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How to join entrepreneurs' rich club: Beware 9 wealth traps – BizNews

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EDINBURGH — One of the best ways to build wealth is by joining that brave group of entrepreneurs who take business risks and opportunities. Dawn Ridler, a Johannesburg-based independent financial advisor, has practical advice for entrepreneurs who do not have much business experience but a high appetite for an economic adventure. She highlights the importance of preparation, in particular working out the numbers, so that your entrepreneurship generates wealth instead of decimating your savings. Ridler highlights some hidden traps waiting for unsuspecting entrepreneurs. – Jackie Cameron

By Dawn Ridler*

Financial emigrationMoney expert Dawn Ridler

Entrepreneurs, especially if they haven’t been cursed with climbing the corporate ladder or an MBA, have some unique challenges when navigating the field of personal and small business risk and finance. Perhaps it’s that fearless spirit and boundless confidence that will guarantee your success, but “jump and build your wings on the way down” sometimes ends in a bloody mess at the bottom. A bit of homework on wing design and jumping with the right tools would have prevented that – and the same goes for that entrepreneurial venture you dream about.

1. Test your idea. Unless you’re buying a franchise, a new venture usually starts with an idea, and with a product (which could be a service of course). It is important to iron out at least some of the bugs before you sink too much money into the venture. Who is your target market? What are their expectations? How much are they prepared to pay for the product? What after-sales service do they expect? How often will they buy your product? How can you retain their loyalty? Don’t let a poor product sink your venture before it even starts.

2. Everyone needs to ‘maak’ a plan. Seat of the pants ventures or bootstrapping your way through the early years probably works a charm in your early twenties when you don’t have obligations, not so much later on. One of the biggest mistakes entrepreneurs make is to buy into the fallacy that business plans, financial plans, marketing plans, business qualifications are all bureaucratic nonsense designed to kill your dreams. Dreams and visions are all very well, but unless you know what your “break-even” is for example – and when you might achieve that dream – then it can become a nightmare. The good news is that all this information is freely available on the net, in books and online courses. Do all that homework and put your plan together before you leave your day job. If you’re ‘between jobs’ then use the time to do this homework, but keep looking for a job, even if it as a temp, Uber driver or from your rented room while you rent out your house. Money to launch your venture is hard enough to come by without spending it doing the homework and learning basic business skills.

3. Who are your clients going to be and how are you going to get them? This is key to any venture’s success. If you’re starting a business very similar to your ‘day job’ tread carefully, if you cannibalise their clients or copy their products, you might spend a chunk of your change in court. Brushing up on social media marketing and building your potential network takes time and trail and error as you find out what works and what doesn’t. You can also use social media to test your product or use free tools like Survey Monkey.

4. Funding your venture. How much money you need will come out of your business plan. Realistically nobody, not a financial institution nor your friends and family, should be funding this venture without a plan. Be realistic. You could try a kick-starter campaign, but that is going to just need a plan too and it is going to need some pretty savvy marketing to lure in investors. Don’t cash in your pension on a whim and regret it later. This is one of the most common sources of funds for new ventures and inevitably results in a huge hole in retirement savings down the line. Banks may lend you money, but it will probably be at prime plus 3-6%. Taking out a second bond would be cheaper but could put your entire family’s future financial security at risk. Part of your business plan should be a cash-flow plan. This is vital – cash is king and without cash to pay employees and suppliers your venture will come to an abrupt end very quickly.

5. Business structure. A PTY company is very quick and easy to set up and will help you sell it in the future. If you’re married in Community of Property you may need to go one step further and place the company in a Trust. Please read the small print of any bank facility you are given so that you don’t expose your spouse to the risk of the company going bankrupt – most of them require personal surety for things like overdrafts.

Read also: Want to be wealthy? Try this Banting-style guide to boosting your riches

6. Know the trends. Our buying habits are changing all the time, and the last thing you want to do is get in on a ‘dying’ trend. Retail stores are battling because buying habits are changing. In many cases they are turning into ‘showrooms’ where customers can see what they want, only to go online and find the best deal. If you look to the States for emerging trends, then service/ leisure/ restaurants/ convenience is the biggest growing sectors. The cornerstone to this is that personal relationship – having a ‘service’ mentality, so not ideal for introverts or prima donnas. Find a venture that suits your personality and partners who fill in the blanks.

7. Partners. Pick them very carefully. Make sure your values are aligned, especially when it comes to money. All of you should get independent credit checks (I also recommend people do this when they marry). If one partner is frugal and the other a spendthrift you will come to blows. Have a solid shareholder’s agreement, with a buy-and-sell agreement backed by life policies so one of you isn’t left holding the liability if the other dies prematurely (or is disabled). Having an active partner gives you a succession plan. While you may have different specialities, you should both know the whole business, especially the nuts and bolts of your business plan.

Read also: How money makes world go round: Dawn Ridler unravels mysteries about cash in your wallet

8. Business risks. Understand what all of these risks are: Cybercrime, hacking, denial of service, customer liability, labour risk, theft, fire, product recall and so on. Make sure that these are covered with insurance, where possible. You are going to have to keep reinventing yourself. Understand the “Contingent liability” in your business. Every time you, and your partners, sign a surety of any description (overdraft, loan), you can be held ‘jointly and severally’ liable. What does this mean to the bankers? They have the option to go after the whole amount from ANY of the partners. They are really sneaky, they will often go after a deceased estate because they know the bucks are going to be there, and the executor has no option but to pay them and try and get the money back from the other partners. Tax needs to be very closely controlled – those SARS blighters will keep peeking at your bank account and when they find funds they think you owe them they will whip them out. Usually the day before payday.

9. Succession planning. This should go in the business plan from the very beginning. Are you going to sell one day? When? Are you going to want to extract the equity (selling the company, or part of it) or just take the dividends into retirement ( and get someone else to manage it)? One of the biggest problems with small companies is that once the founder/founders have left it has no intrinsic value that can be sold. For all intents and purposes, this kind of business is only really replacing a ‘day job’ and you’re going to have to plan for retirement the old-fashioned way.

Action: Where possible, do your homework and up-skill while still in your day job. A solid financial and business plan is not optional. Mitigate as much risk as possible with insurance.

  • Dawn Ridler is an Independent Financial Advisor with extensive experience in both financial advisory and business. Her unusual combination of an MBA, BSc and CFP ® has evolved into an ‘ecological’ and holistic approach to advisory, which she has tagged ‘Wealth Ecology’ in her company, Kerenga.

This article is published here on BizNews.com with the kind permission of Dawn Ridler. Copyright: Dawn Ridler

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