The Blue Roof

Yesterday I said “start a business to create wealth” and I shared at least one of my concerns about starting a business.

The question is: why is STARTING a business such a wonderful way to create wealth? The answer is (drum roll, please): because you create something from nothing!

 Obviously, if you have a successful business, you will also have more money to invest and buy more assets. Wealth is determined by assets, not income! And all of us can do with more income.

 But a good business is also an asset! Consider this: you read this, it makes sense and you decide that you want to give it a try. And you start thinking about the type of business you can start (more about that in a next post).

 You start a business selling widgets. And best of all, you don’t have to spend a single cent to get started. The business grows and the profit increases. I am not going to put a figure to the profit, but consider this: as a rule of thumb, or as a working hypothesis, a business sells for about 2 times net profit. Imagine STARTING a successful business, making money and selling it for 2 times net profit! That is creating wealth big time.

 But remember this, you cannot invest the money you make from selling to give you the same income! That is why I am always sceptical when people SELL a business. And why you must think carefully before you sell your business. And that is why there is a saying: let the buyer beware (caveat emptor).

 But there are valid reasons for selling – people simply get tired of what they are doing. Or you get to the limit where you can take the business. Or you want to start a totally new business.

 Just imagine what you could do in terms of investing with an extra R2 000 per month. What about R10 000 per month? And there are people who do better than that with part-time business!

 Next time we look at types of business and the skills needed.

Creating wealth and rules to help you do it, that is what we are busy with.

To create wealth, start a business. When I say this, I say it with some hesitation, but still with the conviction that it is a good way to build wealth.

Why do I have doubts? Because I think too many people jump the gun and are more optimistic than they have reason to be! Too many people under estimate the skills needed to operate a successful business. And, at least in South Africa, the decks are stacked against the small business owner.

To counter act the above, I suggest you consider starting a part-time business. Cover yourself with your present salary and position while you build another business. That way you learn and gain experience and get to build your business income without putting your financial life at risk.

In dealing with business people I have discovered that most people completely under-estimate the amount of money needed for proper marketing and very few had an accurate idea of the working capital they would need to break even. One of the reasons I think so many start-ups fail. What it means, is that I need cash to operate my business. It takes time before I sell enough to pay all my costs from profit. Then my cash runs out before I make enough money to cover costs.

Think of it this way. Somebody offers me R5 000 per month if I can make it to Johannesburg. I get in my car, having sold or bonded everything I have, and start off for Johannesburg. My car runs on petrol, so as I progress along the way, I fill up the tank. My cash gets less and less. Then halfway to Johannesburg I lose a tyre. Unfortunately, in the small town, there is no tyre available, so they order a tyre. But I have to sleep over for two nights. I never considered this, and my cash gets less. Eventually I am on the road again. But because of a storm, I have to take a very long detour, because a bridge got washed away. The bad going increases the fuel consumption. My cash, and fuel gets less. About 200 km from Johannesburg, I see I have to fill up again. I look at the cash in hand, and realise I cannot afford to fill up. And the fuel I buy will not take me to Johannesburg. I ask the owner of the fuel station if he can help me. He wants to know how I will pay him. Well, I have the vehicle, but I need that to get to Johannesburg, so that is of no use. I have the promise of an income of R5 000 in Johannesburg, but it is only a promise, nothing guaranteed. I have sold everything of value or borrowed to the hilt. He is sorry, but he is not going to take a chance.

I drive to the next garage. Try my luck, same story. Driving around from place to place I used even more fuel. So I buy what I can afford and hit the road. I am hungry after all the time spend trying to find help, but I don’t have money for food – I fed the beast, remember? I drive as carefully as possible to use as little fuel as possible. It is slow going and I am tired, but I can’t stop.

Eventually, about 50 km short of Johannesburg, the car comes to a slow stop. I ran out of fuel and have no money or credit left.

I have lost more than everything. I pursued a dream of R5 000 per month for reaching my goal. I sold and bonded everything. Now In am stuck in the middle of no-where with a lot of debt.

I have no doubt that some of you reading this will recognise the story, either from personal experience or because you know somebody that experienced it.

I am not telling this story to scare anybody, just to encourage you to be careful and to seek help BEFORE you start the journey!

Tomorrow we will continue with this.