The 4 Things No One Tells You About Entrepreneurship

Entrepreneurship is glorified in our society today. I have enough experience under my belt to remember the “before” picture of entrepreneurship and it wasn’t always this way.

When I came out of school in the 80s, you were almost a misfit if you started your own company. Sentiment toward entrepreneurs at the time was like brackish water; they weren’t disdained but they weren’t heroes either.

However, in the mid-80s, during Ronald Reagan’s presidency, there was a very specific period of time when you had the emergence of companies like Microsoft, Apple, Oracle, Adobe and MYOB. And during that time, entrepreneurship went from the refuge of the misfits who couldn’t find a job to something that became more accepted. By the 1990s, entrepreneurship had become accepted by the mainstream and today entrepreneurs are rock stars.

The purpose of this article is not to give you the history of entrepreneurship but to share a realistic picture of being an entrepreneur that’s outside of the conversation in the popular media—the real story.  The ugly parts. Because the truth is that not everyone is meant to be an astronaut, not everyone is meant to be a doctor, not everyone is meant to be a sandwich maker and, certainly, not everyone is meant to be an entrepreneur.

Below I’ve outlined what I consider to be some of the most difficult parts of being an entrepreneur, the underbelly of entrepreneurship in an age when entrepreneurs are celebrities. I say this not to discourage would-be entrepreneurs, but to paint a realistic picture.

1) There is a sense of isolation that is really profound. We’re all used to being part of a reference group. When you’re an employee of an established business, you have your colleagues. When you’re in college, you have your classmates. And when you get involved in the community, you have fellow organization members. But when you start a business, you are truly on your own. If you’re lucky, you may have a partner or a co-founder, but that’s it. There is a tremendous sense of isolation and loneliness that comes with not having this reference group. Not a lot of people like to talk about it, whether out of embarrassment or because it doesn’t fit with the perceived personality type of a successful entrepreneur, but the sense of isolation is real.

2) Most businesses provide a lifestyle and a job, but they don’t provide wealth. For example, most restaurant owners probably take home an income that is not much greater than that made by a restaurant manager at a popular chain. That’s important to understand because we think of entrepreneurs as wealthy when the truth is that most entrepreneurs have a job and a very difficult job at that. This is another important misconception that’s not often discussed.

3) It usually takes many years to build a business. I’ve run three businesses in my lifetime: a very simple business, a moderately simple business and a very complicated business. In the first business, the “simple” one, it took me a year to make profits. In the second business, the moderately simple one, it took me about three years to become profitable. To make the third and most complicated business profitable and scalable, it took us about six years of grinding, stretching and pushing. It even took Facebook 5 years to become profitable. It is not common for a business to skyrocket to revenue and profitability. For most entrepreneurs, it takes many years to build a real company.

4) You have to manage people. When you’re running a business, you’re constantly managing, not just employees but vendors and customers as well. You’re always the bad guy, you’re making difficult decisions, and, in many ways, you’re alone with your decisions. I had a friend who ran a business and he used to refer to himself as the Grim Reaper: He was always the guy with the bad news, always the guy to find the problem that really needed to be addressed. Managing people is not easy, and it doesn’t come naturally to many people. However, it’s a critical part of being a successful business leader and entrepreneur.

If you love what you’re doing and you like business, being an entrepreneur could be a great thing. It’s certainly good for the country, but recognize that it might not live up to the picture painted in the popular media.

Edited by CoachRNC c2015

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Young Money : Ray Fraser’s Story.

RayWhile many of Ray Fraser’s peers were working in retail and living at home because they had to, he was choosing to take another path..the educational path.

Fraser, 26, said he had three career-level job offers at graduation, two from companies where he had interned: United Technologies Corp. as a business analyst and Saks Fifth Avenue as a retail buyer.

But he had a dream of building his own company.

Ray Fraser, a young college grad, has founded a company that makes coffee cup sleeves. He’s retooled the product since the founding, and hopes to get nationwide distribution soon.

c2015  CoachRNC.

In Calculating ROI remember don’t confuse Profit & Cash!

Your company is ready to make a big purchase — a fleet of cars, a piece of manufacturing equipment, a new computer system. But before anyone writes a check, you need to calculate the return on investment (ROI) by comparing the expected benefits with the costs. Analyzing ROI isn’t always as simple as it sounds and there’s one mistake that many managers make: confusing cash and profit.

This is an important distinction because if you mistake profit for cash in your ROI calculations, you’re likely to show a far better return that you can expect in reality. So keep in mind: Profit is not the same thing as cash.

Sure, you may know this already, but people who haven’t studied finance often find this statement confusing. If a company earns a $500,000 profit in a calendar year, shouldn’t it have $500,000 more in the bank on December 31 than it did on January 1 of that year?

The answer is no, not necessarily. Profit and cash are really two different animals. Profit appears on a company’s income statement. It indicates what is left after all costs and expenses are subtracted from the company’s revenue. But it isn’t directly related to cash.

For example, “revenue” isn’t a cash-based number: A company can record revenue whenever it ships a good or delivers a service to a customer, whether or not the customer has paid the bill. Some of those costs and expenses aren’t cash-based, either. Income statements almost always include an allowance for depreciation of capital assets.

Cash transactions, meanwhile, show up on the cash flow statement. That statement records cash generated by a company’s operations and cash spent on those operations; cash spent on capital assets (and cash generated by the sale of capital assets); and cash received from, or paid to, lenders and shareholders.

A common mistake in ROI analysis is comparing the initial investment, which is always in cash, with returns as measured by profit or (in some cases) revenue. The correct approach is always to use cash flow — the actual amount of cash moving in and out of a business over a period of time.

Let’s look at an example: A midsize manufacturing company wants to know whether to invest in a new $10 million facility. The plant would generate an additional $10 million in revenue and $3 million in profit per year. At first glance the return looks great: 30% every year. But profit is not cash flow. Once the plant starts operating, for instance, you might need to spend an additional $2 million on inventory. You might also find that your accounts receivable (A/R) — what customers owe you for services rendered or products delivered — rises by $1 million. These two variables alone would consume the entire $3 million in profit, so your incremental cash flow in the first year would actually be $0.

Investments in inventory and A/R are shown on a company’s balance sheet (a “snapshot” of a company’s financial position at a point in time) and are included in working capital — funds used in the operation of a business, often defined as current assets minus current liabilities. Working capital requirements are typically built into an Excel model you’ll use to calculate ROI, so you don’t need to worry about them. But you do need to understand the importance of comparing cash returns with cash outlays. Apples to apples, and all that.

Occasionally companies analyze investments in terms of their effect on revenue. That’s because many young companies focus on hitting certain revenue targets to satisfy their investors. But revenue figures say nothing about profitability, let alone cash flow. True ROI analysis has to convert revenue to profit, and profit to cash.

Once you grasp the cash vs. profit distinction you can better understand the four basic steps of ROI analysis.

  1. Determine the initial cash outlay. Usually this is the simplest part of the analysis. You just add up all the costs of the investment. This includes items such as equipment costs, shipping costs, installation costs, start-up costs, training for the people involved, and so on. Everything that goes into getting the project up and running has to be part of your initial cash outlays.

If you’re just buying a new machine, it’s pretty easy to estimate all the costs. A project or initiative that is likely to take several months will be harder.

  1. Forecast the cash flows from the investment. This step is the toughest part. You need to estimate the net cash the investment will generate, allowing for variables such as increased working capital, changes in taxes, adjustments for noncash expenses, and so on. Putting the cash flows on a calendar will allow you to estimate returns year by year or even month by month. Most of your time will be spent on this step. It’s where your company’s finance department will ask the toughest questions and scrutinize your estimates and assumptions most carefully.
  1. Determine the minimum return required by your company. The minimum rate of return is often called a hurdle rate, and it is determined by your company’s finance department. Companies may have more than one hurdle rate depending on the risk involved in proposed investments. The finance people determine hurdle rates by looking at the company’s cost of capital, at the risk involved in a given project, and at the opportunity cost of forgoing other investments.
  1. Evaluate the investment. This is the final step. You can use one or more of four ROI calculation methods: payback, net present value, internal rate of return, and profitability index. The results will tell you whether the proposed investment offers a return more or less than the company’s hurdle rate. Some of the calculations will also help you compare this investment with alternative investment possibilities.

While these are the basic steps, there is a lot more to getting it right. You have to account for the time value of money. You have to estimate returns based on cash flow rather than on profit. You must know your company’s hurdle rates, and you must determine which method of calculating ROI is the best one for your project.

For more on calculating ROI, see HBR TOOLS: Return on Investment (ROI).


Joe Knight is a finance and business literacy keynote speaker and trainer, a partner and senior consultant at the Business Literacy Institute, and co-owner and CFO of Setpoint Systems, Inc, a manufacturing company based in Ogden, UT. He is the co-author of Financial Intelligence and the HBR Tool: Return on Investment (ROI).

In Calculating ROI remember don’t confuse Profit & Cash!

Your company is ready to make a big purchase — a fleet of cars, a piece of manufacturing equipment, a new computer system. But before anyone writes a check, you need to calculate the return on investment (ROI) by comparing the expected benefits with the costs. Analyzing ROI isn’t always as simple as it sounds and there’s one mistake that many managers make: confusing cash and profit.

This is an important distinction because if you mistake profit for cash in your ROI calculations, you’re likely to show a far better return that you can expect in reality. So keep in mind: Profit is not the same thing as cash.

Sure, you may know this already, but people who haven’t studied finance often find this statement confusing. If a company earns a $500,000 profit in a calendar year, shouldn’t it have $500,000 more in the bank on December 31 than it did on January 1 of that year?

The answer is no, not necessarily. Profit and cash are really two different animals. Profit appears on a company’s income statement. It indicates what is left after all costs and expenses are subtracted from the company’s revenue. But it isn’t directly related to cash.

For example, “revenue” isn’t a cash-based number: A company can record revenue whenever it ships a good or delivers a service to a customer, whether or not the customer has paid the bill. Some of those costs and expenses aren’t cash-based, either. Income statements almost always include an allowance for depreciation of capital assets.

Cash transactions, meanwhile, show up on the cash flow statement. That statement records cash generated by a company’s operations and cash spent on those operations; cash spent on capital assets (and cash generated by the sale of capital assets); and cash received from, or paid to, lenders and shareholders.

A common mistake in ROI analysis is comparing the initial investment, which is always in cash, with returns as measured by profit or (in some cases) revenue. The correct approach is always to use cash flow — the actual amount of cash moving in and out of a business over a period of time.

Let’s look at an example: A midsize manufacturing company wants to know whether to invest in a new $10 million facility. The plant would generate an additional $10 million in revenue and $3 million in profit per year. At first glance the return looks great: 30% every year. But profit is not cash flow. Once the plant starts operating, for instance, you might need to spend an additional $2 million on inventory. You might also find that your accounts receivable (A/R) — what customers owe you for services rendered or products delivered — rises by $1 million. These two variables alone would consume the entire $3 million in profit, so your incremental cash flow in the first year would actually be $0.

Investments in inventory and A/R are shown on a company’s balance sheet (a “snapshot” of a company’s financial position at a point in time) and are included in working capital — funds used in the operation of a business, often defined as current assets minus current liabilities. Working capital requirements are typically built into an Excel model you’ll use to calculate ROI, so you don’t need to worry about them. But you do need to understand the importance of comparing cash returns with cash outlays. Apples to apples, and all that.

Occasionally companies analyze investments in terms of their effect on revenue. That’s because many young companies focus on hitting certain revenue targets to satisfy their investors. But revenue figures say nothing about profitability, let alone cash flow. True ROI analysis has to convert revenue to profit, and profit to cash.

Once you grasp the cash vs. profit distinction you can better understand the four basic steps of ROI analysis.

  1. Determine the initial cash outlay. Usually this is the simplest part of the analysis. You just add up all the costs of the investment. This includes items such as equipment costs, shipping costs, installation costs, start-up costs, training for the people involved, and so on. Everything that goes into getting the project up and running has to be part of your initial cash outlays.

If you’re just buying a new machine, it’s pretty easy to estimate all the costs. A project or initiative that is likely to take several months will be harder.

  1. Forecast the cash flows from the investment. This step is the toughest part. You need to estimate the net cash the investment will generate, allowing for variables such as increased working capital, changes in taxes, adjustments for noncash expenses, and so on. Putting the cash flows on a calendar will allow you to estimate returns year by year or even month by month. Most of your time will be spent on this step. It’s where your company’s finance department will ask the toughest questions and scrutinize your estimates and assumptions most carefully.
  1. Determine the minimum return required by your company. The minimum rate of return is often called a hurdle rate, and it is determined by your company’s finance department. Companies may have more than one hurdle rate depending on the risk involved in proposed investments. The finance people determine hurdle rates by looking at the company’s cost of capital, at the risk involved in a given project, and at the opportunity cost of forgoing other investments.
  1. Evaluate the investment. This is the final step. You can use one or more of four ROI calculation methods: payback, net present value, internal rate of return, and profitability index. The results will tell you whether the proposed investment offers a return more or less than the company’s hurdle rate. Some of the calculations will also help you compare this investment with alternative investment possibilities.

While these are the basic steps, there is a lot more to getting it right. You have to account for the time value of money. You have to estimate returns based on cash flow rather than on profit. You must know your company’s hurdle rates, and you must determine which method of calculating ROI is the best one for your project.

For more on calculating ROI, see HBR TOOLS: Return on Investment (ROI).


Joe Knight is a finance and business literacy keynote speaker and trainer, a partner and senior consultant at the Business Literacy Institute, and co-owner and CFO of Setpoint Systems, Inc, a manufacturing company based in Ogden, UT. He is the co-author of Financial Intelligence and the HBR Tool: Return on Investment (ROI).


Yes,Entrepreneurs are different from the rest of us

Entrepreneurs are indeed different from your everyday person in a number of telling ways. Not all these differences are a product of genes however. The impact of nurture is evident especially where the child is exposed to an entrepreneurial parent. Such early development and learning is highly correlated to an entrepreneurial nature. So also experience in problem solving and decision-making. The brain isn’t hard wired, at least not on this issue.

I was watching Tayo Oviosu’s TEDx Lagos talk again and I have to say, this is really one of those things that make you go hmmm. To think that if he had accurately appraised the challenges before setting out he may never have started Paga is beyond scary. Here’s a guy who’s out there executing on his vision and apparently succeeding at it yet he goes and says something like that. Is he maybe winding us up just a little bit? That’s always a possibility but he seemed genuine and sincere. Makes you think.

One thing that’s fairly certain is that even if there’s merely a thin line between bravery and stupidity, there’s one hell of a chasm between those two on the one hand, and conformity on the other. How else would you explain the reality that not everyone is working on a startup? At the very least you’d expect half the crazies in the world to be slaving away on their super idea for a startup. I guess this lack of abundant seed funding has its uses.

People have long suspected that entrepreneurs’ brains were wired differently and now there seems to be scientific proof. Findings from a study by Peter T.Bryant and Elena Ortiz-Terán show that entrepreneurs jump to action quicker than regular people. Additionally, unlike most people, they keep reviewing their actions long after they have made their move. That’s a much more plausible explanation for Tayo’s observations, wouldn’t you agree? Peter and Elena used a test based on the Stroop Effect to highlight these differences.

Here’s one [if it takes you 20 seconds or less to work through it, you’re definitely entrepreneur-material]:

Stroop Test

Name the shapes and their related colors in the 4 x 4 aligned boxes below as fast as you can. The words below the shapes are placed there to throw you off. Do not read them! For example, you might see the words “Blue Square” printed under a red triangles. In all cases you should say “red triangle” instead. Say the colors and shapes as fast as you can. It is not as easy as you might think…
stroop2
Entrepreneurs are faced with situations where they cannot afford to wait to clear up all ambiguity before taking action. In some cases, even if they had all the time in the world, they still couldn’t clear up ALL ambiguity. As a consequence, entrepreneurs will frequently dive into a situation before fully analysing it. Do not mistake this for mental laziness. Entrepreneurs keep working on problems even after they have taken action; running, refining and re-running experiments with an open mind (as much as is possible) and using the feedback to course-correct.

Lean Startup has really helped codify a lot of that sort of thinking, urging entrepreneurs to conduct experiments around their main failure points and risks. The Lean Startup feedback loop can be approached in two ways, depending on your propensity for action, and tolerance of risk. Entrepreneurs are more likely to build first whereas regular people are more inclined to learn before building.
Screen-shot-2011-02-06-at-5.49.42-PM
This “shoot first ask questions later” approach has its obvious shortcomings. To compensate, most entrepreneurs develop a set of heuristics which they diligently apply whenever they are presented with new opportunities. According to Peter and Elena, entrepreneurs ask the following questions, in no particular order:

  • Does the opportunity fit my core strategy?
  • Do I already know the market?
  • Can I trust the other parties involved?
  • What’s my gut saying?
  • What’s the doomsday scenario if I fail?

An unsatisfactory answer to any of these questions is reason enough to pass on the opportunity.

If you’re conversant with the origin stories of a few one-time startups which have grown into successful corporate juggrnauts, you’ll notice how so many of them muddled their way through a process very much like the Lean Startup process. All this long before Eric Ries came along and helped the rest of us wrap our heads around the apparent alchemy of building a successful startup with as little waste as possible.

Successful entrepreneurs embrace ambiguous problems more quickly. They don’t try to do too much in one go so they don’t get in too deep a hole before realising what’s going on. They devote significant time and effort to resolving any lingering uncertainty during later stages of execution. It sounds simple, elegant, almost like common sense. Do not be deceived. This is the highest form of observation, risk-taking and execution the world has ever witnessed.
Yes, Boss! Entrepreneurs Are Different From the Rest of You was first published on StartupBlackBox

To Hit Your Goals, Get Help

How to make this partnership work:

  1. Tell them your goals. Focus on 1-2 goals, and tell your partners why you think you cannot accomplish those goals on your own. What are your mental roadblocks or resource constraints? What’s holding you back? What do you need that only they can give you?
  2. Ask for feedback in a specific area. There might be 1,001 things you need to work on, but knowing everything at once can overwhelm you. Have your partners set one or two priorities for you.
  3. Have them catch you in the act. Sometimes when people give us feedback, we don’t get it. But if partners catch us doing something wrong, then it makes it clear what we’re doing wrong. I always prompt readers to tell me when my posts are too long winded, for example. Having concrete examples helps. So if you need help with a presentation, do a run-through for them or at least let them comment on a draft of your speech.
  4. Check in regularly. Everyone gets busy, including our accountability partners. Set up a 15-20 minute check-in either once a week or bi-monthly. Use this time to review what is and isn’t working and why. If that’s not possible, then use a feedback form or email exchange.

Now I want to know, who held you accountable in 2014, and what goals were you able to accomplish? Do you have additional techniques you’d like to add to the list above? Let me know in the comments below.

3 Ways to Stay Motivated to Lead Your Business

!!!!MotivateHere are three ways to keep yourself motivated, regardless of the size of your company:

1. Remind yourself of your desire to achieve.

A successful entrepreneur’s number-one asset is perseverance. When I asked around to learn about what keeps entrepreneurs motivated, ambition and perseverance are two words that kept coming up. The need to achieve and succeed prevented them from giving up after every failure and fueled their drive more than any other factor.

If you find it challenging to maintain your morale in the long run, look around you and identify the people who make up your success team. Whether it’s an older mentor who keeps you in line with your goals, or a younger entrepreneur who inspires you and fuels your energy, surrounding yourself with business cheerleaders helps turn every setback into a lesson, not a disappointment.

2. Set realistic goals.

If you are running a startup and your goal is to make a million dollars this year, then you might be setting yourself up for disappointment. Instead, set several smaller, measurable milestones so that you can track your progress.

Related: 5 Reasons Heartbreak Is Good for Entrepreneurs

Create a big-picture strategy for your company, and set realistic business goals on how to achieve them. Everything from creating useful partnerships, networking, marketing, ramping up your social media, or even hiring good employees takes time. Establish a plan and be prepared to tackle it one day at a time.

When you achieve the smaller goals, pat yourself on the back.

3. Take care of yourself.

Yes, having your own business means you’re invested 24/7, but invested and overworked are two different things. There is nothing more daunting than spending your day alone in your home office. Make time to take care of yourself.

Business owner Sharon Middendorf says what keeps her motivated is “ambition, exercise and meditation. This inspires and guides me through the days.”

Set regular times during the week to unplug, hang out with family and friends, sign up for a gym, take walks, read or watch TV. If possible, take a vacation! This gives your brain time to rest, recalibrate and be ready to run a successful business.