Some time ago I asked a group of entrepreneurship students: what is the ultimate goal of a business? There were at least ten company owners in the group, and another eight people wanted to “go their own way” in the near future. And only one person answered this question correctly.
But let’s start with another, simpler question: why do people start their companies? If the first thing that came to your mind is “for money” or “because they want to do what they love” – you will find this article interesting. If, on top of that, you have a company or think about establishing one, it’s a must read.
Ten years after I started my business I got hold of the book titled “The E-myth”. It’s old, its first version was written by Michael Gerber in 1986. When I finished reading, all I could think about was that I wished it had fallen into my hands twelve years earlier. Because I’ve made all the mistakes that the author writes about.
What is the “E-myth” all about? In a nutshell: if you love doing something, setting up a company where you are going to do it is the worst idea ever. Because it basically means that you will have to stop doing what you love. A man who loves to bake cakes and sets up a confectionery must write a business plan, fill out a loan application in the bank, hire people, calculate taxes, pay salaries, prepare documents for accounting, reply to letters from the Tax Office . . . and that’s before they even start to acquire customers! In all this, there is not much time left to bake cakes.
This is exactly what happened to me almost twenty years ago. I wanted to design visual identifications for companies. I founded a design company and . . . gaining customers, calculating taxes, issuing invoices or planning products turned out to be much more important than the designing part.
If you want to bake cakes . . . get hired by someone who will pay you to bake cakes. You will come to work at nine, spend all day doing what you love, and leave at five with no worries. That’s all about “E-myth.” But we are just about to get rolling.
“But I don’t want to have a boss! The one I have is a jerk, he doesn’t let me take a leave, and makes me do overtime. I will be my own man!” I must worry you. When you work for yourself, your boss is . . . the client. And they don’t care if you want to go on vacation. I mean, sure, go ahead. But don’t expect the client to pay you for it. Overtime? You have agreed on a specific amount for the project, you should know how much time it will take you. You don’t know how to calculate this? The customer doesn’t care. You broke your hand and you cannot bake cakes? Well, there is a contractual penalty in the event of a delayed delivery, no matter what.
Meanwhile, a full-time employee is entitled to paid leave, sick pay, and overtime pay. I know, you’re questioning this paid overtime now. Not all companies are so perfect. But the fact that you don’t question the other two should give you food for thought. You’re much better off in a full time job.
“The better money my own company brings is worth the hassle! In my own business, I will make as much as I want!” I’m sorry, but no. If your specialty is baking cakes, you will make . . . less. Why? Let’s talk about mathematics.
Let’s assume you make ten cakes in eight hours. The time you devote to work is 100% (it doesn’t have to equal eight hours – we all know that you take a break to smoke a cigarette, check Facebook, and when the cake is growing, you secretly post selfies on Instagram). You are an expert, so I set your efficiency to 100% – you cannot do it better and faster. Your employer sells cakes for 100 PLN each. You made 1,000 PLN in revenue, 20% of which (200 PLN) stays in your pocket. The employer claims that the remaining money went towards acquiring clients. Some other employee spends the whole day (again: 100% of the time) selling what you have baked (and since they are a specialist, their effectiveness is also 100%).What a rip off, right? You will earn a lot more in your own business! Let’s count.
To make it simple, we divide your time into three parts. You spend 20% baking cakes with 100% efficiency. It gives you 2 cakes, 100 PLN each (I absolutely ignore the fact that as a less known company you would have to lower price a bit so that customers trust you). You spend the remaining 80% of the time searching for clients (40%) and doing all administrative tasks (40%). But because you’re not good at it, your effectiveness is 50% (which is hugely optimistic, right?).
The grand finale of the calculations. A seller working 100% of the time with 100% efficiency sells 10 cakes a day. You, selling 40% of the time with 50% efficiency, sell . . . two cakes (0.4 x 0.5). You earn the same amount, but for 80% of the day you do things that you don’t love. Congratulations. Do not forget about the security of these 200 PLN. Eight out of ten new companies fail. I know few actual jobs where you have an 80% chance of getting fired …
Does this mean that you shouldn’t set up your own company? Absolutely not. But before you do, answer one more very important question. What is the ultimate purpose of your company’s existence?
Most people in the group of entrepreneurs I have asked set up companies to “make money” or “get rid of the boss.” It was very important for us to deal with these arguments before we got to this place. Why? Because what I say now will be difficult to understand if you are still thinking about the company as a place where grass is greener compared to a full-time job. If you treat your own business as any alternative to a comfy job – you will be disappointed. Grossly.
The ultimate purpose of the company’s existence is to grow. A healthy company will make money for you (note that I haven’t written “You will make money in the company”) if it grows appropriately. And this means that you have to build scaling procedures into the business from day one. The two main things you need to think about from the first day of its existence:
Hey freelancer, got a company?? Is it growing? Take any company size indicator (number of clients, revenues, number of orders) and compare it year by year, quarter by quarter. What does it look like? Even if you earn money, but your company is not growing – it’s sick. And you have no reasons to be satisfied. I will tell you why.
So far, we have divided people into two categories: employees (those who work full-time) and business owners. I would like to add a third category, the most terrifying one. When your company is stagnant, you’ll be an employee in your own company for the rest of your life. No chance for a raise, no prospects for promotion, in the constant fear of bankruptcy. If your motivation is the vision of working in your own company to “go your own way”, you will end up being much better off in a 9-5 job.
A long time ago, at the beginning of the internet, the above slogan was almost heresy. We already had offices filled with computers, each of them was a lonely island which could be used to do a good job. Then John Gage, the vice president of Sun Microsystems (one of the first major internet companies), was the first to coin the phrase “The network is the computer”. Today we know that it’s true. We treat computers disconnected from the network as if they were crippled.
Only serial entrepreneurs can call themselves entrepreneurs. The person who correctly answered my question about the purpose of setting up a company was Oksana. She founded a school in Wroclaw that teaches Polish language to Ukrainians. She said that from the very beginning she was designing the company, so that it would be a network of schools in various cities of Lower Silesia, ultimately also in other regions. She didn’t intend to teach at her own school (although she was doing it in the beginning). She built in scaling procedures in every stage of the company. And she’s on her way to achieving her goal.
Do you want to be an entrepreneur? Do you want to go your own way? Go, I’m the last person to stop you. I will cheer for you from the beginning. There’s only one thing I suggest you do first. Understand the difference between these three types of people: employee, employee in your own company, and entrepreneur. And then start the company you have always dreamt about.
The article was originally published on Fox Strategy blog in August 2018 by Aleksandra Sudnik in…
The article was originally published on Facebook in Novermber 2018 by Artur Smolicki in Polish. Based…