When most people think about entrepreneurship or starting their own business, the first thing that comes to mind is the risk that is associated with being your own boss. Perhaps that is why entrepreneurship is such an exhilarating and sexy term. It takes guts to go out on your own.

Photo By Better Than Bacon

But the funny thing is that most of the successful entrepreneurs I know are very conservative and don’t like taking risks at all. Ironically, my entrepreneur friends are some of most risk averse people I know! I happen to fall into this same camp as well. Sure, I would risk a good amount of money to start my own business but would I ever bet the entire bank or stake my livelihood on a business idea? Hell no!

Managing Risk

One of key aspects of entrepreneurship is knowing how to mitigate risk. The media portrays entrepreneurs as these daredevils who dropped out of college and risked everything to start their own companies when the real story was that many had safety nets in place in case things didn’t work out.

Bill Gates didn’t initially drop out of college, he took a leave of absence. Plus, he came from a wealthy family that would have supported him if Microsoft failed. Sergey Brin and Larry Page had their degrees and could have easily found a job if the whole Google thing didn’t work out.

The point is that entrepreneurship is not about gambling so much as it’s about investing intelligently. Here are some tips on how I would mitigate risk when starting an online store.

Keep A Nest Egg

First and foremost, don’t risk all of your money on a business venture ever! Make sure you keep a hidden stash lying around somewhere that can bail you out in case things don’t go as planned. Starting a business is difficult as it is and you don’t need the additional burden of worrying about not being able to pay your bills. This may sound like common sense to most of you, but you’d be surprised by how many people are willing to invest most of their entire net worth on a marginal idea.

Keep Your Full Time Job

If you can pull it off, keep the day job. This takes discipline and it can’t always be done depending on the nature of your business, but it is easily the best, no pressure way of starting a business. My wife and I worked on our wedding linens business on the side knowing that if anything ever went wrong, we were still banking two incomes. Don’t think you have the time? If you analyze your day, you’d be surprised at how much time you can salvage in a typical day.

Pick A Narrow Niche

The narrower your niche, the greater your chances are for success. This may seem counterintuitive at first and many entrepreneurs often fall into the same trap of tackling too much at once.

But when you pick a very specific niche to pursue, your business will be focused. Your business will stand out because you will be perceived as an expert in your field. Your search engine rankings will improve because Google can more effectively categorize your website under a specific topic. In fact, your online business should target no more than 2 or 3 topics or keywords. Any more and you risk diluting your search juice.

For example if you want to sell clothing, I would focus my store on a specific type of clothing first and then target no more than 2 or 3 different clothing types total. If you ever decide to expand beyond this, it might be better to start an entirely new website.

Screw Hope! Test The Market

Since I started this blog, I’ve been corresponding with many newbie shop owners. And one of the biggest mistakes I’ve noticed is that most new store owners have already decided what they want to sell without any testing at all.

“I want to sell widget A! People are going to love it”
“No one’s ever heard of widget B! They’ll sell like hotcakes!”

Every shop owner should have an idea of what they want to offer but leave it up to the market to decide what to actually sell. Test the demand for your products! Use Ebay to see if people will buy your product. Use keyword tools to find out how many people are searching for the products you want to sell. Do a competitive analysis of your niche. Are there any competitors? If not, there probably aren’t any buyers either. The ideal market to pursue is one in which there are only a handful of players.

I remember a long time ago when I heard Bill Gross speak about his company Cars Direct back when ecommerce was in its infancy. Turns out that he initially tested the online car buying market by trying to sell cars that he didn’t even have! He just threw up a website and whenever a car was sold, he had someone go out and buy the car from a local dealer. He didn’t invest much money at all until he discovered that selling cars online was a viable strategy. Make sure you assess the demand for your product before you decide to add it to your portfolio of products! In other words, make sure you have buyers before you decide to sell.

Don’t Buy In Bulk With Your First Order

Along the same lines of testing the market, don’t buy in bulk for your first order if you can help it. Take a loss if necessary but don’t risk a large outlay of cash for goods that you may never get rid of. One of the problems I see with most people is that they don’t want to lose any money even in the interests of experimentation. They’d rather buy a crapload of widget A with the potential of making a huge profit rather than buying a few and breaking even or taking a loss.

Don’t be one of these people and don’t be greedy! Most vendors will provide you with samples or will sell you small quantities at much higher prices. Try to sell in small quantities before you commit to a larger purchase. Don’t worry about losing money!

Find A Partner

It can be emotionally taxing to run a business on your own. Looking back, I could never have done it if I didn’t have my wife. There’s more at stake with your business than monetary risk. There’s also mental risk to consider. Having a partner will keep you motivated and will give you someone to bounce ideas off of. Plus, it will make things much more fun.

On choosing a partner, working with my wife has been fantastic but I’m not 100% sure that I would necessarily recommend working with your spouse on a business. Sure, the amount of mental risk is mitigated but the amount of marital risk drastically increases but that’s a topic for a different post:)

Sell High Mental Value Items

The ideal product to sell is one that evokes some sort of sentimental or emotional value outside of the item’s actual cost. And that is one of the main reasons why my wife and I decided to sell keepsakes as part of our product line. If you can get into your customer’s head, you can command higher prices.

If you sell commodity items, getting customers hooked mentally can still be accomplished through effective branding, but in general it is much easier if you start out with the right product. Avoid commodity items and focus on products that are unique or that you can add value to.

Sell Timeless Items

If you carry inventory, there’s always the risk that your products will sit on your shelves never to be sold. That is why it is important to carry timeless items or products that will rarely go obsolete.

That is why I always stress that it’s much more difficult to sell electronics or technology related products. Pick an industry that moves extremely slowly or avoid selling physical products altogether.

The ideal products to sell in my opinion are informational products because everything is virtual. If you have the means and knowledge to create a book or a course, then that is the way to go.

Keep Spending Low

My wife and I spent about 600 bucks to start our business. We used a beat up old desktop computer that we bought from Craigslist, an old digital camera and launched with a small selection of products. We spent pretty much zero on software, zero on furniture and ran everything out of our living room.

The best part of having an online store is that no one can see the backend of your store. All they get to see is the website storefront so why waste any money initially on your office? Keep spending to an absolute minimum and only buy stuff that is a must have.

One thing that my wife and I focused on was reducing the recurring costs associated with our business. We avoided signing up for too many monthly services unless absolutely necessary. If sales suddenly became slow for any reason, we could keep our online store up and running indefinitely. Even today, it only costs us about 100 bucks a month to maintain our website.

Don’t Buy Your Equipment. Lease Instead!

It is often a big misconception that buying your own equipment is cheaper than renting it. But what most business owners neglect to consider are the maintenance costs and the large initial cash outlay that is required to buy. Why risk the extra money when you have no idea whether your business is going to work out?

If your business requires expensive equipment to run, consider leasing your equipment for at least a few years prior to making the commitment to buy. Don’t feel as though you are throwing your money away with renting. After all, if things don’t work out, you don’t want to be stuck having to liquidate a bunch of heavy machinery that you no longer need.

Have A Backup Plan

The number one way of mitigating risk is to have an escape route or a backup plan. When running any business, it’s important to keep the stress level at an absolute minimum. You want to avoid making decisions under duress or making decisions based on avoiding a drastic outcome. Some entrepreneurship sites recommend going all out without a safety net to add an element of desperation to your startup. The idea is that by placing yourself in a sink or swim situation, you will be forced to learn how to swim.

I personally think that’s a bad idea and I would never intentionally place myself or recommend that you place yourself in any dire situation. That’s called gambling. If you have problems motivating yourself to succeed, then you’ve got other issues that you need to deal with.

Everyone needs a backup plan because things will probably not go as planned with your business. As a result, you will need sufficient runway to make the necessary changes. The obvious backup plan for my wife and I was that we would keep our full time jobs and hire a nanny. Make sure you have something in place and it will make running a successful business that much easier.

How many of you check your Google Analytics stats religiously at least once a day? How many of you check your stats live using Woopra or some other real time stat tracking software? If you run an online store or sell goods online, do you actually go to your website as a customer on a regular basis to look around?

Photo By Gerlos

Informally, I asked a handful of my webmaster friends these exact questions and most of them said “yes” to the first two questions and “no” to the last. In fact, the webmasters I spoke to rarely visit their site at all unless they need to make a change. They rely mostly on analytics data to observe the health of their website.

There’s Just Too Much Data

Have you looked at your analytics data recently? Of course you have. The fact is, there’s just too much data. Sure, you might have detailed statistics on how customers enter and exit the various pages on your site. You might have conversion data that outlines your ROI and which pages generate the most traffic.

But the #1 problem is that your web analytics tools only provide you with the numbers. Then it’s up to you. Somehow, you have to take these vast databases of data and create quantifiable action items to improve your website. And this can be extremely hard to do especially if you only look at the raw data. Since you face a deluge of data every single day, it’s really easy to miss out on simple things that could easily be found by actually going to your own website.

Eat Your Own Dog Food. Be Your Own Customer.

Imagine that! Visit your own website! Surprisingly enough, we all don’t do this enough. The truth is that the best ways to identify and fix problems with your site is if you actually immerse yourself and understand how a customer feels when they enter your website.

I’ll be the first one to admit that I’ve been guilty of this for quite a while now. Below is an example of what I found just a few months ago when I thoroughly browsed my site and tried to buy something online.

• I noticed several subtle typos in my product descriptions where I copy/pasted from other products. For example, we carry several of our products in 2 colors, white and ivory. In going through the product descriptions, I noticed that a few of the ivory items had “ivory” in the title, but the product description indicated that it was white. So which is it? White or ivory? No doubt this has confused our customers.
• One of our personalized items was missing a user input field for personalization. No wonder no one has ever purchased this product before!! Imagine buying a personalized product that can’t be personalized! And I thought this whole time that it was just an unpopular product.
• One of our craft pages was extremely slow to load because I accidentally included a full size version of a photo that was shrunk down using HTML instead of using a lower resolution photo. As a result, this page was trying to download a 3 MB file every time.
• I noticed during checkout that the address fields were a bit out of order when entering a separate billing vs shipping address. For example, the field order should be name, address, city, state, zipcode. However, the actual field order on the separate shipping address page was name, address, zip code, city, state. What ended up happening was that I accidentally typed in the city in the zip code field which was quite annoying. And the sad thing is that this problem had been on our site for quite a long time because I never bothered to checkout with a different shipping address.

Numbers Are Worthless Without Context

When was the last time you looked at your analytics numbers and actually did something about it? Having all of the data in front of you is nice. But in most cases, they will do nothing for you or your website because they are just meaningless numbers until they are correlated.

Would I have caught the problems I described with my website above by looking at analytics data? Maybe, but highly unlikely. I’d have to have noticed fairly minute trends amongst months and years of data. I’d have to have a general idea about the problem I was looking for.

99% of the time, the numbers won’t be nearly as helpful as a simple trip to your website.

When was the last time you typed in your company name in Google and looked at how your company comes up in the search results? Would you visit your own site based on your meta descriptions?

When was the last time you looked at how your Adwords ads come up compared to your competitors. Would you click on your own ads? Are they compelling?

When was the last time you actually tried to find a specific product in your online store? How good is your search? Are your products organized in a logical fashion?

When was the last time you contacted your own customer service department? Are your employees representing your company the way you want them to be? Is it a pain in the ass to make a return?

When was the last time you reviewed your email marketing campaigns?

Type In Your URL

Go ahead. You can do it. Type in your URL right now and take a look around. Go shopping. Only through putting on your customer’s shoes will you come to terms with how bad your site really is and how you can improve. Take a page out of my neurotic customer feedback techniques and get out there and ask/beg for some feedback.

Call or email people who have received their orders already and see how you can improve. We never hear from 99% of our customers after they have made a purchase. I used to think that this was a good thing but who knows? Maybe they were secretly dissatisfied and are now telling their friends about it. It’s best to know the truth and the best way is to dig down deep within the trenches. Don’t get me wrong. Analytics and numbers have their place, but going down to ground zero is the best way to go.

Whenever I think of duct tape, I think of my favorite television superhero MacGyver. What?!? There’s a ticking time bomb set to explode in 10 seconds? Take that stick of chewing gum, some duct tape and disarm that bad boy. It wasn’t always pretty, but MacGyver always got the job done no matter what the situation. He was never concerned with how elegant the solution was, he just did what was necessary to help his client.

If Macgyver was a real person, who wouldn’t want him on your team? The truth is that every small business needs a duct tape guy. Because the duct tape guy is the guy who will make sure you launch your business on time. He’s the one thinking about and developing concrete ways to market your business. He’s the one getting things done while others are endlessly debating over minor details that don’t really matter in the grand scheme of things.

My Anti-Duct Tape Story

When my wife and I first started out with our business, I used to spend an endless amount of time tweaking the look of the website. I would resize a few photos here and there. I would change up the fonts. I’d tweak the column sizes. Before I knew it, a few hours would go by and I’d have very little work done to show for it.

Then there were the coding aspects of our shopping cart. Often times, I wanted new features that the out of the box software didn’t provide so I decided to implement them myself. And this opened up a whole new can of worms.

Should I use javascript or PHP? Man my code is ugly. Shouldn’t I clean this up a bit first before I move on? Ooooh!! If I’m clever, I can write this code in 2 lines and make it super elegant.

Yes. Early on, I was the antithesis of a duct tape entrepreneur. In fact, my wife had to remind me that we were launching an online store, not trying to win some website design contest. Fortunately, her words snapped me back to reality and I was finally able to make progress. Remember, we online entrepreneurs are not here to tweak websites or write elegant code. We’re here to launch and ship product.

Amdahl’s Law

Since I’m a microprocessor designer by day, one of the core principles of designing fast CPUs is defined by Amdahl’s law. For all of you who are not familiar with Amdahl’s law, it basically states that the performance improvement to be gained from using some faster mode of execution is limited by the fraction of the time the faster mode can be used.

Of course this law was made for CPUs but it also applies to starting a business. In a nutshell, it means that you should be spending your time on things that will yield the most benefit. But, you should only spend just enough time on fixing a problem until other more important issues become prominent and require your attention.

Here’s an example of this law in action with our online store. Back when I first started, the design of our website was one of the most important tasks at hand. But once I got the basic website up and running, all of my additional time spent tweaking the aesthetics had diminishing returns.

At this point, working on the look of the website became less important because the site was “good enough” for our initial launch. Looking back, I should have stopped working on the website much sooner and focused more on other pressing issues that required my attention. Recognizing that something is “good enough” is one of the hardest parts about becoming an entrepreneur.

More Duct Tape Please

Duct tape entrepreneurs also excel at recognizing that a partial solution is sometimes better than no solution at all. When we launch a business or feature, it doesn’t have to be absolutely perfect. It doesn’t have to implement 100% of the feature set. If something that we ship only benefits 50% of the people 50% of the time, it might still be worthwhile to just get it out there and refine it later.

A good example of this with our business was with the personalized section of our online store. When we first launched, we didn’t allow our customers that much freedom to customize or personalize our products at all. We basically just wanted to get the product category out there to see if there was demand.

Once we determined that the demand was high, we gradually added more and more functionality to our personalized product line to the point now where it’s one of our biggest money makers. The key point is to not get bogged down with the details. Get the thing out there, experiment and refine.

Complicated=Bad!

The final thing that duct entrepreneurs excel at is squashing everything that is remotely complicated. The truth is that the ideas that are the most effective happen to also be the simplest as well. Complicated ideas are confusing and prone to error so they should be avoided at all costs.

I see this everyday with user interface design. Don’t make a customer jump through hoops or waste their time looking at a splash page or flash animation just because it is cool. Make the customer experience as plain and simple as possible and you will sell more product.

Conclusion

If you don’t have a duct tape guy on your team or if you are a one man show, it means that you have to become the duct tape guy. Sometimes it requires a 180 degree shift in mentality or with the way you normally do things but it’s the most effective way to get things done.

Whenever you get bogged down with a problem or issue, ask yourself whether what you are doing is core to the business. I guarantee you that 9 times out of 10, it’s not as big of a deal as you think it is. If your product is in a good enough state, get out your duct tape, put the whole thing together and launch! You can always refine it later.

The other day, I came across a heated forum discussion that went back and forth debating over the definition of a “true” entrepreneur versus just a regular small business owner. The thread was over 5 pages long and participating in this discussion were a wide variety of different business owners. Some of them ran brick and mortar retail stores. Some of them ran small-medium sized internet consulting or software companies. And some of them were freelancers looking to eventually start their own firms.

Photo By maubrowncow

The main crux of the debate was whether a person opening a brick and mortar business like an ice cream store or a freelancer with no employees could be considered a true entrepreneur. Where do you draw the line between true entrepreneurship and just running a small business?

As the two sides argued back and forth, I couldn’t help but think…who the heck cares? Why are you guys wasting your time on such a stupid topic and who are you to define what a “true” entrepreneur is? As the discussion progressed, the small brick and mortar business owners as well as the freelancers were clearly getting miffed because they were being excluded from the entrepreneurship category. Since when did entrepreneurship become a club?

My Definition Of An Entrepreneur

As far as I’m concerned, everyone who participated in that forum discussion is an entrepreneur. To me, an entrepreneur is anyone willing to take a risk to be their own boss. Someone who is willing to take control of their lives, call the shots and dictate the outcome whether it’s good or bad.

It doesn’t matter whether you open an ice cream shop, an online wedding linens store, a software company or a hardware company. As long as you are adding value to this world doing whatever you are doing, you’re an entrepreneur plain and simple. Don’t let any stuck up, pompous business owner tell you otherwise. So what if your business will never make a billion dollars. Entrepreneurship doesn’t have to be about the next big thing

Choosing The Right Lifestyle

Part of becoming an entrepreneur is understanding what you want to get out of it. If you want to go for the home run and someday create a billion dollar company, then that’s your prerogative. But just keep in mind that working on such an ambitious business venture will likely consume all of your time and sacrifice your social life as well. Not to mention that your chances of success will be very slim.

As with anything, there are many different flavors of entrepreneurship. On one end of the spectrum are the people who want to create something that will completely change the world. They are willing to sacrifice all of their time because their business is their top priority. They push the envelope and want to develop the next big thing and are willing to play the odds.

On the other end of the spectrum are people I call “lifestyle entrepreneurs”. The lifestyle entrepreneur category is certainly the category that I fall into. I don’t want to devote my entire life to my business. I don’t want to sacrifice my family, my friends or my social life. I want a business that complements my life.

What Is A Lifestyle Entrepreneur?

Simply put, a lifestyle entrepreneur is an entrepreneur that creates a business to enhance their lifestyle. Instead of working 8 hours a day at a job or spending 20 hours a day trying to grow a business into a billion dollar company, the lifestyle entrepreneur finds creative ways to free up their time to do what they truly want to do. The lifestyle entrepreneur actually seeks to work less and finds ways to automate the non-critical aspects of their lives.

In my case, my wife and I set out with a goal to spend more time with the kids and be there at every stage of their lives. It didn’t really matter what business we created. We just wanted something that would allow my wife to avoid having to work a day job without sacrificing our lifestyle. For us, this meant earning at least 100K but this number could be different depending on the person or the situation.

An Entrepreneur Is An Entrepreneur

Because our business has well exceeded our goals, my wife and I have a much greater freedom to do whatever we want. I don’t have to worry about losing my job because our business can cover all of our expenses. My wife can spend all of her time during the day playing with the kids while only devoting a small portion of her time at night managing the business. Meanwhile, money flows into our bank accounts while we sleep.

That is why I chuckle every time someone looks down upon certain categories of small business owners. Most people are obsessed with creating a sexy business or making lots of money. Don’t get me wrong, I greatly admire those entrepreneurs who put in the killer hours to truly push the envelope with their businesses but it’s not for me. At the end of the day, we all have to decide what our priorities are. Is your main goal in life to run a company? Or is your main goal in life to enjoy it? If these two things happen to coincide, then power to you.

But you need to decide up front what you want to get out of becoming an entrepreneur. Don’t let anyone classify what you are or what you want to be. Ultimately, you need to create your own definition of entrepreneurship and do what is best for you. Skip the silly debates!

In order to build wealth effectively, we all have to be frugal to a certain extent. We have to watch our spending. We have to analyze our expenditures and cut back on the fat. We have to make sacrifices to make sure that we can save enough money for college and retirement.

Photo By Edward Kimuk

Fortunately, my wife and I both share the same principles when it comes to spending money (ie. we don’t spend frivolously). Otherwise, we would be seriously screwed. But after analyzing last year’s expenses using Quicken, I feel all frugalled out. We have pretty much cut back as much as we possibly can without drastically affecting our lifestyle.

If we look closely at last years expenses, we cut spending by another 4% over the year before. We are going out to eat less thanks to my wife’s desire to cook and we don’t really spend that much on entertainment anymore because the kids have to be in bed early. We haven’t bought a new car in ages and I can’t remember the last gadget that I’ve purchased. All of this for a measly 4% savings. While one could argue that 4% is a lot of money overall, I wouldn’t have minded cutting loose a little bit more.

On the other hand, if you look at our business, our profits grew 41% last year. And this profit increase should have been around 75% had my wife and I not shut down the store to take care of a family emergency. We had a 41% increase and it didn’t really require that much more incremental work to earn a much larger payout. The numbers don’t lie. Why should we bust our butts to pinch every penny when we could just transfer that energy into additional income with our business?

Being Frugal Can Only Take You So Far

I love being frugal, I really do. And I love following all of the frugal blogs out there. In fact, one can really learn a lot about saving money by just taking a few extra measures. But after a while, there’s nothing left. You are just tapped out. Unless you started out spending money egregiously, there is a fundamental number that you simply can’t go below without greatly sacrificing your lifestyle.

For example, I love eating out. Sure, we could cut going out to eat entirely out of our budget but where would that get us? While I truly love my wife’s cooking (hope she sees this), I don’t think I could eat at home every night. I wouldn’t be happy and I’d probably get cranky as a result.

Maybe I could cut out an additional few tenths of a percent by driving less and carpooling or riding my bike, but that would be a major pain as well. And quite frankly, I love buying new gadgets. Why shouldn’t I cut loose a little bit and get that Android phone I’ve been eying for several months now?

How To Have An Unlimited Upside

The problem with using frugality to increase your bank account is that there are diminishing returns. Sure, being frugal is easy to do and that’s why most people try to build their bank accounts by cutting spending first. But will being frugal lead you down the path to riches and a better lifestyle sooner rather than later? Is it worth the sacrifice? One might argue that frugality coupled with a sound investment strategy is the way to go, but for me it’s a no brainer. The best way to accumulate wealth is to simply make more money.

Instead of focusing all of your energies on clipping coupons or searching for the absolute best deal, why not channel that energy into starting a business or freelancing on the side? Why not spend time on something that has limitless earning potential?

Even though my wife and I run a successful online business, I still fall into this trap all of the time. Hell just the other day, I spent 2.5 hours looking for the best deal on a new crib for my son. Sure, I ultimately saved about 50 bucks but with that 2.5 hours I could have been working on my brand new course on how to create an online store (my current project). I could have been writing new blog entries. I could have been optimizing our online wedding linens store. All three of these activities would have easily made me much more than the 50 dollars I saved.

Food For Thought

The truth is that many of us waste time on projects that return very little and we need to step back and to focus our energies on what will give us the most gain. By sticking with what is “easy”, we are limiting our potential. So the next time you are driving around town looking for the best deal or looking for ways to eek out another few extra bucks in savings, think about better ways you could be spending your time. Don’t get me wrong, frugality is not a bad thing but you can always make more by expanding your top line rather than focusing on your bottom line.

Many would be entrepreneurs hesitate to start their own business because they think it is too risky from a monetary perspective. In fact, most people don’t think starting a business is even worth trying unless they can come up with a grand slam profitable idea. Of course profitability is an extremely important factor with any business, but what if I were to tell you that you could save a decent amount of money every year with your business while only making a small profit or none at all?

Photo by Chasing Fun

That’s right! Most people don’t consider the tax savings involved in running a business. Most people don’t realize that having a day job is one of the worst ways to save on taxes because Uncle Sam takes a huge chunk out of your paycheck BEFORE you pay for anything. On the other hand with a business, you can effectively pay for everything using pre-tax dollars which can save you up to 35%. So while on paper your business may not be making any money, in reality you could be saving big bucks by purchasing goods with money that is not taxed at all.

But talk is cheap! I thought that it would be interesting to throw some numbers into the mix by calculating how much the average American could save by starting their own business.

The Average American

First off, the average American makes roughly $63,091 before taxes. If we assume that they fall under the 25% tax bracket, the average American is also getting reamed up the wazoo by Uncle Sam to the tune of about $11960 before they can even use this money leaving themselves with only $51131. Even worse, the average American spends roughly $49638 a year which doesn’t leave much savings. It’s no wonder that the average American household is just barely scraping by!

In order to calculate the tax savings associated with running a business, we must break down each and every expense of the average American to see what can possibly be written off with a business and assume a certain percentage of savings. Below is my analysis.

Transportation – Gasoline And Oil Costs

The average American spends roughly $2384 on gasoline and oil related products. If we assume that gas is $3 a gallon and that the average car gets 20 miles per gallon, the average American drives roughly 15893 miles per year. We’ll round this number to 16000 for simplicity.

Currently with my business, I’m able to expense roughly 22% of the miles I drive on my car for business purposes. How do I do this? Whenever I need to drive some place or run some errands, I make sure that I try to take care of something business related along the way. For example, if I need to go to the grocery store, I also make a trip to the office store or other related establishment where I need to pick up something for the business. It takes a bit of planning and excellent documentation but you’d be surprised by how easily you can find ways to use your car for business.

For the average American, 22% of 16000 miles is roughly 3520 miles. For 2009, the IRS mileage tax deduction is 55 cents. 3520 * $.55 equals a tax writeoff of $1936.

Housing And Shelter

The average American spends $10,023 on housing or shelter every year. Currently, my wife and I expense 20% of our rent for business related purposes. In actuality, we use more than 20% of dedicated business space in our home but we keep things at 20% to prevent the likelihood of an audit. In any case, 20% of $10023 equals $2004.60 of tax writeoffs for the average American.

Food – Eating Out

The average American spends roughly $2668 a year eating out. For my wife and I, we love discussing business over dinner. In fact, we make many of our key business decisions at restaurants because it’s a more relaxed environment and easier for us to concentrate.

As a result, we are able to expense some of our meals every month. For this analysis, let’s assume that the average American can expense 10% of their meals. Because meals and entertainment can only be deducted at 50%, this effectively equals a 5% writeoff. $2668 * .05 equals $133.40.

Travel

The average American spends roughly $1600 on summer vacations every year. While travel expenses purely for pleasure can not be expensed, any vacation can be made to be business related with the proper planning. So what my wife and I usually do every year is plan our vacations around our business travel.

For example, a few years ago my wife and I had to meet with linen and textile vendors in Japan so we made a vacation out of it. We purposely planned our meetings every other day and used our free days to relax and pamper ourselves. If you do things right, you can pretty much expense almost the entire vacation!

Because I’m not sure how the $1600 a year is broken down in terms of airfare vs food/entertainment costs, I’m going to assume that 75% of this cost is deductible for the average American. Total tax deduction $1200.

Utilities

Since we use 20% of our house for business, it’s only fair that we deduct the same percentage for utilities. In addition to water, gas and electricity, we also have a dedicated phone line for the business which can all be expensed.

The average American spends $3477 on utilities every year. Once again, the exact breakdown of this number is unclear so we need to make some assumptions. For example, a business probably wouldn’t be able to expense the cable tv bill. However, most other items are fair game. To be conservative, I’m going to assume that at least 10% of this amount is deductible which puts the deduction at $347.70.

Computer Equipment And Household Furnishings

Unfortunately, this category is extremely vague. Computer equipment and household furnishings covers everything from furniture all the way to decorative items and computers but excludes major appliances. Because this category is so broad, I’m going to be conservative here and assume only 15% of this amount is deductible.

Thanks to section 179, computer equipment and other furnishings can be expensed 100% up to a six figure dollar amount every year. Chances are, if you have a business and purchase a computer, it can be written off in its entirety in the same tax year. The average American spends $1797 in this category. 15% of $1797 is $269.55.

Adding It All Up

Obviously, I have not included every possible business expense in my analysis, only the common items. If you really want to get nit picky, in reality you could probably expense far more than what I’ve mentioned in this article.

In any case, if we total all of the categories mentioned above, this comes out to $1936 + $2004.60 + $133.40 + $1200 + $347.70 + $269.55 = $5891.25.

Based on an income of $63091, this represents almost a 10% writeoff on the average American’s taxes! Putting all of the numbers together at a 25% tax bracket, this is a savings of $1472.81 every year. Keep in mind that most of the deductions I calculated above were on the conservative side. In practice, my wife and I actually deduct a good amount more especially under the computer and equipment category.

If you are worried about getting audited, the best thing to do is to arm yourself with an accountant and document every expense carefully. Your accountant should be able to tell you with high confidence whether or not an expense is actually deductible. This is free money folks, but only available if you have a business. Stop giving your money away to the government now!

Further Reading

• How To Save Money On Taxes

Disclaimer: As one reader pointed out, this article is not meant to encourage people to haphazardly make tax deductions for their business. In fact, I discuss the flip side in depth in my article on Is Your Business Just A Hobby In The Eyes Of The IRS. However that being said, the deductions mentioned in this article are not exaggerated. In fact, I believe that the majority of people don’t take tax deductions that are rightfully theirs because they are afraid of the IRS. Talk to your accountant! They will know how to help you figure out how to make the most out of your deductions.

I’ve heard a ton of business ideas. I’ve listened to and read many business plans. And the one thing that always strikes me is how little most people think about the viability, profitability and end goals of their small business. Is the goal to become a millionaire? Is the goal to just make a living? Is the goal to just do something fun?

Photo By Reinvented

Perhaps this explains why in just the past year alone, I’ve seen many brick and mortar businesses open up their doors only to close down just a short while later. Perhaps this is why I know of several acquaintances who are in limbo with their business. They don’t make much profit yet they are literally working their butts off for the equivalent of minimum wage.

Granted, a lot of this might have to do with the current economy and the fact that people aren’t spending as much money but more realistically, the problem is probably fundamental. Either the market is not there or the business idea is just too costly to implement. So how do you avoid creating a dead end business? How do you create a business that meets your own personal goals? Not everyone is out there trying to make a billion dollars. How much business is going to satisfy your needs?

Think About Profitability First And Foremost

The single most important factor leading to the success of any business is profitability. You have to focus your planning on how you are going to make money. Duh! Seems like a really obvious concept but you would be surprised at how many people decide to throw up a business just for the heck of it.

For example, a go-kart racing place near my place of work closed down within a year of opening. And I’m sure the guys who decided to start it were thinking to themselves, “Wouldn’t it be cool to run a go kart racing track?”

But I’ll bet that once they opened, they quickly realized that the amount of business couldn’t support all of the overhead of maintaining the gokarts, the racetrack and a full staff of people. And it was probably too late at that point because they spent a whole wad of cash on the facility already.

Just because you think that something is cool doesn’t mean you should start a business around it. Just because no one else has implemented your business idea doesn’t mean it’s going to be successful. Chances are that if you don’t have competitors, your target market is not that large to begin with.

The only way to know for sure is to do research and do some testing. Thanks to the internet, performing experiments is relatively easy to do. If you want to sell something, throw it up on Ebay or a similar website first. Want to know what people are looking for? Use Google’s keyword search tool. Whatever you decide to do, just make sure that your business is viable first.

How Much Do You Want To Make?

The second question that most people forget to ask themselves is how much they want to make in order to be happy. And you’d be surprised by how many business owners have no idea what this number is. Do you want to make six figures a year? Do you want to make millions? Billions?

Knowing how much you want is important in order to set your expectations. If you throw up a business without an end profit goal, you could be in for a world of hurt when it comes time to make key decisions regarding how to spend your time and money.

For example, with our wedding linens business, we have no intention of turning it into some multi-million dollar business. Obviously, if it happens, then that’s fine with us but all of our decisions are based on making a solid mid six figure a year salary.

Our goal is not to make millions of dollars. Instead, I want my family to just be comfortable. I want my wife to stay at home and spend most of her time playing and raising our kids and not on running and overseeing a business.

Knowing our goals allows us to make decisions more efficiently. Now that we’re pretty close to where we want to be, we can turn down extra business and pain in the butt customers without flinching. After all, why should we waste our time dealing with people that we don’t enjoy dealing with? Why should we waste precious time and energy on customers that aren’t inline with our business goals?

If you are having problems figuring out your “number” or the amount of money you want to make with your business, then consider this. Your magic number or profit goal should be the amount of money in which you can comfortably say “F&!^ off” to your customers. It’s really that simple.

Just Working Hard Is Not Going To Cut It

You’ve probably heard this one before but just working hard is not going to get you anywhere. You have to spend your time where you think you can make the most impact.

Let’s face it. There are only 24 hours in a day and there’s only so much you can juggle at once. If you can’t accomplish everything on your plate, then you need to work smarter. Leverage automation and computers. Learn how to do some basic programming. Don’t be afraid. Suck it up and learn or find someone to help you.

I remember one time my wife had to take on a double role at her former employer because someone had abruptly left the company. Instead of working twice as hard to fill two jobs, she noticed that much of work of the former employee was extremely manual and repetitive.

Despite a tight deadline, she decided to invest her time writing a series of small scripts to automate the task. In the end, they decided not to hire anyone to replace the former employee because my wife’s scripts pretty much automated his job.

Whatever you choose to pursue, make sure you leverage the web for your business! Your server is always on and you can automate many things if you take the time to learn. Your computer server is like an employee that works 24/7. Do I sound like a broken record yet? Don’t be afraid of technology or you are going to fail!

Key Takeaway

Running your business is all about balance and being true to yourself. If you just want to start a business for fun, then focus on having fun. But if your primary goal is to make money, then profitability should be the top priority. Knowing what you want to get out of your business will reduce stress and make it an enjoyable and rewarding experience.

When most people think about starting a company or business, they think of the Microsofts, the Googles and the YouTubes of the world. They tend to think big because the media focuses on these multi-million dollar success stories and over glamorizes the risks and rewards.

Photo by MarkyBon

In fact, the media tends to portray entrepreneurs like lottery winners because that’s what makes the news. Because the chances of creating a company like You Tube or Facebook are so slim, most people shy away from starting their own business because they think it’s just way too risky with very little chance of success.

Just the other day, I had one of my readers email me that they were afraid to go out on their own because they didn’t want to risk everything for a measly 1% chance at success. A 1% chance at success? Where the hell did he get this number from? Turns out that he read that “99% of small businesses fail within their first year” which made him believe that he only had a 1% chance of succeeding.

Listen to me. This 99% statistic is complete and utter BS! Starting your own business doesn’t have to be the next big thing. And if you do things right, your business doesn’t have to be that risky either.

You Don’t Have To Hit A Home Run

The first thing that you have to understand is that your business idea doesn’t have to be the next Google, You Tube or Facebook to make money. If you are planning to start a company for the sole purpose of getting acquired for a billion dollars, then your chances truly are one in a gazillion. So instead of buying a lottery ticket, start something that you can make profitable within a short time frame.

Instead of setting your sights so high, focus on what can make you some money now with very little risk. Ignore the glamor and the hit or miss ideas. Divert your attention to simpler things. The simple things that people are looking to buy. Your idea may seem boring to your friends and family and it may even be mundane, but who cares? Find something that you can do and do it well.

Take a look at Tony Hsieh of Zappos. The man sells frickin shoes over the internet and makes billions of dollars a year. He’s successful because he sells shoes in such a way that people want to buy from his company. If you need a smaller example, take a look at our wedding linens business as well. We sell frickin handkerchiefs over the internet and make six figures every single year.

You don’t have to invent the next big thing. You don’t even need to do anything fancy. Look for a small niche and exploit it. If someone has already taken your idea, don’t let that stop you because the market is probably big enough for the both of you.

If you still don’t believe me, take a look around the next time you go shopping or go out to eat. My wife and I just ate at our favorite Chinese restaurant the other night. But did we go there because it’s the only Chinese restaurant in town? NO! In fact, there are probably 50 Chinese restaurants within a 15 mile radius of our house. And all of them have been in business for years. Despite the heavy competition, they still all make money.

By choosing a business idea that is simpler and easier to execute, you can improve your chances of success by several orders of magnitude. You might not strike it rich or make instant millions, but you can make a nice comfortable profit and be your own boss.

Keep The Upfront Costs Minimal

Keeping the risk factors low means keeping the expenses low as well. By creating a presence online, you can easily start your business for only a couple of bucks a month. Our wedding linens store is an online only store and costs only 80 dollars a month to maintain. If business were to suddenly stagnate, we could literally keep our store open indefinitely at our current burn rate.

When we first started out, our upfront costs were even less. Our web hosting only cost us $6.95 a month at Bluehost and we paid absolutely nothing in development costs. If you just take the time to look around, you can find a lot of free open source software already written for you and ready to use. These days, it’s extremely easy to Create Your Own Business Online. Read my tutorials and get a head start!

If you want the absolute lowest risk business possible, then start a blog or an affiliate marketing site. At $6.95 month, you can keep your website up for as long as you want until you are profitable.

Don’t Quit Your Job Until You Are Ready

If you need even more of a safety net, work on your business while you have a full time job. Take your time! Incubate your business within the comforts of your full salary and launch only when you are ready.

My wife and I worked on our online wedding linens business while we both had full time jobs. There was no pressure whatsoever for our online business to make any money early on because we had our salaries to back us up. Had we not had this cushion, we probably would have made more rash decisions just for the sake of money.

Some people can only be motivated by placing themselves in pressure situations. But if mitigating risk is your most important criteria, then don’t quit your day job until your business is already making money.

What Does It Mean To Fail Anyways?

My biggest beef about the “99% failure rate” statistic is that all businesses are lumped into one large category. I’ll bet that if this statistic was compiled again for just internet businesses alone that the failure rate would be far less.

These days, it doesn’t take much money to start a business and it doesn’t cost that much to maintain one either. If mitigating risk is your number one concern, then play it safe and start a low cost internet business. Pick something simple and build upon it. Businesses take time to grow and you can turn any boring old business into something huge if you have the time and patience.

My wife and I jumped right into our online business with a “whatever it takes” attitude. We were excited. We were enthusiastic. And we were ready to make money by any means necessary even if it meant catering to our customers. Looking back, this was not necessarily the wrong attitude to have. But this no holds barred policy got us into a lot of trouble and wasted a lot of our time early on in the life of our business.

The truth was that we felt desperate. After countless hours of work, we launched our online store but didn’t have the customers to justify our efforts. Our website was a ghost town and we practically jumped on every customer that came through our virtual doors.

Photo by Stoo Hopwood

As a result, we went out of our way to do special requests for anyone that asked even if it had no long term value for the business.

The quick cash was like a drug. Seeing money come in validated our store’s existence and we let our fear of missing out on potential business turn us into virtual doormats. Back then, we didn’t value our time and it took a few bad customer situations to that help us realize our true worth.

The Wealthy Customer

I very clearly remember our first large potential customer. Her name was Anita and she was helping her daughter plan her wedding which was to take place the following year. I remember speaking with her on the phone for the first time and getting the impression that she was extremely wealthy. I also received a vibe that she wanted her daughter’s wedding to be extra special no matter what the cost. That last part made me salivate.

I remember Anita found us on the web by clicking on our adwords link and wanted to order personalized wedding handkerchiefs for her daughter’s wedding invitations. She had this vision of embroidering the guest’s name on a lace handkerchief and wrapping a paper invitation inside. Quite a novel idea actually and all told we were looking at a deal worth well over $2500 in revenue which easily would have been our largest single order to date.

The problem was that Anita was not satisfied with any of the embroidering options that we had in place at the time. She wanted something very specific to be stitched onto each handkerchief and she wanted to see what it would look like before placing her order.

After getting a rough outline of what she wanted, my wife and I were comfortable with her request and we agreed to help her out. After all, Anita seemed like a very pleasant lady and easy to work with as well. We would work out the details later.

The Result
While Anita was extremely nice, she had no clue what she really wanted. Even though we made samples for her and even put up webpages with detailed photos of the handkerchiefs, she never seemed satisfied. She would tweak things slightly this way, or move the text around. And each iteration would take us several hours to implement.

In fact, we spent several weeks trying to refine the embroidered design to her specifications and she was clearly getting frustrated and so were we. Meanwhile, my wife and I had completely dropped the rest of our business on the floor for this lady. Our original vision of our online store was one of complete automation. Orders were supposed to fly in from the internet and we would just have to fulfill them. Working with Anita on her wedding project just took too much of our time.

Ultimately, we decided to call it quits. The aftermath? One month wasted and no money to show for it.

The Special Order

One of the main strategies that my wife and I had early on with our business was to specifically go after wedding planners. The idea was that if we could get a bunch of wedding planners on board that we could sustain a steady stream of referral business over the long haul. So we were always on our best behavior whenever any sort of event planner contacted us over the phone..

This particular wedding planner wanted to order 50 dozen of our rose embroidered napkins for a last minute reception. But the problem was that it was one of our least popular napkin styles and we didn’t have enough in stock to fulfill her order. The other problem was that she needed the napkins in under 2 weeks.

Since our vendors are from overseas and our products are made to order, we had to pay extra for expedited manufacturing and air delivery. Normally, we would never have placed such an order without collateral, but the wedding planner assured us that she was definitely going to buy from us and just needed the final okay from her customer.

The timeframe was so tight that we decided to place the order with our manufacturer even before the final approval was met. After all, thousands of dollars were at stake.

The Result
The wedding planner was true to her word. She did receive approval from her customer and she did place the order. However, the order was far less than she had initially specified. Turns out her customer decided to reduce their budget and slashed their guest list by over a half. We ended up only making 40% of what we thought we were going to make and we were stuck with dozens of our worst selling napkin styles.

Special Delivery

Perhaps we’re just softies but my wife and I tend to be very sympathetic towards desperate brides. Whenever we get calls from customers on the verge of tears over something wedding related, we are much more inclined to listen and go out of our way to help them out.

Occasionally, we’ll receive orders from customers who live only 10-15 minutes minutes away. This one particular customer placed an order online and then called us begging for permission to pick up her wedding linens in person for her wedding the following day.

One of our policies is that we don’t allow customers to visit our storage facility. We don’t have a physical storefront so we are not comfortable handling customer visits directly. We either ship our orders or we turn the customer away.

Honestly, I have no idea what came over us that day. Perhaps it was because we were desperate for business. Perhaps it was because this bride wanted to order a large quantity of linens. Perhaps it was because she cried over the phone. In any case, we decided to deliver the linens to her rather than have her come to pick them up.

The Result
In her haste, the bride gave us an incorrect address which caused my wife and I to go on this wild goose chase to deliver her order. While her residence was only supposed to be 10 minutes away, we could not find her house nor could we contact her by phone either. She simply wasn’t picking up her cell.

So my wife and I ended up expending a lot of energy trying to track down her real address over the internet. We used every means possible. We searched for her on Google. We tried looking for her fiance by combing the wedding registries. When we finally found her, we had effectively wasted our entire day.

What’s The Point Of All This?

After going through many more situations like the ones described above, my wife and I gradually learned to say no. Learning to say no was an important word to learn because it will allowed us to focus on growing our business the way we wanted it to grow. These days, my wife and I use the following rules of thumb when it comes to one off projects.

• Does the nature of the work provide long term value to the business? Can the work be leveraged towards content or new products for the store?
• Is the money involved justify our personal time and effort? Are we paying ourselves enough?
• Is the income scalable? Can we afford to take on many of these projects without killing ourselves first?

Take it from a former “yes” man. Saying “no” is an underrated skill and can be one of the most valuable words in your vocabulary. One thing we often neglect is the value of our own time. The sooner we realize our true worth, the sooner we can focus our efforts on what truly matters.

You may have experienced this pattern before. You start a brand new job and work extremely hard in the beginning to establish yourself and your reputation. At first, the nature of the work is extremely challenging. You are constantly learning and trying to keep up with your coworkers. You find yourself staying late at the office just to get by.

As time passes however, you become adept at your job. You find ways to do your work faster and more efficiently. You become proficient and an expert at what you do. As more time passes, you feel comfortable and at ease with your job. You find yourself able to finish all of your work in an 8 hour day. You have more free time to spend at home. Things become cushy. Is it time to leave?

Photo by Just Taken Pics

One Perspective

I was chatting with a close friend of mine over the weekend about complacency at the workplace. Turns out that he recently quit his job to join a company that builds completely different products than his last firm. While the nature of his work will be fairly similar, the culture and pace of his new company will be a brand new experience. Inevitably, he will have to work longer hours as well.

So I asked him why he changed jobs. After all, he has a wife and child at home whom he loves spending time with. His former job was a 9-5 type job that lent him plenty of time at night to hang out with his family. In addition, he never had to work weekends and the job itself was pretty low stress. Why did he give all of that up for a new job where he’ll have to work many more hours and re-establish himself? Why did he sacrifice the additional family time for a new job that is more demanding?

My friend has a policy when it comes to work. He never stays at any company longer than 3-4 years and he’ll leave even earlier if he starts to feel complacent at any time. He describes his job hopping behavior as an itch that develops when he starts any job that can only be scratched by switching companies.

In short, he always leaves his company if any of the following are true.

• He’s not learning anymore
• Company politics are getting in the way of work
• He’s getting bored at work
• He’s doesn’t feel like he needs to challenge himself anymore

His reasons seem fundamentally sound. Why stay at a job if you feel complacent? Why stay if you are bored?

Another Perspective

While I agree with all of his reasons for switching companies, I can’t help but feel as though he’s missing out on a completely different opportunity. What opportunity am I referring to?

If your current job pays you enough to support your family and it also provides you with lots of free time, why not use that free time towards your financial independence? Why take on another job that will make you work longer hours for someone else?

At the end of the day, those additional hours of work at the new job are still going towards benefiting someone else. Those extra hours are not going to put more money in your bank account except for maybe a small raise.

Cushy = Opportunity

If you ever want to break out of the rat race and be your own boss, there’s no better time than when you have a cushy job. I’m not saying that you should slack off in any way. You should still perform at your peak while you are on the job. But you should finish your work as quickly and as efficiently as possible so you can go home and work on your independence.

People always make the excuse that starting their own business is risky. But when you start a business on the side, you still have your entire salary from your paycheck and there is absolutely no risk whatsoever. You will continue to be paid while devoting your extra time towards something more meaningful.

What Can I Possibly Accomplish On The Side?

You’ll be surprised at what you can accomplish with the time away from work. Hypothetically speaking, if you get off work at 6pm and eat dinner, that leaves about 3-4 hours a night that you can put towards your own business. Couple that with the weekends and you can get a serious amount of work done.

If you want to think about it in a different way, you are devoting the extra hours you would have been working at your new job towards your own venture. All of your time goes directly to your own top line.

Should You Stay At Your Cushy Job?

The revised answer to this question should be a resounding yes, but only if you eventually want to be your own boss. Your cushy job presents a unique opportunity in which you can make a full salary while challenging yourself at the same time.

But heck, there’s nothing wrong with wanting to live the rest of your life working for someone else if that’s what you want to do. But wouldn’t it be nice to give yourself the ultimate challenge?