Monday 26 September 2016

The 7 utterly essential rules to keep entrepreneurs from going broke

Peter Casey

Published 21/06/2015 | 02:30

I also believe that the mass of people step back from the entrepreneurial cliff often because they worry too much about what other people will think about them if they fail.
I also believe that the mass of people step back from the entrepreneurial cliff often because they worry too much about what other people will think about them if they fail.

If you Google "rules for success" you get 526,000,000 results back. Instead of adding to that pile, let me offer something more useful - what entrepreneurs need to do, but rarely think of doing, simply to keep from going broke.

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1 Think big. Really big

During the Good Friday Agreement, Irish CEOs like myself were invited to present their business plans to American companies that might invest in Northern Ireland. I had a highly polished plan but, after day one of the three-day conference, had attracted zero interest.

I spent part of that night discussing my failure with colleagues.

"Your figures are wrong," said one. "You're asking for $1m. Investing a million requires as much due diligence as $10m, so American investors only get interested at that level."

Come morning, I added a zero to all my numbers and drew a load of potential investors. Think big or don't even think of going into business.

2 Do not fear failure

The actual failure rate in business is hard to pin down because many dub their hobby a "business" and shut it down when the cash evaporates with the fun. A real business is an endeavour into which you pour heart, soul, and family finances knowing you may lose everything: house, savings, car, some friends, and maybe even the odd spouse.

I'd say the failure rate of real businesses is closer to 60pc than to 90pc or 80pc.

Feel better? You should. Jumping off the entrepreneurial cliff is worth the risk if you are doing something you are truly passionate about.

I learned a very valuable lesson at university when a girl I was madly in love and/or lust with broke off the relationship, leaving me with something every entrepreneur should engrave on a plaque. She told me: "You would worry less about what other people think of you if you realised how seldom they do."

I also believe that the mass of people step back from the entrepreneurial cliff - resigning themselves to quiet desperation - often because they worry too much about what other people will think about them if they fail.

Yet, whenever I hear that so-and-so "declared bankruptcy yesterday," I just go about my business - unless, of course, they owe me money.

3 Test your product. For real

I once developed a tubular lighting product that plumbed light into the darkest corners of your house.

It worked great - at least for the three winter months we tested it.

Had I extended the trial into the warmer season, I would have discovered that flies, crafty buggers, got into the tube in droves.

After about nine months of sales, we were deluged with customer calls pleading for instructions on getting the flies out.

4 Love your product, your investors, and your competition

It can be dangerous to love your product, but you'll get nowhere if you aren't passionately in love with it. You'll also get bogged down if you neglect to learn all there is to know about finance, including investment, loans, grants, and lines of credit.

Show investors and creditors lots of love by ensuring you put them in a position to make money.

As for your competition? Well, don't fear them. And don't hate them. Instead you must understand and love them. Love them so much that you let them educate the market so you can move in and take it from them.

Xerox may be the most famous example of a company that created vast markets for amazing products that other companies benefited from.

5 Worship cash flow above profit

Failure hurts, but success can kill. Some of the world's best companies have starved from want of cash flow.

Rolls-Royce had nearly completed development of the RB211 jet engine - destined to become the most successful in aviation history - when it ran out of money and had to be nationalised. That the firm was subsequently privatised, gave no consolation to bereft shareholders.

Don't let success kill you. Expect your first two years' revenue to be half what you project. Assume your costs will be double.

6 Limit your exposure

Count on being sued. Gruntled is not in the dictionary. Disgruntled is.

Therefore, count on employees leaving you and then suing you. Competitors? They'll sue simply because they know they can afford legal costs and you can't.

Under US civil law, plaintiffs risk little in bringing suit. So sue they do. Which means you must take out insurance.

Although I was never sued until my company became successful, you don't need deep pockets to become a target. Competitors will sue just to slow you down by tying you up in court.

7 Don't even try to outfox the taxman

Tax avoidance - not tax evasion - can sometimes make sense, but don't delude yourself for one moment. In the long term, you can't outfox the taxman.

When I lived in Australia, my accountant told me that by prepaying expenses for the year, I could avoid paying tax that year, provided I could justify the prepayment in business terms.

If I could show that prepaying a year's rent would get me three months of free rent, the taxman would smile upon me, and I'd catch a big tax break - for that year.

The problem was next year. Prepay €100k this year, and you start off the next with a taxable profit of €100k.

Worse, the taxman will assume a higher run rate for the year and hit you harder with estimated taxes. Get cute with taxes in the short term, and you will lose big in the long term.

Peter Casey is CEO of Claddagh Resources Follow him at @caseypeterj

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