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| Uncommon Sense | The fantasy -- and reality -- of your own business
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As four Women in Red strike out on their own, they face some daunting challenges. Average net profit for sole proprietors last year? 11 bucks.
By MP Dunleavey
Editor's note: Columnist M.P. Dunleavey and six other women have come together online to strip away the myths surrounding money, lay bare their assets and liberate themselves from debt. Follow the quest for financial fabulousness of these "Women in Red" in Dunleavey's column on MSN Money and on her blog.
Like any den mother, I felt the thrill of pride -- and a twinge of anxiety -- when I learned that four of the Women in Red were planning to launch their own businesses and take on new debt to do it.
Marian decided to parlay her experience as a financial planner for divorced women into a temp agency for paralegals (a niche that needs to be filled in her area). Planned new debt: $100,000.
Tricia, flying under the WIR radar, recently announced that she has opened a formal-wear consignment shop with a friend. It's a supplemental source of income for her now that she hopes will grow into a full-time enterprise. New debt: $7,000.
Jill, who works with computers, confessed her longtime dream to open a spa! She's fleshing out her business plan and figuring out the financing. New debt: Unknown, but likely to be in six figures.
Beth, who was laid off last June, just embarked on a program to become a licensed massage therapist and may go into private practice when her training is finished next year. New debt: Unknown.
Fantasy meets reality
As dazzling at it sounds to start your own business, let's look a little harder at what the average entrepreneur is up against. After all, the prevailing fantasy of becoming a self-made woman or man in this country tends to be steeped in rosy visions of ending up like Oprah.
In reality, according to the latest statistics from the Office of Advocacy in the Small Business Administration, there were about 24.7 million businesses in the U.S. in 2004. And 99.9% of those were small businesses (with fewer than 500 employees). Of those, more than three-quarters, or about 19 million businesses, were sole proprietorships.
According to the latest figures from the Internal Revenue Service, the average sole proprietor (i.e., non-farm businesses that filed a Schedule C) reported net receipts of about $53,272 in 2003.
The average net profit: About $11.
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(It's possible, of course, that many of them are just following Jeff Schnepper's tax advice and are turning personal expenses into business deductions. For more on that topic, see "The ultimate tax shelter: owning your own business.")
The hurdles women face
The good news is that women-owned businesses have a slightly higher survival rate than the average, says Sharon Hadary, executive director of the Center for Women's Business Research: Of small businesses with employees, about 66% of those owned by women survive over a four-year period, compared with 44% overall. (There's no data on survival of small businesses with no employees.)
Moreover, companies owned by women are growing faster, even those without any employees, Hadary says. "The revenue for women-owned businesses grew 66% from 1997 to 2004, compared to only 42% for all companies without employees." (The center bases its research on data provided by the Census Bureau and by Dun & Bradstreet.)
Related news and commentary on MSN Money
But before you dash off to open that cozy bookstore-caf you've always dreamed about, bear in mind that entrepreneurs -- men and women -- still face a host of hurdles, say Hadary and other experts who track this sector.
Here are the improvised explosive devices you'll need to avoid on the road to small-business success:
Lack of vision
Take Beth. Although she's just started her one-year massage-therapy program -- and she's still unsure whether she'll strike out on her own, work at a friend's spa, a hospital or some combination of the above -- Hadary would advise Beth to craft a vision for her business sooner rather than later.
The women who embark on a business "with the goal of creating wealth, creating jobs and really fulfilling a vision" tend to make more savvy decisions about how to finance their business, says Hadary, and their businesses tend to grow.
"You're more likely to grow when your goal is growth," she notes, explaining that many enterprises stall when they've begun without a clear growth vision and try to grow later. "Then they're not positioned for it."
Failure to plan
Take Tricia. She and a friend came up with a casual business plan to open a consignment shop for formal wear: wedding and prom gowns and tuxedos, etc.
They took out a $5,000 bank loan and a $2,000 loan from family to get a lease and set up their shop. The plan is to accept dresses, suits and accessories on consignment, thus keeping inventory costs close to zero.
The items are priced in the $100 to $400 range; they take 50% of each sale.
Sounds like a great idea, but great ideas can be a woman's Achilles' heel, Hadary says.
"The biggest mistake I hear from financial leaders is that women come in with their business plan, and it's all about how wonderful their product will be, how happy the customers will be -- and there are two paragraphs on the financials," Hadary says.
Insufficient market research
Martin Lehman would agree. Formerly in women's apparel, Lehman now volunteers with the Service Corps of Retired Executives, better known as Score, a nationwide not-for-profit that uses more than 10,000 volunteers from the corporate sector to provide free mentoring, advice and counseling to entrepreneurs.
Many of the female clients Lehman sees neglect to think through three key areas of their business plans, he says:
- Research. "I had a woman show me a dress she'd designed. She told me her mother loved it. I said, 'That's wonderful -- but what about the world? Have you showed it to a store? Is there a market for it? How hard will it be to manufacture?'"
- Location. "Stand outside your business for 24 hours," he says. "Look at who passes by. Who are your customers? What are you selling them? Will they come into your store?"
- Advertising. "How am I going to find these people? Handouts? Mailings? A Web site? Word-of-mouth? Can I afford a newspaper ad -- and in what newspaper?"
By contrast, Jill has spent the last six months or more just learning how a business plan is built. She took one of the low-cost seminars Score offers, has worked with a software program to map out her plan, has consulted with other business people in the spa world, and is studying how businesses are financed.
Jill has been amazed by how much the experience of developing a clearly thought-out plan is teaching her. "It forces you to think through every aspect of your business," she says.
Lack of capital
Take Marian. A single mom with three sons and no child support, Marian is already on precarious financial ground. So it's understandable, if you look at it sideways, that she'd want to take the gamble and start her own temp agency for paralegals with the hope she will end up in a better financial position than she would in a regular job.
Her idea has some strengths: Local law offices and paralegals can use a temp agency, according to her research. As a longtime financial planner specializing in helping litigants in divorce cases, Marian has a network of potential clients in the legal business.
But like most entrepreneurs, especially women, Marian is facing an uphill financial battle.
Access to capital is the top problem female entrepreneurs have to deal with. "Women are still more likely than men to max out their credit cards, hit up family and friends for loans, and tap into their 401(k) plans (to start a business)," says Erin Fuller, executive director of the National Association of Women Business Owners.
Hadary points out that, male or female, most people in the startup phase have a hard time getting a small-business loan, i.e., one that's guaranteed by the SBA, or other bank financing. But women seem to be less likely to use credit and equity in general.
Underpaying yourself
Like Marian, many forget to build an adequate salary for themselves into their business plans -- a huge problem in Hadary's eyes.
Marian hopes to raise about $100,000 from friends and family to launch her business this year. She wasn't clear how much of that would be her salary.
"It's not paying yourself, it's valuing yourself," Hadary says. "You have to put paying yourself into the budget -- that's just about the hardest thing for women to do."
Isolation
Another stumbling block for would-be business owners is failing to develop a strong network -- both as a support system and as a source of clients, says Pamela Mitchell, who co-authors a series of columns on women in business at Inc. online.
"I think the networks for men in business are a little more set up," Mitchell says. "Now that women are stepping out of the traditional home-based business model, the networks are less established."
Now, if you've read this far and are still gung-ho about starting your own business, I say go for it with my blessing. You have the kind of indomitable spirit the every entrepreneur needs to survive, and the payoff is there for those who dream big, plan carefully and work tirelessly to succeed.
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