Guest Post Wednesday: “If You Are Starting a Small Business, Do Not Expect To Get Paid”

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This guest post is brought to you by Jason Hull.

“A man’s respect for law and order exists in precise relationship to the size of his paycheck.”
–Adam Clayton

Somewhere deep down inside, I had the image of turning into the next Michael Dell. I was going to do things from my garage (well, at that point, my back deck), build a company, and suddenly have enough cash to fill a bathtub full of 1s and swim in it.

Doesn’t every entrepreneur have that dream?

While I would eventually sell that company, it provided me with neither a bathtub full of 1s nor a smooth ride in getting there. In fact, I went for nearly a year and a half without a paycheck before the owners of the company all agreed that we were going to pay ourselves a very modest salary. It was a significant cut over the pay I’d received at my last job. However, after eighteen months of receiving no paycheck, it felt like I’d won the lottery.

Did I mention 18 months without a paycheck? While working? Ouch.

A recent survey by Citibank shows me that I was not alone in living the life of austerity as we got our company off the ground. 54% of business owners surveyed showed that they had gone for a quarter without being paid, and 23% had gone for a year or more without getting paid. 69% of the respondents had put their own money into the business to help it survive. I’ve done that too.

What are the lessons that I learned from my experiences as a typical business owner, at least according to the Citibank survey?

  • You’re probably going to have to go for quite a while without being paid. Make sure that you pare your household expenses as much as possible. Necessities probably are only wants dressed in different clothes. Have at least six months of expenses in cash and probably twelve. Have a backup plan and a decision point where you decide to wind down the business and get a job so that you’re not dead broke by the time you start looking for a job.
  • Having that financial cushion in the bank also gives you the confidence to pursue business correctly. Not only did I not have sales “buck scent”, but we also had the time to build the business properly. All money is green, but not every dollar is one you want to chase.
  • If you’re going to pull out money to either reinvest in the company or to make payroll, make sure that money is coming back. I only pulled out money to cover gaps when there were already issued invoices from customers whom I knew would pay that would not only catch us up, but get us ahead. It doesn’t do any good if the invoice only covers what you put in and forces you to do the same thing the next time payroll is due or when you have to pay vendors. If you’re going to dig a hole you can’t get out of, then stop digging. Wind up. Cut deals with your vendors and your employees and do everything that you can to make them whole.
  • If you’re married, make sure that your spouse is up for the mad ride. There will be many late nights. There will be a lot of calls. There will be a ton of stress. Unless you’re one of the lucky ones who is profitable from day 1, there’s going to be a dwindling bank account to deal with.
  • Make sure you’ve fully explained the risks to your spouse. It’s part of making sure that you’ve made sure that your spouse is up for the mad ride. Articulate the worst case scenario very clearly to your spouse. That means you have to understand the worst case scenario so that you can fully and succinctly explain it. Don’t sugar coat it.

Entrepreneurship is no bed of roses. If it was easy, everyone would be an entrepreneur. The landscape is littered with failure, and nobody wants to talk about it. Do you think it’s in the Small Business Administration’s interests to tell you the stories of failure? Of course not. Most people who fail are saddled with losses and debts, and that makes a pretty story for nobody.

Prepare for failure and plan contingency plans for it so that if you do not succeed in business, you’re not crippled and digging out of the hole the rest of your life. Have your break and exit points so that you can dust yourself off, build up some reserves, learn from the experience, and try again in the future.

I’ve been on the successful end of entrepreneurship and I can tell you that if you succeed, it is well worth all of the pain and struggle that you put yourself through. While I do not have a child, I can imagine that it’s a similar experience. The day to day struggles of child raising are sometimes agonizing, but when you step back and look at it, it is all worth it.

Did you start up a small business? Were you prepared? Are you thinking about one? Tell us about your experiences in the comments below!

Jason Hull is a candidate for the CFP(R) Board’s certification, is a Series 65 securities license holder, and owns Hull Financial Planning. He is also a personal finance columnist for U.S. News & World Report.
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Reminder: This is a guest post. Please be polite, or the comments moderator will kick in.

 

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Trackbacks

  1. [...] For the first eighteen months, I didn’t receive a paycheck. For the first couple of years, I didn’t take a working day off. This is a story shared by many entrepreneurs (listen to my interview with Michael Prichard to hear what he did). You spend so much time on your business that you not only become financially invested (even bootstrapping is a financial investment because you’re foregoing opportunity costs for your entrepreneurial venture), but you also become emotionally invested. [...]

  2. [...] The first, and most obvious, reason that someone would want to try to start up a business is to earn extra income. This could be a little bit of side income to pay down debt or to fund the IRA, or it could grow to the point where it supplants your regular income from a job. Unless you’re moving directly from a full-time job into some sort of consulting position where you already have clients lined up and ready to go, don’t expect this to happen from day one. In fact, even if you’re eventually successful, it can be a long time before you get paid (you can read about my story in my guest post on the Military Retirement and Financial Independence website). [...]

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