Unsolicited Thoughts on Running Your Own Business

My friends make fun of me for having spent so much time in academic programs.  I hold a professional graduate degree in public administration, a law degree, and a doctorate in religion and politics.  All this school-going and my current occupation as a professor disguises my great interest in business.  I love to read about it and think about it.  

One of the things I enjoy most is asking entrepreneurs questions about their businesses.  My sister and her husband are both corporate types who dream about owning their own operation some day.  I love to talk with them about the different forms that could take.  

From watching the many different television programs in which experts come in and try to turn around failing businesses and from the high failure rate of new start-ups, I suspect there are some basic points people don’t think about when they get into business for themselves.  

Here goes:

  1. You must know what it will cost you to provide the good or service you are offering for sale.  It is not enough to know that you had to purchase the widget for $1 in order to then sell it.  You must know how much it costs you to possess the widget and how much it costs you in addition to possessing it in order to sell it.  How much does it cost you to rent or own a store in which to display the widgets?  How much do you have to spend on utilities, business licenses, supplies, etc.?  How much do you have to pay employees?  Somehow, some way you need to find a way to break those costs down into little pieces you can attach to each widget you want to sell.  
  2. You must know what price you can get from consumers for your widgets.  Once you figure that out, you will know if you can offer the widget for a competitive price at all.  If you can’t, then don’t go into business selling widgets or whatever it is you wish to sell.  Business doesn’t work if you can’t get a price that is higher than your TOTAL cost per unit.  
  3. You need to know the velocity of the widgets you have for sale.  By velocity (a concept I learned from reading this book by Ram Charan), I mean the number of times you can successfully sell your widget each day.  If you will sell the widget many times in a given day, then you have the opportunity to rack up a nice profit AND spread out your overhead costs over lots of units which helps you offer attractive deals on the widget.  If you will only sell the widget once each day or a few times a week, then you’d better have a very large profit margin.  Think about Wal-Mart.  They don’t have a large profit margin on each item, but their velocity is very high.  They engage in a gigantic number of transactions which add up to a massive profit.  If they only sold a few items each day, the big stores would quickly go bankrupt.  
  4. If you are buying an existing business, then you need to have a very good idea of what it is worth.  For example, if you buy a restaurant that rents its space in a strip mall, then all you are getting is the lease, the equipment, and whatever goodwill you think can retain or expand.  You should be VERY careful what you pay for a business, ESPECIALLY if you are not getting a major physical asset such as the building.  

Just a few thoughts, but very important ones.  

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One thought on “Unsolicited Thoughts on Running Your Own Business

  1. Hi Hunter,
    Much thanks for commenting on our site! I’ve enjoyed visiting your site: you’re obviously a thoughtful man with interesting ideas. I see we share concern for the future of young people and sympathize with their activism. I also noted that you are concerned about our national debt, and that you appear to attribute it to excessive spending on entitlements. I’m deeply concerned about the national debt, too, but I attribute it mainly to the extreme growth in income and wealth inequality and the deficit spending that accompanied huge reductions the top income tax rate. Today, poverty is rapidly rising, while top execs make 10x what they did a decade ago. Hedge fund managers bringing in a billion a year pay taxes at the same low rate (about 15%) as people living in poverty.
    I don’t know if you and I would entirely agree on what’s fair: Regardless, my main concern is the deepening depression, if we don’t change course. Growth comes from demand, and demand comes from employment and adequate incomes in the (now vanishing) middle class and below. Even rich people are better off when we’re all better off. (see Buffett, and the “Patriotic Millionaires.”) That is why “supply-side” economics (which caused all this) has to be replaced with real economics. I’m in general agreement with Chuck Collins’ new book “99 to 1,” Robert Reich’s “Aftershock,” and the work of Reich and Paul Krugman.
    Thanks again for visiting our blog – I’ll reply to your comment there soon, and you can come back at me if you wish!
    Cheers,
    Mike Harrison
    (P.S. – I wouldn’t work at a 90% FIT rate, either, unless I was broke and had too!)

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