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A Dangerous Self-Employment Axiom

By Marty Nemko

One of business’s core axioms is “You need money to make money.” It’s axiomatic, and--at least for one- or few-person businesses--often dead wrong.

Most businesses go out of business not because the idea was bad but because its costs were too high. Without sacrificing income potential, you can control costs:

Where to locate. If at all possible, choose a business you can do at home, or in which, you share space in a local business incubator. You may find them by googling “business incubator” and the city you want to work in, at, or in your Yellow Pages under “office rental.” Businesses that require a storefront are risky because they require large monthly cash outlays, usually plus inventory, which is prone to theft.

Your product or service. If at all possible, offer a service, so your cost of product is zero. If you choose to sell a product, reduce your risk by trying to buy it on consignment or through secondary markets, for example, from bankrupt companies.

Personnel. Keeping someone the payroll 52 weeks a year is an enormous drain on your resources. You can easily be driven into bankruptcy by the cost of salary, benefits, payroll paperwork, and legal problems if you need to terminate someone. Where possible, hire people on a by-the-project-, just-in-time basis. Hire salespeople on commission. When you do need to hire employees, instead of cash, offer them equity in the company. That not only controls cash flow but is motivating: the employee wins only if the company does well. You’d be surprised how many good people will work for equity if they believe in you and your business plan.

Equipment. Look for bankruptcies: they’re often noted in the business section of newspapers and in business publications such as Crain’s or the Business Times. You often can get your computers and furniture for very little. I’ve even heard of a case where a business got all its furniture and computers for free in exchange for hauling it away.

Legal and accounting services. A surprising number of good attorneys and accountants will defer their fees for the first year until you’re up and running. Others will work for an equity position. Again, key is that they believe in you and your business plan.

In sum, replace “You need money to make money” with “You need to be a cheapskate to make money.”

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