Here is what you need to know before embarking on your entrepreneurial journey.
The environment, of course, is key for humans and for every other living organism on the planet and you have to adapt. Let us be a little politically incorrect here and look at the South African work climate. In the last century, there have always been pockets of individuals who have had it easier than others. During the apartheid era, people of colour had it much tougher than the (then) ruling minority (and even more specifically, a sub-sector of that minority that spoke the right language). Women had it tough trying to climb the corporate ladder (so you can imagine how much harder it was for women of colour).
The tables have turned, and now, young white males are finding it harder to get ahead in the formal or government sector. Life isn’t fair; it never has been; get over it. The one saving grace through all of this is the entrepreneur – the person who makes their own luck – it has never really mattered their gender or skin colour – it is their persistence and work ethic.
The work environment is changing, and of course, the pandemic helped along that trajectory, as working from home and being more ‘independent’ were normalised. Companies, of course, are pushing back; they are either too lazy to properly monitor remote productivity (the ones that used to use keystroke monitoring to check on your ‘activity’ during the pandemic), feel they are losing control, or need to justify their office space.
Globally, 90%+ of businesses are small businesses and account for over 50% of jobs. Working remotely has shown millions of “workers” that they do not need the “crutch” of a large organisation and can do it themselves in one way, shape or form – but it does come with some challenges.
Entrepreneurship requires risk-taking
It means starting at the bottom. It usually means being the chief cook and bottle washer to begin with. First, though, you must learn the skills – and it has never been easier or cheaper. You don’t need to spend hundreds of thousands of rands on an MBA (and that degree certainly doesn’t instantly imbue you with entrepreneurial drive). Animals automatically ‘hustle’ – if they don’t, they die. Some, of course, are better than others, but if you’ve ever been mobbed by a troop of monkeys when you’re in a game lodge (or any house on the KZN Coast), then you know what I mean.
The first advice I would give a budding entrepreneur is to have a plan. Sure, you are not taught how to do that at school … so don’t go back to playing video games or working with a toxic boss. Instead, spend a couple of hundred bucks on Udemy or find one of the thousands of free resources out there.
One of the biggest mistakes entrepreneurs make is to buy into the fallacy that business plans, financial plans, marketing plans, and business qualifications are all bureaucratic nonsense designed to kill your dreams. Dreams and visions are all very well, but unless you know what your break-even is, your projected cash flow, regulatory hurdles, tax implications, market dynamics, cost of sales, margins, unique selling point, etc., then your business is not going to make it out of the gate.
Until you have a fleshed-out plan, suck up the day job. Do not cash in your pension on a whim to ‘”follow your dreams” and regret it later.
Next, you need ‘seed money’
To keep you alive until the money comes in. Cut all the fat out of your consumption. Hustle baby. Drive Ubers, be a nanny/manny, walk dogs, just get going. If you are already in a job – do not give it up until the business is ready to fly (not soar, maybe, but at least keep the wolves from the door).
If you’re lucky enough to have a partner who will support you and your venture, make sure they are properly protected and rewarded. Protected from you going bust and compensated with assets when you succeed. Obviously, this can be taken care of in an ante-nuptial contract, but get a good lawyer and make sure you both share equally in the success or failures down the line (especially if you are the “sponsoring party”). It must be a win-win.
I have just come across too many cases where a partnership/relationship/marriage dissolves, where one partner is the entrepreneur and the other the corporate slogger who has kept the food on the table but wins the prize for walking away with less than their fair share. Or try this on for size … the [entrepreneur] takes half of the other partner’s pension!
Entrepreneurs, especially if they haven’t been cursed with climbing the corporate ladder or a MBA, have some unique challenges when navigating the field of personal and small business risk and finance. Perhaps it’s that fearless spirit and boundless confidence, but “jump and build your wings on the way down” can leave a nasty mess at the bottom. A bit of homework on wing design would have prevented that – and the same goes for that entrepreneurial venture.
Business Partners
Pick them very carefully. Make sure your values are aligned, especially when it comes to money. If one partner is frugal and the other a spendthrift, you will come to blows. Have a solid shareholder’s agreement, with a buy-and-sell agreement backed by policies so one of you isn’t left holding the liability if the other dies prematurely. (These have to be carefully structured so they don’t fall foul of double estate duty, so use a suitable professional – ironically, it probably isn’t going to cost you any more than using a normal broker.)
Learn from the animal world. Parasites usually kill their host – the longer it takes them, the better. Symbiotes (win-win) have a much better time. Never abdicate from your responsibility for oversight, even if you don’t really like it.
Business Risks
Understand what these are for your type of business –
- Cybercrime
- Hacking
- Denial of service
- Customer liability
- Labour risk, theft, fire, product recall
This is what insurance is made for. There is also the risk of losing your partner and not having the ready cash to payout their estate and end up with an auction or fire-sale of the company or one of your partner’s parasites on your board, constantly pestering you to declare dividends or to employ them. Look at buy-and-sell or keyman policies to generate that cash flow when needed. (Much of this insurance is a business expense anyway.)
Retirement
Your company is not necessarily your pension. Do not abdicate the responsibility for your old age to the (often mistaken) belief that you can sell the company and make yourself a nice little nest egg to retire on. Plan your wealth by assuming that you will make nothing from the business at any time in the future. I’m sure the pandemic has taught most entrepreneurs the painful lesson that “stuff’ “can happen over which you have no control and is not your fault. Don’t be a blinkered fool – look at everything that could happen and prepare accordingly. Always have an investment to the side that you can fall back on if everything unravels. (Only some of those risks can be insured for.)
This really ties in with the mindset of the company being the be-all and end-all pot of gold at the end of the rainbow. I know entrepreneurs and business founders in their 30s and, more importantly, those now in their late 50s and 60s, and the reality is that there are too many factors in the broader environment beyond your control for a business to sustain you solely, whether it’s lack of funding, market downturns, suppressed revenue – the list goes on …. It’s for this reason that we advocate for diversity to allow for the creation of multiple streams of income, especially those that are tax-efficient tools in the grander scheme of financial planning, like a retirement annuity.
Contingent Liability
Every time you and your partners sign a surety of any description (overdraft, loan), you can be held ‘jointly and severally’ liable. What does this mean to the bankers? They can go after the whole lot from ANY of the partners. They ultimately will claim from low-hanging fruit such as a deceased estate because they know the bucks will be there, and the executor has no option but to pay them and try to get the money back from the other partners. They haven’t quite got to the level of Sars just yet – those blighters will keep peaking at your bank account, and when they find funds, whip them out – usually the day before payday.
Succession Planning
This should be part of the business plan from the very beginning. Are you going to sell? When? Will you want to extract the equity (sell the company or part of it) or just take the dividends into retirement? Irrespective of your age, this should be built into your plan.
Neglecting Personal Financial Goals
I find that entrepreneurs, particularly those who are just starting out and getting down to the grind, fixate on the sole success of the business – almost a tunnel vision approach. Now, obviously, passion, grit, and commitment are what set those who succeed apart from those who generally don’t. Still, in my experience, it’s often at the expense of their personal financial planning, such as a diversified portfolio and a contingency of insurance benefits.
An entrepreneur’s greatest asset is essentially their ability to build a thriving source of income, which is why you and I are both such firm advocates for income protection, which is ultimately the single nutrient that your entire ecosystem cannot survive without.
Underestimating/lack of awareness of tax obligations
Failing to plan for taxes can derail the balance of a thriving wealth ecosystem. I find that many entrepreneurs, particularly the younger ones, find this element of a financial plan to be a very murky one. I’ve seen situations where failing to plan for tax payments has resulted in cash flow shortages. It’s crucial for entrepreneurs to have a pillar of professional support from a good tax practitioner and a financial advisor to guide them in how to be tax efficient, both as a business entity and in a personal capacity.
Your Choice Of Financial Advisor
As an entrepreneur this is probably more important than if you are an “employee’” Financial advice isn’t all about asset allocation on a tidy pile of wealth and then leaving it to the asset managers while the advisor sits on the beach sipping mojitos – your advisor should be there helping you understand your personal and business needs and dynamics, mitigate risk, protecting you from yourself, optimising your tax and perhaps most importantly helping you watch your consumption so that you have wealth that you can squirrel away – and yes, they can help you grow.
Also, consider that as an entrepreneur, as you become successful, you will need a helping hand to ensure that not all your newfound cash is ploughed back into another venture, which ultimately does not change your risk profile.
As entrepreneurs age, their risk profiles must also change. Ensuring that these investments are liquid, transferrable, and available becomes important.
In Summary
Entrepreneurship is definitely not for “sissies” but can be highly rewarding in this highly uncertain employment environment but if you make yourself aware of the wealth traps before you embark on this journey, you can negate these challenges.
Reference
Website – https://www.moneyweb.co.za/financial-advisor-views/wealth-traps-waiting-for-unsuspecting-entrepreneurs/
