revenue growth seems to be stagnant and has not grown in a long while, the company fails to make enough profit to cover growth and a return to shareholders and, as such pays shareholders NO dividend?

I don't know about you, but I would choose Option 1, because

1. It fulfills the fundamental purpose of a business.. to make a profit!

2. It also fulfills the objective of an investor because the purpose of investing to to grow your capital as well as generate an income stream (dividend plus capital growth).

I would never choose to invest in a business that loses money, or just makes enough to pay it's way without generating a profit - what's the point? If one chooses to invest in such a business, then one ends up losing money along with the business, which is stupid!

So now that we have established the sole purpose of a business, we now need to discuss what one needs to consider when starting a business. This is where the fun begins!

In Part 2, we will look at some options and considerations prior to starting a business.

A reality check, if you like!