6 steps to being your own boss

2009/03/14 at 9:49 am (Article)

Young entrepreneurs have to work hard to overcome inexperience and gain credibility. These tips increase your odds of success when starting out and starting up.

 Got that entrepreneurial spirit? You aren’t alone. In fact, two out of three teenagers who completed a recent Junior Achievement “Interprise” Poll on Teens and Entrepreneurship said they hope to start their own business one day. But it takes more than a good idea and a desire to be your own boss to launch a successful venture.

Just ask Max Durovic. At 18, he increased his odds of making it with formal and thorough business planning. By taking the right steps, he built a booming business before he even graduated from college.

While a sophomore at Georgetown University, Durovic founded the inventive street-advertising company Aarrow Advertising. He began hiring 14- to 24-year-old students to carry sandwich-board sign ads for nearby retail chains and to perform trademarked tricks, spinning and tossing the signs to attract attention. The sign spinners received hourly pay with a 10-cent increase for mastering each new trick. Durovic turned the idea into a booming livelihood by crafting a complementary team with an expert mentor, meticulously writing a business plan to focus his vision, following the financial feedback and continuing to plan. By age 22, he was leading 200 employees in five cities, and revenue was growing at an average rate of 10% per month.

Early on, Durovic faced one of the biggest challenges of enterprising young adults: the credibility gap. Most entrepreneurs endure long hours, challenging management decisions and months without income, but young entrepreneurs may face larger hurdles. With minimal work experience, limited financial resources, fledgling credit histories and no start-up experience, they often have difficulty convincing people to take their business ideas seriously. Startups are already risky — inexperience adds more risk. In fact, one in three new businesses fails by their second year.

How can you minimize your risks? Use our checklist to get ready. We’ll help you carefully weigh whether to trade valuable years of traditional work experience for your new business dream — and then how to pull it off when you’re ready.

Get some experience

If you’ve never clocked a day of work in your life, you might consider taking a job before striking out on your own — even if the thought of doing time in a cubicle makes you shudder. Work experience in the field you want to break into may be the most productive use of your energy.

 

Think of it as a paid research position. In a couple of years, you can give your business a go. By then, you’ll have learned the ins and outs of the real world and reduced the risk of total inexperience.

“Financial literacy is the language of owning a business,” says Irwin Rudick, the vice president of the San Diego chapter of SCORE, a nonprofit firm that gives advice and training to small business owners. So, if you’re still in school, take classes in business, management or entrepreneurship. If you’ve already graduated, sign up for night classes. Durovic, an international-business and marketing major, says that his formal business education has been integral to his success. “Nothing brings the classes to life like running your own business,” he says.

Build a winning team

Bring on people who complement your skills and fill in the gaps. Mary Beth Metrey, a 24-year-old Spanish-literature master’s student at Georgetown University, had always dreamed of opening a boutique, but her short stint in retail didn’t provide all of the details of running a shop.

 

But Heather White, her hometown friend from Wyckoff, N.J., had studied fashion design and merchandizing. Naturally, Metrey asked White to be her business partner when she opened a shop in Georgetown.

Fight inexperience with advice

Universities and alumni networks are great sources for mentors. Durovic found business-plan help in a Georgetown entrepreneurship class and consulted with his former professor on business decisions. Ryan Comfort, a grad of the University of Pennsylvania’s Wharton School and founder of the online art sales business Comfort2020.com also found cost-cutting connections through his school’s alumni network.

 

The Internet is another great place to get free advice. SCORE, for example, boasts a mentor network of more than 10,000 mostly retired entrepreneurs nationwide. You can search by related background and meet the mentor locally or by email. You can also get feedback online from 12,000 peer entrepreneurs at YoungEntrepreneur.com.

And seek out local organizations. At 27, New Yorker Leah Alani founded SophieSays.com, an online boutique for stationery and gifts for special events. She gained the confidence and the practical skills to accelerate the start-up date after taking a four-week class with Ladies Who Launch, which has local chapters in metropolitan areas.

Write a bulletproof business plan

One of the biggest mistakes a young entrepreneur can make is simply failing to write a business plan. There is no other single process that can be more useful in beginning business problem-solving than addressing the risks and thoughtfully forecasting by writing the plan. Don’t fall into the excuse that you have the business plan in your head. “That’s a fantasy,” says SCORE’s Rudick. “It only becomes a reality when you put it into writing because when it’s in your head, no one else can see it.”

 

Not only is it a good planning tool, but a solid business plan is also your key to raising capital — the money you need to get your show on the road. Although you may not have had time to build a long credit history to show that you are financially responsible, you can demonstrate your penchant for using sound judgment by crafting a document that sells your business and lures financers on board. It’s your greatest opportunity to fill the credibility gap.

A business plan will showcase your product or service, how you plan to make a profit and the exceptional team who can bring the business to success. It should include market data and tests to show the service or product will sell, the essential skills that will drive profits, estimates for startup costs, projections for sales and profits, a break-even analysis and long-term goals for the company.

If, while writing the business plan, you decide from your research that the business isn’t as sensible or profitable as you originally thought, the plan has served its purpose. Rather than cost you money and effort, you’ve spared yourself any loss. Once you’ve crafted a plan that satisfies you, show it to your mentor or entrepreneur friends and ask for their input on how to improve it.

Find inspiration from sample plans at bplans.com. But be sure your plan shows your original thinking for the unique situation so that readers can see how the team problem-solves and relates to the business, says Stever Robbins, a business consultant and start-up veteran of nine companies.

The top-rated Business Plan Pro 2006 ($100 and up) from Palo Alto Software will walk you through the entire planning process. It includes cash-flow projections and a useful tool to help you understand when you’ll break even. With the $200 Premier edition, you can collaborate with other teammates and split up specific parts of the plan to streamline the process. Best of all, it includes freebies like a company logo crafter and a guide to small business law.

Raise money

Your business plan should overestimate how much money you will need from the beginning because it’s easier to raise money before the launch than it is after you’ve failed to meet projections. To minimize risk, limit the amount of personal money that you put into the business, says H. Irving Grousbeck, a co-director of the Center for Entrepreneurial Studies at Stanford Business School. Also, you’ll be tempted to use credit cards, but credit-card debt is the most expensive debt you can have. Try to steer clear.

 

Clutching a business plan that sells, go first to a bank to request a loan. “Banks are conservative, and they’re still in business,” says Robbins. If you have a FICO credit score of 680 or more and you’re seeking a loan for less than $50,000, you’ll likely be granted the loan, says SCORE’s Rudick. Even if the banker can’t offer you a loan, ask for his or her advice about how to improve the plan so you can try again.

If your credit history is too short, friends and family may be your best shot. But tread carefully: Set the loan up like a formal business transaction that explicitly states when it will be repaid. A smart way to manage a loan between family or friends is with a professionally administered loan from CircleLending. The company will send statements and track payments, and provide healthy distance.

Follow the money

Count on a cash cushion to live on for at least the first six months because you likely won’t have an income. Conserve your money before you start. (See Build Your Financial Foundation to learn more about how to build your stash — and where to keep it.) Once the business launches, regularly compare your actual income and expenses to your original forecasts to take the pulse of your company. Intuit’s QuickBooks software ($200 and up for Pro and more advanced versions) features many bookkeeping tools and services such as expense tracking, check printing and payroll managing. Another plus is that you can export your information to Business Plan Pro to simplify your comparisons.

 

And stay focused on your financial goals. One of the biggest causes of failure is diffusion of focus, Grousbeck says. The first year you should have two overarching goals: meeting or exceeding your projections and treating your customers right.

This article was reported and written by Elizabeth Kountze for Kiplinger’s Personal Finance Magazine.

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