Do Business Well

Whenever we talk to people about why they don’t start their own business, the most common excuse we hear is, “I don’t have the money”. Well, if you are truly committed to starting your own business, you’ll find a way or make a way of getting the money. But here’s the problem: All our lives we are encouraged and taught to invest in CASH ABSORBERS and not CASH GENERATORS.

CASH ABSORBERS are those expenses that absorb your cash like the Karoo in the rain. An example of a CASH ABSORBER is a brand new motor car. First of all, it costs a fortune. Then the day you drive it out of the showroom it loses approximately 20% of its value. The interest rate makes the monthly payments even more exorbitant, not to mention the cost of insurance, maintenance and, of course, the essential state of the art sound system. This car will absorb your cash like a vampire around your throat. Or to put it a tamer way, you are committing yourself to a substantial negative return on investment. To tell you the truth, you are committing yourself to a lifetime of financial struggle.

You know what, even now, both of us try to avoid Cash Absorbers as far as possible. As a habit, both of us are still investing as much capital as possible in CASH GENERATORS. For example, the lease on Mike’s wife’s car recently ended. Instead of buying a new car, Mike simply refinanced the existing car. After all, the car is only four years old. It has done limited mileage. It’s a Volkswagen Jetta so it has a lifespan of at least a couple more years. So now, Mike has the cash to invest in his business and he still has the financing costs to write off against tax. (Mike’s wife works in the business).

A CASH GENERATOR is a vibrant investment that will generate cash for you. And, of course, the ultimate example of a CASH GENERATOR is your own business. A successful business will not only pay your salary, but it will also give you a highly favourable return on your investment. And, if you want to sell it one day, you should realize a hefty capital gain on your initial start-up cost.

So what’s our point? Simply this: Get into the habit now of investing as much as you can in Cash Generators and minimize what you put into Cash Absorbers. You’ll be amazed at how much cash you can save.

Okay, let us now consider three examples of how potential entrepreneurs raised capital to start their own businesses.

First Example: Linda, the disciplined 21 year old

Linda was 21 and recently qualified with a BCom (Marketing). She had just been employed as a product manager at a large fruit juice company. Linda lived with her parents and also had a second job moonlighting as a waitress at the local fish restaurant. Linda was determined to start her own business and so she set herself the goal of saving sufficient capital within 3 years.

Linda went to visit her bank manager who was very impressed with her dedication and consistency. He told Linda that he would back her in the business to the tune of 60% of the total capital.

Linda could now go and plan to purchase or establish a business up to the value of R625 000. That’s a nice sized business. And R625 000 in capital is a lot of money by anyone’s standards. So it can be done. Many young people are sceptical of approaching the bank. But the bank will consider you favourably if you have a good plan, like Linda had.

Warning: Make sure that you maintain a spotless credit record. Missing one payment on that clothing account can taint your credit record! And it could make raising capital tougher than it needs to be.

Second Example: Fred, the 50 year old unemployed man

Fred was 50 years old and in good health. However, due to tough economic times his company had performed poorly. Fred had been retrenched with a package equal to 1 year’s earnings. At first Fred felt confident that he would be re-employed rapidly and that the retrenchment package would be a bonus. However, six months later Fred had still not found employment. Time was running out for him. And he knew it. He came to the correct realization that he would probably never be employed in a large company again. Fred knew that he had to start his own business.

What’s more, in addition to his retrenchment package, Fred had almost paid off his house, his car was fully paid for and he had his pension and two relevant annuities. In other words, Fred had built up some sizable assets over the years.

NOW Fred’s dilemma was: should he put up his hard-earned assets to secure a loan?

What do you think? Well, we believe Fred has no option. He is too young to retire and his assets are not sufficient to sustain him in old age. He is also unlikely to get a job working for a company again. In other words, his only option is self-employment. At 50 with good health, his most productive years are probably still ahead of him. Obviously he needs to be extremely cautious, but he needs to acquire or establish a business he can build over time.

And by the way, did you know that some of the world’s most successful entrepreneurs only started their businesses when they were over 50. Just to name two: Ray Krok took over McDonalds in his fifties. Colonel Saunders started Kentucky Fried Chicken in his sixties.

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