guest commentary by David Potts
Editor’s note: David Potts is a certified public accountant with more than 33 years experience. Although every effort is made to provide you accurate and timely tax information, it is general in nature and not specific to your facts and circumstances. Consult a qualified tax professional to discuss your particular case. Feel free to e-mail topic suggestions or questions to email@example.com
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A couple of weeks ago Bono, the lead singer in the rock group U2 and advocate for the developed world to assist in the economic development of Africa, made the statement that, “Commerce and entrepreneurial capitalism take more people out of poverty than aid.”
I doubt this is news to you if you have watched television pundits or read any blogs or news columnists during the past couple of weeks. Because Bono is one of the world’s most successful and popular rock stars, his statement, a statement contrary to the usual persona of a rock star, was a headliner.
That commerce and entrepreneurial capitalism is the best way to create wealth is hard to dispute, at least with facts. Capitalism’s success in driving economic development has been proven again and again. It’s not without its flaws, but it beats any other option.
What makes it work? Self-interest.
It’s such a simple concept. A society that embraces capitalism rewards individuals for taking risk. The reward for some entrepreneurial capitalists is millions, even billions of dollars in wealth. But on the other end of the spectrum, some entrepreneurial capitalists file bankruptcy, leaving their family finances a shamble for decades. That’s the nature of risk.
So who should follow Bono’s advice and embrace capitalism? Everybody should embrace capitalism when commerce is run with integrity, but not everybody should start a business.
U.S. Census Bureau statistics as reported by Forbes revealed that in 2011 there were 22.5 million non-employer firms in the United States. A non-employer firm is simply a business without employees. This would generally include professionals and business owners like real estate agents, barbers, and independent truck drivers. In 2011, the average revenue for a non-employer firm was approximately $44,000 ($43,985 for the Fort Smith, AR-OK MSA) and that is revenue, money received before business expenses are deducted. The average wage was for 2011 was $45,790. Employees made more than the self-employed.
Credible statistics on business failures are hard to find, but many businesses that start ... fail. I have heard people “quoting” statistics on business failures that claim the rate of failure within the first 10 years of a business’ beginnings is as high as 90%. If I was a betting man, I would bet the failure rate is closer to 50% to 60%. That’s just a guess.
It is might be discouraging to people considering a life of self-employment that a high number of people who start a business either fail or make less money than an employee. But that’s the risk you are taking when you start a business. It’s the minority of business startups that continue to survive and grow into businesses providing excellent cash flow to their family and selling for large sums of money when it is time for the founder to exit.
If you have a great desire to be an entrepreneur, how should you decide if you should take a risk and start a business? I personally believe successful entrepreneurs aren’t big risk takers. I think they are generally risk adverse. I believe it’s the big risk takers who generally fail in their business ventures.
Successful entrepreneurs think. They think about were their risk resides and study their options and find ways to minimize their risk. Before they open the doors they have counted their costs but also left a bit of money in reserve to fund the unexpected. They know their potential customers’ needs and where they reside. Some entrepreneurs have already have lined up customer commitments before they begin business.
Another strategy of successful entrepreneurs is to buy an existing business that has a history of strong cash flows and then improve those cash flows based on innovation they bring to the company. Their biggest risk is over paying for the business. If they buy the business right, at a fair value, their risk is not making the money they expected.
A person will never know whether they could be a successful entrepreneur if they sit on the sideline. However, business ownership does involve risk. If you are a nervous person, keep your job. If you want to start a business without employees, the statistics show you might make less than you would working for somebody else. You can always get a job again. If you start big and it’s a flop, the debtor’s prison no longer exists.
However, if you want the opportunity to make money, to improve your and your family’s economic circumstances, start or buy a business. Capitalism is your friend.