Before
you start that business
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Author and personal finance coach, Usiere Uko,
writes on the pitfalls to avoid when starting your business
January is a month of new beginnings, the first
month of the now infamous ‘New Year Resolutions’ when the zeal for change is
still burning. Studies have shown that the top two of most resolutions have to
do with finances, health and fitness (especially the weight loss variety). Many
folks launch new ventures in the first quarter of the New Year. With crashing
money market rates crash and a bearish stock market, many are seeking higher
returns investment outlets for their money. Typically, when the stock market
crashes, investors flee for safety in the money market, and as the stock market
booms, they move their funds back in the market. In the event whereby both
markets are down, the tendency is to flee to the real estate market, invest in
or start a business.
Thou shall not liquidate your reserves
If you are familiar with asset allocation and the
elements of a solid financial foundation, you will notice that each element
plays a different role. I often use football as illustration. Your savings or
reserve is the security element. The CBN is rolling out directives with
bewildering rapidity because our reserve (savings) is down and like football,
our defence is porous. Your savings is a defensive mechanism, not a tool to
become rich. I am not sure if a coach will ask the goal keeper and central
defence to move to the opponent’s half of the field simply because the team is
desperate to score.
When money market rates crash, there is the
temptation to move your goal keeper and defence forward (move your money to
high risk high return investments) in the quest to boost your cash flow. That
stunt may work, but if it backfires, you are worse off (the opponent scores).
Saving money will not make you rich. It can if you save and reinvest
consistently and persistently for decades. It is a slow way of getting rich,
and very few have that discipline and fortitude to bear the prolonged belt
tightening and scrapping the bottom of the barrel. One danger with this method
of getting rich is that you may develop a lack or poverty mentality along the
way, and rather than enjoy life, become miserable forever hunting for the
cheapest, the discounted and the bottom of the range.
Are you looking for a short cut to access capital?
The fastest way to become rich, create jobs and
boost the economy is to own a successful business. A lot has been written about
how to start a business and more will still be written as the business
landscape evolves. I have watched businesses start and crash. I have loaned
money to many to start a business without getting my money back or the business
going the distance. If I was a bank, I would have gone out of business. That is
the situation with most of us. Apart from the fact that we are not equipped to
analyse risk, we allow emotions to get in the way.
We want to help. Looking back, I see that virtually
none of the people I tried to help by giving them money to start a business has
been helped. They were grateful quite alright, thanked me profusely, prayed for
me, my family and generations yet unborn (feels really good, doesn’t it?). Fast
forward a few years down the line; the money and the business is gone. What
went wrong? Why do people come to us that have limited resources rather than go
to a bank which has more than enough and are looking for who to loan money to?
Why do people who want to start a business run away from banks?
Going through banks is too much ‘trouble’. They
cannot withstand the scrutiny and the rigour of the process. They don’t have
what banks are looking for – proof that their concept works. They know it will
work. They have done all they need to do. All that is left is funding. Banks
are ‘shylocks’ hence they are coming to you who will understand. Is that true?
If yes, how come many businesses with start-up capital kiss the dust? Is it
because the founders did not have enough faith and hope?
There is a saying that the worst thing to happen to
you in Vegas is to win. Why? Because you think you are smart, and will want to
win again. When you start to lose, you start throwing good money after bad,
trying to win back what you lost. Many ‘win’ to the point that they walk away
from the table without their valuables and a pile of debt. The worst thing that
may happen to you if you want to start a business for the first time is to have
the money to do it. You will simply bypass process and rush to open the doors.
Since you have the money, why bother going through the hassles? Just get down
to business. There is no need to test your assumptions. Consequently, rather
than fail at the concept stage, you fail where it hurts most, when a lot of
money, time and resources have been sunk in only to learn one lesson – your
assumptions were wrong. You took the much more expensive route to learn the
lesson.
Proof of concept
If you are to access a grant, you will be asked for
a proof of concept. Proof of concept is documented evidence that a potential
product or service can be successful. Venture capitalists, banks etc have other
names for it, but it means the same thing – prove that your concept actually
works. For someone who has no track record of running successful businesses,
the theory, projections, market research etc is brilliant, but you need to
prove that it actually works. They need a field tested prototype. They need
actual numbers. They need to see the cash flow. Like the popular phrase from
the 1996 film ‘Jerry Maguire’ – show me the money! If you can show investors
and banks the money, they will be begging for a piece of the action. They are
desperate for good investments to put their money, especially in today’s
Nigeria where the days of armchair banking is gradually drawing to a close.
The challenge we have is that we believe start-up
capital is the issue. Rather than save up seed capital to prove our concept on
a small scale, we are looking for big money to test our assumptions with. We
rush to battle with a bundle of untested assumptions. There is no business
founder who does not believe his business will succeed. This belief becomes
fatal financially, when there is money to back up the untested assumption (like
winning in Vegas). Until your assumptions are field tested, they remain
assumptions unless you are spiritually guided. Anybody who puts money on it,
including your good self is gambling. Your hard earned money is too precious to
put on an idea that has not been tested. Don’t get too emotionally invested in
your business idea. Do your homework properly. Don’t run from banks. They have
experts ready to help. Even if you don’t take the loan, you have a lot to learn
going through the process. So before you start that business, one last check
before you pump in money – have you field tested your assumptions?
EXTRACTED FROM: THE PUNCH NEWSPAPER. WEDNESDAY 16 JANUARY 2016