Smart Business: The Pros & Cons of Going into Business for Yourself — Part 2
Note: This article is the second of a three-part series. It addresses the downsides of going into business for yourself, and is aimed at field crews as much as the owners and managers who are our main audience. Last month’s article dealt with the plusses and should be read as a companion piece to this month’s article. If you can’t locate it, you can access it from National Driller’s electronic archive.
If you’re a sports fan, you may have noticed that great athletes don’t necessarily make the best coaches. A person blessed with great athletic ability typically has trouble understanding and motivating players with lesser skills. Great ballplayers succeed through raw talent and hard work. Coaches need people skills and strategic vision. It’s rare to find all of those ingredients in one package.
The same holds true for trade workers. A first-rate craftsman gets that way through mechanical skills. But being a great craftsman does not automatically translate to business success. The skills required for business have little to do with tool-working ability. Businesses almost never fail because the owner lacks sufficient technical ability to do the work. It’s usually because of a lack of good business sense.
The keys to success in business lay in three areas: 1 — financial; 2 — marketing; 3 — people skills. You have to be a good money manager and good people manager, and a promoter. If none of this sounds appealing to you, better think twice about starting your own business.
M-O-N-E-YLast month I identified money as the main reason most people go into business for themselves. I stated that owning a business offers the possibility of getting rich and that many business owners make six-figure incomes. However, they are not the majority. A harsh fact of life is that the vast majority of new businesses fail within the first few years of existence. Many more contractors go broke than get rich.
If succeeding in business were easy, everyone would start his own company. What stops most people is the risk involved. Big rewards entail big risk.
As an employee, if you lose your job the worst thing that’s likely to happen is you’ll be unemployed for a period of time and lose income during that period. When a business fails, not only does the owner lose an income, s/he will be out all the money invested in the business, plus all that may be owed to creditors. It might be your own savings that go down the drain, or it may be money borrowed from a bank or from friends or relatives. In any case, it’s not a good feeling to wonder how you’re going to put food on the table — plus pay back what you owe.
Even if the company doesn’t go bankrupt, drilling is a tough business with much competition. A few companies become very successful and generate the six-figure incomes for their owners that I spoke of last month. But many more are barely getting by, and their owners make nowhere near six figures. Many contractors end up earning less than they could working for someone else.
Overhead HeadachesThe main reason for this is that most trade workers who go into business for themselves don’t have a clue about business economics. A trade worker’s eyes get big seeing the difference between what s/he is making and what the company charges for labor. A driller might be getting paid, say, $15 an hour, and notices that the company bills for labor at $60 or $70 an hour. S/he starts to think, “I could make two or three times as much working for myself.”
This common type of thinking fails to account for overhead. A contractor needs expensive equipment in order to operate: trucks, tools, computer, radios and cell phones, insurance and so on. A lot of people entering the business think they can cut costs to the bone by working out of their homes and scraping by with old equipment. But even doing that, there are certain large expenses that can’t be cut very much.
For instance, let’s take the most essential large expense — a drill rig. A lot of people start out with a beat-up rig. But the more beat up, the more money they have to sink into maintenance and repairs. And what happens when that rig breaks down and they can’t make it to jobs? They lose not only money but also credibility with customers. That’s no way to run a business.
Insurance, tools, advertising and so on cost more than most new business owners imagine going in. The suppliers of those things must be paid if you are going to stay in business. So when money gets tight, the most convenient expense to cut is the owner’s income. For every owner making a hundred grand a year, there are dozens struggling to make ends meet.
The Office SlaveAnother trap many fledgling contractors fall victim to involves the spouse working in the business at little or no salary. Typically, hubby works in the field while the wife answers the phone, sends out invoices, pays bills, keeps the books, etc. They think of themselves as a team, and they figure this is a great way to keep costs down instead of hiring someone to do the office work.
Think hard about this for a moment. Are they really coming out ahead?
If the wife is smart enough to run their business, she’s smart enough to earn a salary managing someone else’s office. So even if she’s not getting paid, the company must factor into its overhead what’s known as an opportunity cost. The time she spends keeping the family business books for free is time she could be out earning money working for someone else. Even though the owner isn’t paying his wife, it may be costing them $30,000-$40,000 a year or more, i.e., whatever she could command in the open market as an employee of some other firm. The spouse’s services may seem free, but it’s an illusion.
Yes, six-figure salaries are possible, but they almost never take place from the start. Successful business owners typically work their fannies off for many years taking in modest incomes before they build a business that supports an elevated lifestyle.
Grueling HoursAnother downside to running your own business is the hours you must put in. It’s never a 40-hour a week job, and the first few years after start-up are the most grueling of all. Expect to put in 60 hours a week minimum, and don’t be surprised if it escalates to 70- and even 80-hour weeks during peak periods or when problems develop. Don’t expect to take many days off, and forget about vacations for many years.
If start-up owners have children, they better resign themselves to the fact that they are going to miss out on school plays, ball games and other events that are part of growing up — and once missed can never be made up. They can try their best to make time to attend some of them, but when they’re starting out in business, it’s very difficult to find the time.
Many of the hours they work are going to be unpaid time. They’ll be working 12-hour days and more, but out of that they will be lucky to come up with five or six billable hours. The rest of the time will be spent visiting prospective customers to give free estimates, working up job quotes, putting together advertising, paying bills, dealing with suppliers and so on.
Let’s be optimistic and say that during the first year in business, a contractor earns $50,000 in income before taxes and deductions. This is a realistic number. It’s not exactly getting rich, but it’s enough for most people to survive on when starting out
But what will it take to generate that income? A contractor would almost certainly have to put in at least 3,000 hours of work that year. This, too, is a realistic number, even a bit on the conservative side. It averages out to 50 weeks at 60 hours a week.
Now divide that $50,000 income by 3,000 hours. It comes to an hourly wage of about $16.67 an hour. How does this compare with what they can earn as an employee? In many cases, it’s not much more. It might even be less.
And if they have the wife working in the business for free, they need to add her hours into the equation. Let’s say she’s only needed part-time to keep the books, say 1,000 hours a year. Now divide that $50,000 by 4,000 hours. As a couple, they would be working for an average of $12.50 an hour.
This just addresses income. People who are self-employed also need to provide health insurance for themselves, and ideally some kind of retirement savings plan.
And what happens if they come down with the flu? Who is going to handle the work? I’ve seen self-employed trade workers force themselves to work when they’re so sick they can hardly walk. Serious illness is unthinkable. You better have terrific disability or worker’s comp insurance. However, the sad truth is that most novice contractors are uninsured or underinsured.
Of course, once a business becomes established and successful, the owners don’t have to work so hard. Workers may see their bosses taking afternoons off to play golf and maybe disappear for several weeks a year on exotic vacations. That’s the reward for operating a successful business. But most of those people spent many years working 3,000 hours and more at pitiful incomes to build their business to the point where they can take it easy.
Next month we’ll conclude this series with a look at the special problems of the small shop.