Few subjects are as plagued by myths and falsehoods as starting a small business. Everywhere you turn, someone is making sweeping proclamations about small businesses – the difficulty of starting one, the risks involved, the odds of failure or what you “have to do” in order to make it. And unlike in some fields, myths about small business are not simply harmless old wives tales. Rather than leaving you to fend for yourself against business dogma, Business Pundit assembled – and debunked – this list of 12 pervasive myths about running a small enterprise.
“It Takes Money to Make Money”
Like many of the myths we will examine, there is a grain of truth to this one. In other words, you probably cannot get up and running in any type of business without at least some up-front expenditures. That being said, “some” is a very loose term and varies widely depending on the type of small business you are looking to start. Starting a restaurant, for instance, is the epitome of a capital-intensive business. Day one cannot even begin until you have rented or acquired a building, hired a staff, purchased inventory and equipment, furnished the restaurant, and the like. No matter how you slice it, a substantial sum must be spent to start such a business. Other businesses, meanwhile, are far less capital intensive. Self-publishing is one such business. Harvard MBA and how-to author John T. Reed, for instance, writes that you can even refrain from publishing a single book until you secure an order from a customer. Reed actually goes so far as to say that “if someone gave me $100,000 and forced me to spend it on my publishing business, I would not know what to do with it.”
“You’re Sunk Without a Business Plan”
Here, again, a grain of truth obscures a much larger point. Without question, it’s smart to have an overall strategy in mind before diving headlong into a business of any kind. That is to say, you should have some idea of the segment of customers you feel best suited to serve, and a general sense of what you bring to the table. But this is not what most people mean when they admonish others to have a business plan. More often, what is meant is that you should have a lengthy document spelling out in precise detail exactly how your business will advance from one stage to the next. “What’s wrong with that”, you might ask. The problem is that detailed plans work best when you are pursuing a fixed goal – such as losing weight or sticking to a budget. In these cases, a known sequence of steps has been proven time and time again to accomplish the goal. The goal in business, however, is meeting consumer demand – which is often a moving target. As evidence, look at all the businesses (like Google) that are now doing something radically different from their original plan. Instead of feeling like you must religiously adhere to a plan, resolve to be open-minded and react to opportunities as you see them emerge.
“It Takes a Great Idea”
Perhaps the most pernicious myth of all is that business success (small, medium or large) depends on having a great idea. It is difficult to exaggerate how many books, articles and speakers have declared the monumental importance of starting out with an amazing idea. So universal is the appeal of “the great idea” that many now believe it is impossible to succeed with ordinary, proven business models like cleaning carpets or delivering pizza. In fact, there is very little truth to this at all. What counts far more than the idea you start out with is the speed and effectiveness with which you execute. At the time of the VCR’s emergence, for instance, many experts felt that Beta-Max was superior technologically for any number of defensible reasons. None of that matters, however, because most people have owned or used a VCR, but few have any personal experience with Beta-Max at all. The takeaway here is that the idea (no matter how groundbreaking) is always subservient to firm, relentless execution. Furthermore, it matters more that you are satisfying a genuine consumer demand than whether you are implementing the idea you personally wanted to implement.
“50% (or However Many) of Small Businesses Fail”
We see such statistics reported constantly, painting a gloomy picture for any prospective small business owner. In light of such foreboding data, who but the most doggedly determined among us will even bother to try? Well, here’s the truth about this one. There is arguably no such thing as the rate of “small businesses” that fail. The phrase “small business” is scandalously vague, encompassing such wholly different and unrelated fields as restaurant operation, self-publishing, plumbing and web design. Given the endless and critical differences among these and other businesses (the types of customers being served, the prices being charged, the market forces that affect demand, etc.) it means practically nothing to proclaim that “small businesses”, categorically, have a set failure rate that you specifically should be swayed by. Far more important to your own decision making should be the unique factors relevant to your market, your customers and your products and services. If data is available on success or failure rates in your industry, these are far more meaningful than any generic statements about “small businesses.” BusinessWeek concurs, having concluded that the results of studies into small business failure rates are “often contradictory or vague.” Rather than getting preoccupied with broad failure rates, resolve to study in-depth the factors that determine success or failure in your line of work, so you can address the pertinent risks ahead of time and reduce your unique odds of failure.
“You Can Delegate All The Unpleasant Stuff”
After years or decades of toiling under The Man’s thumb, small business owners are sometimes enamored with the idea of delegating unpleasant tasks to subordinates. If you have ever uttered the sentence “oh, I’ll just hire people to do that” in a dismissive tone of voice, you have fallen victim to this myth before. By now, however, you might be painfully aware of how far short it falls of the truth. The truth is that in most businesses, you will need to be a generalist who has at least some working knowledge of all the tasks needed to run the show. No, we don’t mean that you need to be an accounting expert to hire an accountant. However, if you literally know nothing about keeping the books, how can you know whether the accountant you hire is competent and ethical – or setting you up as his own miniature Enron? Beyond that, it is not always easy to simply “hire someone to do” whatever you need done. Good people are hard to come by, and generally expect to be compensated at market rates. In the early days, you may find yourself operating as a jack of all trades to keep costs down. Once and if you grow, it will then become feasible to hire some help in managing the expansion. In either case, abandon at once the notion that you can hire the functions you need and then wash your hands of them forever.
“I Call All The Shots”
Hands down, the biggest draw of starting a small business is unshackling yourself from the control and oversight of a boss. And certainly, running your own company will accomplish this. Nonetheless, the whole truth in this case is, once again, messier and less appealing than we are at first led to believe. While you wont have a pointy-haired middle manager hawking over your shoulder about TPS reports, nor will you be able to just sit around and “do whatever.” In fact, it might be more accurate to say that you will have a boss (albeit an indirect one) – your competitors. In his essay How To Make Wealth, venture capitalist Paul Graham says that your competitors decide how hard you’ll have to work, “and they pretty much all make the same decision: as hard as you possibly can.” In other words, you can only run a relaxed ship insofar as the other pizza shops or financial planners or plumbers do the same. If they ramp up their efforts or capacity, chances are you will be forced by the market to do the same if you want to remain in business. Essentially, a boss provides in corporate America the discipline and structure that you must create for yourself as a small business owner.
“It Takes X Years for Small Businesses to Turn a Profit”
Yet another in a long line of sweeping statements about “small businesses” is how long they take to turn a profit. We often hear discouraging estimates that it can take as long as 2-10 years for a small business to start putting money in the owner’s pocket. By now, however, you should know that such statements are too vague to mean anything. To use the restaurant example again, this is a business that you should probably expect to take its time in producing a profit. The likelihood there is that you had to take out a substantial loan to acquire your property, finance equipment, and the like. So now, the restaurant must not only cover the costs of operation, but also service one or more loans for years. A web design business, on the other hand, could theoretically be profitable on day one by charging the first client more than it costs to design their website. Ditto for a financial planner or other consultant. In short, the truth eludes generic estimates and depends largely on the nature of the business you are in.
“I’ll Have More Freedom to Live My Life”
Once more, whether this hoped-for scenario actually pans out is largely a function the business you are in and how much time you devote to it up front. Early on, you will almost certainly not have more freedom. This goes down to the root differences between having a job and running a business. Many jobs, for all the disparaging remarks that can be made about them, permit you to invest little of your concern into it and mentally depart from it completely at the end of the day. A business, conversely, often demands your constant attention. Whereas a problem outside your job description can be dismissed as “somebody else’s problem”, when it’s your business, every unresolved problem is your problem. It is not enough to simply explain why there is a problem or prove to a higher-up that you did not cause it – all that will matter is swiftly resolving it. Furthermore, you will come to see your company (for better or for worse) as an extension of yourself, rather than something you passively do for money. None of this is to say that you will not ultimately have more freedom as a result of running your business. However, to expect a ton of it in the early days would be an exercise in self-delusion.
“Now I Can Write Everything Off”
While it’s true that business owners can write off far more than employees can, there is great risk in taking this too far. Entrepreneur.com quotes New York-based CPA Philip C. Roventini admonishing small business owners to always ask, before attempting a write-off: “is this something I would have bought anyway if I were not in business?” Keeping this standard in mind, you probably will not get away with deducting 100% of your car payments, nor gas and repairs. Rather, your deductions must be limited to those things (or aspects of things) which pertain strictly to the operation of your business. In other words, you can write off the portion of auto expenses that you can document as being essential to your operations. Keeping good records is also critical. Basically, if you cannot document it and cite a clear connection between the write-off and the operation of your small business, your attempt at a write-off could trigger audits, fines or worse. Be mindful of the saying, “pigs get fed, but hogs get slaughtered.”
“If I Build It, They Will Come”
If this is your approach to customer acquisition, you are setting yourself up for disappointment. Very simply, customers today have an endless array of choices – for everything. Where to shop, eat, rent a movie, take a vacation, you name it, there are a myriad of options to pick from. For our purposes, that means that simply “building it” is most certainly not going to bring anyone through your doors (or onto your website.) In order to succeed as a business owner, you will need to actively and ambitiously market yourself to consumers. Some businesses (like restaurants) often thrive on word of mouth promotion. That’s fine as far as it goes, but even this strategy depends on running your business in such a way as to be attractive to a specific segment of customers, and perhaps encouraging them to tell their friends. No matter what type of small business you choose to start, it will rarely – if ever – be sufficient to open up shop and idly wait for orders to start pouring in. Instead, consider your number one task after opening to be spreading the word as far and wide among your target market as often as possible.
“I Can Pay Myself Whatever I Want”
There is no faster way than running a small business to forget the notion that salaries are just arbitrary numbers plucked out of thin air. While it’s true that having equity in a profitable business typically offers higher income potential than selling your time (which is what most jobs amount to), it is not true that you can pay yourself “whatever you want”, either. What you take out as income will be subject to input from various factors, such as product sales, your costs and whether you plan on expanding. Many small business owners, for instance, re-invest early profits back into the company to fuel its growth. Then again, others don’t, preferring instead to taste the fruits of their labor as early as possible. Neither approach is necessarily right or wrong, but it’s important to be aware that your income (even though it can certainly be high and rewarding) is not unlimited. You will be limited by the constraints of your business in how much salary you can take out, both in the beginning and throughout the life of the company.
“Small Business Success Requires Bold Risk-Taking”
There is a romanticized stereotype of the entrepreneur as a “swashbuckling risk taker” (to quote Forbes) who throws caution to the wind, risking life and limb to get his or her doors open. However, detailed studies of specific entrepreneurs often show that far from embracing heedless risk-taking, they are actually masters at managing risk and insulating themselves from it whenever possible. While he admittedly isn’t a small business owner by anyone’s definition, the textbook example is Bill Gates. Tim Ferris, author of the Four Hour Work Week, has an excellent chronicle on his blog called Do You Really Know Bill Gates? The Myth of Entrepreneur As Risk Taker. In our opinion, this is required reading anyone who believes that major risk taking is needed to succeed in small business. In it, you will learn that Gates systematically and purposely protected himself from just about every risk that confronted him, being careful not to expose himself to any unnecessary threats. In short, the lesson here is to assess what risks you face and confront them head-on, rather than believing that you’re doing what “real” entrepreneurs do by taking them no matter what.