Home / Finances / Small Business Entrepreneur Route to Financial Independence

Small Business Entrepreneur Route to Financial Independence

Picture showing two paths in a weed, a representation of small business entrepreneur route to financial independenceThis post talks about reasons to avoid the small business entrepreneur route to financial independence.

I want to talk about this topic because last week’s blog post promoted the idea that small business entrepreneurship counts as a valid approach for achieving financial independence.

While I think the argument presented in last week’s post is correct, you need to know that like every strategy for achieving financial independence, the small business entrepreneurship strategy suffers certain flaws.

Specifically, I see five practical flaws or problems with the idea that you can use small business entrepreneurship as a way to make a living, achieve financial independence, and then prepare for retirement.

Flaw #1: You’ve Already Got a Pretty Good Gig

You know what? You may already have a pretty secure job you like. Your job may compensate you with a better-than-average salary and great tax-free fringe benefits. You may work with people you like. Prospects for the industry your employer operates in may be good and getting better. And what’s more, you may have a great aptitude to do the things you’re already doing in your regular job.

In this sort of situation—I’m just going to say it— I don’t think small business entrepreneurship makes a whole lot of sense.

Small business ownership requires you to bear additional risk, make extra effort, and invest your family’s (probably scarce) financial resources. To me—and I’ve spent almost my entire adult life running my own small business—those investments of your time and treasure just don’t seem to make as much sense if you’re already, right now, someplace “pretty darn good.”

Flaw #2: Mostly-Complete “FIRE” or “Bogleheads” Plan

Another reason to avoid small business ownership? If you’ve mostly completed a “Mr.-Money-Mustache-style” FIRE plan or a “Bogleheads-style” retirement plan, I don’t think the small business entrepreneurship route makes much sense either. Let me explain.

If you have mostly completed a Bogleheads-style financial plan, you’ve nearly won the game. (Good job, by the way.) The big flaws I pointed out a couple weeks ago in another blog post aren’t even risk areas for you anymore. You simply don’t have much reason to change course.

And if you’ve mostly completed a Mr.-Money-Mustache-style FIRE plan? Well, in your case, sure, small business entrepreneurship may make sense. But what you want to do, if you’ve nearly achieved FIRE status, is simple: finish the plan. You can, once you are retired, start a small business if you want. (Running a small business in retirement can actually be a pretty good idea.) But gosh you ought not change course late in a plan. Especially when the plan has worked. (Good job on this, too, by the way.)

Flaw #3: Unbearable Financial or Emotional Risk

On to another practical flaw…

Running a small business jacks your risk. Now, of course, relying on a single employer causes you to bear quite a bit of risk, too.

But small business ownership means you’re risking capital and time in a venture that may provide plenty of upside, but also surely presents big downside risks, too.

Even beyond the financial and entrepreneurial risk, small business may emotionally burden the entrepreneur, his or her spouse, and even the entrepreneur’s family with extra stress.

Many people just aren’t comfortable bearing the fluctuating income that a small business often produces.

Many people don’t like, for good rational reasons, having a large percentage of the family net worth tied up in a single high-risk and potentially-leveraged asset—even if the asset generates a generous return on investment.

If you or your family aren’t comfortable bearing the risk, therefore, I think that discomfort counts as a good reason to avoid small business entrepreneurship. A really good reason.

Oh, and a related comment: If you or your family don’t think there’s a lot of risk? Yeah, that’s going to be a problem too. (I say this because if you guys think there’s not going to be risk, possibly that’s because you guys just don’t yet understand what the family is getting into.)

Flaw #4: Inability to Cross Knowledge Thresholds

Let me now mention something that represents another flaw, or problem, related to small business entrepreneurship.

My observation and then the popular academic research support the idea that you need a good amount of knowledge and information about how to run a business in order to succeed.

You’ll need explicit knowledge of the sort covered in any undergraduate business major program, including stuff like how to do basic accounting. (Explicit knowledge is the stuff you can learn in any traditional manner such as from a class or book.)

You will also need tacit knowledge about the industry in which you operate, your competitors, the products and services you sell, and a whole bunch of other stuff, too. (Tacit knowledge refers to knowledge you can’t get any place like a book or classroom and so need to learn in all sorts of other, informal, unstructured, and often inefficient ways.)

Note: Harvard Business Review published a classic discussion of this idea nearly thirty years ago, which is available here.

You will, therefore, need to either possess or quickly acquire both this explicit and tacit knowledge in order to prudently pursue the small business entrepreneurship route to financial independence.

If you’re unable or unwilling to quickly get the required knowledge, small business entrepreneurship probably doesn’t work. At least in my opinion.

Flaw #5: No Slacking Off

One final quick flaw related to small business. Some jobs let you coast. Some jobs let you, let’s be honest, slack off. You can’t do that with a small business.

You don’t need to work 60 or even 40 hours a week. But you do need to continue earning the patronage of your customers and clients. And that means you need to provide them with better-than-average products and services.

Further, you need to continue to deserve the loyalty of key employees and vendors. Those folks probably lose patience, understandably, if you aren’t putting anything into the relationship.

Despite the picture portrayed in some movies and television shows, then, small business ownership doesn’t really ever let you check out of your business for extended time intervals. Sorry.

Final Remarks about Small Business Entrepreneur Route to Financial Independence

Two quick comments in closing about taking the small business entrepreneur route to financial independence.

First, if you’ve read the preceding paragraphs and think, “Well, yeah Steve, I get all that… but I still think it sounds like a good idea…”, then I think you should consider the small business entrepreneurship thing. Don’t forget about the stuff discussed in the preceding paragraphs. But don’t let my Debbie-Downer discussion spoil your dream.

Second, just so you know, the only real job I myself ever had was working at Arthur Andersen & Co, then the world’s largest public accounting firm, the first three years after I completed my MBA. After that job and one brief position with a venture capital funded startup, I always worked in my own small business. And, yeah, looking back, I wouldn’t do any differently second time around.

Other Posts for a Small Business Entrepreneur

Seven Reasons for Starting Your Own Business

Six Common Formulas for Small Business Success

Your Real Odds of Succeeding in Small Business

 

 

 

The post Small Business Entrepreneur Route to Financial Independence appeared first on Evergreen Small Business.

Click Here For Original Source Of The Article

Check Also

Stock Market Monte Carlo Simulation Spreadsheet

Stock Market Monte Carlo Simulation Spreadsheet

Microsoft Excel makes it pretty easy for you to build a stock market Monte Carlo simulation spreadsheet. No, sorry, this spreadsheet won’t let you run a hedge fund. Or engage[...]

The post Stock Market Monte Carlo Simulation Spreadsheet appeared first on Evergreen Small Business.

Leave a Reply

Your email address will not be published. Required fields are marked *

css.php