In this economy, many people have lost their jobs. After trying unsuccessfully for several months to acquire employment from other people, it might be tempting to go it alone and start your own business. Sometimes that’s a good idea. Often, necessity (or desperation!) is the mother of invention. Still, most businesses do fail, and in this economy, it is actually harder to create a successful enterprise than it would be in a strong economy. So, the stakes are higher. Can you do it? Well, maybe you can. The trick is to start small.
My husband and I started a construction business a little over three years ago, before the economy plummeted. We actually had one good year before the construction economy in our area disintegrated. Although we were really encouraged by the success that we had when the economy was doing well, we were such a fledgling business, that we had no financial cushion at all.
What we did have was low overhead and very little debt. Many entrepreneurs feel that they must borrow thousands of dollars to start a business and make that business large. The problem becomes this: how do you acquire large sums in capital in order to start your business dream? Well, you borrow it, of course. Some businesses do manage to borrow these large sums, and they begin their enterprises with ready cash. The problem is, they also begin their enterprises already in debt. People and business often forget that when they borrow money, this money has to be paid back on a schedule, usually starting immediately. This debt payment schedule then becomes part of your overhead.
If you begin a business enterprise already several thousand dollars in debt, you must make even more every month in order to break even. In fact, I heard once that most businesses do not show a profit in the first five years. This is true, even if their product begins to fly off the shelves immediately. Why? Debt is why.
This overhead that I’ve been speaking of is also a factor in pricing your product. There is a magic number for pricing that involves determining the cost of producing a product and then determining how many products you will have to sell in order to make a profit. After you divide by pi, move the decimal point, and carry the one, you will have the magic price point for selling your product. This is the magic price number that will make people happy to buy your product, while still garnering your business a profit selling that product. Putting all this voodoo aside (and it is voodoo), the biggest factor in determining price is overhead. The higher your overhead, the higher your prices have to be in order to stay afloat, let alone make a profit.
This is important because of the law of supply and demand. In a good economy, there are lots of customers available to purchase your product. Using the law of averages, that makes it much more likely that your product will get purchased, no matter what the price is. In a bad economy, however, people are not buying as much. There are fewer customers available. This equates to more competition for the same customers. Usually, if all other factors involving the product are the same, the low price wins. Using our low overhead, we were able to keep our prices lower than our competitors, and that has made the difference for us.
Of course, starting your own business still means working your tail off, and it also means you’re walking a tight rope without a net. But if you are able to beat the odds, the feeling of exhilaration can’t be beat. Also, it’s comforting to know that no one can set a limit on your success. And it can be done. The key is to keep debt down, and keep operating expenses low. Then put your head up and reach for the stars.