Successful Entrepreneurship – Cracking the Code

Successful Entrepreneurship - Cracking the Code

There are many stories about poor immigrants who arrived in Canada with nothing more than a dream and then built a life of privilege. How did they do it?

It is not clear to most people that a person with a post-secondary education goes on to work as an employee in the labor force. Our educational system teaches students how to be employees, not entrepreneurs.

We often wonder how these people managed to achieve their rags-to-rich stories. Here’s my perspective on Cracking The Code to Successful Entrepreneurship as someone who was raised in an entrepreneurial family.

1. Most employees will never be financially independent. You can be fired by anyone, regardless of whether you’re a bookkeeper at the entry-level or the CEO of a large company. Financial catastrophe is possible if you are so vulnerable.

2. The only way to financial independence is to create and sustain a profitable business.

3. A “magic formula”, which will help you evaluate the chances of a business’s success, exists.

[(Sale Price of Product – Variable Cost of Product) x Units Sold] – Fixed Overhead costs = Profit

Accounting professionals will recognize this formula as the Contribution Margin Ratio.

Let’s show you how to make Bubble Tea. You may be wondering why there are so many Bubble tea shops in Toronto. They make a lot of money and have very little risk.

* Price per bubble tea drink – $4.00

* Per drink cost (water, powder, and sugar): $0.50

* Drink sales per calendar month, assuming 100 drinks per day – 3,000

* Monthly rent for the shop: $3,000

* No labor costs are assumed – the shop owners will operate it themselves in the beginning years.

See also  Ten Reasons Why Most People Venture Into Business

* (($4.00- $0.50) x 3000 ] = $10.500 in sales

* Profit after paying rent: $10,500 – $3,000 = $7,500

This formula can be applied to multinational soft drink companies to analyze the beverage businesses. You will begin to see why soft-drink companies have grown from humble beginnings into global corporations.

This formula can be used to evaluate any type of small business, including a restaurant, nail salon, or hair salon. It is important to select businesses that have a high-profit margin. This means a high selling price for the service/product and a low cost of supply. Also, you should consider high customer traffic (i.e. units sold and people served).

Future Vision – Cash Flow Projection

Before you move on, it is important to determine if your business will make a profit. This step is critical to avoid failure.

Find out what it costs to start and manage your business. These are the most popular:

* Rent – How much does it cost to rent the area where you want to put up?

* Payroll tax and wages – do you need employees? Or can you run the business on your own? What amount should you earn to cover your living expenses?

* Advertising costs – What types of advertising will your company use – radio, TV, or internet? And what are their costs and potential returns on investment?

* The cost of raw materials or inventory – can these be imported? If you answer yes, then you will need to consider the impact of exchange rate fluctuations on your profitability.

* Equipment purchase – equipment such as phones, computers, and the IT network. Also, furniture and specialized equipment that you need for your particular line of business, like equipment for opening a restaurant.

See also  NEW Alternative Ways to Make Money From Your Site

* Business liability insurance: To protect yourself against liability in the event that someone is inadvertently injured by your product/service, or on your premises.

* Pricing – How much can you sell your product/service to make it competitive with other businesses in your industry?

After you have figured out your monthly overhead and pricing, you can now determine the number of unit sales that you will need to break even. Remember the Contribution Margin Ratio we looked at. To create a cash flow projection model, use a spreadsheet.

Protecting yourself – Creditor Proofing

You could lose your entire business if things go wrong. Consider the following strategies to help protect your personal assets against creditors from your business.

1. Incorporate the company. This will give you some creditor protection. Most obligations of a corporation are limited to its assets. Therefore, this structure can protect personal assets. The structure can also provide income tax benefits that will not be discussed.

2. Pay your statutory debt promptly, and in particular:

* Deductions from the Payroll Source;

* Federal and Provincial Sales Tax collected

* Vacation and employee wages.

These debts can be borne by corporate directors, regardless of whether the company is incorporated. The shareholder, i.e. the business owner, and the director in many small businesses are one person.

3. Avoid giving personal guarantees regarding your corporation’s obligations (e.g. landlords, suppliers) if you are able to, unless absolutely necessary.

To address the issues in this article, you will need to have a financial specialist on your team. A CPA can be of great assistance to you.

See also  4 Essentials Areas of a Business

I hope I have helped to unravel some of the mysteries behind success as an aspiring entrepreneur. Make sure you use this tool well and don’t stop dreaming!

About the Author

The author graduated from the University of Ottawa with degrees both in Economics and Commerce. He is currently a Chartered Professional Accountant and Licensed Insolvency trustee practicing in Toronto, Canada.